UNITED STATES SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C.
20549


_______________





Form 10-K





(Mark One)





R
            ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
              ACT OF
    1934For the fiscal year ended
      December 31, 2007OR£
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES
              EXCHANGE ACT OF
      1934For the transition period
      from                                                                                                to





Commission File Number:
000-50327


_______________





iPass Inc.


(Exact name of Registrant as
specified in its charter)


_______________





Delaware
            93-1214598(State or Other
      Jurisdiction
            (I.R.S.
      Employerof Incorporation or
      Organization)
            Identification
      No.)





3800 Bridge
Parkway


Redwood Shores, California
94065


(Address of principal executive
offices) (Zip Code)








Registrant’s telephone number,
including area code: (650) 232-4100


_______________





Securities registered pursuant to
Section 12(b) of the Act:





Title of Each
      Class
            Name of Each Exchange on Which
      RegisteredCommon
      Stock, $0.001 Per Share Par Value
            NASDAQ
      Global Market





Securities registered pursuant to
Section 12(g) of the Act:


None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes £ No R





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes £ No R





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 R No £





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. £





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
 See the definitions of large “accelerated filer”, large accelerated filer”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):




Large
accelerated filer £                                                      Accelerated filer R


Non-accelerated
filer £ (Do not
check if a smaller reporting
Company)                                                      Smaller
reporting company £





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes £ No R





Aggregate market value of the
registrant’s common stock held by non-affiliates
of the registrant, based upon the closing price of a share of the
registrant’s common stock on June29,2007as reported by the Nasdaq Global
Market on that date:$205,248,966.The determination of affiliate status
for the purposes of this calculation is not necessarily a conclusive
determination for other purposes. The calculation excludesapproximately25,586,252shares held by directors, officers and
stockholderswhose
ownership exceeded five percent of the registrant’s outstanding Common Stock as of June29,2007. Exclusion of these shares should not
be construed to indicate that such person controls, is controlled by or is under
common control with the registrant.





The
number of shares outstanding of the Registrant’s Common Stock, $0.001 par value,
as of February 29, 2008 was 62,663,694.





DOCUMENTS INCORPORATED BY
REFERENCE





Portions
of the registrant’s definitive proxy statement in connection with our 2008
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission not later than April 29, 2008, are incorporated by reference in Part
III, Items 10-14 of this report on Form 10-K.

















iPASS
INC.




FORM 10-K


FOR THE FISCAL YEAR ENDED DECEMBER
31, 2007





TABLE OF CONTENTS





PagePART I.Item
      1.
            Business
            3Item
      1A.
            Risk
      Factors
            11Item
      1B.
            Unresolved
      Staff Comments
            16Item
      2.
            Properties
            16Item
      3.
            Legal
      Proceedings
            16Item
      4.
            Submission of
      Matters to a Vote of Security Holders
            16PART II.Item
      5.
            Market For
      Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities
            17Item
      6.
            Selected
      Financial Data
            18Item
      7.
            Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
            19Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            27Item
      8.
            Financial
      Statements and Supplementary Data
            27Item
      9.
            Changes in
      and Disagreements With Accountants on Accounting and Financial
      Disclosure
            28Item
      9A.
            Controls and
      Procedures
            28Item
      9B.
            Other
      Information
            29PART
III.Item
      10.
            Directors,
      Executive Officers and Corporate Governance
            29Item
      11.
            Executive
      Compensation
            29Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            30Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            30Item
      14.
            Principal
      Accountant Fees and Services
            30PART IV.Item
      15.
            Exhibits and
      Financial Statement Schedules
            31SIGNATURES
            57EXHIBIT
      INDEX
            59




1





Disclosure Regarding Forward-Looking
Statements





This
annual report on Form 10-K contains forward-looking statements regarding future
events and our future results that are based on current expectations, estimates,
forecasts, and projections about the industries in which we operate and the
beliefs and assumptions of our management. Words such as “expects,”
“anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,”
“seeks,” “estimates,” variations of such words, and similar expressions are
intended to identify such forward-looking statements. In addition, any
statements which refer to projections of our future financial performance, our
anticipated growth and trends in our business, and other characterizations of
future events or circumstances, are forward-looking statements. Readers are
cautioned that these forward-looking statements are only predictions and are
subject to risks, uncertainties, and assumptions that are difficult to predict.
Therefore, actual results may differ materially and adversely from those
expressed in any forward-looking statements. Readers are directed to risks and
uncertainties identified below, under “Item 1A. Risk Factors” and elsewhere
herein, for factors that may cause actual results to be different than those
expressed in these forward-looking statements. Any forward-looking statement
speaks only as of the date on which it is made, and except as required by law,
we undertake no obligation to revise or update publicly any forward-looking
statements for any reason.





2




PART
I





Item 1.Business





Overview





The
growth of remote and mobile work combined with the proliferation of mobile
devices and remote and mobile broadband networks has created increasing
complexity for enterprises which can lead to multiple risks including growth in
total costs for supporting knowledge workers, lost workforce productivity from
technical complexity, and security and regulatory threats to the
business.





To
address this growing enterprise pain point, we provide software-enabled
enterprise services that unify the management of remote and mobile connectivity
and devices on a global basis. First, we offer a portfolio of connectivity
services. Our flagship connectivity service, iPass Mobile Office, is designed to
enable enterprises to provide their employees with secure internet and corporate
network connectivity over any access network through a single easy-to-use
interface. iPass Mobile Office unifies access across more than 400 3G mobile
broadband, Wi-Fi hotspot and dial-up networks in over 160 countries that make up
the iPass global virtual network. The service also gives customers the option to
use the service for access over networks that are not yet part of the iPass
global virtual network such as on-campus wireless local area networks (LANs) as
well as third-party home broadband links, Wi-Fi hotspot networks, municipal
Wi-Fi networks, 3G mobile data networks and hotel Ethernet
links.





In
addition, iPass Mobile Office includes capabilities for managing laptop and
handhelds over the Internet, including detailed reporting on device
configurations and usage and the ability to automatically update software on
these hard-to-reach devices based on corporate policies.





iPass
also offers the iPass Virtual Office service that combines iPass Mobile Office
with managed home broadband service in the US, Canada, and the United
Kingdom.  iPass aggregates over 150 providers of cable, DSL and other
home broadband services into the industry’s most complete network, and then
provisions and manages these links for the enterprise.





iPass
also offers site-to-site managed network services via the internet through its
iPass Branch Office and iPass Retail Office services that combine service
functions that include end-to-end Managed IP VPN, Visa accredited PCI security
solutions for retail, and home gateway management for tele-workers. 
Complete with a tailored design and end-to-end SLAs to meet enterprise
performance requirements, iPass services are used by leaders in a range of
industries including retail, hospitality, financial services and health
care.





Lastly,
iPass provides device authentication capabilities using the iPass DeviceID
service which can be used in conjunction with iPass Mobile Office or on a
stand-alone basis.





Fundamental
to all iPass services is enabling the IT Manager or an iPass Solution Provider
partner servicing the enterprise to maintain direct control of the determination
and application of policies as part of a self-service management
process.





We were
incorporated in California in July 1996 and reincorporated in Delaware in June
2000.





Software-Based Platform for Service
Delivery





As
opposed to traditional telecommunications companies that build, operate and
maintain network facilities, we have created a software-based platform that
delivers a virtual network over which our services operate. Our software
architecture gives our services the technology flexibility and cost-effective
scalability valued by enterprises. It comprises contractual relationships and
technical integrations with over 550 fixed and mobile telecommunications
carriers, Internet service providers and other network service providers
around the globe. This architecture has redundancy built in throughout, from the
use of multiple network providers in most countries to fault-tolerance
mechanisms at all points in the user login process. This allows us to deliver
extremely high service availability to our customers. In fact, since 2000, there
has been no service-wide system down-time that impacted the platform and the
services that it provides.





In
addition, our architecture allows customers to gain better control of remote and
mobile connectivity and simplify their back-end operations. Customers can
configure and enforce policies around network access based on financial and
security considerations. They also receive centralized delivery of detailed
billing, reporting and management information.





Revenue
Sources





We derive
revenues from usage of our networks, from service fees and from enterprise
software licenses and maintenance fees. Our usage revenues are generated by
providing enterprise connectivity services to customers using narrowband access
technologies, such as modem dial-up, and from broadband access technologies,
including hotel Ethernet and Wi-Fi hotspots and Mobile Data Services based on
technologies such as 1xRTT, EV-DO, GPRS and HSDPA.  Revenues pertaining to
usage represented 74% of our total revenues in 2007. Additionally, we receive
revenue from fees and other services, including authentication services for
channel partners, service fees for use of our iPassConnect client software on
3rd-party networks,
value-added reporting services, endpoint systems management services and
professional services including service customization, service deployment and
customer training.  In 2007, we generated approximately 26% of our
revenues from fees and other services. We market and sell our services directly,
as well as indirectly through channel partners, including network service
providers, Internet service providers, systems integrators and value-added
resellers.  See our Consolidated Financial Statements for our revenues
and other financial performance and condition for the past three
years.





3


Our Strategy





Our objective is to use our
software-enabled platform to become the leading provider of enterprise mobility
services worldwide. The key elements of our strategy to achieve this objective
include:





Expand ourEnterpriseCustomer Base. We seek to
increase the number of enterprises that use our services by leveraging
direct-touch sales professionals and channel partners who focus on generating
new accounts. We also seek to expand our indirect sales capabilities by building
additional relationships with channel partners, such as value-added resellers,
systems integrators, providers of security products and services (i.e. virtual
private networks (VPN), personal firewalls and intrusion detection) and
telecommunications carriers. We also intend to build and maintain iPass brand
awareness through the promotion of our brand through public relations, marketing
campaigns, our web presence, and our large installed base of branded client
software, and to increase our market reach through technical integration of our
back-end software and client software with the offerings of our channel
partners.





Increase User Penetration within our
Existing Customer Base. We seek to accelerate the adoption of our
services by increasing usage of our services from the highly mobile business
travelers who dominate our current user base to all customer employees who use
laptop and handheld mobile devices at home, while traveling, or in the office
over a wireless LAN. We intend to achieve this through the sale of services
related to use of iPass connectivity and device management software over
non-iPass networks, such as enterprise home broadband and on-campus wireless
LANs as well as Wi-Fi hotspots, municipal Wi-Fi networks, mobile data
networks and hotel Ethernet links.  We also intend to continue to add
to our service connectivity footprint to capture users who we do not yet serve
within existing customers.





Within
customers who only have implemented our services in a single division, we
endeavor to broaden service adoption to all other operating units of the
enterprise. A key function of our sales force is to assist our customers with
the adoption and integration of our services with their organizations,
continually assess the customers evolving needs and offer new services for
adoption, and provide ongoing account management.





Continue to Expand our Wired and
Wireless Broadband Coverage and Service Offerings. We believe that the
improved security, ease of use, simplified management and improved cost control
that our services provide can address many of the challenges presented by the
emerging broadband markets, such as wireless security, lack of unified roaming
standards and increased complexity driven by provider fragmentation, and
increased costs driven by grass-roots purchase of wireless services by
individuals within enterprises.  As such, we seek to continually
expand the broadband coverage of our virtual network to venues attractive
to international, inter-city and metro-area business travelers, such as
airports, hotels, train stations, convention centers, cafes, restaurants, and
other retail locations, as well as hotzones, municipal area networks and
in-transit access on airplanes and trains. We intend to continue increasing the
number of these venues by establishing relationships with network service
providers that provide access to these venues. We also plan to expand the
network coverage through mobile broadband data services based on 2.5G and
3G networks around the world, which provides another layer of wireless data
coverage. We also seek to continue evolving our back-end authentication,
settlement and clearinghouse capabilities to support this expansion, developing
our client software to both enrich and simplify the user experience, and
improving our management capabilities to simplify management control for our
customers.





Continue to Enhance our Virtual
Network. We intend to continue to establish new relationships with
network service providers to increase the coverage and redundancy of our virtual
network. We intend to enhance the functionality and features of our software
architecture and to address changing customer requirements and technologies
through internal development, strategic partnerships and/or acquisitions. We
also seek to expand our service offerings by supporting and integrating new
access methods, devices, applications and operating systems, and by building
additional relationships with systems integrators and technology providers and
develop services that effectively leverage an enterprise’s existing
infrastructure. We also intend to explore additional services that enhance our
competitive advantage and provide us with new growth
opportunities.  We endeavor to web-enable our business processes
wherever feasible, to increase the leverage of our software-based service
model.





Leverage and Extend our Mobile
Device Management Capabilities. In order to deepen the value we provide
to customers, we intend to continue to improve the mobile device management
capabilities of our services through both extension of our platform to new
functions that serve to protect identities, endpoints, the network, and user
data as well as integrate with technology partners in the enterprise security
industry.





Our Core
Capabilities





Our
services are designed to enable enterprises to provide their employees with
secure access from approximately 160 countries to the internet and an
enterprise’s internal networks through a single easy-to-use interface. We
provide our services through a virtual network that is enabled by our
software-based network architecture and our contractual relationships with over
550 network service providers around the globe.





Our core
assets and capabilities include:





Global Virtual Network for Mobile
Use. Our virtual network aggregates over 121,000 access points in
approximately 160 countries. As of December 31, 2007, over 27,000 of these
access points were dial-up connections and approximately 94,000 were broadband
connections, comprised of approximately 92,000 Wi-Fi hotspots and approximately
2,000 wired hotspots as well as mobile data services in the United States,
China, Japan, UK, Netherlands, Hong Kong and Singapore. As a result, enterprises
that use our services can provide their remote and mobile workers with access
from these countries, in most instances with a local telephone or broadband
connection.





4


Virtual Fixed Broadband Network for
Use in Home, Branch and Retail Locations:In North America we have
contractual relationships with over 150 fixed broadband network providers,
allowing us to provide the region’s most complete fixed broadband coverage for
enterprises looking for a single source through which to connect home offices,
branch offices, and retail locations.





High-Availability and Scalable
Authentication Architecture. Our relationships with over 550 network
service providers enable us to provide connectivity through multiple networks in
approximately 120 out of the approximately 160 countries on our virtual network.
As a result, our virtual network reduces the risk of service interruptions
associated with depending on only one service provider. Furthermore, our
geographically distributed transaction centers act as a unified and
fault-tolerant system that provides scalable and highly-available user
authentication and quality management information collection. Each point in the
authentication process is designed with built-in redundancy and fail-over
capabilities. There has been no service-wide system down-time that impacted the
platform and the services that it provides since 2000.





This
architecture also makes our virtual network scalable, allowing us to handle many
connections and users without a proportionate increase in capital
expenditures.





Flexible Enterprise Security
Integration. Our software is designed to enable integration between an
enterprise’s network connectivity infrastructure and a wide variety of
enterprise security applications. Our services integrate with a breadth of
security software and systems, including VPN, personal firewall, anti-virus and
authentication systems, enabling enterprises to rapidly deploy our services
while leveraging their best-of-breed investments in security
infrastructure.





Authentication Security.
Unlike many network service providers, we securely route all credentials
relating to our end users with 128-bit Secure Socket Layer, or SSL, protocols,
ensuring the confidentiality of sensitive user information as it traverses the
Internet.  All transactions between iPass systems are further secured
by mutual authentication and digital certificate exchange. Lastly, to defend
against identity theft over local shared and wireless links, an additional layer
of authentication using 131-bit ECC cryptography protects user credentials from
the laptop or handheld into the iPass virtual network.





Policy-Based Access Control.
Our virtual network also offers policy management capabilities, enabling
customers to allow or deny access to their network based on specific user and
session characteristics. The characteristics may be based on the user’s
location, the user’s identity and role within the organization, the type of
access network being used, and the compliance of the user’s computer with
enterprise security policies.





Mobile Device Management. We
have software and services that allow for flexible and automated systems
management capabilities, with specific advantages with regard to laptop and
handheld endpoint systems used by remote and mobile workers. The capabilities
can be used for device discovery, device inventory, asset management, device
configuration, patch management and software distribution. These capabilities
can be hosted on servers at our customer’s premises or delivered from iPass data
centers.  They are supported by agent software that runs on the
mobile worker’s device.





Unified Billing, Reporting and
Management. We integrate the networks of multiple service providers to
create one global virtual network, eliminating the need for enterprises to
negotiate agreements with multiple network service providers to provide network
connectivity to their mobile workers. Our virtual network enables the creation
of detail records (CDRs) for each network session, including user, date, time,
duration of usage and other parameters. We are also able to provide detailed
transaction-level billing in a single invoice for all services provided to
enterprises and network service providers and can tailor the invoice to provide
the level of detail and the format that our customers desire. We also offer the
ability for information technology managers to gain a comprehensive and near
real-time view of their employees’ network connectivity usage patterns, enabling
faster identification and resolution of user-related issues.





Our
technology enables us to deliver near real-time information of connection
success rates, client configurations, authentication times, error codes and
other information critical to diagnosing network health and troubleshooting user
connection problems. This patented capability is used internally to manage
network provider quality as well to provide in-depth reporting to customers for
trouble-shooting purposes.





Most
management functions are directly available to customers and partners over the
web on the iPass Portal.  This one-stop shop is designed to help
reduce the cost and resources required for customers to manage enterprise
mobility.





Integration of New
Technologies. We actively evaluate and integrate support for new access
methods, laptop and handheld operating systems and applications into our service
offering. For example, we support wired broadband, wireless broadband based on
the current and emerging Wi-Fi standards, as well as 3G mobile data services.
End users can access our virtual network using desktop and laptop computers,
wireless handheld devices and other Internet Protocol (IP) enabled electronic
devices. Our network integrates with our enterprise customers’ existing VPN and
security applications, and our software supports a wide range of computer
operating systems, including various versions of Microsoft’s Windows(R), Apple’s
Mac OS, as well as Symbian OS and Microsoft’s Windows Mobile versions for
handheld devices.





5


Services





iPass Mobile
Office





iPass
Mobile Office offers our customers the ability to reduce their costs of
delivering mobility by providing unified global connectivity, connectivity
management and device management.  It delivers 3G mobile data, Wi-Fi
hotspot, wired broadband and dial-up access through the iPassConnect mobility
manager.  It unifies a management and billing for the IT department.
We generally bill customers based on usage of the iPass virtual network, as well
as additional monthly fees based on number of users for use of our client and
management software over non-iPass networks. The process by which a mobile
worker accesses their enterprise network through iPass virtual network is
illustrated in the following diagram and described through the following
steps:














1. The
iPassConnect mobility manager software installed on a mobile worker’s laptop
computer or other electronic device enables the mobile worker to connect to our
virtual network. For wired access the mobile worker launches the
iPassConnect(TM) mobility manager, selects the city in which he or she
is located, and then selects a local network access point (dial-up, ISDN,
PHS, or wired high-speed internet). For wireless access, the client software
automatically detects and displays any available Wi-Fi hotspots or mobile data
services, whether it is a part of the iPass footprint or not. It will also
automatically choose the appropriate authentication protocol to initiate the
access request without user intervention. This is especially beneficial in Wi-Fi
hotspots, corporate wireless LANs or home wireless LANs that require
802.1x-based security. The client software can also be used to connect via the
user’s home broadband connection and home Wi-Fi LAN.





Security
checks can be built into the connection process. A feature called SecureConnect
allows the enterprise to set policies that detect whether the user’s personal
firewall or anti-virus software is active, auto-launch this software if it is
not, and disallow the connection attempt if the proper software cannot be
launched. In addition, the user must enter his or her corporate
credentials, which will be authenticated by his or her enterprise database
before the connection is allowed.





2. The
iPass NetServer software, installed in a network service provider’s network,
provides the interface between the network service provider and the iPass
network. The NetServer recognizes that the end user belongs to the iPass user
base and securely transmits the username and password to the nearest available
iPass Transaction Center using 128-bit SSL encryption. Our eight transaction
centers are located in California, New York, Georgia, Hong Kong, Australia, the
United Kingdom, The Netherlands and Japan. Any NetServer can communicate with
any Transaction Center, allowing for high availability in the rare event of a
single Transaction Center failure.





3. The
Transaction Center to which the authentication request is routed looks up the
enterprise to which the user belongs and securely transmits the user name and
password to the iPass RoamServer software residing on the enterprise’s
servers.





6


4. The
RoamServer receives the request from the Transaction Center, converts it to the
local authentication protocol used at the enterprise, and passes it to the
enterprise authentication database. Enterprises can manage their own user lists
and authentication databases and control users’ access to their internal network
through the authentication system of their choice.





5. The
enterprise authentication database then grants or denies authorization. The
RoamServer securely sends a yes/no response back to the NetServer via a
Transaction Center.





6. The
NetServer authorizes the network service provider to allow the user access to
the Internet. At this point the iPassConnect mobility manager software can be
configured to invoke the Device Management (formerly Endpoint Policy Management)
service to assess and remediate the mobile device for compliance with endpoint
security policies before providing access to the corporate network. Once
remediation is complete, iPassConnect can automatically launch the user’s VPN to
securely connect to the enterprise network.





7. When
the mobile worker terminates the Internet session, the VPN connection is also
terminated and a record of the transaction is forwarded to the iPass
Clearinghouse. The enterprise receives detailed invoices either on a monthly or
more frequent basis, as requested. For additional security, customers can use
the Auto-Teardown feature to set policies that terminate the internet session if
the VPN, personal firewall, or anti-virus software is terminated during the
session.





Additional Mobile Office
features





iPass
Mobile Office includes the following features:





iOQ Advanced Reporting. iOQ
allows our customers’ in-house or outsourced help desk personnel to quickly
identify issues and troubleshoot connection problems. With this feature
enterprises can generate records and reports regarding access locations, client
configuration, error codes, connection speeds, time to authenticate and other
critical information. We generally charge a monthly fee for our iOQ service. We
periodically update the iOQ software in order to provide improved reporting for
our internal support organization and our customers. These upgrades are
downloaded to the user’s computer or other electronic device when the user logs
in, at no additional cost to the customer.





Hosted Authentication. We
offer a hosted authentication option for iPass Mobile Office to enable
enterprises to realize the benefits of our enterprise connectivity services
while avoiding the cost of installing and managing additional authentication
infrastructure. We manage an enterprise’s authentication server in one of our
secure data centers, but the enterprise’s information technology manager
retains full control. There is an additional option in ExpressConnect that
allows the individual charges to be directly charged to their corporate credit
card.





On-Campus Roaming. This
feature allows enterprise IT departments to offer a single user experience for
all remote and local wireless connections while extending centralized management
of security policies to these potentially vulnerable corporate wireless
networks.





Virtual Office. iPass Virtual
Office adds managed fixed broadband for tele-workers to Mobile Office, providing
enterprise customers a method of outsourcing the broadband network design,
implementation and on-going support for their entire population of home
workers.  This service provides customers a managed service with a
single point of contact and single consolidated bill while supporting broadband
connections on different technologies and carriers. iPass maintains
relationships with over 150 cable and DSL providers to provide coverage in the
United States, Canada and the United Kingdom. The Virtual Office service comes
with a secured, managed Wi-Fi enabled router to allow a user the freedom to work
anywhere within the home.





iPass Managed Network
Services





Branch Office. This service provides an
organization with a managed wide-area network to connect hundreds of small
offices back to a corporate data center. It leverages iPass’ relationships with
over 150 cable and DSL providers to provide coverage throughout the United
States, Canada and the United Kingdom. The connections are secured using VPN
platforms from Cisco, Juniper Networks and SonicWALL and the entire service is
managed by iPass. As part of the managed service, iPass provides end-to-end
proactive monitoring, reporting and troubleshooting of the health of the
network, including availability, latency and packet loss. All of this
information is available on a real-time basis on the Universal Remote Control
section of the iPass portal.





Retail Office. Retail Office
provides wide-area networking for distributed retail locations to connect to a
corporate data center. It is identical to the Branch Office product except that
the offering includes Payment Card Industry (PCI) Compliance as part of the
solution. PCI is required for any network which transmits credit card data.
Retail Office solutions include VPN platforms from Cisco and Juniper Networks
and include all of the proactive management and reporting associated with Branch
Office as well as specific reporting for PCI Compliance.





Device Authentication
Service





DeviceID. The DeviceID
service strengthens network security through device authentication. This service
creates a digital fingerprint for every device by gathering unique identifying
numbers from select hardware components and uses this information when
interrogating the device to provide access to the corporate LAN via a VPN.
DeviceID helps protect against replay attacks, reverse engineering and spoofing
by checking different hardware attributes during each authentication request.
This service is designed to ensure that only corporate-issued or authorized
machines access the network as well as validate device identity as an additional
factor for VPN authentication.





7


Principal Components of the iPass
Platform





The
technology incorporated in our services is designed to provide our customers
with reliability, quality of service, network security, policy enforcement,
consolidated billing and scalability. Our technology consists of the following
four principal components, each of which was designed and developed internally:
iPassConnect mobility manager; distributed authentication system; iPass
Clearinghouse; and Service Quality Management.





iPassConnect Mobility
manager. The iPassConnect mobility manager software is installed on
mobile workers’ laptop computers or other devices, and allows them to securely
and reliably connect to the Internet using a variety of access methods including
narrowband, integrated services digital network, or ISDN, wired and wireless
broadband, GSM and 3G. The iPassConnect mobility manager is designed to be
easy-to-use and to be a flexible and scalable network connectivity platform for
enterprises. The key features of iPassConnect include:





•
            Intuitive User
      Interface.iPassConnect mobility manager was designed with over seven years of
      experience and customer feedback, resulting in a user-friendly interface
      with many features.





•
            Automatic
      Updates.iPassConnect mobility manager also provides enterprises with the ability to
      schedule periodic software modifications or updates of iPassConnect to
      their end users without handling each end user device separately. These
      upgrades are securely downloaded to the user’s computer or other electronic
      devicewhen the user logs in, at no
      additional cost to the
customer.





•
            Central Policy
      Control.iPassConnect mobility manager enables an enterprise to define a set of
      criteria, such as length of session or idle timeouts, once and apply those
      criteria to manage its remote access policies across
      its entire workforce.





•
            Dynamic
      Directory.iPassConnect mobility manager enables enterprises to adjust the order of
      narrowband access points that are displayed to the end user, based on
      service quality. Customers also havethe flexibility of integrating
      in-house access numbers with iPass’access points in cases where
      both networks are being
utilized.





•
            Third Party Application
      Integration.iPassConnect mobility manager can be configured to automatically launch a
      variety ofthird
      party VPNs upon successful connection to the Internet. iPassConnect can
      also monitor anti-virus software, personal firewalls and VPNs and
      disconnect a user if there not running (based on the customer’s
  policy).





•
            Support for multiple operating
      systems and
      languages.iPassConnect mobility manager supports a wide range of computer operating
      systems, including Microsoft Windows 2000, XP, Mac OS X and above, and
      Windows Mobile. Additionally, iPassConnect for Windows is localized in
      Brazilian Portuguese, Portuguese, Simplified Chinese,
      Traditional Chinese, French, German, Japanese, Korean and
      Spanish.





