##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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Form 10-K

|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
| 
|  |  | For the fiscal year ended December 31,
    2003                                             
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| 
|  |  | For the transition period
    from           to                                             

Commission File Number 000-50327



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iPass Inc.

(Exact name of Registrant as specified in its
charter)




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

3800 Bridge Parkway

Redwood Shores, California 94065


(Address, including zip code, of principal
executive offices)


(650) 232-4100

(Registrants telephone number, including
area code)




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

None


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

Common Stock, $0.001 Par Value


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 þ          No o

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.     No o

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

The
registrants common stock was not publicly traded, nor was
it registered pursuant to Section 12 of the Exchange Act,
until July 24, 2003. Consequently, there was no published
last sales price, nor average bid and asked price, of such
common stock as of June 30, 2003.

The number of
shares outstanding of the Registrants Common Stock, $0.001
par value, as of February 27, 2004 was 60,937,591.



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iPASS, INC.

FORM 10-K


FOR THE FISCAL YEAR ENDED DECEMBER 31,
2003


TABLE OF CONTENTS

|              |  |                                                                                                                      |    |      |    | 
|------------- |  | -------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|              |  |                                                                                                                      |    | Page
|              |  |                                                                                                                      |    |     
|PART I       
|Item 1.       |  | Business                                                                                                             |    |      | 2  | 
|Item 2.       |  | Properties                                                                                                           |    |      | 9  | 
|Item 3.       |  | Legal Proceedings                                                                                                    |    |      | 10 | 
|Item 4.       |  | Submission of Matters to a
    Vote of Security Holders                                                              |    |      | 10 | 
|PART II      
|Item 5.       |  | Market For Registrants
    Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities |    |      | 10 | 
|Item 6.       |  | Selected Financial Data                                                                                              |    |      | 11 | 
|Item 7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                            |    |      | 11 | 
|Item 7A.      |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                       |    |      | 26 | 
|Item 8.       |  | Financial Statements and
    Supplementary Data                                                                      |    |      | 27 | 
|Item 9.       |  | Changes in and Disagreements
    With Accountants on Accounting and Financial Disclosure                             |    |      | 29 | 
|Item 9A.      |  | Controls and Procedures                                                                                              |    |      | 29 | 
|PART III     
|Item 10.      |  | Directors and Executive
    Officers of the Registrant                                                               |    |      | 29 | 
|Item 11.      |  | Executive Compensation                                                                                               |    |      | 29 | 
|Item 12.      |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters               |    |      | 30 | 
|Item 13.      |  | Certain Relationships and
    Related Transactions                                                                   |    |      | 30 | 
|Item 14.      |  | Principal Accountant Fees
    and Services                                                                           |    |      | 30 | 
|PART IV      
|Item 15.      |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                                 |    |      | 30 | 
|SIGNATURE     |  |                                                                                                                      | 51 |     
|EXHIBIT INDEX |  |                                                                                                                      | 53 |     
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 





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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 Factors Affecting Operating
Results in Managements Discussion and Analysis
of Financial Condition and Results of Operations and
elsewhere herein, for factors that may cause actual results to
be different than those expressed in these forward-looking
statements. Except as required by law, we undertake no
obligation to revise or update publicly any forward-looking
statements for any reason.

1



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PART I






|        |         
|------- | --------
|Item 1. | Business

Overview

We are a global provider of software-enabled
enterprise connectivity services for mobile workers. Our primary
service offering, iPass Corporate Access, is designed to enable
enterprises to provide their employees with secure access from
over 150 countries to the enterprises internal
networks through an easy-to-use interface. As opposed to
telecommunications companies that own and operate physical
networks, we provide our services through a virtual network. Our
virtual network is enabled by our software, our scalable network
architecture and our relationships with over
280 telecommunications carriers, Internet service providers
and other network service providers around the globe. Our
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. We
provide our services predominantly over wired networks, and
recently we have begun providing our services over wireless
networks. We have generated 99% of our revenues to date from the
sale of enterprise connectivity services using narrowband access
technologies, such as modem dial-up, and seek to generate
additional revenues from broadband access technologies,
including Ethernet and Wireless-Fidelity (Wi-Fi). We market and
sell our services directly, as well as indirectly through
channel partners, which consist of network service providers,
systems integrators and value-added resellers. We were
incorporated in California in July 1996 and reincorporated in
Delaware in June 2000.

Our Services

Our services are designed to enable enterprises
to provide their employees with secure access from over
150 countries to the enterprises internal networks
through an easy-to-use interface. We provide our services
through a virtual network that is enabled by our software, our
scalable network architecture, and our relationships with over
280 network service providers around the globe.

The key benefits of our services include:

Broad Global
Coverage.Our virtual network
aggregates over 20,000 access points in over
150 countries. As of December 31, 2003, over 16,000 of
these access points were dial-up connections and approximately
5,000 were broadband connections, including over
3,500 Wi-Fi hotspots and over 1,000 wired hotspots. As
a result, enterprises that use our services can provide their
mobile workers with access from these countries, in most
instances with a local telephone connection.

Redundant and Scalable Virtual
Network.Our relationships with over
280 network service providers enable us to provide
connectivity through multiple networks in approximately 105 out
of the over 150 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, which operate as collection points for
transactional and other user information, provide efficient,
redundant transaction processing. Our technology enables us to
monitor and manage our virtual network by producing near
real-time updates, generally within 15 minutes, of
connection success rates, client configurations, authentication
times and other information critical to diagnosing network
health and troubleshooting user connection problems. In
addition, our virtual network is scalable, which allows us to
handle many connections and users and reduces the need for
enterprises to employ additional information technology
resources.

Secure Connectivity.Our software is designed to enable an enterprises network
connectivity infrastructure to integrate with a wide variety of
enterprise security applications. Our services integrate a wide
variety of security software and systems, including VPNs,
firewalls and authentication tokens, enabling enterprises to
rapidly deploy our services while leveraging their existing and
future investments in security infrastructure. Unlike many
network service providers, we securely route all credentials
relating to our end users with 128-bit Secure Socket Layer, or
SSL, ensuring the confidentiality of sensitive user information.
Our virtual network also offers policy management capabilities,
which enable customers to allow or deny access to their network
based on specific user and session characteristics.

2



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Centralized Billing and
Reporting.We integrate multiple
network 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
creates call-detail records 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.

Integration of New
Technologies.We actively evaluate and
integrate new access methods, devices, applications and
operating systems into our service offering. For example, we
have added wired broadband as well as wireless broadband based
on the current and emerging Wi-Fi standards to the list of
access methods we support. End users can access our virtual
network using desktop and laptop computers, wireless PDAs and
other Internet protocol-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 Windows,
Mac OS, Pocket PC and Palm OS versions. As new
access methods, devices, applications and operating systems
emerge, we intend to integrate these new technologies into our
service offerings.

Our Strategy

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

Expand our Customer
Base.We seek to increase the number
of enterprises that use our services by increasing the number of
our direct sales professionals who focus on generating new
accounts. We also seek to expand our indirect sales capabilities
by building additional relationships with channel partners, such
as systems integrators, and providers of VPN and broadband
access service equipment. We also intend to build and maintain
iPass brand awareness through the promotion of our logo and
marketing campaigns, and by increasing our market credibility
through integrating our software with the offerings of our
channel partners and co-branding our client software.

Increase Penetration within our Existing
Customer Base.We seek to accelerate
the adoption of our services by increasing the number of mobile
workers who connect to our virtual network, as well as
increasing usage by existing customers. Our sales force assists
our customers with the adoption and integration of our services
with their organizations, assesses their needs and usage and
provide support. In addition, we do not have exclusive
arrangements with any particular vendor of connectivity, VPN or
security services, so our account representatives can work with
our enterprise customers to provide the technical solution that
best meets their needs.