Distributed and Redundant
Authentication System. Our distributed authentication system, which is
made up of iPass NetServer software, iPass RoamServer software and iPass
TransactionServer software, is designed to enable the reliable, scalable and
secure initiation and termination of a remote access session on our virtual
network. NetServer is installed on the servers of our network service providers.
RoamServer is installed on our enterprise customer’s internal networks,
typically located on their premises. Our eight Transaction Centers, each of
which is comprised of two or more transaction servers, are located in third
party co-location facilities.





The
software components of NetServer, RoamServer and the transaction server operate
on third party single- or multi-processor servers based on Unix, Linux, or
Windows. We send our enterprise customers updates to NetServer, RoamServer and
the transaction server electronically on an as needed basis to support new
authentication and management needs.





iPass
NetServer software receives end user authentication requests for Internet
connectivity and securely forwards the request to a transaction server across a
128-bit SSL connection. The iPass transaction server validates the request and
securely forwards this request to a RoamServer located at the enterprise. The
RoamServer receives the authentication request for Internet connectivity and
forwards the request in a format compatible with the enterprise’s authentication
database. Once the enterprise authentication database has allowed or denied the
end user’s request for access, this reply is returned along the same
route.





We have
developed a security enhancement to our authentication system that further
ensures the confidentiality of sensitive user credentials.





iPass Clearinghouse. Our
iPass Clearinghouse software collects, filters, resolves, analyzes and
summarizes the accounting details necessary to bill for the iPass Mobile Office
services. Once an end user session is terminated, the Clearinghouse retrieves
accounting records for each customer from each transaction server. Once received
by the Clearinghouse, the records are filtered to eliminate duplicate records
and reviewed for completeness and integrity of the data. The Clearinghouse then
determines the identities of both the customer and the network service provider
and generates two billing records to reflect the revenues and network access
expenses based on the details contained in the original accounting record.
The Clearinghouse then summarizes the records of each network service provider
and generates and distributes customer call detail records and invoices. The
Clearinghouse software is run internally on servers residing at a secure data
center in Redwood City, California, with a fail-over and disaster recovery in a
separate location.





8


Service Quality Management.
Our patented iPass service quality management process, or SQM, system consists
of several quality-of-service monitoring and management elements that we
incorporated into our services. These tools and processes are comprised of the
following:





•
            Client-Side
      SQM.Client-side SQM captures detailed status and usage information from
      connection attempts
      and uploads this information to a central iPass database when a successful
      connection is made. SQM records and reports access points from which
      connections are made, client configuration, error codes, connection
      speeds, time to authenticate and otherinformation important in
      diagnosing network health. Our SQM software is deployed on networks
      worldwide to gather data on local access points and network conditions and
      allows us to monitor our virtual network from a customer’s point of
      view.





•
            SQM Reporting.Our SQM infrastructure enables
      our iOQ service and provides information such as detailed access point
      performance, individual and corporate connection success rates, and other
      connection data to our customers and to us. With this data, our customer
      support and
      development teams can monitor service quality and continue to improve the
      reliability and performance of our service offering. Through our iOQ
      service, our customers benefit from this SQM technology because it enables
      them to diagnose problems their users are
      experiencing.





•
            Phonebook/Connection
      Directory.Based on input from the SQM infrastructure, the phonebook tool within the
      iPassConnect mobility manager places the highest quality access point at
      the top of the directory in order to enhancethe experience for our
      customers’end
  users.





Co-location
Facilities





Our eight
Transaction Centers are located in third-party co-location facilities in
California, New York, Georgia, Hong Kong, Australia, the United Kingdom, The
Netherlands and Japan. Three additional co-location facilities are utilized to
host our primary Clearinghouse and Finance systems, and corporate web services,
which are located in California. Three out of our eight transaction centers also
run the standby and disaster recovery Clearinghouse environments, our
ExpressConnect service and the phonebook distribution servers. We maintain
standard contractual agreements with the third parties that host our co-location
facilities which generally provide for a term of between one and three
years. If our relationships with these providers terminate, we believe that we
will be able to secure relationships with alternative providers without any
significant disruption to our operations.





Customers





We sell
our service offering directly to enterprise customers and indirectly though
channel partners.





International
revenues accounted for approximately 38%, 40% and 45% of total revenues for the
year ended December 31, 2007, 2006 and 2005, respectively. Revenues generated in
the United Kingdom accounted for 11%, 11% and 14% of total revenues for the year
ended December 31, 2007, 2006 and 2005, respectively. International revenues are
determined by the location of the customer’s headquarters.





Substantially
all of our long-lived assets are located in the United States.





Agreements with Network Service
Providers





We have
relationships with over 550 telecommunications carriers, Internet service
providers and other network service providers that enable us to offer our
services in over 160 countries around the world. We pay network service
providers for access to their network on a usage or session basis, in some
cases, subject to minimum purchase commitments. Most of these contracts have a
term of one year, after which either party can terminate the contract with two
months notice. In 2007, two network service providers, T-Mobile US and Verizon
Business Services (formerly MCI), accounted for approximately 9% and 7% of our
network access expenses, respectively. The contracts we have entered into with
providers are non-exclusive and may contain minimum commitments for the purchase
of network access.  A new agreement was executed with Verizon Wireless
in May 2007 for a three-year term with a commitment of 70 million megabytes,
ramping over the term of the agreement. The T-Mobile agreement has no
commitment, and is due to expire in March 2009. In countries in which we
have contracted with multiple network service providers, if one network service
provider is no longer available, we can generally obtain alternative network
access without significant disruption to our business. We are also able to
direct users to the network of particular service providers to fulfill minimum
purchase commitments.





Sales and
Marketing





We sell
our services directly through our sales force and indirectly through our channel
partners. Our sales organization is organized into regional account teams, which
include sales directors, sales managers, account executives, account managers,
sales engineers and sales operations personnel. We maintain sales offices or
personnel in a number of cities in the United States as well as Australia, the
United Kingdom, Hong Kong, Japan, Germany, France, Singapore, Denmark, Sweden
and The Netherlands. As of December 31, 2007, our sales organization was
comprised of 57 individuals in North America, 15 individuals in Asia Pacific and
39 individuals in Europe.





Our
channel partners include network service providers, telecommunications carriers,
systems integrators and value added resellers. A channel partner typically signs
a one to two year agreement with us through which we appoint the partner as a
nonexclusive reseller of our services. Channel partner responsibilities
vary may include actively marketing and selling iPass services, deploying and
supporting customer accounts, and implementing and managing billing for their
customers. Selling through channel partners allows us to offer our services
without incurring the cost of maintaining a direct sales force or customer
support capability in each target market. Our channel partners typically sell
complementary hardware, software, and services, and bundle our services with
their core offerings.  In some cases, once an enterprise has signed a
contract for our services through a channel partner, our post-sales team may
work with the channel partner to ensure successful implementation of our
services. However, the enterprise remains the channel partner’s customer and has
no direct financial relationship with us.





We focus
our marketing efforts on creating awareness for our services and their
applications, educating potential customers and generating new sales
opportunities and generating end-user demand within customer accounts. We
conduct a variety of marketing programs including advertising, press relations,
analyst relations, telemarketing, direct marketing, web and e-mail marketing,
collateral and sales tools creation, seminars, events and trade shows,
co-operative channel marketing and promotions.





9


Competition





We
compete primarily with large, facilities-based carriers and software-enabled
virtual network operators. We compete based on geographic coverage, reliability,
quality of service, ease of implementation, ease of use and the ability to
manage both remote and mobile connections and
devices.  We believe that we compete favorably in terms of
geographical coverage, reliability, quality of service, ease of implementation
and ease of use.





Facilities-based
telecommunications carriers against whom we compete, such as AT&T globally,
Verizon Business in the U.S. and BT Infonet and Orange Business Services in
Europe, generally have substantially greater resources, larger customer bases,
longer operating histories, and greater name recognition than we have. Carriers
may have the ability to offer a broad range of services and may be willing
to reduce the price for remote access that is bundled with their other services.
In some cases, potential customers are also suppliers to these carriers, and may
be more inclined to purchase enterprise connectivity services from these
carriers than from us. We believe that we compete favorably against
facilities-based carriers when the potential customer is not a supplier to the
carrier, and when the customer requires global multi-technology access rather
than access only within a limited geographic region or via a single access
method.





To a
lesser extent we also compete with software-enabled virtual network operators.
In some cases, our service offerings may be offered at a price premium
to those offered by our competitors, which may put us at a competitive
disadvantage. We believe we compete favorably against these competitors in terms
of the coverage, redundancy, security, quality and ease of use of our service
offerings. Still, software-based virtual network operators may also provide
managed services such as VPNs and firewalls, and additional telecommunications
services such as local exchange and long distance services, voicemail and DSL
services.  We do have channel partners that offer these types of
services in conjunction with our service, but we do not offer these additional
services directly, which may put us at a competitive disadvantage when competing
for potential customers.





For a
discussion of the possible effects that competition could have on our business,
see “Risk Factors” — We face strong competition in our market, which could
make it difficult for us to succeed.”





Research and
Development




We
believe that to compete favorably we must continue to invest in the research and
development of our services. Our research and development efforts are focused on
improving and enhancing our existing service offerings as well as developing new
proprietary products and services. As of December 31, 2007, our research and
development organization consisted of 172 employees. Our research and
development expenses were $21.1 million, $22.6 million and $17.7 million in
2007, 2006, and 2005, respectively.





Intellectual
Property





We rely
on a combination of trademark, copyright, trade secret laws and disclosure
restrictions to protect our intellectual property rights. We also enter into
confidentiality and proprietary rights agreements with our employees,
consultants and other third parties and control access to software,
documentation and other proprietary information. iPass has a patent portfolio of
eight US patents, one Australian patent and one Israeli patent.  Our
patents expire between 2016 and 2025.  In 2007 we were granted two new
US patents, one around our SQM technology and the other around our dynamic
configuration for iPassConnect.  We were also granted one new patent in
Europe on our DeviceID technology. We currently have twenty-two US patent
applications pending, and twenty-seven international patent applications pending
(in the same subject areas as the US patent applications). If a claim is
asserted that we have infringed the intellectual property of a third party, we
may be required to seek licenses to that technology. In addition, we license
third-party technologies that are incorporated into our services, including our
license for encryption granted by RSA Security. Licenses from third party
technologies may not continue to be available to us at a reasonable cost, or at
all. Additionally, the steps we have taken to protect our intellectual property
rights may not be adequate. Third parties may infringe or misappropriate our
proprietary rights. Competitors may also independently develop technologies that
are substantially equivalent or superior to the technologies we employ in our
services. If we fail to protect our proprietary rights adequately, our
competitors could offer similar services, potentially significantly harming our
competitive position and decreasing our revenues.





Employees





As of
December 31, 2007, we had 504 employees, consisting of 115 in network
operations, 172 in research and development, 139 in sales and marketing and 78
in general and administrative. We consider our relationship with our employees
to be good.





Trademarks





iPass(R),
iOQ(R) and the iPass logo are our U.S. registered trademarks. iPassConnect(TM),
ExpressConnect(TM), iPassNet(TM), RoamServer(TM), NetServer(TM), iPass Mobile
Office(TM), DeviceID(TM), EPM(TM), iSEEL(TM) and iPass Alliance(TM) are
designations that we use. We have also applied for or registered company
trademarks in over 50 other countries.





Available
Information





Our
Internet address is www.ipass.com. We make available free of charge through our
Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act, as
amended, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.





Further,
a copy of this annual report is located at the SEC’s Public Reference Room at
450 Fifth Street, NW, Washington, D.C. 20549. Information on the operation of
the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding our filings at
www.sec.gov.





10




Item 1A. Risk
Factors





Our business is subject to a number
of risks, many of which are described below. If any of the events described in
these risks factors actually occur, our business, financial condition or results
of operations could be materially and adversely affected, which would likely
have a corresponding impact on the value of our common stock. Further, the risk
factors described below could cause actual results to differ materially from the
results contemplated by the forward-looking statements contained in this report.
These risk factors should be reviewed carefully.





Risks
Relating to Our Business





If we are unable to meet the
challenges posed by broadband access, our ability to profitably grow our
business will be impaired.





Historically,
we have generated the large majority of our revenues from the sale of enterprise
connectivity services using narrowband technologies such as modem dial-up. In
the United States as well as many other countries, the use of narrowband as a
primary means of enterprise connectivity has significantly declined and is
expected to continue to decline at an accelerated rate over time as broadband
access technologies, such as cable modem, DSL, Wi-Fi, 3G data, Wi-Max and other
wireless technologies, including 3G, become more broadly used. A substantial
portion of the growth of our business has depended on, and will continue to
depend, in part upon our ability to expand the broadband elements of our virtual
network to address these new technologies. Such an expansion may not result in
additional revenues to us. Key challenges in expanding the broadband elements of
our virtual network include:




The broadband access market
continues to develop at a rapid pace. Although we derive revenues from
wired and wireless broadband “hotspots”, such as particular airports, hotels and
convention centers, the broadband access market, particularly for wireless
access, continues to develop and demand at levels we anticipate may not develop.
In particular, the market for enterprise connectivity services through broadband
is characterized by evolving industry standards and specifications and there is
currently no uniform standard for wireless access. Furthermore, although the use
of wireless frequencies generally does not require a license in the United
States and abroad, if Wi-Fi frequencies become subject to licensing
requirements, or are otherwise restricted, this would substantially impair the
growth of wireless access. Some large telecommunications providers and other
stakeholders that pay large sums of money to license other portions of the
wireless spectrum may seek to have the Wi-Fi spectrum become subject to
licensing restrictions. If the broadband wireless access market does not
develop, we will not be able to generate substantial revenues from broadband
wireless access.





The broadband service provider
market is highly fragmented.There are currently many wired and wireless
broadband service providers that provide coverage in only one or a small number
of hotspots. We have entered into contractual relationships with numerous
broadband service providers. These contracts generally have an initial term of
two years or less. We must continue to develop relationships with many providers
on terms commercially acceptable to us in order to provide adequate coverage for
our customers’ mobile workers and to expand our broadband coverage. We may
also be required to develop additional technologies in order to integrate new
broadband services into our service offering. If we are unable to develop these
relationships or technologies, our ability to grow our business could be
impaired. In addition, if broadband service providers consolidate, our
negotiating leverage with providers may decrease, resulting in increased rates
for access, which could harm our operating results.





Broadband service provider actions
may restrict our ability to sell our services.  Some network
providers restrict our ability to sell access to their networks to iPass
resellers whom they consider competitive with them.  This can reduce
our revenue by limiting the footprint our partners can make available to their
customers.  In addition in some geographies the conventional practice
is for a mobile data (3G) carrier to provide a device on a subsidized
basis.  This device cannot easily be used with any network besides
that of the carrier who provides it, which makes it difficult for iPass to
replace that carrier in the account and thus may negatively impact our ability
to sign new enterprise customers to our Mobile Data service.





If demand
for broadband access continues to increase but we do not meet the challenges
outlined above, our ability to grow our business may suffer.





If we do not accurately predict
usage for our Enterprise Flat Rate price plan, our costs could increase without
a corresponding increase in revenue.





We have
transitioned a number of our customers to our Enterprise Flat Rate price plan,
and are signing new customers to this plan.  In this plan, our
customers pay a flat rate price to access our services.  However, we
continue to pay our providers based on usage.  The rate we charge in
our Enterprise Flat Rate price plan is based on statistical predictions of usage
across a pool of users within an enterprise.  If actual usage is
higher than expected our profitability will be negatively impacted.





If we do not deliver valuable
services for smart-phones and other Internet-connected handheld devices our
ability to profitably grow our business may be
impaired.





A variety
of smart-phone devices are available in the marketplace enabling individuals to,
among other things, check email and access the Internet.  There are a
number of competing operating systems in use on these
smart-phones.  Most of these smart-phones are distributed by mobile
operators to their customers for use over their 3G mobile data networks, and the
mobile operators subsidize the purchase price of the devices in exchange for a
commitment to a long-term service contract.





If the
capabilities of smart-phones cause our users to stop using laptops while
traveling, or to use them less often, then our operating results may be
harmed.  Further, if we do not develop valuable services for these
smart-phones in a timely fashion, these devices may access the internet and or
be managed without our services, impairing our ability to grow
profitably.




11


Our customers require a high degree
of reliability in our services, and if we cannot meet their expectations, demand
for our services will decline.





Any
failure to provide reliable network access, uninterrupted operation of our
network and software infrastructure, or a satisfactory experience for our
customers and their mobile workers, whether or not caused by our own failure,
could reduce demand for our services. If outages occur, or if we experience
hardware or software problems, our business could be harmed.





We face strong competition in our
market, which could make it difficult for us to
succeed.





We
compete primarily with facilities-based carriers as well as with other
non-facilities-based network operators. Some of our competitors have
substantially greater resources, larger customer bases, longer operating
histories or greater name recognition than we have. Our device management
services face additional competition from companies that provide security and
policy-based services and software.  In addition, we face the
following challenges:





Many of our competitors can compete
on price.Because many of our facilities-based competitors own and
operate physical networks, there may be little incremental cost for them to
provide additional hotspot or telephone connections. As a result, they may offer
remote access services at little additional cost, and may be willing to discount
or subsidize remote access services to capture other sources of revenue. In
contrast, we have traditionally purchased network access from facilities-based
network service providers to enable our remote access service. As a result,
large carriers may sell their remote access services at a lower price. In
addition, new non-facilities-based carriers may enter our market and compete on
price. In either case, we may lose business or be forced to lower our prices to
compete, which could reduce our revenues.





Many of our competitors offer
additional services that we do not, which enables them to compete favorably
against us.Some of our competitors provide services that we do not, such
as local exchange and long distance services, voicemail and digital subscriber
line, or DSL, services. Potential customers that desire these services on a
bundled basis may choose to obtain remote access and device management services
from the competitor that provides these additional services.





Our potential customers may have
other business relationships with our competitors and consider those
relationships when deciding between our services and those of our competitors.Many of our competitors are large facilities-based carriers that purchase
substantial amounts of products and services, or provide other services or goods
unrelated to remote access services. As a result, if a potential customer is
also a supplier to one of our large competitors, or purchases unrelated services
or goods from our competitor, the potential customer may be motivated to
purchase its remote access services from our competitor in order to maintain or
enhance its business relationship with that competitor.  In addition,
telecommunications providers may also offer Wi-Fi for free as part of a home
broadband or other service contract, which also may force down the prices which
the market will bear for our services.




Users may adopt free Wi-Fi networks
for internet and corporate access.Some venues such as cafes
and hotels offer Wi-Fi internet access as a free amenity for their
customers.  Use at these venues may replace iPass “for charge”
sessions and put downward pressure on flat rate prices iPass charges
enterprises for its Wi-Fi remote access services.  In addition, if
home users allow others to use their Wi-Fi networks in exchange for free access
to other home networks, this may force down the prices which the market will
bear for our services.





If our security measures are
breached and unauthorized access is obtained to a customer’s internal network,
our virtual network may be perceived as not being secure and enterprises may
curtail or stop using our services.





It is
imperative for our customers that access to their mission critical data is
secure. A key component of our ability to attract and retain customers is the
security measures that we have engineered into our network for the
authentication of the end user’s credentials. These measures are designed to
protect against unauthorized access to our customers’ networks. Because
techniques used to obtain unauthorized access or to sabotage networks change
frequently and generally are not recognized until launched against a target, we
may be unable to anticipate these techniques or to implement adequate
preventative measures against unauthorized access or sabotage. If an actual or
perceived breach of network security occurs, regardless of whether the breach is
attributable to our services, the market perception of the effectiveness of our
security measures could be harmed. To date, we have not experienced any
significant security breaches to our network.





If our channel partners do not
successfully market our services to their customers or corporate end users, then
our revenues and business may be adversely affected.





We sell
our services directly through our sales force and indirectly through our channel
partners, which include network service providers, systems integrators and value
added resellers. Our business model has changed to rely more on our channel
partners.  Our business depends on the efforts and the success of
these channel partners in marketing our services to their customers. Our own
ability to promote our services directly to their customers is often limited.
Many of our channel partners may offer services to their customers that may be
similar to, or competitive with, our services. Therefore, these channel partners
may be reluctant to promote our services. If our channel partners fail
to market our services effectively, our ability to grow our revenue would
be reduced and our business will be impaired.





12


If demand for enterprise remote and
mobile connectivity does not continue to expand, we may experience a shortfall
in revenues or earnings or otherwise fail to meet public market
expectations.





The
growth of our business is dependent, in part, upon the increased use of
enterprise connectivity services and our ability to capture a higher proportion
of this market. If the demand for enterprise connectivity services does not
continue to grow, or grows in ways that do not use our services, then we may not
be able to grow our business, maintain profitability or meet public market
expectations. Increased usage of enterprise connectivity services depends on
numerous factors, including:





•
            the
      willingness of enterprises to make additional information technology
      expenditures;•
            the
      availability of security products necessary to ensure data privacy over
      the public networks;•
            the
      quality, cost and functionality of these services and competing
      services;•
            the
      increased adoption of wired and wireless broadband access methods;
      and•
            the
      proliferation of electronic devices such as handhelds and smartphones and
      related applications.





If we are unable to meet the
challenges related to the market acceptance and provision of our device
management services, our ability to grow the business may be
harmed.





We expect
that the growth of our business may depend in part upon whether our device
management services will achieve and sustain expected levels of demand and
market acceptance. If enterprises do not perceive the benefits of our device
management services, then the market for these services may not develop at all,
or it may develop more slowly than we expect, either of which could
significantly and adversely affect our growth. Key challenges that we face
related to our provision of these services include the risk that we may
encounter unexpected technical and other difficulties in developing our device
management services which could delay or prevent the development of these
services or certain features of these services; the risk that the rate of
adoption by enterprises of network security software or integrated secure
connectivity solutions will not be as we anticipate, which if slow would reduce
or eliminate the purchase of these services; and the risk that security breaches
may occur, notwithstanding the use of our device management services, by hackers
that develop new methods of avoiding security software. If we do not adequately
address these challenges, our growth and operating results may be negatively
impacted.





There are approximately 24 countries
in which we provide dial-up access only through Equant. The loss of Equant as a
dial-up network service provider would substantially diminish our ability to
deliver global network access.





In
approximately 24 countries, our sole dial-up network service provider is Equant.
Network usage from access within these countries accounted for less than 1% of
our revenues in the years ended December 31, 2007, 2006 and 2005.  If
we lose access to Equant’s network and are unable to replace this access in some
or all of these countries, our revenues would decline. In addition, our ability
to market our services as being global would be impaired, which could cause us
to lose customers. Our agreement with Equant expires in February 2009, but
Equant may terminate the agreement earlier if we materially breach the contract
and fail to cure the breach, or if we become insolvent. In addition, Equant
has no obligation to continue to provide us with access to its network after
February 2009. If Equant were to cease operations or terminate its arrangements
with us, we would be required to enter into arrangements with other dial-up
network service providers, which may not be available. This process could be
costly and time consuming, and we may not be able to enter into these
arrangements on terms acceptable to us.





The telecommunications industry has
experienced a decline, which has caused further consolidation among network
service providers and which may impair our ability to provide reliable,
redundant service coverage and negotiate favorable network access
terms.





The
telecommunications industry has experienced significant technological change and
increased competition that have led to significant declines in network access
pricing. In addition, the revenues of network service providers have declined as
a result of the general economic slowdown. As a result, network service
providers have experienced operating difficulties in the last several years,
resulting in poor operating results and a number of these providers declaring
bankruptcy. As these conditions have continued, some of these service providers
have consolidated and are working to consolidate or otherwise cease operations,
which would reduce the number of network service providers from which we are
able to obtain network access. As this occurs, while we expect that we will
still be able to maintain operations and provide enterprise connectivity
services with a small number of network service providers, we would potentially
not be able to provide sufficient redundant access points in some geographic
areas, which could diminish our ability to provide broad, reliable, redundant
coverage. Further, our ability to negotiate favorable access rates from network
service providers could be impaired, which could increase our network access
expenses and harm our operating results.





If we fail to address evolving
standards and technological changes in the enterprise connectivity and device
management services industry, our business could be
harmed.





The
market for enterprise connectivity, devices (laptops, handhelds, smart-phones)
and device management services is characterized by evolving industry standards
and specifications and rapid technological change, including new access methods,
devices, applications and operating systems. In developing and introducing our
services, we have made, and will continue to make, assumptions with respect to
which features, security standards, performance criteria, access methods,
devices, applications and operating systems will be required or desired by
enterprises and their mobile workers. If we implement technological changes or
specifications that are different from those required or desired, or if we are
unable to successfully integrate required or desired technological changes or
specifications into our wired or wireless services, market acceptance of our
services may be significantly reduced or delayed and our business could be
harmed.





Our software is complex and may
contain errors that could damage our reputation and decrease usage of our
services.





Our
software may contain errors that interrupt network access or have other
unintended consequences. If network access is disrupted due to a software error,
or if any other unintended negative results occur, such as the loss of billing
information, a security breach or unauthorized access to our virtual network,
our reputation could be harmed and our business may suffer. Although we
generally attempt by contract to limit our exposure to incidental and
consequential damages, if these contract provisions are not enforced or
enforceable for any reason, or if liabilities arise that are not effectively
limited, our operating results could be harmed.





13


Because much of our business is
international, we encounter additional risks, which may reduce our
profitability.





We
generate a substantial portion of our revenues from business conducted
internationally.  Revenues from customers domiciled outside of the United
States were 38% of our revenues in 2007, of which approximately 27% and 7% were
generated in our EMEA (Europe, Middle East and Africa) and Asia Pacific regions,
respectively.  Although we currently bill for our services in U.S.
dollars, our international operations subject our business to specific risks.
These risks include:





•
            longer
      payment cycles for foreign customers, including delays due to currency
      controls and fluctuations;•
            the
      impact of changes in foreign currency exchange rates on the attractiveness
      of our pricing;•
            high
      taxes in some foreign jurisdictions;•
            difficulty
      in complying with Internet-related regulations in foreign
      jurisdictions;•
            difficulty
      in staffing and managing foreign operations; and•
            difficulty
      in enforcing intellectual property rights and weaker laws protecting these
      rights.





Any of
these factors could negatively impact our business.





Our long sales and service
deployment cycles require us to incur substantial sales costs that may not
result in related revenues.





Our
business is characterized by a long sales cycle between the time a potential
customer is contacted and a customer contract is signed. Once a customer
contract is signed, if the contract is not a flat-rate contract there is
typically an extended period before the customer’s end users actually begin to
use our services, which is when we begin to realize revenues.  As a result,
we may invest a significant amount of time and effort in attempting to secure a
customer which may not result in any revenues.  Even if we enter into a
contract, we may have incurred substantial sales-related expenses well before we
recognize any related revenues. If the expenses associated with sales increase,
we are not successful in our sales efforts, or we are unable to generate
associated offsetting revenues in a timely manner, our operating results will be
harmed.




Completed or future acquisitions or
investments could dilute the ownership of our existing stockholders, cause us to
incur significant expenses or harm our operating
results.