Expand our Wired and Wireless Broadband
Service Offerings.We believe that the
ease of use, security functionality and our ability to aggregate
and integrate providers into our virtual network together with
the other benefits of our services can address many of the
challenges presented by the emerging broadband markets, such as
security concerns, as well as the lack of unified standards and
a high degree of fragmentation in the wireless broadband market.
As such, we seek to expand the scope and coverage of our virtual
network to venues focused on business travelers, such as
airports, hotels and convention centers. We intend to continue
increasing the number of these venues by establishing
relationships with network service providers that provide access
to these hotspots. We also seek to continue developing
authentication, settlement, client development and other
services for Wi-Fi service providers to expand their
broadband capabilities through our virtual network.

Continue to Enhance our Virtual Network and
Service Offerings.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 and to address changing customer requirements and
technologies through internal development, strategic
partnerships or acquisitions.

3



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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.
We also intend to explore additional managed services that
enhance our competitive advantage and provide us with new growth
opportunities.


Services



| |                       
| | ----------------------
| | iPass Corporate Access

iPass Corporate Access is our primary service
offering. We generally bill customers on a usage basis, based on
negotiated rates. The process by which a mobile worker accesses
the enterprises network through iPass Corporate Access is
illustrated in the following diagram and described through the
following steps:

LOGO



| |    |                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | The iPassConnect client software installed on a
    mobile workers laptop computer or other electronic device
    enables the mobile worker to connect to our virtual network. The
    mobile worker indicates the city in which he or she is located,
    and then selects a local network access point or has the client
    software select one automatically.
|
| | 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
    network and securely transmits the username and password to the
    nearest iPass transaction center.         
|
| | 3. | The transaction center to which the
    authentication request is routed securely transmits the user
    name and password to the iPass RoamServer software residing on
    the enterprises servers. Our eight transaction
    centers are located in California, New York, Georgia, Hong
    Kong, Australia, the United Kingdom, Germany and Japan.            
|
| | 4. | The RoamServer receives the request from the
    transaction center 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 network service provider via a
    transaction center.                                                                                                                                                            

4



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| |    |                                                                                                                                                                                                                                                                    
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | Once we authorize the network service provider to
    allow access to the Internet, the iPassConnect client software
    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 one or more detailed monthly invoices, as
    requested.



| |                                              
| | ---------------------------------------------
| | Deployment Services and Technical
    Support

We provide our customers with deployment services
and technical support throughout the term of the contract. Fees
for these services represented less than 2% of our revenues in
2003, 2002, and 2001.



| |                    
| | -------------------
| | Additional Services

In addition to iPass Corporate Access, we
currently offer the following services:

iOQ.We have
developed our iOQ service to allow our customers
in-house or outsourced help desk personnel to quickly identify
issues and troubleshoot connection problems. With our
iOQ service, 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.

ExpressConnect.Our
ExpressConnect service is designed 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 at an off-site secure data center, but the
enterprises information technology manager retains full
control. We generally charge a monthly fee for our
ExpressConnect service.

Fees for these additional services represented
approximately 1% of our revenue in 2003, 2002, and 2001.

Technology



| |                     
| | --------------------
| | Principal Components

The technology incorporated in our service 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 client; distributed
authentication system; iPass Clearinghouse; and service quality
management.

iPassConnect Client.The iPassConnect client 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 existing and emerging access methods, including narrowband,
integrated services digital network, or ISDN, and wired and
wireless broadband. The iPassConnect client 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 client was
    designed with over four years of experience and customer
    feedback, resulting in a user-friendly interface with many
    features.                                                                                                                                                                                
|
| |  | Automatic Updates.iPassConnect client also provides enterprises with the ability
    to schedule periodic software modifications or updates to their
    end users without handling each end user device separately.
    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.
|
| |  | Central Policy
    Control.iPassConnect client 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.                                                                                                                     

5



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| |   |                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Dynamic Phonebook.iPassConnect client enables enterprises to adjust the order of
    narrowband access points that are displayed to the end user,
    based on service quality. Customers also have the flexibility of
    integrating in-house access numbers with iPass access
    points in cases where both networks are being utilized.                                           
|
| |  | Third Party Application
    Integration.iPassConnect client can
    be configured to automatically launch a variety of third party
    VPNs upon successful connection to the Internet.                                                                                                                                                                                                 
|
| |  | Support for multiple operating systems and
    languages.iPassConnect client
    supports a wide range of computer operating systems, including
    Windows 95, 98, NT, 2000, Me, XP, Mac OS 8.x,
    9.x, 10.x, Windows CE, Pocket PC2000,
    Pocket PC2002 and Palm OS. Additionally, iPassConnect
    is localized in Chinese, French, German, Japanese, Portuguese
    and Spanish.

Distributed Authentication
System.Our distributed authentication
system, which is comprised of iPass NetServer software, iPass
RoamServer software and iPass transaction server 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 to 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 recently developed and are presently
deploying an additional security enhancement to our
authentication system designed to further ensure 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 Corporate Access and ExpressConnect 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.

Service Quality
Management.Our iPass service quality
management, or SQM, software 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 other information
    important in diagnosing network health. Our SQM software is
    deployed on networks worldwide to gather data on local access

6



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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.Based on
    input from the SQM infrastructure, the phonebook tool
    within the iPassConnect client places the highest quality access
    point at the top of the directory in order to enhance the
    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, Germany and
Japan. In addition, two out of our eight transaction
centers also run the Clearinghouse, 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 our channel partners.

International revenue is determined by the
location of the customers headquarters. International
revenue accounted for approximately 39% of total revenues for
the years ended December 31, 2003, 2002 and 44% for the
year ended December 31, 2001. No individual foreign country
represented 10% or more of total revenues for the years ended
December 31, 2003, 2002 and 2001.

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

Agreements with Network Service
Providers

We have relationships with over
280 telecommunications carriers, Internet service
providers and other network service providers that enable us to
offer our services in over 150 countries around the world.
We pay network service providers for access to their network
access points on a usage basis, in some cases, subject to
minimum purchase commitments. Most of these agreements have a
term of one year, after which either party can terminate
the contract with six months notice. In 2003,
two network service providers, MCI and Equant, accounted
for approximately 21% and 14% of our network access expenses,
respectively. The contracts we have entered into with these
providers are non-exclusive and contain minimum commitments for
the purchase of network access. The initial term of our contract
with Equant expires in February 2006. The terms of our two
contracts with MCI expire in July and August of 2004. These
contracts are automatically renewable for successive periods of
one or 12 month periods unless terminated by either party.
Other than the approximately 34 countries in which our sole
network service provider is Equant, and in approximately
16 other countries in which we have contracted with a
single service provider in each country, we provide alternative
access points in a given geographic area to enable redundancy of
our services. Network usage from access with these approximately
50 countries accounted for approximately 1% of our revenues
in 2003. In addition, in countries in which we have contracted
with multiple network service providers, if one network service
provider is no longer available, we can obtain alternative
network access without substantial delay or disruption to our
business. We are also able to direct users to the network of
particular service providers to fulfill minimum purchase
commitments.

7



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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, inside sales representatives and sales
engineers. 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, Singapore, Denmark, Sweden
and the Netherlands. As of December 31, 2003, our sales
organization was comprised of 80 individuals in North
America, 23 individuals in Asia Pacific, and
28 individuals in Europe. We intend to increase the size of
our sales organization and establish additional sales offices as
needed.

Our channel partners include network service
providers, 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 for resale of our services. Channel partners are
responsible for implementing and managing billing and
promotional activities for their customers. Selling through
channel partners allows us to offer our services without
incurring the cost of maintaining a direct sales force in each
target market. Our channel partners typically sell related
networking products and bundle our services with their core
offerings. Once an enterprise has signed a contract for our
services through a channel partner, our post-sales team works
with the channel partner to ensure successful implementation of
our services. However, the enterprise remains the channel
partners customer and has no direct 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. We
conduct a variety of marketing programs to educate our target
market and enhance brand awareness, including advertising, press
relations, telemarketing, direct marketing, seminars and trade
shows.

Competition

We compete primarily with large, facilities-based
carriers and non-facilities-based software-enabled network
operators. We compete based on geographic coverage, reliability,
quality of service, ease of implementation, ease of use and
cost. We believe that we compete favorably in terms of
geographical coverage, reliability, quality of service, ease of
implementation and ease of use.

Facilities-based carriers against whom we
compete, such as AT&T and MCI, 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
rather 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 access rather than access only within a limited
geographic region.

We also compete with other non-facilities-based
software-enabled network operators, such as
GRIC Communications and Fiberlink. In some cases, our
service offerings may not be as attractively priced as those
offered by our competitors, which may put us at a competitive
disadvantage. Non-facilities-based network operators that
provide managed services such as VPNs and firewalls, may also
provide, as a package, additional services such as local
exchange and long distance services, voicemail and DSL services.
Although our channel partners may offer these services in
conjunction with our service, we do not offer these additional
services directly, which may put us at a competitive
disadvantage when competing for potential customers. Also, we
believe we compete favorably against these competitors in terms
of the coverage, redundancy, security, quality and ease of use
of our service offerings.

For a discussion of the possible effects that
competition could have on our business, see Factors
Affecting Operating Results  We face strong
competition in our market, which could make it difficult for us
to succeed.

8



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Research and Development

We believe that to compete favorably we must
continue to invest in 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, 2003, our research and development
organization consisted of 63 employees. Our research and
development expenses were $9.9 million, $7.1 million
and $5.4 million in 2003, 2002, and 2001, 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®, iOQ® and the iPass logo are our
U.S. registered trademarks. iPassConnectTM,
ExpressConnectTM, iPassNetTM,
RoamServerTM, NetServerTM, and iPass
Corporate AccessTM are designations that we use. We
have 13 U.S. patent applications pending relating to
our service. On January 21, 2003, we were issued a
U.S. patent for a method and a technology relating to our
SQM technology. The duration of the patent is 20 years
from the date of issuance. We have also applied for or
registered company trademarks on over 50 other countries.
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. The
license agreement with RSA Security expires in February
2006 and automatically renews for additional three-year periods
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. 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, 2003, we had
330 employees, consisting of 64 in network operations,
63 in research and development, 158 in sales and
marketing and 45 in general and administrative. We consider
our relationship with our employees to be good.

Trademarks

iPass®, iOQ® and the iPass logo are our
U.S. registered trademarks. iPassConnectTM,
ExpressConnectTM, iPassNetTM,
RoamServerTM, NetServerTM, and iPass
Corporate AccessTM are designations that we use. We
have also applied for or registered company trademarks on 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.






|        |           
|------- | ----------
|Item 2. | Properties

We lease approximately 71,000 square feet of
space in our headquarters in Redwood Shores, California under a
lease that expires in 2010. 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

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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

We are not a party to any material legal
proceeding. We may be subject to various claims and legal
actions arising in the ordinary course of business from time to
time.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

None.




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 National
Market under the symbol IPAS and has been traded on
NASDAQ since our initial public offering on July 24, 2003.

The following table sets forth the high and low
sale price of our common stock, based on the last daily sale, in
each of the quarters since our initial public offering:

|                                         |                                    |                |   |                 |  |  |   |       | 
|---------------------------------------- | ---------------------------------- | -------------- | - | --------------- |  |  | - | ----- | 
|                                         |                                    | Low Sale Price |   | High Sale Price
|                                         |                                    |                |   |                
|Fiscal year ended December 31,
    2003: |                                    |                |   |                 |  |  |   |      
|                                         | Fourth Quarter                     |                | $ | 15.25           |  |  | $ | 26.90 | 
|                                         | Third Quarter (from July 24, 2003) |                |   | 17.60           |  |  |   | 28.22 | 

We had 60,937,591 shares of our common stock
outstanding held by 281 stockholders of record as of
February 27, 2004.

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 the board.

Recent Sales of Unregistered
Securities

In from January 1, 2003 to July 24,
2003, the date of our initial public offering, we sold and
issued the following unregistered securities:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We sold an aggregate of 20,138 shares of our
    common stock to employees, directors and consultants for cash
    consideration in the aggregate amount of $2,886 upon the
    exercise of stock options granted under our 1997 stock option
    plan.                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | We granted stock options to employees, directors
    and consultants under our 1999 stock option plan covering an
    aggregate of 1,441,000 shares of our common stock, at a
    weighted average exercise price of $3.05 per share. Of
    these, options covering an aggregate of 5,000 were canceled
    without being exercised. During the same period, we sold an
    aggregate of 542,511 shares of our common stock to
    employees, directors and consultants for cash consideration or
    in exchange for promissory notes in the aggregate amount of
    $631,258 upon the exercise of stock options granted under the
    1999 plan.

The sales of common stock and grants of stock
options described above were made in reliance on the exemption
from registration under the Securities Act under
Section 4(2) under the Securities Act in that such

10



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sales and issuances did not involve a public
offering, or under Rule 701 promulgated under the
Securities Act, in that they were offered and sold either
pursuant to written compensatory plans or pursuant to a written
contract relating to compensation, as provided by Rule 701.


We did not make any sales of unregistered
securities in 2003 following the date of our initial public
offering.






|        |                        
|------- | -----------------------
|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,              
|                             |         |                                      
|                             |         | 2003                                  |         | 2002 |  | 2001 |        | 2000 |  | 1999
|                             |         |                                       |         |      |  |      |        |      |  |     
|                             |         |                                      
|                             |         | (In thousands, except per share data)
|Statement of Operations Data |         |                                       |         |      |  |      |        |      |  |      |         |       |   |   |         |       |   |   |         |      
|Revenues                     |         | $                                     | 136,078 |      |  | $    | 92,830 |      |  | $    | 53,164  |       |   | $ | 35,281  |       |   | $ | 14,319  |      
|Total operating expenses     |         |                                       | 113,721 |      |  |      | 86,178 |      |  |      | 80,898  |       |   |   | 69,316  |       |   |   | 32,797  |      
|Operating income (loss)      |         |                                       | 22,357  |      |  |      | 6,652  |      |  |      | (27,734 | )     |   |   | (34,035 | )     |   |   | (18,478 | )    
|Net income (loss)            |         |                                       | 13,902  |      |  |      | 29,759 | (1)  |  |      | (27,801 | )     |   |   | (34,964 | )     |   |   | (18,374 | )    
|Net income (loss) per share: |         |                                       |         |      |  |      |        |      |  |      |         |       |   |   |         |       |   |   |         |      
|                             | Basic   |                                       |         | 0.26 |  |      |        | 2.34 |  |      |         | (2.43 | ) |   |         | (3.60 | ) |   |         | (2.48 | )
|                             | Diluted |                                       |         | 0.23 |  |      |        | 0.57 |  |      |         | (2.43 | ) |   |         | (3.60 | ) |   |         | (2.48 | )