Integrating
any newly acquired businesses, technologies or services may be expensive and
time-consuming. For example, we completed the acquisitions of Safe3w, Inc. in
September 2004, Mobile Automation, Inc. in October 2004 and GoRemote in February
2006. To finance any acquisitions, it may be necessary for us to raise
additional funds through public or private financings. Additional funds may not
be available on terms that are favorable to us and, in the case of equity
financings, would result in dilution to our stockholders. In the case of
completed or future acquisitions, we may be unable to operate any acquired
businesses profitably or otherwise implement our strategy successfully. If we
are unable to integrate any newly acquired entities, such as GoRemote, or
technologies effectively, our operating results could suffer. Completed
acquisitions by us, such as the aforementioned Safe3w, Inc., Mobile Automation,
Inc. and GoRemote transactions, or future acquisitions by us could also result
in large and immediate write-offs or assumption of debt and contingent
liabilities, either of which could harm our operating results.





If we are unable to effectively
manage future expansion, our business may be adversely
impacted.





We have
experienced, and in the future may continue to experience, rapid growth in
operations which has placed and could continue to place, a significant strain on
our network operations, development of services, internal controls and other
managerial, operating, and financial resources. If we do not manage future
expansion effectively, our business will be harmed. To effectively manage any
future expansion, we will need to improve our operational and financial systems
and managerial controls and procedures, which include the
following:





•
            managing
      our research and development efforts for new and evolving
      technologies;•
            expanding
      the capacity and performance of our network and software
      infrastructure;•
            developing
      our administrative, accounting and management information systems and
      controls; and•
            effectively
      maintaining coordination among our various departments, particularly as we
      expand internationally.





If we are unable to effectively
manage our India-based research and development operation, our business may be
adversely impacted.Much of our research and
development activity occurs in India.  The remoteness of our India
operation to corporate headquarters, as well as difficulty of acquiring and
retaining talent in India, could impact our ability to release planned new
products on time, which could adversely impact our business.





We currently are, and in the future
may be, subject to securities class action lawsuits due to decreases in our
stock price.





We are at
risk of being subject to securities class action lawsuits if our stock price
declines substantially. Securities class action litigation has often been
brought against a company following a decline in the market price of its
securities. For example, in June 2004, we announced that we would not meet
market expectations regarding our financial performance in the second quarter,
and our stock price declined. Beginning on January 14, 2005, three purported
class action complaints, which were subsequently consolidated, were filed
against iPass and certain of our executive officers, purportedly on behalf of a
class of investors who purchased iPass stock between April 22, 2004 and June 30,
2004. If our stock price declines substantially in the future, we may
be the target of similar litigation. The current, and any future,
securities litigation could result in substantial costs and divert management’s
attention and resources, and could seriously harm our business.




14


Litigation arising from disputes
involving third parties could disrupt the conduct of our
business.





Because
we rely on third parties to help us develop, market and support our service
offerings, from time to time we have been, and we may continue to be, involved
in disputes with these third parties. If we are unable to resolve these disputes
favorably, our development, marketing or support of our services could be
delayed or limited, which could materially and adversely affect our
business.




If licenses to third party
technologies, including our license with RSA Security, do not continue to be
available to us at a reasonable cost, or at all, our business and operations may
be adversely affected.





We
license technologies from several software providers that are incorporated in
our services. We anticipate that we will continue to license technology from
third parties in the future. In particular, we license encryption technology
from RSA Security. Our license agreement with RSA Security expired in February
2006 and automatically renewed for an additional three-year period. This license
will continue to automatically renew for additional three-year periods upon
expiration, unless terminated by us or by RSA Security. Licenses from third
party technologies, including our license with RSA Security, may not continue to
be available to us at a reasonable cost, or at all. The loss of these
technologies or other technologies that we license could have an adverse effect
on our services and increase our costs or cause interruptions or delays in our
services until substitute technologies, if available, are developed or
identified, licensed and successfully integrated into our services.





Litigation arising out of
intellectual property infringement 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, or that other parties will not assert infringement claims against us.
From time to time we have been, and we may continue to be, involved in disputes
with these third parties. Any claim of infringement of proprietary rights of
others, even if ultimately decided in our favor, could result in substantial
costs and diversion of our resources. Successful claims against us may result in
an injunction or substantial monetary liability, in either case which could
significantly impact our results of operations or materially disrupt the conduct
of our business. If we are enjoined from using a technology, we will need to
obtain a license to use the technology, but licenses to third-party technology
may not be available to us at a reasonable cost, or at all.





Risks Relating to Our
Industry





Security concerns may delay the
widespread adoption of the Internet for enterprise communications, or limit
usage of Internet-based services, which would reduce demand for our products and
services.





The
secure transmission of confidential information over public networks is a
significant barrier to further adoption of the Internet as a business medium.
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 hackers to penetrate online
security systems may reduce the demand for our services. Further, new access
methods, devices, applications and operating systems have also introduced
additional vulnerabilities which have been actively exploited by hackers.
Internet-based worms and viruses, computer programs that are created to
slow Internet traffic or disrupt computer networks or files by replicating
through software or operating systems, are examples of events or computer
programs that can disrupt users from using our Internet-based services and
reduce demand for our services, potentially affecting our business and financial
performance. In particular, certain Internet worms and viruses affected some of
our customers and their mobile users, which may have negatively impacted our
revenues. Furthermore, any well-publicized compromises of confidential
information may reduce demand for Internet-based communications, including our
services.





Financial, political or economic
conditions could adversely affect our revenues.





Our
revenues and profitability depend on the overall demand for enterprise
connectivity services. The weakening of the global economy may lead to decreased
trade and corporate spending on Internet infrastructure. In addition, in the
past, terrorist attacks, including the attacks on the United States and
internationally, have had a significant impact on global economic conditions and
our operations. If there are further acts of terrorism, if hostilities involving
the United States and other countries continue or escalate, or if other future
financial, political, economic and other uncertainties or natural disasters
arise, this could lead to a reduction in travel, including by business travelers
who are substantial users of our services, and continue to contribute to a
climate of economic and political uncertainty that could adversely affect our
revenue growth and financial results.





Government regulation of, and legal
uncertainties regarding, the Internet could harm our
business.





Internet-based
communication services generally are not subject to federal fees or taxes
imposed to support programs such as universal telephone service. Changes in the
rules or regulations of the U.S. Federal Communications Commission or in
applicable federal communications laws relating to the imposition of these fees
or taxes could result in significant new operating expenses for us, and could
negatively impact our business. Any new law or regulation, U.S. or foreign,
pertaining to Internet-based communications services, or changes to the
application or interpretation of existing laws, could decrease the demand for
our services, increase our cost of doing business or otherwise harm our
business. There are an increasing number of laws and regulations pertaining to
the Internet. These laws or regulations may relate to taxation and the quality
of products and services. Furthermore, the applicability to the Internet of
existing laws governing intellectual property ownership and infringement,
taxation, encryption, obscenity, libel, employment, personal privacy, export or
import matters and other issues is uncertain and developing and we are not
certain how the possible application of these laws may affect us. Some of these
laws may not contemplate or address the unique issues of the Internet and
related technologies. Changes in laws intended to address these issues could
create uncertainty in the Internet market, which could reduce demand for our
services, increase our operating expenses or increase our litigation
costs.





15





Item 1B.Unresolved Staff
Comments





Not
applicable





Item 2.Properties





We lease
approximately 48,000 square feet of space in our headquarters in Redwood Shores,
California under a lease that expires in 2015. We also lease sales and support
offices in other parts of the Unites States and abroad. We believe that our
principal facility in Redwood Shores will be adequate for our needs for at least
the next several years, and we might expect that additional facilities will be
available in other jurisdictions to the extent we add new offices.





Item 3.Legal
Proceedings





On
November 22, 2006, Blue Waters Management, L.L.C., a former iPass reseller,
filed a claim against Carlson Companies, Inc. alleging breach of contract and
conversion based upon the iPass services and software provided by Blue Waters to
Carlson.  Blue Waters has alleged damages of approximately $9
million.  On July 23, 2007, Carlson Companies filed a counter-claim
against Blue Waters seeking damages for breach of contract, fraud and unjust
enrichment.  Carlson Companies had been a customer of Blue Waters from
about December 2002 through September 2006, after which Carlson Companies
entered into a contract with iPass in order to continue to use the iPass
services and software.  At the same time, Carlson terminated its
agreement with Blue Waters.   Blue Waters has claimed that
Carlson’s continued use of the iPass software after September 2006 is a
violation of Carlson’s agreement with Blue Waters.   Blue Waters
has not alleged a specific amount of damages with this portion of its
complaint.  In the counterclaim filed by Carlson, Carlson has claimed
that iPass is required to indemnify Carlson to the extent Carlson is required to
pay any damages to Blue Waters as a result of Carlson’s continued use of the
iPass software.   On August 14, 2007,  iPass filed a
response to Carlson’s claim denying any liability to
Carlson.   The Court has ordered the parties to participate in
mediation and conclude such mediation by July 1, 2008.  The Court has
scheduled a trial on the issues for August 11, 2008.  No loss has been
accrued as a loss is not probable or estimable as of December 31,
2007.




In 2001,
GoRemote Internet Communications, Inc. (formerly known as GRIC Communications,
Inc., hereinafter, "GoRemote"), a company we acquired in February 2006, and
certain of its officers and directors were named as defendants in a class action
shareholder complaint filed in the United States District Court for the Southern
District of New York, now consolidated as In re GRIC Communications, Inc.
Initial Public Offering Securities Litigation, Case No. 6771. In the amended
complaint, the plaintiffs allege that GoRemote, certain of its officers and
directors and the underwriters of its initial public offering ("IPO") violated
section 11 of the Securities Act of 1933 based on allegations that GoRemote's
registration statement and prospectus failed to disclose material facts
regarding the compensation to be received by, and the stock allocation practices
of, the IPO underwriters. The complaint also contains a claim for violation of
section 10(b) of the Securities Exchange Act of 1934 based on allegations that
this omission constituted a deceit on investors. The plaintiffs seek unspecified
monetary damages and other relief. Similar complaints were filed in the same
court against hundreds of other public companies ("Issuers") that conducted IPOs
of their common stock in the late 1990s and 2000 (the "IPO
Lawsuits").




In October 2002,
GoRemote's officers and directors were dismissed without prejudice pursuant to a
stipulated dismissal and tolling agreement with the plaintiffs. In February
2003, the court dismissed the section 10(b) claim against GoRemote without leave
to amend, but declined to dismiss the section 11 claim.  In June 2004,
GoRemote and almost all of the other Issuers executed a settlement agreement
with the plaintiffs.  In February 2005, the court certified the
litigation as a class action for settlement purposes and granted preliminary
approval of the settlement, subject to modification of certain bar orders
contemplated by the settlement.  In August 2005, the court reaffirmed
class certification and preliminary approval of the modified
settlement.  On February 24, 2006, the Court dismissed litigation
filed against certain underwriters in connection with the claims to be assigned
to the plaintiffs under the settlement.  On April 24, 2006, the Court
held a Final Fairness Hearing to determine whether to grant final approval of
the settlement.  On December 5, 2006, the Second Circuit Court of
Appeals vacated an earlier decision by the district
court certifying as class actions the six IPO Lawsuits designated as "focus
cases."  Thereafter, the district court ordered a stay of all proceedings
in all of the IPO Cases pending the outcome of plaintiffs’ petition to the
Second Circuit for rehearing en banc.  On April 6, 2007, the Second
Circuit denied plaintiffs' rehearing petition, but clarified that the plaintiffs
may seek to certify a more limited class in the District Court. 
Accordingly, the settlement was terminated and will not receive final
approval.  Plaintiffs filed amended complaints in the six focus cases on or
about August 14, 2007.  GoRemote is not a focus case.  In
September 2007, GoRemote's named officers and directors again extended the
tolling agreement with plaintiffs.  On or about September 27, 2007,
plaintiffs moved to certify the classes alleged in the focus cases and to
appoint class representatives and class counsel in those cases.  The “focus
case” issuers filed motions to dismiss the claims against them in November
2007.  Both motions are pending.  No loss has been accrued
as a loss is not probable or estimable as of December 31, 2007.





We may be
subject to various other claims and legal actions arising in the ordinary course
of business from time to time.





Item 4.Submission of Matters to a Vote of
SecurityHolders





No
matters were submitted to a vote of our stockholders during the fiscal quarter
ended December 31, 2007.




16





PART II





Item 5.Market For Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities





Price Range of Common
Stock





Our
common stock is traded on the Nasdaq Global Market under the symbol “IPAS”. The
following table sets forth the high and low sale price of our common stock,
based on the daily sale, in each quarterly period within the two most recent
fiscal years, as reported on the Nasdaq Global Market:





Low Sale
      Price
            
            
            High Sale
      PriceFiscal year ended December 31,
      2007:First
      Quarter
            
            $
            4.76
            
            
            $
            6.07Second
      Quarter
            
            
            4.98
            
            
            
            5.69Third
      Quarter
            
            
            3.92
            
            
            
            5.62Fourth
      Quarter
            
            
            3.88
            
            
            
            4.86Fiscal year ended December 31,
      2006:First
      Quarter
            
            $
            6.40
            
            
            $
            8.01Second
      Quarter
            
            
            5.11
            
            
            
            8.52Third
      Quarter
            
            
            4.16
            
            
            
            5.75Fourth
      Quarter
            
            
            4.25
            
            
            
            5.92





We had62,663,694shares of our common stock outstanding
held by254stockholders of record as of February29, 2008.




Performance Measurement
Comparison(1)




The
following graph shows the total stockholder return of an investment of $100 in
cash as of July 24, 2003, the date of our initial public offering for
(i) our common stock, (ii) the NASDAQ Composite Index and
(iii) the Russell 2000 Index. All values assume reinvestment of the full
amount of all dividends and are calculated as of December 31:









17


7/24/03
            
            
            12/31/03
            
            
            12/31/04
            
            
            12/31/05
            
            
            12/31/06
            
            
            12/31/07iPass
      Inc.
            
            
            100.00
            
            
            
            85.75
            
            
            
            39.64
            
            
            
            35.14
            
            
            
            31.49
            
            
            
            21.75Russell
      2000 Index
            
            
            100.00
            
            
            
            116.99
            
            
            
            137.46
            
            
            
            142.03
            
            
            
            166.28
            
            
            
            158.06Nasdaq
      Market Index
            
            
            100.00
            
            
            
            115.67
            
            
            
            126.78
            
            
            
            129.82
            
            
            
            143.27
            
            
            
            155.34





We do not
believe that there are any published industry or line of business indices that
are directly relevant to our line of business. In addition, we do not believe
that we can construct a peer group index as many of the services similar to ours
comprise a small portion of the business of the companies providing the
services. Consequently, in addition to the NASDAQ Composite Index, we are
comparing our stock price performance to the Russell 2000 Index as it is an
index of businesses with an average market capitalization similar to
ours.




(1)This
Section is not “soliciting material,” is not deemed “filed” with the SEC and is
not to be incorporated by reference in any filing of iPass under the 1933 Act or
the 1934 Act whether made before or after the date hereof and irrespective of
any general incorporation language in any such filing.





Stock Repurchases





On May 9,
2006, we announced that our Board of Directors approved a two-year stock
repurchase program which authorizes us to repurchase up to $30.0 million of our
outstanding common stock.  In July 2007, we completed the repurchase
program and retired a total of approximately 5.6 million shares of common stock
for an aggregate purchase price of $30.0 million.





On
February 12, 2008, we announced that our Board of Directors approved another
two-year stock repurchase program which authorizes us to repurchase up to $30
million of outstanding common stock.





Dividend Policy





We have
never paid any cash dividends on our common stock. Our board of directors
currently intends to retain future earnings to support operations and to finance
the growth and development of our business and does not intend to pay cash
dividends on our common stock in the foreseeable future. Any future
determination related to dividend policy will be made at the discretion of our
board of directors.





Item 6.Selected Financial Data





The
following selected consolidated financial data should be read in conjunction
with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” following this section and our consolidated financial statements and
related notes included elsewhere in this report. The historical results are not
necessarily indicative of results to be expected in any future
period.





Year Ended December
      31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(In thousands, except per share
      data)Statement of Operations
      DataRevenues
            
            $
            191,732
            
            
            $
            182,711
            
            
            $
            169,373
            
            
            $
            166,319
            
            
            $
            136,078Total
      operating expenses
            
            
            206,077
            
            
            
            202,001
            
            
            
            151,474
            
            
            
            137,353
            
            
            
            113,721Operating
      income (loss)
            
            
            (14,345
            )
            
            
            (19,290
            )
            
            
            17,899
            
            
            
            28,966
            
            
            
            22,357Net
      income (loss)
            
            
            (34,214
            )
            
            
            (8,089
            )
            
            
            12,895
            
            
            
            19,068
            
            
            
            13,902Net
      income (loss) per share:Basic
            
            
            (0.54
            )
            
            
            (0.13
            )
            
            
            0.20
            
            
            
            0.31
            
            
            
            0.26Diluted
            
            
            (0.54
            )
            
            
            (0.13
            )
            
            
            0.19
            
            
            
            0.29
            
            
            
            0.23





As of December
      31,2007
            
            2006
            
            2005
            
            2004
            
            2003(In
      thousands)Balance Sheet
      DataTotal
      assets
            
            $
            221,898
            
            
            $
            263,602
            
            
            $
            254,474
            
            
            $
            230,513
            
            
            
            $
            190,117Total
      stockholders’ equity
            
            
            181,108
            
            
            
            221,389
            
            
            
            226,251
            
            
            
            207,222
            
            
            
            
            171,722





Please
see discussion of acquisitions in the “Recent Acquisitions” section of Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.





18


Item 7.Management’s Discussion and Analysis of
Financial Condition and Results of Operations





Company Overview





We
deliver simple, secure and manageable enterprise mobility services, maximizing
the productivity of workers as they move between office, home and remote
locations. Our policy management services close the gaps in protecting
computers, network assets, user identities and data whenever users connect over
the Internet. Our connectivity services utilize the iPass global virtual
network, a unified network of over 550 dial-up, wireless, and broadband
providers in over 160 countries.





Overview of 2007





In 2007,
we continued to experience a decline in revenues derived from our traditional
dial-up business as dial-up revenue decreased 36% to $67.8 million in 2007 as
compared to $105.7 million in 2006 and $138.1 million in 2005.  This
decrease was offset in part by revenues generated from fees and usage of our
broadband service. However, we continued to add new customers during 2007,
including 40 from the Forbes Global 2000, bringing our total Forbes Global 2000
customers to 417 as of December 31, 2007.





As we
continued to increase the number of broadband access points during the year,
increasing our global broadband footprint was a priority for us in 2007. We
ended 2007 with approximately 94,000 Wi-Fi and wired hotspots worldwide,
approximately 92,000 of which were Wi-Fi hotspots and approximately 2,000 of
which were wired hotspots. This enabled our customers to remotely access their
corporate networks from more locations, at higher speeds and contributed to a
$35.1 million or 88% increase in broadband usage revenue in 2007 over
2006.





Going
forward, we will continue to focus on delivering innovative services and
solutions for our customers, increasing the number of end users of our services
for both dial-up and broadband access, as well as continue to increase fee
revenues from device management and other fee based services. In 2008, we expect
to see continued growth in our business. However, our success could be limited
by several factors, including the timely release of new products, continued
market acceptance of our products and the introduction of new products by
existing or new competitors. For a further discussion of these and other risk
factors, see the section below entitled “Risk Factors.”





Sources of
Revenues





We derive
our revenues primarily from providing enterprise connectivity services through
our virtual network. We sell these services directly, as well as indirectly
through our channel partners. We bill substantially all customers on a time
basis for usage based on negotiated rates. We bill the remaining customers based
on a fixed charge per active user per month with additional charges for excess
time. Substantially all enterprise customers commit to a one to three year
contract term. Most of our contracts with enterprise customers contain minimum
usage levels. We bill customers for minimum commitments when actual usage is
less than their monthly minimum commitment amount. The difference between the
minimum commitment and actual usage is recognized as fee revenue based on our
estimate of cash that will ultimately be collected related to the minimum
commitment. Our usage-based revenues, which consists of dial-up and broadband
usage, represented 74%, 80% and 87% of our total revenues for the years ended
December 31, 2007, 2006 and 2005, respectively.


We have
incurred expenses to expand our broadband coverage and are seeking to generate
additional revenues from our broadband wired and wireless coverage. Revenues
from usage of our broadband services were 39%, 22% and 5.2% of our total
revenues for the years ended December 31, 2007, 2006 and 2005,
respectively.





We also
provide customers with deployment services and technical support throughout the
term of the contract. We typically charge fees for these services on a one-time
or annual basis, depending on the service provided and the nature of the
relationship. In addition, we also offer customers additional services for which
we generally bill on a monthly basis. With the acquisition of Mobile Automation,
Inc. in October 2004, we also began generating license and maintenance revenue
through software licensing agreements. Revenues generated from license and
maintenance fees, together with revenues generated from deployment services
and technical support, represented approximately 26%, 20% and 13% of our
revenues for the years ended December 31, 2007, 2006 and 2005,
respectively.





Recent
Acquisitions





In
February 2006, we acquired all the outstanding shares of GoRemote, a provider of
managed virtual business network services for approximately $78.9 million in
cash.  This acquisition allows us to expand our product offering to include
GoRemote’s managed broadband services for branch offices and teleworkers. 
In 2004, we acquired all the outstanding shares of Mobile Automation and Safe3w
for approximately $28.5 million in cash.  Mobile Automation created a
solution to help enterprise IT departments protect and manage their remote and
mobile devices such as computers and personal data assistants.  Safe3w
developed a dynamic device “fingerprinting” technology.  The technology
from both of these acquisitions has been integrated into our existing
products.





19


Critical Accounting Policies and
Estimates





Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, income taxes, and allowance for doubtful
accounts. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable, the results of which form the
basis of making judgments about the carrying values of assets and
liabilities.





We
believe the following critical accounting policies and estimates are important
in understanding our consolidated financial statements.





Revenue
Recognition





Usage and Services
Fees





We derive
a substantial portion of our revenues from broadband and dial-up usage fees. We
recognize revenues when persuasive evidence of an arrangement exists, service
has been provided to the customer, the price to the customer is fixed or
determinable, and collectability is reasonably assured.





We
recognize revenues during the period the services are rendered to end users
based on usage at negotiated rates.  We typically require our customers to
commit to minimum usage levels.  Minimum usage levels can be based on an
annual term, monthly term or over the term of the arrangement.  If actual
usage in a given period is less than the minimum commitment, we recognize the
difference between the actual usage and the minimum commitment as revenue when
the fee is fixed and determinable.  We estimate the amount of the
difference that will ultimately be collected because we have from time to time
renegotiated minimum commitments in cases where customers have sought
renegotiation of their contract for reasons such as a significant downturn in
their business or where we have determined that it would be in our best interest
to do so. Customers are not contractually entitled to use or otherwise receive
benefit for unused service in subsequent periods.




License, Maintenance and
Training




We also
license our DeviceID and Device Management automated systems management and
security software products.  We recognize revenue in accordance with
Statement of Position (“SOP”) No. 97-2, “Software Revenue
Recognition,” as amended by SOP No. 98-9, “Modification of 97-2 Software
Revenue Recognition, With Respect to Certain Transactions,” and generally
recognize revenue when all of the following criteria are met as set forth in
paragraph 8 of SOP No. 97-2:  (1) persuasive evidence of an
arrangement exists, (2) delivery has occurred, (3) the fee is fixed or
determinable and (4) collectability is probable.




One of
the critical judgments that we make is the assessment that “collectability is
probable.”  We base our recognition of revenue on our assessment of the
probability of collecting the related accounts receivable balance on a
customer-by-customer basis.  As a result, the timing or amount of revenue
recognition may have been different if different assessments of the probability
of collection had been made at the time the transactions were recorded in
revenue.  If we determine that collectability is not probable, we recognize
revenue as cash is collected.




Another
critical judgment that we make involves the “fixed or determinable” criterion.
We consider payment terms where arrangement fees are due within three
months from delivery to be normal contractual terms.  We consider
payment terms beyond three months from delivery extended and not fixed or
determinable. For arrangements with extended payment terms, we recognize
arrangement fee revenues when fees become due, assuming all other revenue
recognition criteria have been met.




Maintenance
revenue consists of fees for providing software updates on a when and if
available basis and technical support for software products (post-contract
support or “PCS”). Our maintenance rates are generally based on the percentage
of license paid.  We recognize maintenance revenue ratably over the
term of the agreement.





Training
revenue consists of fees for training services, generally provides to customer’s
technical teams to help support their own end-users.  Our training
rates are generally based on a fixed rate per day and revenue is recognized as
training services are delivered.





We defer
payments received in advance of services until services are performed. We
provide allowances for estimated uncollectable amounts of minimum commitments
billed as well as future discounts upon recognition of
revenue.


Accounting for Income
Taxes





In
preparing our consolidated financial statements, we assess the likelihood that
our deferred tax assets will be realized from future taxable income. We
establish a valuation allowance if we determine that it is more likely than not
that some portion of the net deferred tax assets will not be realized. We
include changes in the valuation allowance in our consolidated statements of
income as a provision for (benefit from) income taxes. We exercise significant
judgment in determining our provisions for income taxes, our deferred tax assets
and liabilities and our future taxable income for purposes of assessing our
ability to utilize any future tax benefit from our deferred tax
assets.





20


When we
assess the likelihood that we will be able to recover our deferred tax assets,
we consider all available evidence, both positive and negative, including
historical levels of income, expectations and risks associated with estimates of
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for a valuation allowance. If recovery is not likely, we
would increase our provision for taxes by recording a valuation allowance
against the deferred tax assets that we estimate will not ultimately be
recoverable.





Financial
Accounting Standards Board Statement No. 109, “Accounting for Income Taxes”
provides for the recognition of deferred tax assets if realization of such
assets is more likely than not. Based upon the weight of available evidence,
which includes our historical operating performance and the reported cumulative
net losses to date, we have provided a full valuation allowance of $56.0 million
against our deferred tax assets at December 31, 2007.  At each period
end, we reassess our ability to realize our deferred tax assets, including net
operating losses.  In the event we were to determine that we would be able
to realize our deferred income tax assets in the future in excess of their net
recorded amount, we would make an adjustment to the valuation allowance which
would reduce the provision for income taxes. To the extent the valuation
allowance relates to acquired entities, the recognition of any future tax
benefits would first reduce goodwill and then reduce the provision for income
taxes.