---



|    |                                                                          
|--- | -------------------------------------------------------------------------
|(1) | Of this amount, $24.3 million was due to a
    non-recurring tax benefit.

|                                 |  |                                       |         |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|-------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                 |  |                                      
|                                 |  | As of December 31,                   
|                                 |  |                                      
|                                 |  | 2003                                  |         | 2002 |  | 2001 |        | 2000 |  | 1999
|                                 |  |                                       |         |      |  |      |        |      |  |     
|                                 |  |                                      
|                                 |  | (In thousands, except per share data)
|Balance Sheet Data               |  |                                       |         |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Total assets                     |  | $                                     | 190,117 |      |  | $    | 75,442 |      |  | $    | 37,421 |  |  | $ | 52,232 |  |  | $ | 24,216 | 
|Line of credit and loans payable |  |                                       |        |      |  |      | 10,375 |      |  |      | 8,932  |  |  |   | 2,726  |  |  |   | 4,371  | 
|Total stockholders equity       |  |                                       | 171,722 |      |  |      | 49,600 |      |  |      | 16,262 |  |  |   | 38,294 |  |  |   | 11,941 | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Company Overview

We are a global provider of software-enabled
enterprise connectivity services for mobile workers. Our primary
service offering is designed to enable enterprises to provide
their employees with secure access from over 150 countries
to the enterprises internal networks through an
easy-to-use interface.

Overview of 2003

In 2003, our primary goal was to improve upon our
existing service offering as well as increase our user base
through new and existing customers to drive revenue and earnings
growth. We also continued the expansion of both our dial-up and
broadband global footprints, enabling our users to remotely
access their corporate networks from more locations, with
increased redundancy than in any previous year.

We continue to focus on delivering innovative
services and solutions for our customers and increasing the
number of end users of our services as well as expand the
breadth of our service offerings with additional new services
which we will begin to market in 2004. In 2004, we expect to see
continued growth in our business. 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

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further discussion of these and other risk
factors, see the section below entitled Factors Affecting
Operating Results.


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
per-minute 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 over an
allocated number of hours. Substantially all enterprise
customers commit to a one to three year contract term. Most of
our contracts with enterprise customers contain minimum usage
levels. Since our inception, substantially all of our revenues
have been usage-based.

To date, we have derived 99% of our revenues from
narrowband connectivity services. Although we have incurred
expenses to expand our broadband coverage and are seeking to
generate additional revenues from our broadband wired and
wireless coverage, we have generated less than 1% of our
revenues from broadband coverage in 2003, and we cannot
determine when, if ever, we will generate any substantial
revenues from broadband.

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. These fees represented less than
2% of our revenues in 2003.

We also offer customers additional services for
which we generally bill on a monthly basis. Fees for these
services were approximately 1% of our revenues for 2003.

Critical Accounting Policies and
Estimates

Our discussion and analysis of our financial
condition and results of operations are 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

We have derived substantially all of our revenues
from usage fees associated with providing enterprise
connectivity services through our virtual network. 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 collectibility is
probable.

We recognize revenues during the period the
services are rendered to end users based on usage at negotiated
rates. Most of our contracts with enterprise customers contain
minimum usage levels. If actual usage in a given period is less
than the minimum commitment, we recognize the additional charge
between the minimum commitment and the actual usage as revenues
when cash is collected because we cannot reasonably estimate the
amount of the difference that will be collected. We utilize
historical experience as our basis in determining that we cannot
reasonably estimate the amount of additional charges to be
collected because we have from time to time renegotiated minimum
commitments in cases where customers have exercised a right to
seek 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.

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We typically provide our customers with
deployment services, technical support and additional optional
services. Depending on the service provided and the nature of
the arrangement, we may charge a one-time, annual or monthly
fee. We recognize revenues relating to one-time fees on a
straight-line basis over the term of the initial contract,
generally one to three years. We recognize revenues relating to
annual fees on a straight-line basis over the year. We recognize
revenues for monthly services during the month that these
services are provided.

We generally perform credit reviews to evaluate
the customers ability to pay. If we determine that
collectibility is not probable, we recognize revenue as cash is
collected.



| |                            
| | ---------------------------
| | 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. Changes in the valuation allowance are included
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.

During the year ended December 31, 2002, we
determined that it was more likely than not that we would
realize all of our available net deferred tax assets in the
carryforward period of up to 19 years. As a result, we
determined that it was no longer necessary or appropriate to
maintain a valuation allowance related to our deferred tax
assets. Accordingly, we recorded a $24.3 million tax
benefit in our consolidated statements of income for the year
ended December 31, 2002.

Although we believe it is more likely than not
that we will realize our net deferred tax assets, there is no
guarantee this will be the case as our ability to use the net
operating losses is contingent upon our ability to generate
sufficient taxable income in the carryforward period. At each
period end, we will be required to reassess our ability to
realize the benefit of our net operating losses. If we were to
conclude it is not more likely than not that we would realize
the benefit of our net operating losses, we may have to
re-establish the valuation allowance and therefore record a
significant charge to our results of operations.



| |                                    
| | -----------------------------------
| | Allowance for Doubtful
    Accounts

Our allowance for doubtful accounts is based on a
detailed assessment of for specific accounts receivable, as well
as anticipated, uncollectible accounts receivable. Our provision
for doubtful accounts has been approximately 1% of revenues on
an annual basis. Our estimate in determining the allowance for
doubtful accounts is based on credit profiles of our customers,
current economic trends, contractual terms and conditions, and
historical payment experience. 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.

RESULTS OF OPERATIONS

Revenue

|              |  |                                    |  |         |  |       |  |         |  |         |  |       |  |        
|------------- |  | ---------------------------------- |  | ------- |  | ----- |  | ------- |  | ------- |  | ----- |  | -------
|              |  |                                   
|              |  | December 31,                      
|              |  |                                   
|              |  |                                    |  |         |  |       |  |         |  |        
|              |  |                                    |  | Change  |  |       |  | Change  |  |        
|              |  |                                    |  |         |  |       |  |         |  |        
|              |  | 2003                               |  | $       |  | %     |  | 2002    |  | $       |  | %     |  | 2001   
|              |  |                                    |  |         |  |       |  |         |  |         |  |       |  |        
|              |  |                                   
|              |  | (In thousands, except percentages)
|Total Revenue |  | $136,078                           |  | $43,248 |  | 46.6% |  | $92,830 |  | $39,666 |  | 74.6% |  | $53,164

The growth in total revenue in 2003 over 2002 was
due to an increase in the usage of our services resulting from
an increased number of end users of our services at new and
existing customers. Distinct end users of our

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service increased to 447,000 in the month of
December of 2003 from 286,000 for the same period in 2002. No
individual customer accounted for 10% or more of total revenues
for the years ended December 31, 2003, 2002 or 2001. Fees
for additional services represented approximately 1% of our
revenue in 2003, 2002, and 2001.


The growth in total revenue in 2002 over 2001 was
due to an increase in usage of our service, resulting from an
increased number of end users of our services at new and
existing customers. The number of distinct end users of our
service increased to 286,000 for the month of December 2002 from
160,000 in the month of December 2001.

International revenues, which are revenues
generated from customers domiciled outside the United States,
accounted for approximately 39% of total revenues in 2003 and
2002, and 44% in 2001. International revenues have declined as a
percent of revenue due to the expansion of our direct sales
force within the United States during 2000 and 2001.
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 21%, 17% and
17% of total revenues in 2003, 2002 and 2001, respectively. The
increase in the EMEA region as a percent of revenues is due to
the expansion of our sales force in EMEA in 2002. Revenues in
the Asia Pacific region represented 14%, 15% and 20% of total
revenues in 2003, 2002 and 2001, respectively. No individual
foreign country accounted for 10% or more of total revenues in
2003, 2002 or 2001. All of our revenues to date have been
denominated in U.S. dollars, although in the future some
portion of revenues may be denominated in foreign currencies.

Operating Expenses



| |               
| | --------------
| | Network Access

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

|                        |  |                                    |        |        |  |   |       |        |  |   |      |    |  |      |        |   |  |   |       |  |  |  |       |    |  |   |        |  
|----------------------- |  | ---------------------------------- | ------ | ------ |  | - | ----- | ------ |  | - | ---- | -- |  | ---- | ------ | - |  | - | ----- |  |  |  | ----- | -- |  | - | ------ | -
|                        |  |                                   
|                        |  | December 31,                      
|                        |  |                                   
|                        |  |                                    |        |        |  |   |       |        |  |  
|                        |  |                                    |        | Change |  |   |       | Change |  |  
|                        |  |                                    |        |        |  |   |       |        |  |  
|                        |  | 2003                               |        | $      |  | % |       | 2002   |  | $ |      | %  |  | 2001
|                        |  |                                    |        |        |  |   |       |        |  |   |      |    |  |     
|                        |  |                                   
|                        |  | (In thousands, except percentages)
|Network access expenses |  | $                                  | 30,121 |        |  | $ | 6,798 |        |  |   | 29.1 | %  |  | $    | 23,323 |   |  | $ | 3,847 |  |  |  | 19.8  | %  |  | $ | 19,476 |  
|As a percent of revenue |  |                                    | 22.1   | %      |  |   |      |        |  |   | (3.0 | )% |  |      | 25.1   | % |  |   |      |  |  |  | (11.5 | )% |  |   | 36.6   | %

The growth in network access expenses in 2003
over 2002 was due to increased usage of our virtual network. The
decrease as a percent of revenues from 2002 was due to reduced
access rates, which resulted from our ability to purchase
network access from additional service providers at a lower cost
and to renegotiate a number of our network service provider
contracts. We expect network access expenses to continue to
increase in absolute dollars as usage of our virtual network
increases, but to remain relatively constant as a percentage of
revenues.

The growth in network access expenses in 2002
over 2001 was due to an increased usage of our virtual network,
offset in part by reduced access rates that we paid to our
network service providers. The decrease from 2001 to 2002 as a
percent of revenues was due to reduced access rates, which
resulted from our ability to purchase network access from
additional network service providers at lower rates and to
renegotiate a number of our current network service provider
contracts.

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| |                   
| | ------------------
| | 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, and certain allocated
overhead costs.

|                            |  |                                    |        |        |  |        |  |        |      |    |  |   |        |      |  |      |  |  |      |    |  |   |       |  
|--------------------------- |  | ---------------------------------- | ------ | ------ |  | ------ |  | ------ | ---- | -- |  | - | ------ | ---- |  | ---- |  |  | ---- | -- |  | - | ----- | -
|                            |  |                                   
|                            |  | December 31,                      
|                            |  |                                   
|                            |  |                                    |        |        |  |        |  |        |      |   
|                            |  |                                    |        | Change |  |        |  | Change |      |   
|                            |  |                                    |        |        |  |        |  |        |      |   
|                            |  | 2003                               |        | $      |  | %      |  | 2002   |      | $  |  | % |        | 2001
|                            |  |                                    |        |        |  |        |  |        |      |    |  |   |        |     
|                            |  |                                   
|                            |  | (In thousands, except percentages)
|Network operations expenses |  | $                                  | 14,306 |        |  | $3,847 |  |        | 36.8 | %  |  | $ | 10,459 |      |  | $759 |  |  | 7.8  | %  |  | $ | 9,700 |  
|As a percent of revenue     |  |                                    | 10.5   | %      |  |       |  |        | (0.8 | )% |  |   | 11.3   | %    |  |     |  |  | (6.9 | )% |  |   | 18.2  | %

The increase in network operations expenses in
2003 over 2002 in absolute dollars was due primarily to
$1.5 million in additional compensation and benefits
expense due to an increase in personnel, $665,000 of additional
transaction center fees, and $540,000 of additional depreciation
expense on network operations equipment in support of the
expansion of our virtual network. The decrease as a percentage
of revenues from 2002 to 2003 was due primarily to economies of
scale in our network operations infrastructure. As we expand our
operations, we expect that our network operations expenses will
continue to increase in absolute dollars, but remain relatively
constant or increase slightly as a percentage of revenues.

Network operations expenses increased in absolute
dollars, but decreased as a percentage of revenues during fiscal
2002 compared to fiscal 2001. The most significant components of
the absolute dollar increase were approximately $200,000 of
additional transaction center fees in 2002 and $270,000 of
additional depreciation expense for network operations
equipment. The decrease as a percentage of revenues was due
primarily to economies of scale in our network operations
infrastructure.



| |                         
| | ------------------------
| | 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,                      
|                                  |  |                                   
|                                  |  |                                    |       |        |  |        |  |        |      |   
|                                  |  |                                    |       | Change |  |        |  | Change |      |   
|                                  |  |                                    |       |        |  |        |  |        |      |   
|                                  |  | 2003                               |       | $      |  | %      |  | 2002   |      | $  |  | % |       | 2001
|                                  |  |                                    |       |        |  |        |  |        |      |    |  |   |       |     
|                                  |  |                                   
|                                  |  | (In thousands, except percentages)
|Research and development expenses |  | $                                  | 9,944 |        |  | $2,874 |  |        | 40.7 | %  |  | $ | 7,070 |      |  | $1,641 |  |  | 30.2 | %  |  | $ | 5,429 |  
|As a percent of revenue           |  |                                    | 7.3   | %      |  |       |  |        | (0.3 | )% |  |   | 7.6   | %    |  |       |  |  | (2.6 | )% |  |   | 10.2  | %

The increase in research and development expenses
in 2003 over 2002 was due primarily to an additional
$1.8 million of compensation and benefits expenses related
to an increase in headcount, and approximately $540,000 in fees
paid to consultants to further develop our service. The decrease
as a percentage of revenues was due to revenues increasing at a
faster pace than research and development expenses. We expect
that our research and development expenses will continue to
increase in absolute dollars as we increase the number of our
personnel and consultants to develop and enhance new and
existing service offerings. We also expect research and
development expenses to increase slightly as a percentage of
revenues due to the acceleration of our timetables for bringing
certain products and services to market.

The increase in research and development expenses
in 2002 over 2001 in absolute dollars was due primarily to an
additional $1.0 million in fees paid to consultants, and an
additional $670,000 of compensation and benefits expenses
relating to the increase in number of research and development
personnel.