Stock-Based
Compensation




Effective
January 1, 2006, we adopted FAS 123R using the modified prospective method,
in which compensation cost was recognized based on the requirements of FAS 123R
for (a) all share-based payments granted or modified after the effective
date and (b) for all awards granted to employees prior to the effective
date of FAS 123R that remain unvested on the effective date. FAS 123R requires
the use of judgment and estimates in performing multiple calculations. We have
estimated the expected volatility as an input into the Black-Scholes-Merton
valuation formula when assessing the fair value of options granted. Our estimate
of volatility was based upon the historical volatility experienced in our stock
price and the volatility of peers in our industry. To the extent volatility of
our stock price increases in the future, our estimates of the fair value of
options granted in the future could increase, thereby increasing stock-based
compensation expense in future periods. In addition, we apply an expected
forfeiture rate when amortizing stock-based compensation expense. Our estimate
of the forfeiture rate was based primarily upon historical experience of
employee turnover. To the extent we revise this estimate in the future, our
stock-based compensation expense could be materially impacted in the quarter of
revision, as well as in following quarters. Our estimate of expected term of
options granted was derived from the average midpoint between vesting and the
contractual term, as described in the SEC Staff Accounting Bulletin
No. 107, “Share-Based
Payment.” In the future, as information regarding post vesting
termination becomes more accessible, we may change our method of deriving the
expected term. This change could impact the fair value of our options granted in
the future.




Upon
adoption, we elected the alternative transition method provided in the Financial
Accounting Standards Board (“FASB”) Staff Position for calculating the tax
effects of equity-based compensation. The alternative transition method includes
simplified methods to establish the beginning balance of the additional paid-in
capital pool (APIC pool) related to the tax effects of employee equity-based
compensation, and to determine the subsequent impact on the APIC pool and
Consolidated Statement of Cash Flows of the tax effects of employee equity-based
compensation awards that are outstanding upon the implementation of
SFAS 123(R). As of December 31, 2006, there was $8.7 million of
unrecognized compensation cost, adjusted for estimated forfeitures, related to
non-vested stock-based payments granted to employees.  We will adjust
total unrecognized compensation cost for future changes in estimated
forfeitures.


Restructuring




Restructuring charges are
comprised primarily of costs for abandonment of excess facilities, severance and
associated employee termination costs.  We record severance costs
pursuant to Statement of Financial Accounting Standard ("SFAS") No. 112, “Employers' Accounting for
Postemployment Benefits—an amendment of FASB Statements No.
5 and43” and
the excess facility costs are recorded pursuant to SFAS No. 146, “Accounting for Costs Associated with
Exit or Disposal Activities” ("SFAS No. 146").  SFAS No. 146
requires that liabilities be recorded at fair value.  The difference
between the fair value of the liability at the time it was recorded and the
total cash liability is accreted ratably over the expected term.  This
accretion is reported in the restructuring expense line on the condensed
consolidated statements of operations.  We reduce costs for the
abandonment of excess facilities by estimated income from the sublease of the
vacated facilities. As of December 31, 2007, we have estimated $1.5 million in
sublease income through the end of the sublease lease term in April
2010.  If we are unable to sublease the facilities within the
timeframe and for the rates anticipated, we may need to revise our estimates and
record additional restructuring charges.




We recognized the
accrual related to the facilities abandoned in connection with the acquisition
of GoRemote as part of the purchase price allocation pursuant to Emerging Issues
Task Force Issue No. 95-3, Recognition of Liabilities in Connection with a
Purchase Business Combination.





Allowance for Doubtful
Accounts





Our
allowance for doubtful accounts is based on a detailed assessment of accounts
receivable for specific, as well as anticipated, uncollectible accounts
receivable. Our estimate for the allowance for doubtful accounts is based on
credit profiles of our customers, current economic trends, contractual terms and
conditions, and historical payment experience. We have an allowance for doubtful
accounts of $2.7 million, $3.1 million and $2.0 million as of December 31, 2007,
2006 and 2005, respectively, for estimated losses resulting from the inability
of our customers to make their required payments. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their ability
to make payments, or if we underestimated the allowances required, additional
allowances may be required, which would result in an increased general and
administrative expense in the period such determination was made.





21


RESULTS OF
OPERATIONS





Revenue




December
      31,Change
              
              
              
              
              
              Change2007
              
              
              $
              
              
              
              %
              
              
              2006
              
              
              $
              
              
              
              %
              
              
              2005(In thousands, except
      percentages)Total
      Revenue
              
              $
              191,732
              
              
              $
              9,021
              
              
              
              4.9
              %
              
              $
              182,711
              
              
              $
              13,338
              
              
              
              7.9
              %
              
              $
              169,373


Total
revenue increased in 2007 as compared to 2006, due to the addition of new
customers signed over the last year and the increase in existing customers’
mobile broadband usage.  This was partially offset by a continued
decline in dial-up revenue as customers migrated from dial-up to broadband as
the preferred method of connecting to their corporate networks.





Total
revenue increased in 2006 as compared to 2005 due to offsetting factors.
Revenues generated from dial up usage decreased from $138.1 million in 2005 to
$105.7 million in 2006. This represents a decrease of $32.4 million or 23%. This
was offset in part by increases in revenues generated from broadband usage and
fees. Revenues generated from usage of our broadband services were $39.7 million
and $8.8 million dollars for the years ended December 31, 2006 and 2005
respectively. Fee revenue increased from $22.5 million in 2005 to $37.3
million in 2006.





A breakdown of revenue
by type is as follows:





December
      31,Change
            
            
            
            
            
            Change2007
            
            
            $
            
            
            
            %
            
            
            2006
            
            
            $
            
            
            
            %
            
            
            2005(In thousands, except
      percentages)Broadband
            
            $
            75,073
            
            
            $
            35,137
            
            
            
            88.0
            %
            
            $
            39,936
            
            
            $
            31,121
            
            
            
            353.0
            %
            
            $
            8,815As
      a percent of revenue
            
            
            39.2
            %
            
            
            —
            
            
            
            17.3
            %
            
            
            21.9
            %
            
            
            —
            
            
            
            16.7
            %
            
            
            5.2
            %Dial
      up
            
            $
            67,826
            
            
            $
            (37,856
            )
            
            
            (35.8
            %)
            
            $
            105,682
            
            
            $
            (32,375
            )
            
            
            (23.5
            %)
            
            $
            138,057As
      a percent of revenue
            
            
            35.4
            %
            
            
            —
            
            
            
            (22.5
            %)
            
            
            57.8
            %
            
            
            —
            
            
            
            (23.7
            %)
            
            
            81.5
            %Services
      fees and other
            
            $
            48,833
            
            
            $
            11,740
            
            
            
            31.7
            %
            
            $
            37,093
            
            
            $
            14,592
            
            
            
            64.9
            %
            
            $
            22,501As
      a percent of revenue
            
            
            25.5
            %
            
            
            —
            
            
            
            5.2
            %
            
            
            20.3
            %
            
            
            —
            
            
            
            7.0
            %
            
            
            13.3
            %





We expect
revenue from dial-up usage to continue to decrease in absolute dollars as well
as a percentage of total revenue as we expect the use of dial-up as a
primary means of enterprise connectivity is expected to continue to decline, but
we cannot reasonably estimate if the decline will be consistent with that seen
from 2006 to 2007.  No individual customer accounted for 10% or more of
total revenues for the years ended December 31, 2007, 2006 or 2005.





International
revenues, which are revenues generated from customers domiciled outside the
United States, accounted for approximately 38%, 40% and 45% of total revenues in
2007, 2006 and 2005, respectively. Substantially all of our international
revenues are generated in the EMEA (Europe, Middle East and Africa) and Asia
Pacific regions. Revenues in the EMEA region represented 27%, 26% and 29% of
total revenues in 2007, 2006 and 2005, respectively. The increase in EMEA as a
percent of revenues has been driven by the expansion of our sales force in the
region. Revenues in the Asia Pacific region represented 7%, 10% and 12% of total
revenues in 2007, 2006 and 2005, respectively. Revenues in the United Kingdom
accounted for 11%, 11% and 14% of total revenues in 2007, 2006 and 2005,
respectively. To date, substantially all of our revenues have been denominated
in U.S. dollars, although in the future some portion of revenues may be
denominated in foreign currencies.





22


Operating
Expenses





Network
Access





Network
access expenses consist of charges for access, principally by the minute, which
we pay to our network service providers.




December
    31,2007
              
              
              Change $
              
              
              Change %
              
              
              2006
              
              
              Change $
              
              
              Change %
              
              
              2005Network
      access expenses
              
              $
              69,143
              
              
              $
              12,214
              
              
              
              21.5
              %
              
              $
              56,929
              
              
              $
              14,820
              
              
              
              35.2
              %
              
              $
              42,109As
      a percent of revenue
              
              
              36.1
              %
              
              
              —
              
              
              
              4.9
              %
              
              
              31.2
              %
              
              
              —
              
              
              
              6.3
              %
              
              
              24.9
              %


The
growth in network access expenses from 2007 to 2006 was due primarily to
increased usage of our virtual network with respect to our broadband services.
While network access costs for broadband access are higher than those for dial
up, we expect that as broadband usage continues to increase we may be in a
better position to negotiate lower rates for access to broadband
networks.  We expect network access expenses to continue to increase
in absolute dollars and increase slightly as a percentage of revenues as usage
shifts from higher margin dial to lower margin broadband.





The
growth in network access expenses from 2006 to 2005 was due primarily to
increased usage of our virtual network with respect to our broadband services.
For our dial-up access costs, we continued to purchase network access from
additional service providers at a lower cost and to renegotiate a number of our
existing network service provider contracts.





Network
Operations





Network
operations expenses consist of compensation and benefits for our network
engineering, customer support, network access quality and information technology
personnel, outside consultants, transaction center fees, depreciation of our
network equipment, costs of mobile data cards and certain allocated overhead
costs.




December
    31,2007
            
            
            Change $
            
            
            Change %
            
            
            2006
            
            
            Change $
            
            
            Change %
            
            
            2005Network
      operations expense
            
            $
            34,258
            
            
            $
            2,245
            
            
            
            7.0
            %
            
            $
            32,013
            
            
            $
            11,067
            
            
            
            52.8
            %
            
            $
            20,946As
      a percent of revenue
            
            
            17.8
            %
            
            
            —
            
            
            
            0.3
            %
            
            
            17.5
            %
            
            
            —
            
            
            
            5.1
            %
            
            
            12.4
            %





The
increase in network operations expenses from 2006 to 2007 in absolute dollars
was due primarily to $962,000 in additional compensation and benefits expense,
$485,000 related to additional consulting expense, $440,000 related to
additional maintenance and support and $439,000 related to additional
co-location and network services.  We expect that our network
operations expenses will increase slightly in absolute dollars and to the extent
that revenues increase, will remain relatively constant as a percentage of
revenues.





The
increase in network operations expenses from 2005 to 2006 in absolute dollars
was due primarily to $5.6 million in additional compensation and benefits
expense related to increased headcount from the acquisition of GoRemote Internet
Communications, Inc., $1.0 million related to the adoption of SFAS 123(R), $1.2
million in mobile data card subsidy costs, $433,000 to write-down obsolete
mobile data cards and $1.4 million for external consulting and contractor
support.





Research and
Development





Research
and development expenses consist of compensation and benefits for our research
and development personnel, consulting, and certain allocated overhead
costs.


December
    31,2007
              
              
              Change $
              
              
              Change %
              
              
              2006
              
              
              Change $
              
              
              Change %
              
              
              2005Research
      and development expenses
              
              $
              21,141
              
              
              $
              (1,416
              )
              
              
              (6.3)
              %
              
              $
              22,557
              
              
              $
              4,811
              
              
              
              27.1
              %
              
              $
              17,746As
      a percent of revenue
              
              
              11.0
              %
              
              
              —
              
              
              
              (1.3)
              %
              
              
              12.3
              %
              
              
              —
              
              
              
              1.8
              %
              
              
              10.5
              %
 The decrease
in research and development expenses from 2006 to 2007 was due primarily to
transition of research and development work to India.  This resulted
in a reduction in consulting costs of approximately $879,000 and a
reduction in incentive compensation of approximately $422,000 due to lower
incentive compensation rates for India-based employees.  The remaining
portion of the decrease was due to individually insignificant
items.  We expect that our research and development expenses will
decrease in absolute dollars in the first quarter of 2008 due to the
reorganization in the fourth quarter of 2007 and then remain relatively constant
for the remainder of the year, and to the extent revenues increase, will
decrease slightly as a percentage of revenues.





The increase in research
and development expenses from 2005 to 2006 was due primarily to an additional
$3.2 million of compensation costs related to increased headcount due to the
acquisition of GoRemote and $1.2 million related to the adoption of SFAS 123(R)
offset by a decrease of $931,000 in consulting and contractor expenses. The
remaining portion of the increase was due to individually insignificant items.
The increase as a percentage of revenues as well as absolute dollars was
primarily due to the acquisition of GoRemote as well as the continued
acceleration of our development of new products, the integration of technology
acquired into existing products and services as a result of the business
acquisitions that were completed in 2004 and 2006.





23


Sales and
Marketing





Sales and
marketing expenses consist of compensation, benefits, advertising, promotion
expenses, and certain allocated overhead costs.




December
    31,2007
              
              
              Change $
              
              
              Change %
              
              
              2006
              
              
              Change $
              
              
              Change %
              
              
              2005Sales
      and marketing expenses
              
              $
              52,809
              
              
              $
              (5,811
              )
              
              
              (9.9)
              %
              
              $
              58,620
              
              
              $
              7,907
              
              
              
              15.6
              %
              
              $
              50,713As
      a percent of revenue
              
              
              27.5
              %
              
              
              —
              
              
              
              (4.4)
              %
              
              
              31.9
              %
              
              
              —
              
              
              
              2.0
              %
              
              
              29.9
              %




The
decrease in sales and marketing expenses from 2007 to 2006 in absolute
dollars was due primarily to approximately $2.4 million decrease in commission,
compensation and benefits expenses resulting from sales personnel terminated as
part of our 2006 and 2007 restructuring activities.  The decreased
sales personnel resulted in an additional $960,000 reduction in stock-based
compensation expense and $875,000 reduction in travel costs.  Targeted
reductions in specific marketing programs further reduced sales and marketing
expenses by approximately $1.0 million.  The remaining portion of the
decrease was due to individually insignificant items.  We expect that
our sales and marketing expenses will decrease in absolute dollars in the first
quarter of 2008 due to the reorganization in the fourth quarter of 2007 and then
remain relatively constant for the remainder of the year, and to the extent
revenues increase, will decrease slightly as a percentage of
revenues.





The
increase in sales and marketing expenses from 2006 to 2005 in absolute dollars
was due primarily to approximately $4.8 million in additional compensation and
benefits expenses due to additional sales personnel related to the acquisition
of GoRemote and expansion of the sales organization in the EMEA region, and
an additional $2.2 million related to the adoption of SFAS 123(R). The remaining
portion of the increase was due to individually insignificant
items.





General and
Administrative





General
and administrative expenses consist of compensation and benefits of general and
administrative personnel, legal and accounting expenses, bad debt expense, and
certain allocated overhead costs.




December
    31,2007
                
                
                Change $
                
                
                Change %
                
                
                2006
                
                
                Change $
                
                
                Change %
                
                
                2005General
      and administrative expenses
                
                $
                21,358
                
                
                $
                (1,820
                )
                
                
                (7.9)
                %
                
                $
                23,178
                
                
                $
                5,585
                
                
                
                31.7
                %
                
                $
                17,593As
      a percent of revenue
                
                
                11.1
                %
                
                
                —
                
                
                
                (1.6)
                %
                
                
                12.7
                %
                
                
                —
                
                
                
                2.3
                %
                
                
                10.4
                %


General
and administrative expenses decreased in absolute dollars and as a percentage of
revenues from 2006 to 2007. The decrease was driven primarily by a reduction of
rent expense of approximately $1.3 million due to facilities abandoned as part
of our restructuring activities in 2006.  A reduction of bad debt
expense contributed an additional $1.0 million decrease.  The decrease
is offset in part by various individually insignificant items.  We
expect that our general and administrative expenses will remain relatively
constant in absolute dollars and, to the extent that revenues increase, will
decrease as a percentage of revenues.





General
and administrative expenses increased in absolute dollars and as a percentage of
revenues from 2005 to 2006. The increase was driven primarily by approximately
$2.7 million in additional compensation and benefits expenses due to the
acquisition of GoRemote, and an additional $1.7 million related to the adoption
of SFAS 123(R). Additionally, bad debt expense increased by $893,000 and we
began matching employee contributions to the 401(k) plan resulting in an
additional expense of $792,000. The increase is offset in part by various
individually insignificant items.





Restructuring
Charges





In June
and September 2006, we recorded restructuring charges totaling approximately
$1.7 million related to the workforce reduction of 58 iPass employees, across
all functions.  In November 2006, we recorded an additional
restructuring charge of $3.0 million related to excess iPass facilities. The
severance costs were recorded pursuant to Statement of Financial Accounting
Standard ("SFAS") No. 112, Employers' Accounting for
Postemployment Benefits—an amendment of FASB Statements No.
5 and 43 and the excess facility costs were recorded pursuant
to SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (SFAS No. 146).





By June
2007, we finalized the aforementioned terminations, settled all
negotiations and paid out the remaining severance.  As a result
of finalizing all such terminations, we adjusted the accrual for the difference
between initial estimates of severance liability and the final payments
ultimately made.  This adjustment of approximately $179,000 was
credited to the restructuring expense in the second quarter of
2007.  SFAS No. 146 requires that liabilities be recorded at fair
value.  The difference between the fair value of the liability at the
time it was recorded and the total cash liability is accreted ratably over
the expected term.  This accretion is reported in the
restructuring expense line on the condensed consolidated statements of
operations.





In
November 2007, we recorded an additional restructuring charge of approximately
$3.2 million related to a workforce reduction of 72 employees, the abandonment
of certain facilities and the write off of certain capitalized
assets.  As of December 31, 2007, we finalized approximately 56 of the
aforementioned terminations and had fully vacated the abandoned
facilities.





24


Amortization of Acquired
Tangibles





Amortization
of acquired intangibles was $4.2 million, $4.0 million and $2.4 million for the
years ended December 31, 2007, 2006 and 2005, respectively.  The increase
from 2005 to 2006 was due to the impact of amortization of intangibles related
to the GoRemote acquisition in February 2006.





Non-Operating Income and
Expenses





Interest
Income





Interest
income includes interest income on cash, cash equivalents, and short-term
investment balances. Interest income and other was $3.3 million, $3.7 million
and $3.9 million for the years ended December 31, 2007, 2006 and 2005,
respectively. The decrease in interest and other income in 2007 was primarily
due to the use of approximately $30.0 million of cash for the repurchase of
shares of our outstanding common stock.  The decrease in interest and
other income in 2006 was due to the net use of $72.2 million of cash, cash
equivalents and short-term investment balances for the acquisition of GoRemote
in February 2006.





Provision for Income
Taxes





The
provision for income taxes was $23.2 million in 2007, compared to a benefit
of ($7.2) million in 2006. The change from benefit to provision is primarily due
to the establishment of a valuation allowance against net deferred tax assets in
2007 as a result of continued losses.  The change from provision to
benefit for income taxes in 2006 compared to 2005 was due to a loss before
income taxes of $15.6 million in 2006 as compared to income before taxes of
$21.8 million in 2005.  The effective tax rate was 209% for the year ended
December 31, 2007 and (46%) and 41% for the years ended December 31, 2006 and
2005, respectively.





Liquidity and Capital
Resources





Since our
initial public offering of common stock in July 2003, our principal source of
funding has been cash from our operations.  As of December 31, 2007,
we had approximately 75.2 million in cash, cash equivalent and short-term
investments, as compared to $99.2 million at December 31, 2006, and $183.3
million at December 31, 2005.





Net cash
used in operating activities in 2007 was $7.3 million compared to net cash
provided by operating activities of $2.3 million for the year ended December 31,
2006 and $32.1 million for the year ended December 31, 2005.  The
increase in cash used for operating activities primarily relates to an increase
in accounts receivable resulting from increased billings and slower than
expected collections from customers.  The decrease in cash provided by
operating activities in 2006 as compared to 2005 is due primarily to
operating expenses increasing by $50.5 million due to the acquisition of
GoRemote while our total revenues increased approximately $13.3 million
acquisition of GoRemote and increased broadband revenue offset by decline in
dial revenue.





Net cash
provided by investing activities in 2007 was $73.8 million compared to net cash
used by investing activities in 2006 of $16.0 million in 2006 and $32.5 million
in 2005, respectively. In 2007, net cash provided by investing activities
related to maturities of short-term investments net of purchases in the amount
of $80.4 million, as well as $5.1 million for the purchases of property and
equipment. The $89.1 million increase of cash provided by investing
activities in 2007 as compared to 2006 primarily relates to $78.0 million of
cash used for the acquisition of GoRemote in 2006.  Additionally,
$54.0 million of short term investments were classified as cash equivalents at
December 31, 2007 due to investments in securities with original maturities
of less than 90 days.  Net cash used in investing activities in 2006
was primarily from the acquisition of GoRemote, which net of cash acquired was
$78.0 million, which we funded primarily by liquidating short term
investments.  In 2005, net cash used in investing activities related
to purchases net of maturities of $29.6 million in short-term investments as
well as $3.9 million for the purchases of property and equipment.





Net cash
used in financing activities in 2007 was $11.1 million which was comprised
of $13.8 million of cash used for repurchases of common stock offset in part by
$2.7 million of cash received for stock option exercises.  Net cash
used in financing activities in 2006 was $8.7 million which was comprised of
$16.2 million of cash used for repurchases of common stock offset in part by
$7.5 million of cash received for stock option exercises. The increase in cash
used in financing activities in 2007 as compared to 2006 primarily relates to
decreased cash inflows from employee stock option exercises.  Net cash
provided by financing activities in 2005 was $3.8 million which was comprised of
proceeds from the issuance of common stock for employee stock options and
through the employee stock purchase program.





We
anticipate that our operating expenses, as well as planned capital expenditures,
will constitute a material use of our cash resources for the foreseeable future
in order to execute our business plan. In addition, we may utilize cash
resources to fund acquisitions of complementary businesses, technologies or
product lines. We believe that our cash and cash equivalents and short-term
investments on hand will be sufficient to meet our cash requirements for at
least the next 12 months, including working capital requirements and planned
capital expenditures.





25


Off-Balance Sheet
Arrangements





At
December 31, 2007 and 2006, we did not have any off-balance sheet arrangements
or relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities,
which are typically established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited
purposes.





Commitments





At
December 31, 2007, we had no material commitments for capital
expenditures.





We have
signed contracts with some network service providers under which we have minimum
purchase commitments that expire on various dates through October 2016. 
Other than in the approximately 24 countries in which our sole dial-up network
service provider is Equant, we have contracted with multiple network service
providers to provide alternative access points in a given geographic area. In
those geographic areas where we provide access through multiple providers, we
are able to direct users to the network of particular service providers. Consequently,
we believe we have the ability to fulfill our minimum purchase commitments in
these geographic areas.




In May
2005, we consolidated several term license agreements that were set to expire
into a single, long-term operating lease with a vendor. Future minimum purchase
commitments under these agreements as of December 31, 2007 are as follows (in
thousands):





Year
      ending December 31:2008
            
            $
            5,0682009
            
            
            14,1812010
            
            
            15,075$
            34,324





We lease
our facilities under non-cancelable operating leases that expire at various
dates through October 2016. Future minimum lease payments under these operating
leases as of December 31, 2007 are as follows (in thousands):





Year
      ending December 31:2008
            
            $
            7,4962009
            
            
            6,7852010
            
            
            4,6502011
            
            
            3,5592012
      and thereafter
            
            
            9,322$
            31,812





Tabular Disclosure of Contractual
Obligations





Payments Due by
      PeriodContractual
      Obligations
            
            Total
            
            
            Less Than 1
      Yr
            
            
            1-3
Years
            
            
            3-5
Years
            
            
            More Than 5
      YrsOperating
      Lease Obligations
            
            $
            31,812
            
            
            $
            7,496
            
            
            $
            11,435
            
            
            $
            6,288
            
            
            $
            6,593Purchase
      Obligations
            
            
            34,324
            
            
            
            5,068
            
            
            
            29,256
            
            
            
            —
            
            
            
            —Total
      Contractual Obligations
            
            $
            66,136
            
            
            $
            12,564
            
            
            $
            40,691
            
            
            $
            6,288
            
            
            $
            6,593





In
addition, in
accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”),we
have recorded a $3.8 million reserve as of December 31, 2007. 
Included in these unrecognized tax benefits is $290,000 for accrued
interest.  We
believe that it is reasonably possible that unrecognized tax benefits of up to
$1.9 million may be settled in the next twelve months.




26


Item 7A.Quantitative and Qualitative
Disclosures About Market
Risk





Foreign Currency





Although
we currently bill our services in U.S. dollars, our financial results could be
affected by factors such as changes in foreign currency rates or weak economic
conditions in foreign markets. A strengthening of the dollar could make our
services less competitive in foreign markets and therefore could reduce our
revenues. We are billed by and pay substantially all of our network service
providers in U.S. dollars. In the future, some portion of our revenues and costs
may be denominated in foreign currencies. To date, exchange rate
fluctuations have had little impact on our operating results.





Interest Rate
Sensitivity





As of
December 31, 2007, we had cash, cash equivalents, and short-term investments
totaling $75.2 million. Our investment portfolio consists of cash and government
securities, generally due within one to two years. All of our instruments are
classified as available for sale. We place investments with high quality issuers
and limit the amount of credit exposure to any one issuer. These securities are
subject to interest rate risks. Based on our portfolio content and our ability
to hold investments to maturity, we believe that, a hypothetical 10% increase or
decrease in current interest rates would not materially affect our interest
income.





As of
December 31, 2006, we had cash, cash equivalents, and short-term investments
totaling $100.0 million. Our investment portfolio consisted of auction rate and
money market securities, asset backed securities, corporate securities, and
government securities, generally due within one to two years. All of our
instruments were classified as available for sale.





The
following is a chart of the principal amounts of short-term investments by
expected maturity as of December 31, 2007 (in thousands):





Expected Maturity Date for Par
      Value Amounts for the Year Ended December 31,
            
            
            As of Dec. 31,20072008
            
            
            2009
            
            
            2010
            
            
            Total Cost
      Value
            
            
            Total Fair
      ValueGovernment
      agencies
            
            $
            4,250
            
            
            $
            —
            
            
            $
            —
            
            
            $
            4,256
            
            
            $
            4,258Total
            
            $
            4,250
            
            
            $
            —
            
            
            $
            —
            
            
            $
            4,256
            
            
            $
            4,258




Our
general policy is to limit the risk of principal loss and ensure the safety of
invested funds by limiting market and credit risk.  We consider all
investments to be short-term investments, which are classified in the balance
sheet as current assets, because (1) the investments can be readily converted at
any time into cash or into securities with a shorter remaining time to maturity
and (2) the investments are selected for yield management purposes only and we
are not committed to holding the investments until maturity.  We determine
the appropriate classification of our investments at the time of purchase and
re-evaluate such designations as of each balance sheet date. All short-term
investments and cash equivalents in our portfolio are classified as
“available-for-sale” and are stated at fair market value, with the unrealized
gains and losses reported as a component of accumulated other comprehensive
income (loss). The cost of securities sold is based on the specific
identification method.  We evaluate the individual securities in our
portfolio that are in an unrealized loss position for other-than-temporary
impairment.  As of December 31, 2007 we had six securities in
unrealized loss positions, totaling less than $2,000.  We do not
believe that these unrealized losses constitute an other-than temporary
impairment.