15



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##### Table of Contents





| |                    
| | -------------------
| | Sales and Marketing

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

|                             |  |                                    |        |        |  |        |  |        |      |    |  |   |        |      |  |        |  |  |       |    |  |   |        |  
|---------------------------- |  | ---------------------------------- | ------ | ------ |  | ------ |  | ------ | ---- | -- |  | - | ------ | ---- |  | ------ |  |  | ----- | -- |  | - | ------ | -
|                             |  |                                   
|                             |  | December 31,                      
|                             |  |                                   
|                             |  |                                    |        |        |  |        |  |        |      |   
|                             |  |                                    |        | Change |  |        |  | Change |      |   
|                             |  |                                    |        |        |  |        |  |        |      |   
|                             |  | 2003                               |        | $      |  | %      |  | 2002   |      | $  |  | % |        | 2001
|                             |  |                                    |        |        |  |        |  |        |      |    |  |   |        |     
|                             |  |                                   
|                             |  | (In thousands, except percentages)
|Sales and marketing expenses |  | $                                  | 41,049 |        |  | $8,118 |  |        | 24.7 | %  |  | $ | 32,931 |      |  | $2,975 |  |  | 9.9   | %  |  | $ | 29,956 |  
|As a percent of revenue      |  |                                    | 30.2   | %      |  |       |  |        | (5.3 | )% |  |   | 35.5   | %    |  |       |  |  | (20.8 | )% |  |   | 56.3   | %

The increase in sales and marketing expenses in
2003 over 2002 in absolute dollars was due primarily to an
additional $3.7 million in compensation and benefits
expenses resulting from the expansion of the sales organization
and increased commissions expense as a result of sales growth in
2003 over 2002. The increase also included $1.3 million of
additional advertising and public relations expenses, as well as
a $930,000 increase in compensation and benefits expenses for
additional marketing personnel. The remaining portion of the
increase was due to individually insignificant items. We expect
that sales and marketing expenses will increase in absolute
dollars to the extent revenues increase and as we expand our
sales force and increase marketing activities, but will continue
to decline as a percentage of revenues.

The increase in absolute dollars in sales and
marketing expenses in 2002 as compared to 2001 was due primarily
to $2.8 million of additional compensation and benefits
expenses for the expansion of our sales organization. As a
percentage of revenues, sales and marketing expenses decreased
from 2002 as compared to 2001 because revenues increased at a
higher rate than sales and marketing expenses.



| |                           
| | --------------------------
| | 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,                      
|                                    |  |                                   
|                                    |  |                                    |        |        |  |        |  |        |      |  
|                                    |  |                                    |        | Change |  |        |  | Change |      |  
|                                    |  |                                    |        |        |  |        |  |        |      |  
|                                    |  | 2003                               |        | $      |  | %      |  | 2002   |      | $ |  | % |       | 2001
|                                    |  |                                    |        |        |  |        |  |        |      |   |  |   |       |     
|                                    |  |                                   
|                                    |  | (In thousands, except percentages)
|General and administrative expenses |  | $                                  | 14,232 |        |  | $4,602 |  |        | 47.8 | % |  | $ | 9,630 |      |  | $53 |  |  | 0.6  | %  |  | $ | 9,577 |  
|As a percent of revenue             |  |                                    | 10.5   | %      |  |       |  |        | 0.1  | % |  |   | 10.4  | %    |  |    |  |  | (7.6 | )% |  |   | 18.0  | %

A significant part of the increase in general and
administrative expenses in 2003 over 2002 was $1.2 million
in compensation and benefits expenses for additional personnel.
There was also an increase of $1.0 million for directors
and officers insurance, as well as $930,000 for consulting, and
an $800,000 increase in rent expense. General and administrative
expenses increased in absolute dollars in 2003 over 2002 due to
incurring additional costs associated with becoming a public
company. We expect that our general and administrative expenses
will increase in absolute dollars to the extent that we expand
our operations, but to remain relatively constant as a
percentage of revenues.

Although general and administrative expenses
remained constant in 2002 and 2001, in 2002 there was $520,000
of additional bad debt expense offset in part by a $380,000
decrease in compensation and benefits expenses. Included in 2001
compensation expenses was $450,000 of severance payments to our
former Chief Executive Officer. As a percentage of revenues,
general and administrative expenses decreased from 2002 as
compared to 2001 due primarily to economies of scale in our
corporate infrastructure.



| |                                             
| | --------------------------------------------
| | Amortization of Stock-Based
    Compensation

We record stock-based compensation charges in the
amount by which the option exercise price or the restricted
stock purchase price is less than the deemed fair value of our
common stock at the date of grant. We amortize this compensation
expense on an accelerated basis over the vesting period of the
applicable

16



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##### Table of Contents



agreements, generally four years. Amortization of
stock-based compensation expense relates to stock options
granted to employees prior to our initial public offering in
July of 2003.


|                                                 |  |                                    |       |        |  |        |  |        |      |   |  |   |       |      |  |  |         |   |  |  |       |    |  |   |       |  
|------------------------------------------------ |  | ---------------------------------- | ----- | ------ |  | ------ |  | ------ | ---- | - |  | - | ----- | ---- |  |  | ------- | - |  |  | ----- | -- |  | - | ----- | -
|                                                 |  |                                   
|                                                 |  | December 31,                      
|                                                 |  |                                   
|                                                 |  |                                    |       |        |  |        |  |        |      |  
|                                                 |  |                                    |       | Change |  |        |  | Change |      |  
|                                                 |  |                                    |       |        |  |        |  |        |      |  
|                                                 |  | 2003                               |       | $      |  | %      |  | 2002   |      | $ |  | % |       | 2001
|                                                 |  |                                    |       |        |  |        |  |        |      |   |  |   |       |     
|                                                 |  |                                   
|                                                 |  | (In thousands, except percentages)
|Amortization of stock-based compensation expense |  | $                                  | 4,069 |        |  | $1,304 |  |        | 47.2 | % |  | $ | 2,765 |      |  |  | $(2,885 | ) |  |  | (51.1 | )% |  | $ | 5,650 |  
|As a percent of revenue                          |  |                                    | 3.0   | %      |  |       |  |        |     |   |  |   | 3.0   | %    |  |  |        |   |  |  | (7.6  | )% |  |   | 10.6  | %

We expect to incur amortization of stock-based
compensation expense of at least $2.4 million in 2004 and
$1.2 million in 2005. The amount of amortization of
stock-based compensation expense to be recognized in future
periods could decrease if stock options for which accrued but
unvested compensation expense has been recorded are forfeited.



| |                      
| | ---------------------
| | Restructuring Charges

In April 2001, we decided to focus on enterprise
customers and therefore reduced the need for resources related
to non-enterprise customers. As a result, we terminated 30
people and determined that certain office facilities would no
longer be needed to run our business. Eight network operations
employees, three research and development employees, 14 sales
and marketing employees and five general and administrative
employees were included in the workforce reduction. We recorded
a charge of $440,000 for severance costs related to this
reduction, substantially all of which were paid during 2001. The
charge relating to the lease obligation was comprised of two
components:



| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | lease termination fees, net, totaling
    approximately $190,000; and                                                                                        
|
| |  | future rental obligations through February 2003
    of $678,000, offset by estimated future sublease income of
    $198,000, totaling approximately $480,000.

We had no restructuring activity in 2003 or 2002.

Non-Operating Expenses



| |                            
| | ---------------------------
| | Other Income (Expense), Net

Other income (expense) consists of the net total
of interest income and interest expense for the period.

Interest income includes interest income on cash,
cash equivalents, and short-term investment balances. Interest
income and other was $1.1 million and $440,000 in 2003 and
2002, respectively. The increase in interest income was due to
an increase in the average cash, cash equivalents, and
short-term investment balances for the period, resulting
primarily from proceeds received from the initial public
offering in July 2003. Interest income and other decreased from
$895,000 in 2001 to $440,000 in 2002 due to a lower average cash
balance and a reduction in the average interest rates.