Item 8.Financial Statements and
Supplementary Data





Financial
Statements





Our
financial statements required by this item are set forth in Item 15 of this
report and incorporated by reference here.  See Item 15(a)(1) for a
listing of financial statements provided in the section titled “Financial
Statements.”





Supplementary
Data





The
following tables set forth unaudited quarterly supplementary data for each of
the years in the two-year period ended December 31, 2007 (in thousands, except
per share amounts):





Quarter
      EndedMarch 31
            
            
            June 30
            
            
            September
    30
            
            
            December
    31Year Ended December 31,
      2007Revenues
            
            $
            46,888
            
            
            $
            47,597
            
            
            $
            47,736
            
            
            $
            49,511Operating
      loss
            
            
            (3,288
            )
            
            
            (3,705
            )
            
            
            (2,709
            )
            
            
            (4,643
            )Net
      loss
            
            
            (468
            )
            
            
            (2,313
            )
            
            
            (1,081
            )
            
            
            (30,352
            )Basic
      net loss per share
            
            $
            (0.01
            )
            
            $
            (0.04
            )
            
            $
            (0.02
            )
            
            $
            (0.49
            )Diluted
      net loss per share
            
            $
            (0.01
            )
            
            $
            (0.04
            )
            
            $
            (0.02
            )
            
            $
            (0.49
            )





Quarter
      EndedMarch 31
            
            
            June 30
            
            
            September
    30
            
            
            December
    31Year Ended December 31,
      2006Revenues
            
            $
            44,270
            
            
            $
            47,384
            
            
            $
            45,900
            
            
            $
            45,157Operating
      loss
            
            
            (2,255
            )
            
            
            (5,142
            )
            
            
            (4,695
            )
            
            
            (7,198
            )Net
      loss
            
            
            (65
            )
            
            
            (2,054
            )
            
            
            (2,209
            )
            
            
            (3,761
            )Basic
      net loss per share
            
            $
            (0.00
            )
            
            $
            (0.03
            )
            
            $
            (0.03
            )
            
            $
            (0.06
            )Diluted
      net loss per share
            
            $
            (0.00
            )
            
            $
            (0.03
            )
            
            $
            (0.03
            )
            
            $
            (0.06
            )





27


Item 9.Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure





None.





Item 9A.Controls and
Procedures





Controls and
Procedures





We
carried out an evaluation, under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the
period covered by this report. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective.





Changes in Internal Control Over
Financial Reporting





There
have been no changes in our internal controls over financial reporting during
the quarter ended December 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.





Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within iPass have been detected.




Management’s Report on Internal
Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended) for iPass. Our management assessed
the effectiveness of our internal control over financial reporting as of
December 31, 2007. In making this assessment, our management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal Control-Integrated
Framework. Our
management has concluded that, as of December 31, 2007, our internal control
over financial reporting is effective based on these criteria. Our independent
registered public accounting firm, KPMG LLP, that audited our financial
statements included in this annual report containing the disclosure required by
this item has issued an audit report on the effectiveness of our internal
control over financial reporting, which is included herein.





The Board
of Directors and Stockholders


iPass,
Inc.:





We have
audited iPass, Inc. and subsidiaries’ (the Company) internal control over
financial reporting as of December 31, 2007, based on criteria established
in Internal
Control—Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Report on Internal Control over
Financial Reportingappearing in Item 9A. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.




A company’s
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material effect on
the financial statements.




28


Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal
Control—Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway
Commission.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of iPass, Inc.
as of December 31, 2007 and December 31, 2006, and the related consolidated
statements of operations, stockholders’ equity and comprehensive income (loss),
and cash flows for each of the years in the three-year period ended
December 31, 2007, and our report dated March17, 2008 expressed an
unqualified opinion on those consolidated financial
statements.





Mountain
View, California


March 17,
2008





Item 9A(T).Control and
Procedures





Not
applicable.





Item 9B.Other
Information





None.




PART III





Item 10.Directors,Executive Officers and Corporate
Governance





Information
relating to our executive officers and directors will be presented under the
captions “Executive Officers” and “Proposal 1 — Election of Directors” in our
definitive proxy statement in connection with our 2007 Annual Meeting of
stockholders to be filed with the Securities and Exchange Commission not later
than April 29, 2008 (the “Proxy Statement”). That information is incorporated
here by reference.





Information
concerning compliance with Section 16(a) of the Securities Exchange Act of 1934
will be presented under the caption “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Proxy Statement. That information is incorporated
into this report by reference.





Information
concerning our Code of Ethics will be presented under the caption “Code of
Conduct and Ethics” in “Proposal 1 — Election of Directors” in the Proxy
Statement. That information is incorporated here by reference.





Information
concerning procedures for recommending nominees for director will be presented
under the caption “Corporate Governance and Nominating Committee” in “Proposal 1
— Election of Directors” in the Proxy Statement. That information is
incorporated here by reference.





Information
relating to our audit committee and the audit committee financial experts will
be presented under the captions “Information Regarding the Board of Directors
and its Committees” and “Audit Committee” in “Proposal 1 — Election of
Directors” in the Proxy Statement. That information is incorporated here by
reference.





Item 11.Executive
Compensation





Information
relating to director and executive compensation and other matters required by
this Item 11will be presented under the caption “Executive
Compensation and Related Information,” “Compensation Committee Interlocks and
Insider Participation” and “Report of the Compensation Committee Report” in the
Proxy Statement. That information is incorporated here by
reference.





29


Item 12.Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters





Information
relating to the security ownership of our common stock by our management and
other beneficial owners will be presented under the caption “Security Ownership
of Certain BeneficialOwners and Management” in the Proxy Statement. That
information is incorporated here by reference.





Information
relating to securities authorized for issuance under equity compensation plans
will be presented under the caption “Securities Authorized for Issuance Under
Equity Compensation Plans” in the Proxy Statement. That information is
incorporated here by reference.





Item 13.Certain Relationships and Related
Transactions, and Director Independence





Information
relating to certain relationships of our directors and executive officers and
related transactions and the independence of our directors will be presented
under the captions “Independence of the Board of Directors” in “Proposal 1 —
Election of Directors” and “Certain Relationships and Related Transactions” in
the Proxy Statement. That information is incorporated here by
reference.





Item 14.Principal AccountingFees and
Services





The
information required by this item will be included under the caption “Principal
Accountant Fees and Services” in “Proposal No. 2 — Ratification of Independent
Auditors” in the Proxy Statement. That information is incorporated here by
reference.





30





PART IV





Item 15.Exhibits,Financial Statement
Schedules





(a)The following financial
statements are filed as part of this report:





1. Financial
Statements




PageReport of IndependentRegistered Public
      Accounting Firm
            32Consolidated
      Financial Statements:Balance
      Sheets as of December 31,2007and2006
            33Statements
      of Operations for the years ended December 31,2007,2006and2005
            34Statements of
      Stockholders’Equity and Comprehensive Income
      (Loss) for the years ended December 31,2007,2006and2005
            35Statements of Cash Flows for the
      years ended December 31,2007,2006and2005
            36Notes to
      Consolidated Financial Statements
            59





2. Financial Statement
Schedules





None. All schedules are
omitted because they are not required or the required information is shown in
the financial statements or notes thereto.





3.
Exhibits





See the
Exhibit Index which follows the signature page of this Annual Report
on Form 10-K, which is incorporated here by reference.





31





REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





The Board
of Directors and Stockholders


iPass,
Inc.:




We have
audited the accompanying consolidated balance sheets of iPass, Inc. and
subsidiaries (the Company) as of December 31, 2007 and December 31, 2006,
and the related consolidated statements of operations, stockholders’ equity and
comprehensive income (loss), and cash flows for each of the years in the
three-year period ended December 31, 2007. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of iPass, Inc. and subsidiaries
as of December 31, 2007 and December 31, 2006, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles.




As discussed
in note 2 to the consolidated financial statements, effective
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income
Taxes–an interpretation of FASB Statement
No. 109. Also, as discussed in note 2 to the consolidated
financial statements, effective January 1, 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based
Payment.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 17, 2008 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial
reporting.




Mountain
View, California


March 17,
2008




32








iPASS INC. AND
SUBSIDIARIES





CONSOLIDATED BALANCE
SHEETS





(In thousands, except share and per
share amounts)





As of December
      31,2007
            
            
            2006ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            70,907
            
            
            $
            15,492Short-term
      investments
            
            
            4,258
            
            
            
            83,708Accounts
      receivable, net of allowance for doubtful accounts of $2,792 and $3,089,
      respectively
            
            
            35,938
            
            
            
            28,579Prepaid
      expenses and other current assets
            
            
            7,116
            
            
            
            6,341Deferred
      tax assets
            
            
            575
            
            
            
            8,070Total
      current assets
            
            
            118,794
            
            
            
            142,190Property
      and equipment, net
            
            
            9,272
            
            
            
            10,519Other
      assets
            
            
            4,876
            
            
            
            3,344Long-term
      deferred tax assets
            
            
            —
            
            
            
            14,952Acquired
      intangibles, net
            
            
            9,504
            
            
            
            13,705Goodwill
            
            
            79,543
            
            
            
            78,892Total
      assets
            
            $
            221,989
            
            
            $
            263,602LIABILITIES AND STOCKHOLDERS’
      EQUITYCurrent
      liabilities:Accounts
      payable
            
            $
            15,923
            
            
            $
            14,830Accrued
      liabilities
            
            
            15,788
            
            
            
            18,535Deferred
      revenue—short term
            
            
            6,606
            
            
            
            5,411Total
      current liabilities
            
            
            38,317
            
            
            
            38,776Deferred
      tax liability-long term
            
            
            575
            
            
            
            —Deferred
      revenue—long term
            
            
            949
            
            
            
            1,468Other
      long term liabilities
            
            
            1,040
            
            
            
            1,969Total
      liabilities
            
            
            40,881
            
            
            
            42,213Commitments
      (Note 13)Stockholders’
      equity:Common
      stock, $0.001 par value; authorized 250,000,000 shares; issued and
      outstanding 61,812,598 and 63,467,796 shares,
      respectively
            
            
            62
            
            
            
            63Additional
      paid-in capital
            
            
            241,703
            
            
            
            247,882Accumulated
      other comprehensive income (loss)
            
            
            15
            
            
            
            (98
            )Accumulated
      deficit
            
            
            (60,672
            )
            
            
            (26,458
            )Total
      stockholders’ equity
            
            
            181,108
            
            
            
            221,389Total
      liabilities and stockholders’ equity
            
            $
            221,989
            
            
            $
            263,602





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




33








iPASS INC. AND
SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF OPERATIONS





(In thousands, except share and per
share amounts)





For the Year Ended December
      31,2007
            
            
            2006
            
            
            2005Revenues
            
            $
            191,732
            
            
            $
            182,711
            
            
            $
            169,373Operating
      expenses (1):Network
      access
            
            
            69,143
            
            
            
            56,929
            
            
            
            42,109Network
      operations
            
            
            34,258
            
            
            
            32,013
            
            
            
            20,946Research
      and development
            
            
            21,141
            
            
            
            22,557
            
            
            
            17,746Sales
      and marketing
            
            
            52,809
            
            
            
            58,620
            
            
            
            50,713General
      and administrative
            
            
            21,358
            
            
            
            23,178
            
            
            
            17,593Restructuring
      charges
            
            
            3,167
            
            
            
            4,733
            
            
            
            —Amortization
      of acquired intangibles
            
            
            4,201
            
            
            
            3,971
            
            
            
            2,367Total
      operating expenses
            
            
            206,077
            
            
            
            202,001
            
            
            
            151,474Operating
      income (loss)
            
            
            (14,345
            )
            
            
            (19,290
            )
            
            
            17,899Interest
      income
            
            
            3,282
            
            
            
            3,659
            
            
            
            3,899Income
      (loss) before income taxes
            
            
            (11,063
            )
            
            
            (15,631
            )
            
            
            21,798Provision
      for (benefit from) income taxes
            
            
            23,151
            
            
            
            (7,195
            )
            
            
            8,903Net
      income (loss) before cumulative effect of change in accounting
      principle
            
            
            (34,214
            )
            
            
            (8,436
            )
            
            
            12,895Cumulative
      effect of change in accounting principle, net of zero tax
      effect
            
            
            —
            
            
            
            (347
            )
            
            
            —Net
      income (loss)
            
            $
            (34,214
            )
            
            $
            (8,089
            )
            
            $
            12,895Net
      income (loss) per share before cumulative effect of change in accounting
      principle:Basic
            
            $
            (0.54
            )
            
            $
            (0.13
            )
            
            $
            0.20Diluted
            
            $
            (0.54
            )
            
            $
            (0.13
            )
            
            $
            0.19Per
      share effect of cumulative change in accounting
      principle:Basic
            
            $
            —
            
            
            $
            —
            
            
            $
            —Diluted
            
            $
            —
            
            
            $
            —
            
            
            $
            —Net
      income (loss) per share:Basic
            
            $
            (0.54
            )
            
            $
            (0.13
            )
            
            $
            0.20Diluted
            
            $
            (0.54
            )
            
            $
            (0.13
            )
            
            $
            0.19Number
      of shares used in per share calculations:Basic
            
            
            63,211,888
            
            
            
            64,572,603
            
            
            
            63,353,779Diluted
            
            
            63,211,888
            
            
            
            64,572,603
            
            
            
            66,277,342(1)
      Stock-based compensation is included in the following expense line
      items:Network
      operations
            
            $
            799
            
            
            $
            1,031
            
            
            $
            163Research
      and development
            
            
            959
            
            
            
            1,235
            
            
            
            175Sales
      and marketing
            
            
            1,246
            
            
            
            2,206
            
            
            
            265General
      and administrative
            
            
            1,914
            
            
            
            1,706
            
            
            
            534





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




34








iPASS INC. AND
SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(LOSS)





(In thousands)


Common StockShares
                
                
                Amount
                
                
                Additional Paid-In
      Capital
                
                
                Deferred Stock-Based
      Compensation
                
                
                Accumulated Comprehensive
      Income (Loss)
                
                
                Accumulated
      Deficit
                
                
                Total Stockholders'
      Equity
                
                
                Comprehensive Income
      (Loss)Balances,
      December 31, 2004
                
                
                62,757
                
                
                $
                63
                
                
                $
                240,629
                
                
                $
                (1,782
                )
                
                $
                (424
                )
                
                $
                (31,264
                )
                
                $
                207,222
                
                
                $
                18,519Exercise
      of stock options — common stock issued
                
                
                1,041
                
                
                
                1
                
                
                
                1,960
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,961
                
                
                
                —Employee
      stock purchase plan — common stock issued
                
                
                405
                
                
                
                —
                
                
                
                1,840
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,840
                
                
                
                —Cancellation
      of unvested stock options
                
                
                —
                
                
                
                —
                
                
                
                (52
                )
                
                
                52
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Amortization
      of stock-based compensation
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,137
                
                
                
                —
                
                
                
                —
                
                
                
                1,137
                
                
                
                —Tax
      benefit from employee stock option plans
                
                
                —
                
                
                
                —
                
                
                
                1,079
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,079
                
                
                
                —Unrealized
      gain on available-for-sale investments, net
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                117
                
                
                
                —
                
                
                
                117
                
                
                
                117Net
      income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                12,895
                
                
                
                12,895
                
                
                
                12,895Balances,
      December 31, 2005
                
                
                64,203
                
                
                $
                64
                
                
                $
                245,456
                
                
                $
                (593
                )
                
                $
                (307
                )
                
                $
                (18,369
                )
                
                $
                226,251
                
                
                $
                13,012Exercise
      of stock options — common stock issued
                
                
                1,831
                
                
                
                2
                
                
                
                5,622
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                5,624
                
                
                
                —Employee
      stock purchase plan — common stock issued
                
                
                409
                
                
                
                —
                
                
                
                1,884
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,884
                
                
                
                —Outstanding
      common stock repurchased and retired
                
                
                (2,975
                )
                
                
                (3
                )
                
                
                (16,188
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (16,191
                )
                
                
                —Reversal
      of unearned stock-based compensation upon adoption of SFAS No.
      123(R)
                
                
                —
                
                
                
                —
                
                
                
                (593
                )
                
                
                593
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Cumulative
      effect of change in accounting principle
                
                
                —
                
                
                
                —
                
                
                
                (347
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (347
                )
                
                
                —Fair
      value of options assumed in acquisition of GoRemote
                
                
                —
                
                
                
                —
                
                
                
                5,826
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                5,826
                
                
                
                —Stock-based
      compensation
                
                
                —
                
                
                
                —
                
                
                
                6,178
                
                
                
                
                
                
                
                —
                
                
                
                —
                
                
                
                6,178
                
                
                
                —Tax
      benefit from employee stock option plans
                
                
                —
                
                
                
                —
                
                
                
                44
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                44
                
                
                
                —Unrealized
      gain on available-for-sale investments, net
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                209
                
                
                
                —
                
                
                
                209
                
                
                
                209Net
      income (loss)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (8,089
                )
                
                
                (8,089
                )
                
                
                (8,089
                )Balances,
      December 31, 2006
                
                
                63,468
                
                
                $
                63
                
                
                $
                247,882
                
                
                $
                —
                
                
                $
                (98
                )
                
                $
                (26,458
                )
                
                $
                221,389
                
                
                $
                (7,880
                )Exercise
      of stock options — common stock issued
                
                
                515
                
                
                
                1
                
                
                
                879
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                880
                
                
                
                —Employee
      stock purchase plan — common stock issued
                
                
                425
                
                
                
                1
                
                
                
                1,822
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,823
                
                
                
                —Outstanding
      common stock repurchased and retired
                
                
                (2,595
                )
                
                
                (3
                )
                
                
                (13,798
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (13,801
                )
                
                
                —Stock-based
      compensation
                
                
                —
                
                
                
                —
                
                
                
                4,918
                
                
                
                
                
                
                
                —
                
                
                
                —
                
                
                
                4,918
                
                
                
                —Unrealized
      gain on available-for-sale investments, net
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                113
                
                
                
                —
                
                
                
                113
                
                
                
                113Net
      income (loss)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (34,214
                )
                
                
                (34,214
                )
                
                
                (34,214
                )Balances,
      December 31, 2007
                
                
                61,813
                
                
                $
                62
                
                
                $
                241,703
                
                
                $
                —
                
                
                $
                15
                
                
                $
                (60,672
                )
                
                $
                181,108
                
                
                $
                (34,101
                )
  The accompanying
notes are an integral part of these consolidated financial
statements.




35








iPASS INC. AND
SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS





(In thousands)





For theYear Ended December
      31,2007
            
            
            2006
            
            
            2005Cash flows from operating
      activities:Net
      income (loss)
            
            $
            (34,214
            )
            
            $
            (8,089
            )
            
            $
            12,895Adjustments
      to reconcile net income (loss) to net cash provided by (used
      in) operating activities:Amortization
      of stock-based compensation for employees
            
            
            4,918
            
            
            
            6,178
            
            
            
            1,137Amortization
      of acquired intangibles
            
            
            4,201
            
            
            
            3,971
            
            
            
            2,367Depreciation,
      amortization and accretion
            
            
            4,545
            
            
            
            5,989
            
            
            
            4,732Loss
      on disposal of property and equipment
            
            
            1,018
            
            
            
            —
            
            
            
            —Tax
      benefit from employee stock option plans
            
            
            —
            
            
            
            27
            
            
            
            1,079Deferred
      income taxes
            
            
            22,310
            
            
            
            (6,739
            )
            
            
            5,700Provision
      for doubtful accounts
            
            
            29
            
            
            
            1,056
            
            
            
            163Cumulative
      effect of change in accounting principle
            
            
            —
            
            
            
            (347
            )
            
            
            —Realized
      loss on investments, net
            
            
            52
            
            
            
            —
            
            
            
            31Changes
      in operating assets and liabilities, net of assets acquired and
      liabilities assumed:Accounts
      receivable
            
            
            (7,388
            )
            
            
            868
            
            
            
            374Prepaid
      expenses and other current assets
            
            
            (775
            )
            
            
            (1,102
            )
            
            
            (616
            )Other
      assets
            
            
            (62
            )
            
            
            (1,015
            )
            
            
            (337
            )Accounts
      payable
            
            
            1,093
            
            
            
            (38
            )
            
            
            3,515Accrued
      liabilities
            
            
            (2,747
            )
            
            
            (4,253
            )
            
            
            1,011Deferred
      revenue
            
            
            676
            
            
            
            3,848
            
            
            
            47Other
      liabilities
            
            
            (929
            )
            
            
            1,969
            
            
            
            —Net
      cash provided by (used in) operating activities
            
            
            (7,273
            )
            
            
            2,323
            
            
            
            32,098Cash flows from investing
      activities:Purchases
      of short-term investments
            
            
            (440,294
            )
            
            
            (140,490
            )
            
            
            (170,422
            )Maturities
      of short-term investments
            
            
            520,658
            
            
            
            207,695
            
            
            
            141,839Purchases
      of property and equipment
            
            
            (5,108
            )
            
            
            (5,222
            )
            
            
            (3,882
            )Restricted
      cash pledged for letter of credit
            
            
            (1,470
            )
            
            
            —
            
            
            
            —Acquisition
      of GoRemote, net of cash acquired
            
            
            —
            
            
            
            (77,960
            )
            
            
            —Net
      cash provided by (used in) investing activities
            
            
            73,786
            
            
            
            (15,977
            )
            
            
            (32,465
            )Cash flows from financing
      activities:Proceeds
      from issuance of common stock
            
            
            2,703
            
            
            
            7,508
            
            
            
            3,801Cash
      used in repurchase of common stock
            
            
            (13,801
            )
            
            
            (16,191
            )
            
            
            —Net
      cash provided by (used in) financing activities
            
            
            (11,098
            )
            
            
            (8,683
            )
            
            
            3,801Net
      increase (decrease) in cash and cash equivalents
            
            
            55,415
            
            
            
            (22,337
            )
            
            
            3,434Cash
      and cash equivalents at beginning of year
            
            
            15,492
            
            
            
            37,829
            
            
            
            34,395Cash
      and cash equivalents at end of year
            
            $
            70,907
            
            
            $
            15,492
            
            
            $
            37,829Supplemental disclosures of
      cash flow information:Assumption
      of GoRemote options
            
            $
            —
            
            
            $
            5,826
            
            
            $
            —Cash
      paid for taxes
            
            $
            929
            
            
            $
            1,471
            
            
            $
            1,094





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




36







iPASS INC. AND
SUBSIDIARIES





NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS





Note 1. Description of
Business





iPass
Inc. (the “Company”, “iPass” or “we”) provides software-enabled enterprise
connectivity services for mobile workers. Its primary service offering, iPass
Corporate Access, is designed to enable enterprises to provide their employees
with secure access from approximately 160 countries to the enterprise’s internal
networks through an easy-to-use interface. As opposed to telecommunications
companies that own and operate physical networks, iPass provides its services
through a virtual network. iPass’ virtual network is enabled by its software,
its scalable network architecture and its relationships with over 300
telecommunications carriers, internet service providers and other network
service providers around the globe. In addition, we provide policy management
services that extend our secure offering to enable better protection of user
identities, the integrity of an enterprise’s remote and mobile computer systems,
or endpoints, as well as an enterprise’s network. These services can be used in
conjunction with iPass Corporate Access or over non-iPass network connections.
The Company’s software is designed to provide enterprises with a high level of
security, the ability to affect and control policy management, and to receive
centralized billing and detailed reporting. iPass was incorporated in California
in July 1996 and reincorporated in Delaware in June 2000.





Note 2. Summary of Significant
Accounting Policies





Use of
Estimates





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.





Principles of
Consolidation





The
accompanying consolidated financial statements include the financial statements
of iPass Inc. and its wholly owned subsidiaries after elimination of
intercompany accounts and transactions.





Reclassifications and
Revisions





Certain
cash flows related to the incorrect recording of the stock option APIC pool for
the year ended December 31, 2006 have been revised in the current year between
net cash provided by operating activities and net cash used in investing
activities.  Additionally, amounts related to the goodwill, accrued
liabilities and additional paid in capital accounts have been revised for
reflect the adjustment of the stock option APIC pool.  The revisions
are as follows (in thousands):





Consolidated Statement of Cash
      Flows
            
            
            Consolidated Balance
      SheetExcess tax benefit from
      employee stock option plans
            
            
            Net cash provided by operating
      activities
            
            
            Tax benefit from employee stock
      option plans
            
            
            Net cash used in financing
      activities
            
            
            Goodwill
            
            
            Accrued
      Liabilities
            
            
            Additional Paid in
      CapitalAs
      previously reported
            
            $
            (1,962
            )
            
            $
            361
            
            
            $
            1,962
            
            
            $
            (6,721
            )
            
            $
            78,757
            
            
            $
            16,482
            
            
            $
            249,800Revision
            
            
            1,918
            
            
            
            1,918
            
            
            
            (1,962
            )
            
            
            (1,962
            )
            
            
            135
            
            
            
            2,053
            
            
            
            1,918As
      reported
            
            
            (44
            )
            
            
            2,279
            
            
            
            —
            
            
            
            (8,683
            )
            
            
            78,892
            
            
            
            18,535
            
            
            
            247,882




Foreign Currency
Transactions




Substantially
all revenues and network access expenses are denominated in U.S. dollars.
Therefore, the Company considers the functional currency of its foreign
subsidiaries to be the U.S. dollar. Foreign currency transaction gains and
losses are included in the accompanying Consolidated Statements of Operations.
Foreign currency gains and losses were not significant for the years ended
December 31, 2007, 2006 and 2005.





37


Comprehensive Income
(Loss)





Comprehensive
income (loss) is a measure of all changes in equity of an enterprise that result
from transactions and other economic events of the period other than
transactions with stockholders.  Comprehensive income (loss) is the total
of net income (loss) and all other non-owner changes in equity.
 Comprehensive income (loss) includes net income (loss) and unrealized
gains and losses on available-for-sale securities.





Comprehensive
income (loss) is comprised of the following (in thousands):





Year Ended December
      31,2007
            
            
            2006
            
            
            2005Net
      income (loss)
            
            $
            (34,214
            )
            
            $
            (8,089
            )
            
            $
            12,895Comprehensive
      income (loss):Change
      in accumulated unrealized gain (loss) on available-for-sale securities,
      net of taxes
            
            
            113
            
            
            
            209
            
            
            
            117Total
      comprehensive income (loss)
            
            $
            (34,101
            )
            
            $
            (7,880
            )
            
            $
            13,012




Cash Equivalents and Short-term
Investments





Cash
equivalents consist of highly liquid investments including corporate debt
securities and money market funds with maturities of 90 days or less from the
date of purchase.





The
Company has the ability to convert its short-term investments into cash or into
securities with a shorter remaining time to maturity without penalty and is not
committed to holding the investments until maturity. As such, all short-term
investments in the Company’s portfolio are classified as “available-for-sale”
and are stated at fair market value, with the unrealized gains and losses
reported as a component of accumulated other comprehensive income (loss). The
cost of securities sold is based on the specific identification
method.





Concentrations of
Risk





Substantially
all of the Company’s cash, cash equivalents and short-term investments are held
by two well-established financial institutions. The Company’s investment
portfolio consists of investment-grade securities diversified among security
types, industries, and issuers and are managed by recognized financial
institutions that follow the Company’s investment policy. Any concentration of
credit risk related to these investments is believed to be
minimal.





The
Company provides credit to its customers in the normal course of business,
performs ongoing credit evaluations of its customers, and maintains an allowance
for doubtful accounts. The Company provides reserves based on the combination of
the age of the receivables, historical write-offs and reserves for specific
customer balances. As of December 31, 2007 and 2006, no individual customer
represented 10% or more of accounts receivable. For the years ended December 31,
2007, 2006 and 2005, no customer represented more than 10% of total
revenues.





For the
three years ended December 31, 2007, 2006 and 2005, no individual supplier
represented 10% or more of total network access expenses.





Fair Value of Financial
Instruments





For the
Company’s financial instruments, including cash, cash equivalents, accounts
receivable, accounts payable, and accrued liabilities, carrying amounts
approximate fair value due to the relatively short maturities of the financial
instruments.





Property and
Equipment





Property
and equipment are recorded at cost less accumulated depreciation and
amortization. Depreciation of property and equipment and amortization of
leasehold improvements is calculated using the straight-line method over the
estimated useful lives of the related assets as follows:





Equipment
(Three years)


Furniture
and fixtures (Five years)


Computer
software and equipment (Three years)


Leasehold
improvements (Shorter of useful life or expected lease term)





38


Goodwill and Other Intangible
Assets




In
accordance with SFAS 142, “Goodwill and Other Intangible Assets,” goodwill is
not amortized, but is instead reviewed for impairment at least annually, or as
circumstances indicate its value may no longer be recoverable.  The Company
performs an annual impairment review during the fourth quarter of the fiscal
year.  Goodwill is reviewed for impairment at the enterprise
level.
 
 Goodwill
impairment testing is a two-step process.  First, the fair value of the
enterprise, as defined by the Company’s market capitalization, is compared to
its carrying value. If the fair value exceeds the carrying value, goodwill is
not impaired and no further testing is performed.  If a possible impairment
exists, a second step of measuring such impairment will be performed. No
impairment losses were incurred in the years presented.  Other
purchased intangible assets with definite useful lives are amortized on a
straight-line basis over their useful lives, and tested for impairment when an
impairment indicator exists.




Impairment of Long-Lived
Assets





The
Company periodically evaluates the carrying amount of its long-lived assets and
when events or changes in business circumstances have occurred which indicate
the carrying amount of such assets may not be fully
realizable. Determination of impairment is based on an estimate of
undiscounted future cash flows resulting from the use of the assets and their
eventual disposition.  If the Company determines these assets have been
impaired, the impairment charge is recorded based on a comparison of the net
book value of the fixed assets and the fair value of the assets.





As part
of the Company’s restructuring and reorganization activities in the fourth
quarter of 2007, management abandoned certain asset and recorded a $900,000
impairment.





Income
Taxes





Income taxes are
accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized as
income in the period that includes the enactment date. A valuation allowance is
recorded against deferred tax assets if it is more likely than not that all or a
portion of the deferred tax assets will not be realized.




We record
net deferred tax assets to the extent we believe these assets will more likely
than not be realized. In making such determination, we consider all available
positive and negative evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax planning strategies and recent
financial operations.  In the fourth quarter of 2007, we recorded the
impact of a full valuation allowance on the remaining net balance of our
deferred income tax assets.  In the event we were to determine that we
would be able to realize our deferred income tax assets in the future in excess
of their net recorded amount, we would make an adjustment to the valuation
allowance which would reduce the provision for income taxes. To the extent the
valuation allowance relates to acquired entities, the recognition of any future
tax benefits would first reduce goodwill and then reduce the provision for
income taxes.




On July 13, 2006, the FASB issued
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an entity’s financial
statements in accordance with FASB Statement No. 109, “Accounting for Income
Taxes” and prescribes a recognition threshold and measurement attributes for
financial statement disclosure of tax positions taken or expected to be taken on
a tax return. Under FIN 48, the benefit of an uncertain income tax position on
the income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position is not recognized if it has less
than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.





The Company adopted the
provisions of FIN 48 on January 1, 2007. The adoption of FIN48 did not require a
change in the Company’s liability for unrecognized tax benefits. The total
amount of unrecognized tax benefits at December 31, 2007 is $3.8 million, and at
January 1, 2007 was $3.6 million. If any of these tax benefits that are
unrecognized should become recognizable at a future time, the Company would
reverse the associated liability resulting in a change in the Company’s annual
effective tax rate.





The Company recognizes
accrued interest related to unrecognized tax benefits in the tax provision. At
December 31, 2007, the Company’s liability for unrecognized tax benefits
includes an accrual for interest in the amount of $290,000, and at January 1,
2007 was $204,000,




The Company is subject to
taxation in the United States and various other foreign jurisdictions.  The
Company records accruals for the estimated outcomes of these audits, and the
accruals may change in the future due to new developments in each
matter.  Fiscal years 2004 to 2007 remain open to examination by the
major taxing jurisdictions to which the Company are subject, with the
exception of California which is open from 2003 to 2007.  The Company
has not been audited for U.S. federal income tax matters.  The Company has
income tax audits in progress in India and the state of California.  The
years under examination by the Indian taxing authorities are 2005 to 2006. 
The years under examination by the State of California are 2002 to 2005.
 The Indian tax audit is considered a routine audit relating to transfer
pricing calculations.  We do not believe the examination in India will
result in material payments due to the availability of tax holidays, which
effectively reduce the tax rate in India to 0% for tax years ending before March
31, 2007.
  As mentioned above, the Company
is currently under examination by the State of California, which is challenging
various tax issues for the years 2002 to 2005.  Management has reviewed
proposed adjustments and recorded reserves for the estimated liability related
to these tax issues.  During 2007, the Company reached a tentative
settlement with the state of California and paid $510,000.   The
Company anticipates that this matter will be settled with the State of
California during the next twelve months.




39


Stock-Based
Compensation





Change in Accounting
Principle




On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment, (“SFAS
123(R)”) which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors including
employee stock options and employee stock purchases related to the Employee
Stock Purchase Plan (“ESPP”) be based on estimated fair values. SFAS 123(R)
supersedes the Company’s previous accounting under Accounting Principles Board
Opinion No. 25, Accounting for
Stock Issued to Employees (“APB 25”). In March 2005, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”)
relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in
its adoption of SFAS 123(R). Using the modified prospective transition method of
adopting SFAS 123(R), the Company began recognizing compensation expense for
stock-based awards granted or modified after December 31, 2005 and awards
that were granted prior to the adoption of SFAS 123(R) but were still unvested
at December 31, 2005. Under this method of implementation, no restatement of
prior periods has been made.
 
 Total
stock-based compensation expense, including stock options, ESPP and restricted
stock awards, recognized under SFAS 123(R) in the consolidated statements of
operations for the year ended December 31, 2007 and 2006 was $4.9 million and
$6.2 million, respectively. The income related tax benefit totaled $0 and
$220,000 for the same periods. The estimated fair value of the Company’s
stock-based awards, less expected forfeitures, is amortized over the awards’
vesting period on a straight-line basis.
 
 SFAS
123(R) requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in the Company’s statements of
operations. Prior to January 1, 2006, the Company measured compensation expense
for its employee stock-based compensation plans using the intrinsic value method
under APB 25 and related interpretations. In accordance with APB 25, no
stock-based compensation expense was recognized in the Company’s income
statements for stock options granted to employees and directors that had an
exercise price equal to the deemed fair value of the underlying common
stock on the date of grant.


Stock-based
compensation expense recognized in the Company’s statement of operations for the
years ended December 31, 2007 and 2006 included compensation expense for
share-based payment awards granted prior to, but not yet vested as of December
31, 2005, based on the grant date fair value estimated in accordance with the
pro forma provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based
Compensation (“SFAS 123”), as amended, and compensation expense for the
share-based payment awards granted subsequent to December 31, 2005 based on the
grant date fair value estimated in accordance with the provisions of SFAS
123(R). As stock-based compensation expense recognized in the consolidated
statements of operations for the years ended December 31, 2007 and 2006 is based
on awards ultimately expected to vest, it has been reduced for estimated
forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.





As a
result of adopting SFAS 123(R), the Company’s loss before income taxes and net
loss were increased by $5.7 million and $5.2 million, respectively, for the year
ended December 31, 2006. The implementation of SFAS 123(R) reduced basic and
fully diluted earnings per share by $0.08 for the year ended December 31, 2006.
The implementation of SFAS 123(R) did not have a significant impact on cash
flows from operations for the ended December 31, 2006. In addition,
the Company has recorded a $(347,000) cumulative effect of a change in
accounting principle in the condensed consolidated statement of operations for
the three months ended March 31, 2006. Prior to adopting SFAS 123(R) the Company
did not reduce stock-based compensation expense by estimated forfeitures; rather
the Company reduced stock-based compensation only upon actual
forfeiture. In the Company’s pro forma information required under SFAS 123
for the periods prior to 2006, the Company accounted for forfeitures as they
occurred. The cumulative effect adjustment is equal to the difference
between previously recorded stock-based compensation expense associated with
unvested options at January 1, 2006 and the amount that would have been
recognized had the Company estimated forfeitures.





Pursuant
to the income tax provisions included in SFAS 123(R), the Company has elected to
adopt the alternative transition method provided in the FASB Staff Position for
calculating the tax effects of equity-based compensation. The alternative
transition method includes simplified methods to establish the beginning balance
of the additional paid-in capital pool (APIC pool) related to the tax effects of
employee equity-based compensation, and to determine the subsequent impact on
the APIC pool and Consolidated Statement of Cash Flows of the tax effects of
employee equity-based compensation awards that are outstanding upon the
implementation of SFAS 123(R).  When the Company applied the tax
ordering provisions prescribed by SFAS 123(R), it determined that no APIC pool
reserve should be recorded.  As of December 31, 2007, there was $6.2
million of unrecognized compensation cost, adjusted for estimated forfeitures,
related to non-vested stock-based payments granted to employees. Total
unrecognized compensation cost will be adjusted for future changes in estimated
forfeitures.





40


Pro Forma Information under SFAS 123
for Periods Prior to 2006





Prior to
January 1, 2006, the Company followed the disclosure-only provisions under SFAS
123, as amended. The following table illustrates the effect on net income and
earnings per share for the year ended December 31, 2005 if the Company had
applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation (in thousands, except per share data):





For the Year Ended December 31,
      2005Net
      income — as reported
            
            $
            12,895Add:
      Stock-based employee compensation expense included in the reported net
      income, net of related tax effects
            
            
            671Deduct:
      Stock-based employee compensation expense using the fair value method, net
      of related tax effects
            
            
            (3,570
            )Pro
      forma net income
            
            $
            9,996Basic
      net income per common share:As
      reported
            
            $
            0.20Pro
      forma
            
            $
            0.16Diluted
      net income per common share:As
      reported
            
            $
            0.19Pro
      forma
            
            $
            0.15





Based on
the Black-Scholes option pricing model, the weighted average fair value of
options granted during fiscal 2005 was $1.54 and the total intrinsic value of
options exercised was $4.2 million.




Prior to
January 1, 2006, the expected life and expected volatility of the stock options
were based upon historical data and other relevant factors. Forfeitures of
employee stock options were accounted for on an as-incurred basis. Amortization
of deferred compensation expense for the year ended December 31, 2005 was
approximately $1,137,000. The fair value of each option grant was estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants for the twelve months
ended December 31, 2005:





Employee Stock Options For the
      Year Ended December 31, 2005
            
            
            Employee Stock Purchase Plan
      For the Year Ended December 31, 2005Risk-free
      rate
            
            
            3.9
            %
            
            
            3.7
            %Expected
      dividend yield
            
            
            0
            %
            
            
            0
            %Expected
      volatility
            
            
            35-41
            %
            
            
            36-41
            %Expected
      life
            
            3
      Years
            
            
            .5
      Years





Computation of Net Income (Loss) per
Share





Basic net
income (loss) per share is computed by dividing net income (loss)by the weighted daily average number of shares of common stock
outstanding during the period. Diluted net income (loss) per share is computed
using the weighted daily average number of shares of common stock
outstanding for the period plus dilutive potential common shares from the
issuance of stock options and restricted stock using the treasury-stock
method.





41


Revenue
Recognition





The
Company derives revenues primarily from providing enterprise connectivity
services through our virtual network. These services are sold directly, as well
as indirectly through the Company’s channel partners.  The revenues
related to the sale of these services are classified as either usage fees,
license and maintenance fees, or services fees.  The Company bills
substantially all customers on a time basis for usage based on negotiated rates.
The remaining customers are billed based on a fixed charge per active user per
month with additional charges for excess time. Substantially all enterprise
customers commit to a one to three year contract term. Most of the Company’s
contracts with enterprise customers contain minimum usage levels. Minimum
commitments are billed when actual usage is less than the customer’s monthly
minimum commitment amount.




The
Company generally performs credit reviews to evaluate the
customers’ ability to pay. If the Company determines that it is not
probable that the revenue is collectible, the revenue is recognized as cash is
collected. We record allowances against revenues for estimated uncollectable
amounts of minimum commitments billed and cancellations in the same period the
revenues are recorded. These estimates are based upon historical analysis of our
service level agreements, credit memo data and other known factors for pricing
and transaction volume disputes that arise in the normal course of
business.


Usage Fees




We derive
the large majority of our revenues from dial-up and broadband usage fees. We
recognize revenues when persuasive evidence of an arrangement exists, service
has been provided to the customer, the price to the customer is fixed or
determinable, and collection is reasonably assured.




We
recognize revenues during the period the services are rendered to end users
based on usage at negotiated rates. We typically require our customers to commit
to minimum usage levels. Minimum usage levels can be based on an annual term,
monthly term or over the term of the arrangement. If actual usage in a given
period is less than the minimum commitment, the difference between the actual
usage and the minimum commitment is recognized as revenue when the fee is fixed
and determinable. We estimate the amount of the difference that will ultimately
be collected because we have from time to time renegotiated minimum commitments
in cases where customers have sought renegotiation of their contract for reasons
such as a significant downturn in their business or where we have determined
that it would be in our best interest to do so. Customers are not contractually
entitled to use or otherwise receive benefit for unused service in subsequent
periods.




Through
the acquisition of GoRemote Internet Communications, Inc., the Company provides
services over a heterogeneous virtual network, which was created by forming
contractual relationships with approximately 550 access providers, including
Internet service providers, cable companies, DSL companies and
telecommunications companies. These companies may provide us their services
under either a reseller or an agency arrangement. In applying our revenue
recognition policy we consider the factors prescribed by EITF 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent, and must make judgments with regard to
the specific facts and circumstances surrounding each provider relationship to
determine which portion of our revenues we provide under a reseller arrangement,
where we would record gross revenues and cost of revenues, and which portion of
our revenues we provide as an agent, where we would record revenues and cost of
revenues combined on a net basis. In exercising our judgment, we evaluate the
contractual arrangements and de facto relationships with each provider, together
with various other assumptions believed to be applicable and reasonable under
the circumstances, to determine whether revenues are gross versus net. We have
one significant provider arrangement under which we account for revenues on a
net basis as the arrangement is considered an agency relationship and the
Company primarily acts only as a billing agent. All other provider arrangements
are accounted for on a gross basis.
 
 For
arrangements accounted for on a gross basis, the Company defers the costs
associated with deploying each endpoint and amortizing the costs over the
estimated life of an endpoint, typically 21 to 41 months. Our judgments may
change as new events occur, as additional information is obtained and as our
operating environment changes, any of which could cause a material impact on the
revenues that we have reported.


Services Fees





The
Company typically provides its customers with deployment services, technical
support, training and additional optional services. Depending on the service
provided and the nature of the arrangement, the Company may charge a one-time,
annual or monthly fee. The Company recognizes revenues relating to one-time
fees on a straight-line basis over the term of the initial contract, generally
one to three years. The Company recognizes revenues relating to annual fees on a
straight-line basis and revenues for monthly services during the month that
these services are provided. Training revenue consists of fees for training
services, generally provided to customer’s technical teams to help support their
own end-users.  Our training rates are generally based on a fixed rate
per day and revenue is recognized as training services are
delivered.





42


License and Maintenance
Fees




The
Company generates license and maintenance revenue through the licensing of its
Device Management and DeviceID automated systems management and security
software products. License revenue is generally recognized when a signed
contract or other persuasive evidence of an arrangement exists, the software has
been shipped or electronically delivered, the license fee is fixed or
determinable, and collection of the resulting receivable is probable as
prescribed by AICPA Statement of Position (“SOP”) 97-2. We enter into
revenue arrangements in which a customer may purchase a combination of software,
upgrades and maintenance and support (multiple-element arrangements). When
vendor-specific objective evidence (“VSOE”) of fair value exists for all
elements, we allocate revenue to each element based on the relative fair value
of each of the elements. VSOE of fair value is established by the price charged
when that element is sold separately. When contracts contain multiple elements
wherein VSOE of fair value exists for all undelivered elements, we account for
the delivered elements in accordance with the “residual method” prescribed by
SOP 98-9. Revenue from subscription license agreements, which include software,
rights to future products on a when-and-if available basis and maintenance, is
recognized ratably over the term of the subscription period. Revenue on
shipments to resellers, which is generally subject to certain rights of return
and price protection, is recognized when the products are sold by the resellers
to the end-user customer.




Maintenance
revenue consists of fees for providing software updates on a when and if
available basis and technical support for software products (post-contract
support or “PCS”).  Maintenance rates are generally based on the
percentage of license paid.  Maintenance revenue is recognized ratably
over the term of the agreement.





Network
Access





Network
access expenses represent the amounts paid to network access providers for the
usage of their networks. The Company has minimum purchase commitments with some
network service providers for access that it expects to utilize during the term
of the contracts. Costs of minimum purchase contracts are recognized as network
access expenses at the greater of the minimum commitment or actual
usage.





If the
Company estimates that the revenues derived from the purchase commitment will be
less than the purchase commitment, the Company recognizes a loss on that
purchase commitment to the extent of that difference. No such loss has been
recognized regarding such costs through December 31, 2007.





Advertising





Advertising
and promotional costs are expensed as incurred. For the years ended December 31,
2007, 2006 and 2005 these costs totaled approximately $259,000, $533,000 and
$435,000, respectively.





Software Development
Costs





Costs
related to the research and development of new software and enhancements to
existing software are expensed as incurred until technological feasibility,
defined as the completion of a working model, has been established. To date, the
Company’s software has been available for general release upon the establishment
of technological feasibility, and accordingly, no costs have been
capitalized.





Costs
related to software purchased to be sold are capitalized at the lower of
unamortized cost or net realizable value. The Company had approximately $900,000
of capitalized purchase software included in property and equipment, net on the
consolidated balance sheets as of December 31, 2006 that was acquired to provide
additional features and functionality to the Company’s existing products.
Capitalized costs are amortized based on current and future revenue related to
each product however the Company has not sold any purchased software and
therefore has not amortized any of the capitalized costs.  As part of
the Company’s restructuring and reorganization activities in the fourth quarter
of 2007, management abandoned certain asset and recorded a $900,000
impairment.
  The
Company capitalizes the costs of computer software developed or obtained for
internal use. During the year ended December 31, 2006, the Company had
approximately $350,000 of capitalized software development costs which were
acquired in the Company’s acquisition of GoRemote.  Internal use software
costs are amortized over the estimated useful life of the software
developed.


Recent Accounting
Pronouncements





In
December 2007, the FASB issued SFAS No. 141 (revised 2007)
("SFAS 141R"), Business
Combinations and SFAS No. 160 ("SFAS 160"), Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No. 51. SFAS 141R will change how business acquisitions are
accounted for and will impact financial statements both on the acquisition date
and in subsequent periods. SFAS 160 will change the accounting and
reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity.  SFAS
141R and SFAS 160 are effective for fiscal years beginning after December 15,
2008.


In
September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (SFAS
157).  SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value measurements, as the
FASB had previously concluded in those accounting pronouncements that fair value
is the relevant measurement attribute. Accordingly, SFAS 157 does not require
any new fair value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007.  However, in February 2008, the FASB
issued FSP FAS 157-2, which delays the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except items recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). This FSP partially defers the effective date of SFAS 157 to
fiscal years beginning after November 15, 2008, and interim periods within those
fiscal years for items within the scope of this FSP. The Company adopted
the new accounting provision, except as it applies to those nonfinancial assets
and nonfinancial liabilities as noted in FSP FAS 157-2, as of January 1, 2008.
The Company is currently evaluating the effect that the adoption of SFAS 157
will have on the consolidated financial statements.
  43
 In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 159, TheFair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115 (“SFAS No. 159”). SFAS No. 159 expands
the use of fair value accounting but does not affect existing standards which
require assets or liabilities to be carried at fair value. The objective of SFAS
No. 159 is to improve financial reporting by providing companies with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. Under SFAS No. 159, a company may elect to use fair
value to measure eligible items at specified election dates and report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. Eligible items include,
but are not limited to, accounts and loans receivable, available-for-sale and
held-to-maturity securities, equity method investments, accounts payable,
guarantees, issued debt and firm commitments. If elected, SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company
does not believe fair value accounting is appropriate for any of its eligible
items.


Note 3. Business
Combinations





GoRemote





On
February 15, 2006, the Company completed its acquisition of GoRemote, a
publicly-traded company headquartered in Milpitas, California that provides
secure managed virtual business network services. The Company expanded its
product offering to its customers by offering GoRemote’s managed broadband
services for branch offices and teleworkers. The Company acquired 100% of the
outstanding shares of GoRemote paying approximately $78.9 million in cash, to
acquire approximately 43.3 million shares of common stock for $1.71 per share
and approximately 541,631 shares of Series A preferred stock for $3.37 per
share. The purchase price includes approximately $3.1 million in direct
transaction costs including legal and valuation fees. In addition, iPass assumed
outstanding options to acquire approximately 8.3 million shares of GoRemote
common stock, and converted those into options to acquire approximately 1.7
million shares of iPass common stock, which had a gross fair value of $7.8
million.


The
results of operations of GoRemote are included in the Company’s Condensed
Consolidated Statement of Operations beginning February 15, 2006, the date of
the transaction closing. The following table summarizes the allocation of the
purchase price based on the estimated fair values of the tangible assets
acquired and the liabilities assumed at the date of acquisition (in
thousands):





Cash
      consideration for common and preferred stockholders
            
            $
            75,806Estimated
      fair value of options assumed
            
            
            5,826Direct
      transaction costs
            
            
            3,097Total
      purchase price
            
            $
            84,729





Under the purchase method
of accounting, the total purchase price as shown in the table above is allocated
to GoRemote’s net tangible and intangible assets based on their estimated fair
values as of February 15, 2006. Management has allocated the purchase price
based on various factors. The allocation of the purchase price is as follows (in
thousands):





Cash
      acquired
            
            $
            6,706Accounts
      receivable
            
            
            7,138Other
      tangible assets acquired
            
            
            2,550Deferred
      tax assets, net
            
            
            10,876Amortizable
      intangible assets:Customer
      relationships
            
            
            7,600Supplier
      contracts
            
            
            950Internally
      developed software
            
            
            350Goodwill
            
            
            60,713Deferred
      revenues
            
            
            (1,025
            )Restructuring
      liabilities
            
            
            (1,249
            )Other
      liabilities assumed
            
            
            (9,880
            )Total
      purchase price
            
            $
            84,729





Goodwill
represents the excess of the purchase price over the fair value of tangible and
identifiable intangible assets. The consolidated statements of operations do not
reflect the amortization of goodwill acquired in the proposed merger, consistent
with the guidance in the Financial Accounting Standards Board Statement No. 142,
Goodwill and
Other Intangible
Assets.The Company believes that its purchase of GoRemote resulted in
the allocation of considerable amounts to goodwill because of significant
synergistic and strategic benefits that it expects to realize from the
acquisition. The Company believes that it, unlike other market participants, had
unique opportunities to generate revenues and profits through (1) the Company’s
ability to convert its existing dial-up customer base to broadband services and
(2) its ability to sell expanded services into GoRemote’s existing customer
base. Further, the Company acquired an R&D and sales force from GoRemote
that was familiar with broadband technologies, a much more significant growth
segment than iPass’ current dial-up service. The value of the workforce-in-place
was subsumed into goodwill as required by SFAS 141, Business Combinations.





44


Restructuring
costs of $1.2 million relate primarily to costs for abandoned excess facilities.
Pursuant to Emerging Issues Task Force Issue No. 95-3, Recognition of Liabilities in
Connection with a Purchase Business Combination, all restructuring
charges related to the acquisition are recognized as part of the purchase price
allocation. The Company completed the relocation of all employees and vacated
the facilities in the second quarter of 2006.





The following unaudited
pro forma information represents the results of operations for iPass and
GoRemote for the years ended December 31, 2006 and 2005 as if the acquisition
had been consummated as of January 1, 2006 and 2005, respectively. This pro
forma information does not purport to be indicative of what may occur in the
future (in thousands, except per share amounts):





Year Ended December
      31,2006
            
            
            2005Total
      revenue
            
            $
            187,734
            
            
            $
            212,492Net
      income (loss) before cumulative change in accounting
      principle
            
            $
            (13,124
            )
            
            $
            1,935Net
      income (loss)
            
            $
            (12,777
            )
            
            $
            1,935Net
      income (loss) per share:Basic
            
            $
            (0.20
            )
            
            $
            0.03Diluted
            
            $
            (0.20
            )
            
            $
            0.03Number
      of shares used in per share calculations:Basic
            
            
            64,572,779
            
            
            
            63,353,779Diluted
            
            
            64,572,779
            
            
            
            66,277,342





Note 4. Short-Term
Investments





The
following tables summarize the Company’s short-term investments as of December
31, 2007 and 2006 (in thousands):





Short-Term
      InvestmentsDecember 31,
      2007
            
            Cost
            
            
            Unrealized
      Gains
            
            
            Unrealized
      Losses
            
            
            Fair
    ValueGovernment
      agencies
            
            $
            4,256
            
            
            $
            2
            
            
            $
            —
            
            
            $
            4,258Total
            
            $
            4,256
            
            
            $
            2
            
            
            $
            —
            
            
            $
            4,258





Short-Term
      InvestmentsDecember 31,
      2006
            
            Cost
            
            
            Unrealized
      Gains
            
            
            Unrealized
      Losses
            
            
            Fair
    ValueGovernment
      agencies
            
            $
            58,818
            
            
            $
            19
            
            
            $
            (181
            )
            
            $
            58,656Money
      market securities
            
            $
            25,051
            
            
            $
            1
            
            
            $
            —
            
            
            $
            25,052Total
            
            $
            83,869
            
            
            $
            20
            
            
            $
            (181
            )
            
            $
            83,708





The
following table summarizes the principal amounts of the Company’s short-term
investments by expected maturity date (in thousands):





Expected Maturity Date for Par
      Value Amounts
              for the Year Ended December
      31,
            
            
            As of Dec. 31,20072008
            
            
            2009
            
            
            2010
            
            
            Total Cost
      Value
            
            
            Total Fair
      ValueGovernment
      agencies
            
            $
            4,250
            
            
            $
            —
            
            
            $
            —
            
            
            $
            4,256
            
            
            $
            4,258Total
            
            $
            4,250
            
            
            $
            —
            
            
            $
            —
            
            
            $
            4,256
            
            
            $
            4,258





The
Company recognized gross realized losses of $59,000 and gross realized gains of
$8,000 for the year ended December 31, 2007.  The Company recognized
gross realized losses of $10,000 and gross realized gains of $6,000 for the year
ended December 31, 2006.  The Company recognized gross realized gains
of $17,000 and gross realized losses of $115,000 for the year ended December 31,
2005.  The Company recognized $3.3 million, $3.7 million and $3.9 million
in interest income for the years ended December 31, 2007, 2006 and 2005,
respectively.