Interest expense consists of interest paid on our
line of credit and loans, as well as amortization of a loan
discount associated with the fair value of warrants issued in
connection with our financing activities. Interest expense was
$620,000 and $1.0 million in 2003 and 2002, respectively.
The decrease in interest expense was the result of paying off
our line of credit and all outstanding loans payable in July and
August 2003. Interest expense increased from $852,000 in 2001 to
$1.0 million in 2002. The increase was due to higher
average borrowings in 2002 as well as $64,000 of amortization of
a loan discount associated with the fair value of warrants
issued in connection with our financing activities.



| |                                              
| | ---------------------------------------------
| | Provision for (benefit from) Income
    Taxes

The provision for income taxes was
$9.0 million in 2003 compared to a net benefit of
$23.7 million in 2002. The increase is due to an increase
in taxable income in 2003 over 2002, and the $27.2 million
reversal of

17



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##### Table of Contents



the valuation allowance in 2002 discussed below.
The net benefit in 2002 is $3.5 million less than the
reversal of the valuation allowance due to taxable earnings
generated in 2002.


During 2003, we recorded a research and
development tax credits of approximately $1.3 million. A
tax study was completed during the year 2003 for the years 1996
through 2003 which identified research and development expenses
that were eligible for federal and state income tax credits.

We incurred net operating losses in 2001 and
consequently paid insignificant amounts of federal, state and
foreign income taxes. As of December 31, 2001, we had
recorded a valuation allowance of $27.2 million, which was
equal to the amount of our deferred tax assets. These assets
relate to net operating loss carryforwards and other tax credit
carryforwards and temporary differences between items recorded
for financial reporting and tax return purposes. We established
this valuation allowance because we determined that it was more
likely than not that some portion or all of the deferred tax
assets would not be realized. We reversed the valuation
allowance totaling $27.2 million during fiscal year 2002,
of which $2.9 million was due to taxable earnings generated
during 2002, and $24.3 million because we determined that
it is more likely than not that we will generate enough taxable
income to use our net operating losses.

Liquidity and Capital Resources

From our inception in July 1996 through our
initial public offering of our common stock in July 2003, we
funded our operations primarily through issuances of preferred
stock, which provided us with aggregate net proceeds of
approximately $86.5 million. In July 2003, we completed the
sale of 8,050,000 shares of common stock in an initial
public offering, including the underwriters exercise of an
over-allotment option, and realized net proceeds of
$102.7 million. We used $10.9 million of the net
proceeds to pay off all outstanding balances on loans payable
and line of credit.

Net cash provided by operating activities was
$23.7 million for the year ended December 31, 2003,
compared to $10.6 million for the year ended
December 31, 2002. This increase is primarily due to the
expansion of our business, as reflected in the increase in net
income from 2002 to 2003 excluding a $24.3 million reversal
of the valuation allowance on our deferred tax asset in 2002.

Net cash used in investing activities in 2003 was
$99.2 million, compared to $3.5 million and
$1.3 million in 2002 and 2001. Net cash used in investing
activities was for the purchases of property and equipment, with
the exception of a net investment of $93.5 million in
short-term investments in 2003 as a result of the receipt of the
proceeds from our initial public offering.

Net cash provided by financing activities in 2003
was $93.2 million, compared to $2.1 million and
$6.2 million in 2002 and 2001. Net cash provided by
financing activities in 2003 was primarily due to net proceeds
from our initial public offering, offset in part by the payment
of all outstanding balances on our line of credit and loans
payable. Net cash provided by financing activities in 2002 and
2001 were primarily due to net proceeds from loans payable as
well as proceeds from payments on stockholder notes receivable
and, in 2001, from the receipt of $6.7 million from a line
of credit.

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
18 months, including working capital requirements and
planned capital expenditures.

As of December 31, 2003, our principal
source of liquidity was $139.3 million of cash, cash
equivalents and short-term investments.

18



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##### Table of Contents





| |            
| | -----------
| | Commitments

At December 31, 2003, 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 February 2006.
Other than in the approximately 34 countries in which our sole
network 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
have 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. Future
minimum purchase commitments under all agreements as of
December 31, 2003 are as follows (in thousands):

|                         |      |   |       |       | 
|------------------------ | ---- | - | ----- | ----- | 
|Year ending December 31: |      |   |       |      
|                         | 2004 |   | $     | 3,504 | 
|                         | 2005 |   |       | 2,935 | 
|                         | 2006 |   |       | 208   | 
|                         |      |   |       |      
|                         |      | $ | 6,647 |      
|                         |      |   |       |      

We lease our facilities under non-cancelable
operating leases that expire at various dates through February
2010. Future minimum lease payments under these operating leases
as of December 31, 2003 are as follows (in thousands):

|                         |                     |   |        |       | 
|------------------------ | ------------------- | - | ------ | ----- | 
|Year ending December 31: |                     |   |        |      
|                         | 2004                |   | $      | 3,671 | 
|                         | 2005                |   |        | 3,799 | 
|                         | 2006                |   |        | 3,927 | 
|                         | 2007                |   |        | 4,055 | 
|                         | 2008                |   |        | 4,183 | 
|                         | 2009 and thereafter |   |        | 5,764 | 
|                         |                     |   |        |      
|                         |                     | $ | 25,399 |      
|                         |                     |   |        |      



| |                                                  
| | -------------------------------------------------
| | Tabular Disclosure of Contractual
    Obligations

|                            |                               |                        |        |           |  |           |       |           |  |         |       |        |  |   |       |       |  |   |       |       | 
|--------------------------- | ----------------------------- | ---------------------- | ------ | --------- |  | --------- | ----- | --------- |  | ------- | ----- | ------ |  | - | ----- | ----- |  | - | ----- | ----- | 
|                            |                               |                       
|                            |                               | Payments Due By Period
|                            |                               |                       
|                            |                               |                        |        | Less than |  |           |       | More than
|Contractual Obligations     |                               | Total                  |        | 1 Year    |  | 1-3 Years |       | 3-5 Years |  | 5 Years
|                            |                               |                        |        |           |  |           |       |           |  |        
|Operating Lease Obligations |                               | $                      | 25,399 |           |  | $         | 3,671 |           |  | $       | 7,726 |        |  | $ | 8,238 |       |  | $ | 5,764 |      
|Purchase Obligations        |                               |                        | 6,647  |           |  |           | 3,504 |           |  |         | 3,143 |        |  |   |      |       |  |   |      |      
|                            |                               |                        |        |           |  |           |       |           |  |         |       |        |  |   |       |       |  |   |       |      
|                            | Total Contractual Obligations |                        | $      | 32,046    |  |           | $     | 7,175     |  |         | $     | 10,869 |  |   | $     | 8,238 |  |   | $     | 5,764 | 
|                            |                               |                        |        |           |  |           |       |           |  |         |       |        |  |   |       |       |  |   |       |      



| |                                              
| | ---------------------------------------------
| | Related Party Transactions With
    Customers

Cisco Systems Inc., a holder of 5.8% of our
outstanding common stock as of December 31, 2003 is one of
our indirect customers through our channel partner, Equant. In
2003 and 2002, we billed approximately $770,000 and $963,000 to
Equant relating to our services purchased by Cisco from Equant.

FACTORS AFFECTING OPERATING RESULTS

Set forth below and elsewhere in this report
are risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the
forward-looking statements contained in this report.

19



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##### Table of Contents



Risks Relating to Our Business



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There are approximately 34 countries in
    which we provide access only through Equant. The loss of Equant
    as a network service provider would substantially diminish our
    ability to deliver global network access.