45


Note 5. Allowance for Doubtful
Accounts





Changes
in the Company’s allowance for doubtful accounts, including acquired amounts,
for the years ended December 31, 2007, 2006 and 2005 are as follows (in
thousands):





Beginning
      Balance
            
            
            Provisions
            
            
            Charge
    Offs
            
            
            Ending
      BalanceYear
      ended December 31, 2005
            
            $
            2,071
            
            
            $
            163
            
            
            $
            (194
            )
            
            $
            2,040Year
      ended December 31, 2006
            
            $
            2,040
            
            
            $
            1,667
            
            
            $
            (618
            )
            
            $
            3,089Year
      ended December 31, 2007
            
            $
            3,089
            
            
            $
            29
            
            
            $
            (326
            )
            
            $
            2,792





Note 6. Property and
Equipment





Property
and equipment consisted of (in thousands):





December 31,
      2007
            
            
            December 31,
      2006Equipment
            
            $
            32,390
            
            
            $
            30,283Furniture
      and fixtures
            
            
            4,297
            
            
            
            3,794Computer
      software and equipment
            
            
            10,138
            
            
            
            10,705Leasehold
      improvements
            
            
            3,882
            
            
            
            2,50250,707
            
            
            
            47,284Less:
      Accumulated depreciation and amortization
            
            
            (41,435
            )
            
            
            (36,765
            )Property
      and equipment, net
            
            $
            9,272
            
            
            $
            10,519





Depreciation
expense was $5.2 million, $5.3 million and $4.9 million for the years ended
December 31, 2007, 2006 and 2005, respectively.





Note 7. Goodwill and Acquired
Intangibles





The
following table represents a rollforward of goodwill and acquired intangible
assets, net (in thousands):





December 31,
      2006
            
            
            Adjustment
            
            
            Acquisition
            
            
            Amortization
            
            
            December
      31,2007Goodwill
            
            $
            78,892
            
            
            $
            651
            
            
            $
            —
            
            
            $
            —
            
            
            $
            79,543Intangibles:Existing
      technology
            
            
            4,361
            
            
            
            —
            
            
            
            —
            
            
            
            (1,612
            )
            
            
            2,749Patent/Core
      technology
            
            
            1,564
            
            
            
            —
            
            
            
            —
            
            
            
            (563
            )
            
            
            1,001Maintenance
      agreements and certain relationships
            
            
            256
            
            
            
            —
            
            
            
            —
            
            
            
            (67
            )
            
            
            189Customer
      relationships
            
            
            6,476
            
            
            
            —
            
            
            
            —
            
            
            
            (1,671
            )
            
            
            4,805Supplier
      contracts
            
            
            742
            
            
            
            —
            
            
            
            —
            
            
            
            (238
            )
            
            
            504Internally
      developed software
            
            
            306
            
            
            
            —
            
            
            
            —
            
            
            
            (50
            )
            
            
            256$
            92,597
            
            
            $
            651
            
            
            $
            —
            
            
            $
            (4,201
            )
            
            $
            89,047





In 2007,
the beginning balance of goodwill related to the GoRemote acquisition was
adjusted by $651,000 for the reversal of temporary differences that were not
correctly captured at the date of acquisition.





46


Total
amortization expense related to acquired intangible assets is set forth in the
table below (in thousands):





Twelve Months Ended December
      31,2007
            
            
            2006
            
            
            2005Intangibles:Existing
      technology
            
            $
            (1,612
            )
            
            $
            (1,612
            )
            
            $
            (1,613
            )Patent/Core
      technology
            
            
            (563
            )
            
            
            (563
            )
            
            
            (563
            )Maintenance
      agreements and certain relationships
            
            
            (67
            )
            
            
            (66
            )
            
            
            (67
            )Customer
      relationships
            
            
            (1,671
            )
            
            
            (1,478
            )
            
            
            (125
            )Supplier
      contracts
            
            
            (238
            )
            
            
            (208
            )
            
            
            —Internally
      developed software
            
            
            (50
            )
            
            
            (44
            )
            
            
            —$
            (4,201
            )
            
            $
            (3,971
            )
            
            $
            (2,367
            )




The
following tables set forth the carrying amount of other intangible assets that
will continue to be amortized (in thousands):





December 31,
      2007Amortization
      Life
            
            Gross Carrying
      Amount
            
            
            Accumulated
      Amortization
            
            
            Net Carrying
      AmountIntangibles:Existing
      technology
            4-8
      yrs
            
            $
            7,900
            
            
            $
            (5,151
            )
            
            $
            2,749Patent/Core
      technology
            4-8
      yrs
            
            
            2,800
            
            
            
            (1,799
            )
            
            
            1,001Maintenance
      agreements and certain relationships
            5
      yrs
            
            
            400
            
            
            
            (211
            )
            
            
            189Customer
      relationships
            4-7
      yrs
            
            
            8,100
            
            
            
            (3,295
            )
            
            
            4,805Supplier
      contracts
            4
      yrs
            
            
            950
            
            
            
            (446
            )
            
            
            504Internally
      developed software
            7
      yrs
            
            
            350
            
            
            
            (94
            )
            
            
            256$
            20,500
            
            
            $
            (10,996
            )
            
            $
            9,504








December 31,
      2006Amortization
      Life
            
            Gross Carrying
      Amount
            
            
            Accumulated
      Amortization
            
            
            Net Carrying
      AmountIntangibles:Existing
      technology
            4-8
      yrs
            
            $
            7,900
            
            
            $
            (3,539
            )
            
            $
            4,361Patent/Core
      technology
            4-8
      yrs
            
            
            2,800
            
            
            
            (1,236
            )
            
            
            1,564Maintenance
      agreements and certain relationships
            5
      yrs
            
            
            400
            
            
            
            (144
            )
            
            
            256Customer
      relationships
            4-7
      yrs
            
            
            8,100
            
            
            
            (1,624
            )
            
            
            6,476Supplier
      contracts
            4
      yrs
            
            
            950
            
            
            
            (208
            )
            
            
            742Internally
      developed software
            7
      yrs
            
            
            350
            
            
            
            (44
            )
            
            
            306$
            20,500
            
            
            $
            (6,795
            )
            
            $
            13,705





The following table
presents the estimated future amortization of intangible assets (in
thousands):





Fiscal
    Year2008
            
            $
            3,9012009
            
            
            2,4012010
            
            
            1,2412011
            
            
            1,0212012
            
            
            875Thereafter
            
            
            65$
            9,504





47


Note 8. Accrued
Liabilities





Accrued
liabilities consisted of (in thousands):





December 31,
      2007
            
            
            December 31,
      2006Accrued
      commissions
            
            $
            4,613
            
            
            $
            3,899Accrued
      liabilities
            
            
            5,582
            
            
            
            7,408Deferred
      rent
            
            
            945
            
            
            
            1,013Paid
      time off payable
            
            
            1,301
            
            
            
            1,960Taxes
      payable
            
            
            1,553
            
            
            
            1,958Accrued
      restructuring liabilities - current
            
            
            1,794
            
            
            
            2,297$
            15,788
            
            
            $
            18,535





Note 9. Accrued
Restructuring




In June
and September 2006, the Company recorded a restructuring charge totaling
approximately $1.7 million related to the workforce reduction of 58 iPass
employees, across all functions. In November 2006, the Company recorded an
additional restructuring charge of $3.0 million related to excess iPass
facilities. The severance costs were recorded pursuant to Statement of Financial
Accounting Standard ("SFAS") No. 112, Employers' Accounting for
Postemployment Benefits—an amendment of FASB Statements No.
5 and43
and the excess facility costs were recorded pursuant to  SFAS No. 146,
Accounting for Costs
Associated with Exit or Disposal Activities("SFAS No.
146").




By June
2007, the Company finalized the aforementioned terminations, settled all
negotiations and paid out the remaining severance.  As a result
of finalizing all such terminations, the Company adjusted the accrual for the
difference between initial estimates of severance liability and the final
payments ultimately made.  This adjustment of approximately $179,000
was credited to the restructuring expense in the second quarter of
2007.  SFAS No. 146 requires that the excess facilities liabilities be
recorded at fair value.  The difference between the fair value of the
liability at the time it was recorded and the total cash liability is
accreted ratably over the expected term.  This accretion is reported
in the restructuring expense line on the condensed consolidated statements of
operations.
 
 In
November 2007, the Company recorded an additional restructuring charge of
approximately $3.2 million related to (i) a workforce reduction of 72 employees
spread across all functions though focused on sales and marketing, (ii) the
abandonment of certain facilities and (iii) abandonment of certain
capitalized assets totaling $900,000.  As of December 31, 2007, the
Company finalized approximately 56 of the aforementioned terminations and had
fully vacated the abandoned facilities.




The
following is a summary of restructuring activities (in thousands):




Excess Facility
      Costs
            
            
            Severance
      Costs
            
            
            Total Restructuring
      AccrualBalance
      as of December 31, 2005
            
            $
            —
            
            
            $
            —
            
            
            $
            —Restructuring
      charges
            
            
            3,028
            
            
            
            1,705
            
            
            
            4,733Reclassification
      of deferred rent
            
            
            461
            
            
            
            —
            
            
            
            461Payments
            
            
            (444
            )
            
            
            (1,302
            )
            
            
            (1,746
            )Balance
      as of December 31, 2006
            
            $
            3,045
            
            
            $
            403
            
            
            $
            3,448Restructuring
      charges
            
            
            1,093
            
            
            
            2,196
            
            
            
            3,289Adjustments
            
            
            —
            
            
            
            (179
            )
            
            
            (179
            )Net
      present value accretion
            
            
            57
            
            
            
            —
            
            
            
            57Payments
            
            
            (1,329
            )
            
            
            (1,653
            )
            
            
            (2,982
            )Write-off
      of capitalized assets
            
            
            (900
            )
            
            
            —
            
            
            
            (900
            )Balance
      as of December 31, 2007
            
            $
            1,966
            
            
            $
            767
            
            
            $
            2,733





48


In
February 2006, in connection with the acquisition of GoRemote, the Company
recorded an accrual of $1.2 million for the lease costs associated with the
acquired GoRemote corporate facilities that were expected to be abandoned. The
accrual was recognized as part of the purchase price allocation pursuant to
Emerging Issues Task Force Issue No. 95-3, Recognition of Liabilities in
Connection with a Purchase Business Combination. The Company completed
the relocation of employees and vacated facilities by April 2006. The accrued
costs are expected to be fully utilized by the second quarter of 2008. The
following is a summary of the acquisition-related restructuring activities
for the years ended December 31, 2007 and 2006 (in thousands):




Excess Facility
      CostsBalance
      as of December 31, 2005
            
            $
            —Accrued
      acquisition-related restructuring costs
            
            
            1,249Payments
            
            
            (432
            )Balance
      as of December 31, 2006
            
            $
            817Payments
            
            
            (717
            )Balance
      as of December 31, 2007
            
            $
            100





As of December 31, 2007
and 2006, the Company has classified $1.8 million and $2.3 million,
respectively, of the restructuring liability in accrued liabilities and
remaining $1.0 million and $2.0 million, respectively, in long-term liabilities
based on the Company’s expectation that the remaining lease payments will be
paid over the remaining term of the related leases (net of expected sublease
income).




Note 10. Income
Taxes





Income
(loss) before income taxes includes net income (loss) from foreign operations of
approximately $2.0 million, $750,000 and $120,000 for the years ended December
31, 2007, 2006 and 2005, respectively.





The
provision for (benefit from) income taxes consisted of the following for the
years ended December 31, 2007, 2006 and 2005 (in thousands):





2007
            
            
            2006
            
            
            2005CurrentU.S.
      federal
            
            $
            —
            
            
            $
            (600
            )
            
            $
            1,972State
            
            
            130
            
            
            
            (364
            )
            
            
            828Foreign
            
            
            629
            
            
            
            507
            
            
            
            402759
            
            
            
            (457
            )
            
            
            3,202DeferredU.S.
      federal
            
            
            19,640
            
            
            
            (5,966
            )
            
            
            5,182State
            
            
            2,716
            
            
            
            (772
            )
            
            
            518Other
            
            
            36
            
            
            
            —
            
            
            
            —22,392
            
            
            
            (6,738
            )
            
            
            5,700Total
      provision for (benefit from) income taxes
            
            $
            23,151
            
            
            $
            (7,195
            )
            
            $
            8,902




Deferred
income taxes reflect the net tax effects of temporary differences between
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes and net loss carryforwards.  As of
December 31, 2007, the Company placed a full valuation allowance on its net
deferred tax assets.  At December 31, 2006, the Company had previously
recorded a partial valuation allowance, which was placed on the deferred tax
assets relating to the net operating loss and credit carryforwards obtained as a
result of the acquisition of GoRemote in 2006, and Safe3w and Mobile Automation
in 2004.  The components of deferred tax assets (liabilities) consisted of
the following as of December 31, 2007 and 2006 (in thousands):





2007
            
            
            2006Deferred
      tax assets:Net
      operating loss carryforwards
            
            $
            43,278
            
            
            $
            41,641Reserves
      and accruals
            
            
            8,834
            
            
            
            8,401Research
      and development credits
            
            
            5,722
            
            
            
            4,907Fixed
      assets
            
            
            1,967
            
            
            
            1,679Total
      deferred tax assets
            
            
            59,802
            
            
            
            56,628Valuation
      allowance
            
            
            (56,040
            )
            
            
            (28,289
            )Net
      deferred tax assets
            
            $
            3,762
            
            
            $
            28,339Deferred
      tax liabilities:Acquired
      intangibles
            
            $
            (3,762
            )
            
            $
            (5,316
            )Total
      net deferred tax assets
            
            $
            —
            
            
            $
            23,023




49


During
2007, the Company increased the valuation allowance by approximately $27.8
million.  As of December 31, 2007, approximately $27.7 million of the
total valuation allowance for deferred tax assets relates to net operating loss
and credit carryforwards attributable to acquired entities, the benefit
from which will be allocated to goodwill rather than current earnings when and
if subsequently realized.  These net operating loss and credit
carryforwards are subject to an annual limitation under Internal Revenue Code
Section 382.  Also included in the valuation allowance as of December
31, 2007 is approximately $2.7 million related to foreign
entities.




For the
years ended December 31, 2007, 2006 and 2005, the provision for (benefit from)
income taxes differed from the amounts computed by applying the U.S. federal
income tax rate to pretax income (loss) before income taxes as a result of the
following:





2007
            
            
            2006
            
            
            2005Federal
      statutory rate
            
            
            (35
            )%
            
            
            (35
            )%
            
            
            35
            %State
      taxes, net of federal benefit
            
            
            (5
            )
            
            
            (4
            )
            
            
            5Foreign
      taxes
            
            
            (5
            )
            
            
            2
            
            
            
            2Amortization
      of stock-based compensation
            
            
            3
            
            
            
            2
            
            
            
            1Research
      and development benefit
            
            
            (5
            )
            
            
            (7
            )
            
            
            (4
            )Tax
      exempt interest
            
            
            (4
            )
            
            
            (6
            )
            
            
            —Other
            
            
            4
            
            
            
            2
            
            
            
            2Valuation
      Allowance
            
            
            256Provision
      for (benefit from) income taxes
            
            
            209
            %
            
            
            (46
            )%
            
            
            41
            %





As of
December 31, 2007, the Company had gross cumulative net operating loss
carryforwards for federal and state tax reporting purposes of approximately
$106.9 million and $65.4 million, respectively, which expire in various periods
through 2027.  Under current tax law, net operating loss carryforwards
available in any given year may be limited upon the occurrence of certain
events, including significant changes in ownership interest such as an
IPO.  In addition, the Company has federal net operating losses of $5.7
million and state net operating losses of $5.9 million related to the deduction
of stock options vested prior to the adoption of FAS 123(R).





The
Company also has research and development tax credit carryforwards of
approximately $5.4 million and $4.9 million for federal and state income tax
purposes, respectively. If not utilized, the federal carryforwards will expire
in various amounts through 2027. The state tax credits can be carried forward
indefinitely.





U.S.
income taxes were not provided for on a cumulative total of $5.4 million of
undistributed earnings for certain foreign subsidiaries.  The major foreign
jurisdictions where the Company has operations includes India and the U.K.
 The Company intends to reinvest these earnings indefinitely in its foreign
subsidiaries.  If these earnings were distributed to the U.S. in the form
of dividends or otherwise, or if the shares of the relevant foreign subsidiaries
were sold or otherwise transferred, the Company would be subject to additional
U.S. income taxes (subject to an adjustment for foreign tax credits). 
Fiscal years 2003 to 2007 remain open to examination by the U.S. tax
authorities.  It is not practicable to estimate the amount of additional
income tax that might be payable upon distribution of the earnings.
 The
Company adopted the provisions of FIN 48 on January 1, 2007. The adoption of
FIN48 did not require a change in the Company’s liability for unrecognized tax
benefits. The total amount of unrecognized tax benefits at December 31, 2007 is
$3.8 million, and at January 1, 2007 was $3.6 million. If any of these tax
benefits that are unrecognized should become recognizable at a future time, it
would result in a change in the Company’s annual effective tax
rate.


The
following table presents a reconciliation of the beginning and ending amounts of
unrecognized tax benefits (in thousands):





Balance
      at January 1, 2007
            
            $
            3,603Increases
      for positions taken in prior years
            
            
            98Increases
      for positions related to the current year
            
            
            563Settlements
      with taxing authorities
            
            
            (510
            )Balance
      at December 31, 2007(1)
            
            $
            3,754




(1)
            $3.0 million is included as a
      reserve against deferred tax assets and $800,000 is included in accrued
      liabilities in the consolidated balance
  sheet.


It is
reasonably possible that the total amount of unrecognized tax benefits will
change in 2008.  Decreases in the unrecognized tax benefits will
result from the lapsing of statutes of limitations and the possible completion
of tax audits in various jurisdictions. Increases will result from tax
positions, primarily related to positions expected to be taken on tax
returns for 2008.  We believe it is reasonably possible that
unrecognized tax benefits of up to $1.9 million may
be  settled in the next twelve
months.


The
continuing practice of the Company is to recognize interest and penalties
related to income tax matters in the provision for income taxes.  At
December 31, 2007, the Company had $290,000 accrued for interest and no accrual
for penalties, of which $143,000 was accrued during the year.
 
 50
 The Company is subject to taxation in the United States and various other
foreign jurisdictions.  The Company records accruals for the estimated
outcomes of these audits, and the accruals may change in the future due to new
developments in each matter.  Fiscal years 2004 to 2007 remain open to
examination by the major taxing jurisdictions to which the Company are
subject, with the exception of California which is open from 2003 to
2007.  The Company has not been audited for U.S. federal income tax
matters.  The Company has income tax audits in progress in India and the
state of California.  The years under examination by the Indian taxing
authorities are 2005 to 2006.  The years under examination by the State of
California are 2002 to 2005.  The Indian tax audit is considered a routine
audit relating to transfer pricing calculations.  The Company does not
believe the examination in India will result in material payments due to the
availability of tax holidays, which effectively reduce the tax rate in India to
0% for tax years ending before March 31, 2007.


Note 11. Common
Stock





Stock Option
Plans





In
February 1997, the Company adopted the 1997 Stock Option Plan (1997 Plan). In
June 1999, the Company adopted two option plans, the 1999 Stock Option Plan
(1999 Plan) and the 1999 Interim Stock Option Plan (1999 Interim Plan). The 1997
Plan, the 1999 Plan, and the 1999 Interim Plan are collectively referred to as
the Pre-IPO Plans. Under the Pre-IPO Plans, as amended, the Company is
authorized to issue shares to employees, directors and consultants. On January
15, 2003, the Company adopted the 2003 Equity Incentive Plan and the 2003
Non-employee Directors Plan which are collectively referred to as the 2003
Plans. Under the 2003 Plans, the board of directors may grant incentive and
nonqualified stock options to employees, directors, and consultants of the
Company.




The
exercise price per share for nonstatutory stock options cannot be less than 85%
of the fair market value, as determined by the board of directors, on the date
of grant. The exercise price per share for incentive stock options cannot be
less than the fair market value, as determined by the board of directors on the
date of grant. Options generally vest 25% on the first anniversary of the
grant date with the remainder vesting ratably over the following 36 months;
options generally expire 10 years after the date of grant. As of December 31,
2007, 20,897,222 shares were authorized for grant under all plans, including
those assumed in the acquisition of GoRemote and there were no shares of common
stock subject to repurchase.


In
January 2003, the Company adopted the 2003 Employee Stock Purchase Plan (ESPP).
The ESPP became effective on July 23, 2003. At that time, 2,000,000 shares were
reserved for issuance under this plan. The number of shares reserved under this
ESPP automatically increases annually beginning January 1, 2004 by 1% of the
total number of shares outstanding as of the last day of the previous fiscal
year. The ESPP permits participants to purchase common stock through payroll
deductions of up to 15% on an employee’s compensation, including commissions,
overtime, bonuses and other incentive compensation. The purchase price per share
is equal to the lower of 85% of the fair market value per share at the beginning
of the offering period, or 85% of the fair market value per share on the
semi-annual purchase date.





In June
2006, the Company’s shareholders approved amendments to and restatement of the
2003 Non-Employee Directors Plan (“Directors Plan”). The changes reduced the
initial grant to each director from 120,000 to 30,000 stock options which vest
10,000 shares on the first anniversary of the date of grant and thereafter in
equal month installments over 24 months. Annual grants to each director were
reduced from 30,000 to 15,000 stock options which vest 100% on the anniversary
of the grant date. In addition the Directors Plan now provides and initial grant
of 10,000 shares of restricted stock which vests 1/3 on each anniversary of the
date of grant and annual grants of 5,000 shares of restricted stock which vest
100% on the one-year anniversary of the date of grant.





Stock-Based
Compensation





The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model that uses the weighted average assumptions
noted in the following table. Expected volatilities are based on the historical
volatility of the Company’s common stock and the historical volatility of
comparable securities. The expected term of options granted is derived from the
average midpoint between vesting and the contractual term, as described in
SAB107. The risk-free rate for periods within the contractual life of the option
is based on the U.S. Treasury yield curve in effect at the time of
grant.





For The Year Ended December 31,
      2007
            
            
            For The Year Ended December 31,
      2006Risk-free
      rate
            
            
            4.73
            %
            
            
            4.86
            %Expected
      dividend yield
            
            
            0
            %
            
            
            0
            %Expected
      volatility
            
            
            49
            %
            
            
            50
            %Expected
      life
            
            6.1
      years
            
            
            6.1
      years





51


Stock option activity under the Plans
for the three years ended December 31,2007is summarized
below:




Shares Available for
      Grant
            
            
            Options
      Outstanding
            
            
            Weighted Average Exercise
      PriceBalance
      as of December 31, 2004
            
            
            7,378,671
            
            
            
            10,114,986
            
            
            $
            4.78Authorized
            
            
            3,637,835
            
            
            
            —
            
            
            
            —Granted
            
            
            (1,045,300
            )
            
            
            1,045,300
            
            
            
            5.88Exercised
            
            
            —
            
            
            
            (1,041,176
            )
            
            
            1.88Cancelled
            
            
            771,085
            
            
            
            (771,085
            )
            
            
            6.09Balance
      as of December 31, 2005
            
            
            10,742,291
            
            
            
            9,348,025
            
            
            $
            5.12Authorized
            
            
            3,248,060
            
            
            
            —
            
            
            
            —Options
      granted
            
            
            (2,071,823
            )
            
            
            2,071,823
            
            
            
            6.85Awards
      granted
            
            
            (446,303
            )
            
            
            —
            
            
            
            —Assumed
      in acquisition of GoRemote
            
            
            —
            
            
            
            1,710,353
            
            
            
            18.58Exercised
            
            
            —
            
            
            
            (1,831,995
            )
            
            
            3.03Cancelled
            
            
            1,897,781
            
            
            
            (1,897,781
            )
            
            
            7.09Balance
      as of December 31, 2006
            
            
            13,370,006
            
            
            
            9,400,425
            
            
            $
            7.96Options
      granted
            
            
            (1,445,525
            )
            
            
            1,445,525
            
            
            
            5.10Awards
      granted
            
            
            (560,094
            )
            
            
            —
            
            
            
            —Exercised
            
            
            —
            
            
            
            (473,280
            )
            
            
            1.86Cancelled
            
            
            2,229,681
            
            
            
            (2,164,711
            )
            
            
            15.14Balance
      at December 31, 2007
            
            
            12,689,263
            
            
            
            8,207,959
            
            
            $
            5.92Exercisable
      as of December 31, 2005
            
            
            
            
            
            
            4,945,870
            
            
            $
            4.39Exercisable
      as of December 31, 2006
            
            
            
            
            
            
            5,703,614
            
            
            $
            8.85Exercisable
      as of December 31, 2007
            
            
            
            
            
            
            5,488,540
            
            
            $
            5.94




Shares
            
            
            Weighted Average Exercise Price
      per Share
            
            
            Weighted Average Remaining
      Contractual Term (Years)
            
            
            Aggregate Intrinsic
      Value(In thousands, except share and
      per share amounts)Options
      outstanding at December 31, 2007
            
            
            8,207,959
            
            
            $
            5.92
            
            
            
            6.06
            
            
            $
            2,843Options
      vested and expected to vest at December, 31, 2007
            
            
            7,353,474
            
            
            $
            5.93
            
            
            
            5.78
            
            
            $
            2,843Options
      exercisable at December 31, 2007
            
            
            5,488,540
            
            
            $
            5.94
            
            
            
            4.91
            
            
            $
            2,843





The
weighted average grant date fair value of options granted during the year ended
December 31, 2007 was $2.69. The following is a summary of the weighted average
exercise price on the date of grant for all options granted during the year
ended December 31, 2007:





Shares
            
            
            Weighted Average Exercise Price
      per ShareExercise
      price less than fair value
            
            
            —
            
            
            $
            —Exercise
      price equal to fair value
            
            
            1,445,525
            
            
            $
            5.10Exercise
      price more than fair value
            
            
            —
            
            
            $
            —




The total
intrinsic value of options exercised during the year ended December 31, 2007 was
$1.5 million. At December 31, 2007, the Company had $4.9 million of total
unrecognized compensation expense, net of estimated forfeitures, related to
stock options, ESPP and options assumed in business combinations that will be
recognized over the weighted average period of 1.38 years. Cash received from
stock option exercises was $880,000 during the twelve months ended December 31,
2007. The Company issues new shares of common stock upon exercise of stock
options.





52


The
following table summarizes the options outstanding and exercisable as of
December 31, 2007:





Options
      Outstanding
            
            
            Options
      ExercisableRange of Exercise
      Prices
            
            
            Number
      Outstanding
            
            
            Weighted-
      Average
              Remaining Contractual Life (in
      Years)
            
            
            Weighted-Average
              Exercise Price per
      Share
            
            
            Number
      Exercisable
            
            
            Weighted-Average
              Exercise Price per
      Share$
            0.10
      — 2.10
            
            
            
            1,042,636
            
            
            
            4.43
            
            
            $
            1.37
            
            
            
            1,042,636
            
            
            $
            1.372.60 — 5.05
            
            
            
            1,384,528
            
            
            
            4.72
            
            
            
            4.78
            
            
            
            1,308,543
            
            
            
            4.795.09 —
      5.09
            
            
            
            994,200
            
            
            
            9.07
            
            
            
            5.09
            
            
            
            —
            
            
            
            —5.13
      — 5.30
            
            
            
            152,283
            
            
            
            8.42
            
            
            
            5.23
            
            
            
            44,006
            
            
            
            5.295.32 —
      5.35
            
            
            
            1,159,597
            
            
            
            5.37
            
            
            
            5.35
            
            
            
            1,003,397
            
            
            
            5.355.38 —
      6.12
            
            
            
            829,440
            
            
            
            5.97
            
            
            
            5.72
            
            
            
            628,143
            
            
            
            5.766.13 — 6.49
            
            
            
            887,673
            
            
            
            7.43
            
            
            
            6.34
            
            
            
            374,085
            
            
            
            6.436.51— 7.59
            
            
            
            829,017
            
            
            
            7.31
            
            
            
            6.89
            
            
            
            279,897
            
            
            
            7.357.68 — 20.02
            
            
            
            867,934
            
            
            
            4.83
            
            
            
            11.62
            
            
            
            747,202
            
            
            
            11.9120.80
      — 250.00
            
            
            
            60,651
            
            
            
            4.20
            
            
            
            38.03
            
            
            
            60,640
            
            
            
            38.04Total
            
            
            
            8,207,959
            
            
            
            6.06
            
            
            
            5.92
            
            
            
            5,488,540
            
            
            
            5.94




Employee Stock
Awards




The
Company grants stock awards to employees under the 2003 Plans. These plans
provide for the granting of restricted stock and/or performance awards to
officers and employees. Restricted stock issued under these plans generally vest
annually over two to three years but are considered outstanding at the time of
grant, as the stockholders are entitled to dividends and voting
rights.





A summary
of the changes in stock awards outstanding under the Company’s equity-based
compensation plan for the periods ended December 31, 2007and 2006 is presented
below:





Shares
            
            
            Weighted Average Grant Date
      Fair ValueNonvested
      at December 31, 2005
            
            
            —
            
            
            $
            —Granted
            
            
            446,303
            
            
            $
            6.32Vested
            
            
            —
            
            
            $
            —Forfeited
            
            
            (33,950
            )
            
            $
            6.39Nonvested
      at December 31, 2006
            
            
            412,353
            
            
            $
            6.34Granted
            
            
            560,094
            
            
            $
            5.09Vested
            
            
            (41,667
            )
            
            $
            6.01Forfeited
            
            
            (131,535
            )
            
            $
            5.65Nonvested
      at December 31, 2007
            
            
            799,245
            
            
            $
            5.60





The fair
value of the Company’s stock awards was calculated based upon the fair market
value of the Company’s stock at the date of grant. As of December 31, 2007,
there was $1.3 million of total unrecognized compensation cost related to the
unvested restricted stock awards granted, which is expected to be recognized
over the remaining weighted average vesting period of 1.30 years.





Employee Stock Purchase
Plan





Compensation
expense related to the Company’s employee stock purchase plan (“ESPP”) is
calculated using the fair value of the employees’ purchase rights granted under
the Black-Scholes model, assuming no expected dividends and the following
weighted average assumptions:





For The Year Ended December 31,
      2007
            
            
            For The Year Ended December 31,
      2006Risk-free
      rate
            
            
            3.89
            %
            
            
            4.95
            %Expected
      dividend yield
            
            
            0
            %
            
            
            0
            %Expected
      volatility
            
            
            46
            %
            
            
            55
            %Expected
      life
            
            0.5
      to 1 year
            
            
            0.5
      to 1 year





The
weighted-average fair value of the purchase rights granted under the ESPP during
the year ended December 31, 2007 and 2006 was $1.36 and $1.82,
respectively. During the twelve months ended December 31, 2007 and 2006, 424,832
and 408,510 shares, respectively, were issued pursuant to the plan.





53


Note 12. Stock Repurchase
Program





In May
2006, the Company’s Board of Directors approved a two-year stock repurchase
program which authorizes the Company to repurchase up to $30.0 million of
outstanding common stock from time to time on the open market or through
privately negotiated transactions. In July 2007, the Company completed the
repurchase program and retired a total of approximately 5.6 million shares of
common stock for an aggregate purchase price of $30.0 million.  In 2007,
the Company repurchased and retired approximately 2.6 million shares for an
aggregate purchase price of $13.8 million.





Note 13. Commitments and
Contingencies





We lease
our facilities under non-cancelable operating leases that expire at various
dates through October 2016. Future minimum lease payments under these operating
leases, including payments on leases accounted for under our restructuring plan,
as of December 31, 2007 are as follows (in thousands):





Year
      ending December 31:2008
            
            $
            7,4962009
            
            
            6,7852010
            
            
            4,6502011
            
            
            3,5592012
      and thereafter
            
            
            9,322$
            31,812




Rent expense under
operating leases for the years ended December 31, 2007, 2006, and 2005 was $5.7
million, $6.8 million and $6.0 million respectively.





As of December 31, 2007,
the Company has contracts with certain network service providers which have
minimum purchase commitments that expire on various dates through December
2010.  In connection with a mobile data provider contract signed in
August 2007, the Company agreed to significant annual usage minimum commitments
over the term of three years.  Future minimum purchase
commitments under all agreements are as follows (in
thousands):





Year
      ending December 31:2008
            
            $
            5,0682009
            
            
            14,1812010
            
            
            15,075$
            34,324




Letter of
Credit




In
connection with an agreement with a network service provider, the Company
entered into an irrevocable letter of credit with Silicon Valley Bank in the
amount of $1.5 million. The letter of credit is collateralized by an equal
amount of restricted cash and automatically renews for successive one-year
periods.  The restricted cash is classified as other assets on the
consolidated balance sheet at December 31, 2007,





Legal
Actions





On
November 22, 2006, Blue Waters Management, L.L.C., a former iPass reseller,
filed a claim against Carlson Companies, Inc. alleging breach of contract and
conversion based upon the iPass services and software provided by Blue Waters to
Carlson.  Blue Waters has alleged damages of approximately $9
million.  On July 23, 2007, Carlson Companies filed a counter-claim
against Blue Waters seeking damages for breach of contract, fraud and unjust
enrichment.  Carlson Companies had been a customer of Blue Waters from
about December 2002 through September 2006, after which Carlson Companies
entered into a contract with iPass in order to continue to use the iPass
services and software.  At the same time, Carlson terminated its
agreement with Blue Waters.   Blue Waters has claimed that
Carlson’s continued use of the iPass software after September 2006 is a
violation of Carlson’s agreement with Blue Waters.   Blue Waters
has not alleged a specific amount of damages with this portion of its
complaint.  In the counterclaim filed by Carlson, Carlson has claimed
that iPass is required to indemnify Carlson to the extent Carlson is required to
pay any damages to Blue Waters as a result of Carlson’s continued use of the
iPass software.   On August 14, 2007, iPass filed a response
to Carlson’s claim denying any liability to Carlson.   The Court
has ordered the parties to participate in mediation and conclude such mediation
by July 1, 2008.  The Court has scheduled a trial on the issues for
August 11, 2008.No loss has been
accrued as a loss is not probable or estimable as of December 31,
2007.




54


In 2001,
GoRemote Internet Communications, Inc. (formerly known as GRIC Communications,
Inc., hereinafter, "GoRemote") and certain of its officers and directors were
named as defendants in a class action shareholder complaint filed in the United
States District Court for the Southern District of New York, now consolidated as
In re GRIC Communications, Inc. Initial Public Offering Securities Litigation,
Case No. 6771. In the amended complaint, the plaintiffs allege that GoRemote,
certain of its officers and directors and the underwriters of its initial public
offering ("IPO") violated section 11 of the Securities Act of 1933 based on
allegations that GoRemote's registration statement and prospectus failed to
disclose material facts regarding the compensation to be received by, and the
stock allocation practices of, the IPO underwriters. The complaint also contains
a claim for violation of section 10(b) of the Securities Exchange Act of 1934
based on allegations that this omission constituted a deceit on investors. The
plaintiffs seek unspecified monetary damages and other relief. Similar
complaints were filed in the same court against hundreds of other public
companies ("Issuers") that conducted IPOs of their common stock in the late
1990s and 2000 (the "IPO Lawsuits").




In October 2002,
GoRemote's officers and directors were dismissed without prejudice pursuant to a
stipulated dismissal and tolling agreement with the plaintiffs. In February
2003, the court dismissed the section 10(b) claim against GoRemote without leave
to amend, but declined to dismiss the section 11 claim.  In June 2004,
GoRemote and almost all of the other Issuers executed a settlement agreement
with the plaintiffs.  In February 2005, the court certified the
litigation as a class action for settlement purposes and granted preliminary
approval of the settlement, subject to modification of certain bar orders
contemplated by the settlement.  In August 2005, the court reaffirmed
class certification and preliminary approval of the modified
settlement.  On February 24, 2006, the Court dismissed litigation
filed against certain underwriters in connection with the claims to be assigned
to the plaintiffs under the settlement.  On April 24, 2006, the Court
held a Final Fairness Hearing to determine whether to grant final approval of
the settlement.  On December 5, 2006, the Second Circuit Court of
Appeals vacated an earlier decision by the district
court certifying as class actions the six IPO Lawsuits designated as "focus
cases."  Thereafter, the district court ordered a stay of all proceedings
in all of the IPO Cases pending the outcome of plaintiffs’ petition to the
Second Circuit for rehearing en banc.  On April 6, 2007, the Second
Circuit denied plaintiffs' rehearing petition, but clarified that the plaintiffs
may seek to certify a more limited class in the District Court. 
Accordingly, the settlement was terminated and will not receive final
approval.  Plaintiffs filed amended complaints in the six focus cases on or
about August 14, 2007.  GoRemote is not a focus case.  In
September 2007, GoRemote's named officers and directors again extended the
tolling agreement with plaintiffs.  On or about September 27, 2007,
plaintiffs moved to certify the classes alleged in the focus cases and to
appoint class representatives and class counsel in those cases.  The “focus
case” issuers filed motions to dismiss the claims against them in November
2007.  Both motions are pending.  No loss has been accrued
as a loss is not probable or estimable as of December 31, 2007.





We may be
subject to various other claims and legal actions arising in the ordinary course
of business from time to time.





Note 14. Employee 401(k)
Plan





Substantially
all of the Company’s employees are eligible to participate in the Company’s
401(k) plan, which provides for discretionary Company matching contributions.
Beginning January 1, 2006, the Company provided a 50% match to employee
contributions up to 6% of an employee’s total compensation.  The Company’s
matching contributions to the plan totaled $716,000 and $792,000 for the years
ended December 31, 2007 and 2006, respectively.





Note 15. Net Income (Loss) Per Common
Share




In
accordance with SFAS 128, “Earnings Per Share,” basic net income (loss) per
share is computed by dividing net income (loss) by the weighted daily average
number of shares of common stock outstanding during the period. The weighted
daily average number of shares of common stock excludes shares that have been
exercised prior to vesting and are subject to repurchase by the company as well
as unvested restricted stock awards. As such, basic net income (loss) per share
excludes 352,778 shares subject to repurchase for the year ended 2005.
 There were no shares subject to repurchase for the years ended December
31, 2007 or 2006.  Basic net income (loss) excludes 799,245 and
323,303 shares of unvested restricted stock for the years ended December 31,
2007 and 2006, respectively. These shares have been included in diluted net
income (loss) per share to the extent that the inclusion of such shares is not
anti-dilutive. Diluted net income (loss) per share is based upon the weighted
daily average number of shares of common stock outstanding for the period plus
dilutive potential common shares, including stock options using the
treasury-stock method.




The
following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except share and per share
amounts):





For the Year Ended December
      31,2007
            
            
            2006
            
            
            2005Numerator:Net
      income (loss)
            
            $
            (34,214
            )
            
            $
            (8,089
            )
            
            $
            12,895Denominator:Denominator
      for basic net income per common shareWeighted
      average shares outstanding
            
            
            63,211,888
            
            
            
            64,572,603
            
            
            
            63,353,779Effect
      of dilutive securities:Stock
      options
            
            
            --
            
            
            
            --
            
            
            
            2,923,563Denominator
      for diluted net income (loss) per common share —
      adjusted
            
            
            63,211,888
            
            
            
            64,572,603
            
            
            
            66,277,342Basic
      net income (loss) per common share
            
            $
            (0.54
            )
            
            $
            (0.13
            )
            
            $
            0.20Diluted
      net income (loss) per common share
            
            $
            (0.54
            )
            
            $
            (0.13
            )
            
            $
            0.19





55


The following potential
shares of common stock have been excluded from the computation of diluted net
income (loss) per share because the effect of including these shares would have
been anti-dilutive:





For the Year Ended December
      31,2007
            
            
            2006
            
            
            2005Options
      to purchase common stock
            
            
            8,207,959
            
            
            
            9,400,425
            
            
            
            1,904,406Unvested
      restricted stock awards
            
            
            799,245
            
            
            
            323,303
            
            
            
            --





The
weighted-average exercise price of options to purchase common stock excluded
from the computation was $5.92, $7.70 and $10.00 for the years ended December
31, 2007, 2006 and 2005, respectively.





Note 16. Segment
Information





SFAS No.
131, Disclosures about Segments of an Enterprise and
Related Information, establishes standards for the reporting by business
enterprises of information about operating segments, products and services,
geographic areas, and major customers. The method for determining what
information is reported is based on the way that management organizes the
operating segments within the Company for making operational decisions and
assessments of financial performance. The Company’s chief operating decision
maker is considered to be the Company’s chief executive officer (CEO). The CEO
reviews financial information presented on a consolidated basis for purposes of
making operating decisions and assessing financial performance. The consolidated
financial information reviewed by the CEO is similar to the information
presented in the accompanying consolidated statements of operations. Therefore,
the Company has determined that it operates in a single reportable
segment.





International
revenue is determined by the location of the customer’s headquarters.
International revenue accounted for approximately 38%, 40% and 45% of total
revenues for the years ended December 31, 2007, 2006 and 2005, respectively.
Revenues in the United Kingdom accounted for 11%, 11% and 14% of total
revenues for the years ended December 31, 2007, 2006 and 2005,
respectively.




The following table sets forth disaggregated revenue by
type as reviewed by the Company's chief operating decision maker (in
thousands):




For the Year Ended December
      31,2007
            
            
            2006
            
            
            2005Broadband
            
            $
            75,073
            
            
            $
            39,936
            
            
            $
            8,815Dial-up
            
            
            67,826
            
            
            
            105,682
            
            
            
            138,057Service
      fees and other
            
            
            48,833
            
            
            
            37,093
            
            
            
            22,501191,732
            
            
            
            182,711
            
            
            
            169,373


Substantially
all of the Company’s long-lived assets are located in the United States.
Revenues in the United States were $119.3 million for the year ended December
31, 2007.





Note 17. Subsequent
Event





On
February 12, 2008, the Company's Board of Directors approved a two-year stock
repurchase program which authorizes the Company to repurchase up to $30 million
of outstanding common stock from time to time on the open market or through
privately negotiated transactions.  The timing and amount of any
repurchases will depend upon market conditions and other corporate
considerations.




56








SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) 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.




iPass Inc.By:  /s/ Kenneth
      D. Denman
            
            
            By:  /s/ Frank
      E. VerdecannaKenneth
      D. Denman, Chairman, President and Chief Executive
      Officer
              (Principal Executive
      Officer)
            
            
            Frank
      E. Verdecanna, Vice President and Chief Financial
      Officer
              (Principal Financial
      Officer)





Date:  March
17, 2008




57








POWER OF ATTORNEY





KNOW ALL
PERSONS BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints Frank E. Verdecanna and Bruce K. Posey, and each
or any one of them, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Report, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requiste and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes or substitute, may lawfully do or cause to be
done by virtue hereof.




Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Signature
            Title
            Date/s/
      Kenneth D. Denman
            Chairman,
      President, Chief Executive Officer and Director (Principal Executive
      Officer)
            March
      17, 2008Kenneth
      D. Denman/s/
      Frank E. Verdecanna
            Vice
      President and Chief Financial Officer (Principal Financial
      Officer)
            March
      17, 2008Frank
      E. Verdecanna/s/
      A. Gary Ames
            Director
            March
      17, 2008A.
      Gary Ames/s/
      John D. Beletic
            Director
            March
      17, 2008John
      D. Beletic/s/
      Peter G. Bodine
            Director
            March
      17, 2008Peter
      G. Bodine/s/
      Peter C. Clapman
            Director
            March
      17, 2008Peter
      C. Clapman/s/
      Michael J. McConnell
            Director
            March
      17, 2008Michael
      J. McConnell/s/
      Arthur C. Patterson
            Director
            March
      17, 2008Arthur
      C. Patterson/s/
      Olof Pripp
            Director
            March
      17, 2008Olof
      Pripp/s/
      Allan R. Spies
            Director
            March
      17, 2008Allan
      R. Spies


58








INDEX TO
EXHIBITS





Exhibit
              Number
            
            Description of
      Document2.1
            
            Agreement
      and Plan of Merger dated October 26, 2004 by and among iPass Inc., Montage
      Acquisition Corp., Mobile Automation, Inc. and David Strohm, as
      Stockholders’ Agent.(1)2.2
            
            Agreement
      of Merger among iPass Inc., Keystone Acquisition Sub, Inc. and GoRemote
      Internet Communications, Inc. dated December 9,
2005.(2)3.1
            
            Amended
      and Restated Certificate of Incorporation.(3)3.2
            
            Amended
      and Restated Bylaws (3)4.1
            
            Reference
      is made to Exhibits 3.1 and 3.24.2
            
            Specimen
      stock certificate.(3)10.1
            *
            2003
      Equity Incentive Plan and form of related agreements, as
      amended.(3)10.1.1
            *
            Form
      of Stock Option Grant Notice under the 2003 Equity Incentive Plan
      (containing additional vesting terms).(4)10.2
            *
            2003
      Non-Employee Directors Plan, as amended.(5)10.2.1
            *
            Forms
      of Restricted Stock Award Grant Notice and Restricted Stock Award
      Agreement under the 2003 Non-Employee Directors Plan
  (12)10.2.2
            *
            Formsof Stock Option Grant Notice and
      Stock Option Agreement under the 2003 Non-Employee Directors
      Plan(12)10.3
            *
            1999
      Stock Option Plan and form of related agreements.(3)10.4
            *
            1997
      Stock Option Plan and form of related agreements.(3)10.5
            *
            Interim
      1999 Stock Option Plan.(3)10.6
            *
            Restricted
      Stock Purchase Agreement by and between the Registrant and Anurag Lal
      dated November 8, 1999.(3)10.7
            *
            2003
      Employee Stock Purchase Plan and form of related agreements, as
      amended.(3)10.8
            
            Lease
      Agreement, dated October 26, 1999, between Registrant and Westport Joint
      Venture (as amended).(3)10.9
            
            Amended
      and Restated Investor Rights Agreement, dated August 8, 2000, between
      Registrant, founders and holders of the Registrant’s Preferred
      Stock.(3)10.10
            
            Form
      of Indemnity Agreement.(3)10.11
            *
            Employment
      Agreement, dated November 13, 2001, between Registrant and Kenneth D.
      Denman.(3)10.12
            *
            Form
      of Offer Letter to Executive Officers.(3)10.13
            
            OEM
      Service Provider License Agreement, dated February 29, 2000, between RSA
      Security, Inc. and the Registrant, and amendments
    thereto.(4)10.14
            
            Support
      Agreement, dated February 29, 2000, by and between RSA Security,
      Inc.(4)10.15
            
            Loan
      and Security Agreement dated September 4, 2001 between Silicon Valley Bank
      and the Registrant, and modifications thereto.(3)10.16
            *
            2007
      Annual Executive Management Bonus Plan.(6)10.17
            *
            Outside
      Director Compensation Arrangement.(7)10.18
            *
            Executive
      Officer Cash Compensation Arrangement.(8)10.19
            *
            Offer
      Letter to Thomas Thimot dated December 9, 2005.(9)10.20
            *
            Transition
      Agreement with John Thuma dated January 20, 2006.(10)10.21
            *
            Letter
      Agreement pursuant to which Michael J. McConnell and Peter C. Clapman were
      elected to Registrant’s Board of Directors.(11)10.22
            *
            Description
      of iPass 2007 Annual Executive Management Bonus Plan and Annual Target
      Bonuses for named executive officers. (14)10.23
            *
            iPass
      Inc. Executive Corporate Transaction and Severance Benefit Plan, and
      participants therein (15)10.24
            *
            Amendment
      to Employment Agreement, dated December 20, 2007, between iPass Inc. and
      Kenneth D. Denman. (16)10.25
            *
            Description
      of iPass 2008 Annual Executive Management Bonus Plan and Annual Target
      Bonuses for named executive officers. (17)10.26
            *
            Form
      of Restricted Stock Grant Notice and Agreement for Vice Presidents and
      above, under the Company’s 2003 Equity Incentive Plan.
  (8)10.27
            *
            Form
      of Restricted Stock Grant Notice and Agreement for below Vice Presidents,
      under the Company’s 2003 Equity Incentive Plan. (8)10.28
            *
            Form
      of Performance Shares Grant Notice and Agreement, under the Company’s 2003
      Equity Incentive Plan. (8)21.1
            
            Subsidiaries of the
      Registrant.23.1
            
            Consent of Independent Registered Public
      Accounting Firm.24.1
            
            Power
      of Attorney (reference is made to the signature page of this Form
      10-K).31.1
            
            Certification of the Chief Executive Officer
      pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
            
            Certification of the Chief Financial Officer
      pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
            
            Certification of the Chief
      ExecutiveOfficer
      pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.32.2
            
            Certification of the Chief Financial Officer
      pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002.


__________


(1
              )
              Previously
      filed as the like-numbered exhibit to our Annual Report on Form 10-K
      (Commission No. 000-50327) filed with the Securities and Exchange
      Commission on March 15, 2005, and incorporated by reference
      herein.(2
              )
              Previously
      filed as exhibit 10.22 on our Current Report on Form 8-K (Commission No.
      000-50327) filed with the Securities and Exchange Commission on December
      12, 2005, and incorporated by reference herein.(3
              )
              Previously
      filed as the like-numbered exhibit to our Registration Statement on Form
      S-1 (Commission No. 333-102715), as amended, originally filed with the
      Securities and Exchange Commission on January 24, 2003, as amended, and
      incorporated by reference herein.(4
              )
              Previously
      filed as the like-numbered exhibit to our Annual Report on Form 10-K
      (Commission No. 000-50327) filed with the Securities and Exchange
      Commission on March 16, 2006, and incorporated by reference
      herein(5
              )
              Previously
      filed as exhibit 10.1 on our Current Report on Form 8-K (Commission No.
      000-50327) filed with the Securities and Exchange Commission on August 16,
      2006, and incorporated by reference herein.(6
              )
              Previously
      filed as Item 5.02 on our Current Report on Form 8-K (Commission No.
      000-50327) filed with the Securities and Exchange Commission on February
      13, 2007, and incorporated by reference herein.(7
              )
              Previously
      disclosed under the caption “Compensation of Directors” in our Definitive
      Proxy Statement on Schedule 14A filed with the Securities and Exchange
      Commission on April 30, 2007, and incorporated by reference
      herein.(8
              )
              Filed
      as the like-described exhibit to iPass’ Quarterly Report on Form 10-Q
      (Commission No. 000-50327), filed with the SEC on May 10, 2007, and
      incorporated herein by reference.(9
              )
              Previously
      filed as exhibit 10.23 on our Current Report on Form 8-K (Commission No.
      000-50327) filed with the Securities and Exchange Commission on February
      16, 2006, and incorporated by reference herein.(10
              )
              Previously
      filed as exhibit 10.24 on our Current Report on Form 8-K (Commission No.
      000-50327) filed with the Securities and Exchange Commission on February
      16, 2006, and incorporated by reference herein.(11
              )
              Previously
      filed as exhibit 99.1 on our Current Report on Form 8-K (Commission No.
      000-50327) filed with the Securities and Exchange Commission on February
      21, 2007.(12
              )
              Previously
      filed as the like-numbered exhibit to our Annual Report on form 10-K
      (Commission No. 000-50327) filed with the Securities and Exchange
      Commission on March 29, 2007, and incorporated by reference
      herein(13
              )
              Previously
      filed as exhibit 3.1 on our Current Report on Form 8-K (Commission No.
      000-50327) filed with the Securities and Exchange Commission on November
      13, 2007, and incorporated by reference herein.(14
              )
              Previously
      filed as the description in Item 5.02 of the Current Report on Form
      8-K and incorporated herein by reference.(15
              )
              Previously
      filed as the like-described exhibit to iPass’ Current Report on Form 8-K
      (Commission No. 000-50327), filed with the SEC on August 15, 2007, and
      incorporated herein by reference. Participation in the plan by executive
      officers is described in Item 5.02 of the Current Report on Form
      8-K and incorporated herein by reference.(16
              )
              Previously
      filed as the like-described exhibit to iPass’ Current Report on Form 8-K
      (Commission No. 000-50327), filed with the SEC on December 26, 2007, and
      incorporated herein by reference.(17
              )
              Previously
      filed as the like-described exhibit to iPass’ Current Report on Form 8-K
      (Commission No. 000-50327), filed with the SEC on February 15, 2008, and
      incorporated herein by reference. Participation in the plan by executive
      officers is described in Item 5.02 of the Current Report on Form
      8-K and incorporated herein by
reference.




*Indicates
a management contract or compensatory plan or arrangement