In approximately 34 countries, our sole network
service provider is Equant. Network usage from access within
these countries accounted for less than 2% of our revenues for
the years ended December 31, 2003 and 2002. 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 significantly impaired, which could cause
us to lose customers. Although our agreement with Equant does
not expire until February 2006, 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 2006. If Equant were to cease
operations or terminate its arrangements with us, we would be
required to enter into arrangements with other 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.



| |                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | 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. In addition, we face the
following challenges from our competitors:

Many of our competitors can compete on
price.Because many of our
facilities-based competitors own and operate physical networks,
there is very little incremental cost for them to provide
additional telephone or Internet connections. As a result, they
can 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 purchase
network access from facilities-based network service providers.
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
may choose to obtain remote access 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

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##### Table of Contents



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.




| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. In 2002, we
experienced three outages affecting our clearinghouse system,
which handles invoicing to our customers and network service
providers, resulting in five days of outages and eight days of
work to confirm data integrity in response to the outages.
Although these problems did not affect the ability of mobile
workers to access our services or impact our revenues, one of
these outages caused a delay in our invoicing of approximately
one week. If additional outages occur, or if we experience other
hardware or software problems, our business could be harmed.



| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If enterprise connectivity demand 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, 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 and
    related applications.                               



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

The market for enterprise connectivity 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.



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

We have generated 99% of our revenues to date
from the sale of enterprise connectivity services using
narrowband technologies such as modem dial-up. In some
countries, including the United States, the use of narrowband as
a primary means of enterprise connectivity is expected to
decline over time as broadband access technologies, such as
cable modem, DSL, and Wi-Fi, become more broadly used. Although
we have not

21



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##### Table of Contents



generated substantial revenues from broadband
access, the growth of our business may depend upon our ability
to expand the broadband elements of our virtual network. Such an
expansion may not result in revenues to us. Key challenges in
expanding the broadband elements of our virtual network include:


The broadband access market is at an early
stage of development.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, is at an early stage of development and
demand may never 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.
We have developed and made available Wi-Fi specifications that
are directed at enabling Wi-Fi access points to become ready for
use by enterprise customers. If this specification is not widely
adopted, market acceptance of our wireless broadband services
may be significantly reduced or delayed and our business could
be harmed. As of December 31, 2003, only approximately
5,000 of our over 20,000 access points were broadband access
points. 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. Many 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. In addition, the United States
Department of Defense has asserted that the increasing
popularity of Wi-Fi could interfere with military radar, and is
seeking new limits on the use of Wi-Fi. If the broadband
wireless access market does not develop, we will not be able to
generate revenues from broadband wireless access.

The broadband service provider market is
highly fragmented.Due to the early
stage of development of the broadband access market, 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 several
broadband service providers. These contracts generally have an
initial term of two years or less. As this process is in the
early stages, 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.

We do not generate revenues from broadband
home access.We do not generate
revenues when mobile workers access their enterprise networks
from the home using subscription-based broadband access because
they do not connect through our virtual network. If
subscription-based broadband access from the home increases and
fewer home workers use narrowband access, our revenues may
decline.

If demand for broadband access does not
materially increase, or if demand increases but we do not meet
the challenges outlined above, our ability to grow our business
will suffer.



| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | Our long sales cycle requires us to incur
    substantial sales costs and 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. In addition, the recent downturn in
the economy and the resulting reduction in corporate spending on
Internet infrastructure have further lengthened the average
sales cycle for our services. Furthermore, once a customer
contract is signed, 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 will 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.

22



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##### Table of Contents





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

The telecommunications industry has recently
experienced dramatic 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. If these conditions continue,
some of these service providers may consolidate or otherwise
cease operations, which would reduce the number of network
service providers from which we are able to obtain network
access. To the extent this were to occur, while we would 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 alternative 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.



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | 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 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.



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 depends on the efforts and 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.



| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may engage in future acquisitions or
    investments that could dilute the ownership of our existing
    stockholders, cause us to incur significant expenses or harm our
    operating results.

In the future we may acquire or invest in
businesses, technologies or services, although we currently have
no specific agreements or commitments with respect to any of
these transactions. Integrating any newly acquired businesses,
technologies or services may be expensive and time-consuming. 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. If we do complete an
acquisition, 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 or
technologies effectively, our operating results could suffer.
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.

23



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| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | 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 39% of our revenues
for 2003, of which approximately 21% and 14% 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.



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

We have experienced, and in the future may
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.



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | 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. The license agreement with
RSA Security expires in February 2006 and automatically
renews for additional three-year periods 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.

24



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##### Table of Contents





| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | 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.



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in accounting standards or our
    accounting policy relating to stock-based compensation may
    negatively affect our reported operating results.

We currently are not required to record
stock-based compensation charges if the employees stock
option exercise price equals or exceeds the deemed fair value of
our common stock at the date of grant. However, several
companies have recently elected to change their accounting
policies and begun to record the fair value of stock options as
an expense. Although the standards have not been finalized, the
FASB has announced their support for recording expense for the
fair value of stock options granted. Please see Note 2 of
the Consolidated Financial Statements for a table displaying the
impact to our operating expenses if we were to change our
accounting policy in accordance with Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation and SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosureand retroactively restate all
prior periods as if we had adopted SFAS 123 for all periods
presented.



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | We have incurred significant operating
    losses in the past and may incur significant operating losses in
    the future.

Although we were profitable in 2003 and 2002,
$24.3 million of our $29.8 million in net income in
2002 was due to a non-recurring tax benefit. If revenues do not
meet the levels we anticipate, if our network service providers
increase the rates we pay to access their networks, or if our
expenses otherwise exceed our expectations, we may incur
substantial operating losses in the future, in which case the
price of our common stock may decline.

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. The recent 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. Furthermore, any
well-publicized compromises of confidential information may
reduce demand for Internet-based communications, including our
services.

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##### Table of Contents





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

Our revenues and profitability depend on the
overall demand for enterprise connectivity services. The general
weakening of the global economy has led to decreased corporate
spending on Internet infrastructure. In addition, if there are
further acts of terrorism, such as occurred on
September 11, 2001, if the United States becomes involved
in a war or other hostilities, or if other future financial,
political, economic and other uncertainties arise, this could
lead to a reduction in travel, including by business travelers
who are substantial users of our services.



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | 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.






|         |                                                               
|-------- | --------------------------------------------------------------
|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, 2003, we had cash, cash
equivalents, and short-term investments totaling
$139.3 million. Our investment portfolio consists of money
market funds and securities, asset backed securities, corporate
securities, and government securities, generally due within one
to two years. All of our instruments are held other than
for trading purposes. 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, although there can be no
assurance of this.

As of December 31, 2002, we had cash and
cash equivalents of $27.9 million, which consisted of cash
and highly liquid short-term investments with original
maturities of three months or less at the date of purchase,
which we held solely for non-trading purposes. A hypothetical
increase or decrease in market interest rates by 10% from the
market interest rates would have caused the interest generated
by, and the fair value of, these short-term investments to
change by an immaterial amount.

26



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##### Table of Contents



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

|                         |       |                            |        |        |  |                   |        |            |  |            |     |     |  |   |        |        |  |   |        |        | 
|------------------------ | ----- | -------------------------- | ------ | ------ |  | ----------------- | ------ | ---------- |  | ---------- | --- | --- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                         |       |                            |        |        |  |                  
|                         |       | Expected Maturity Date for |        |        |  |                  
|                         |       | Par Value Amounts          |        |        |  | As of            
|                         |       | For the Year Ended         |        |        |  | December 31, 2003
|                         |       | December 31,               |        |        |  |                  
|                         |       |                            |        | Total  |  | Total            
|                         |       | 2004                       |        | 2005   |  | 2006              |        | Cost Value |  | Fair Value
|                         |       |                            |        |        |  |                   |        |            |  |           
|U.S. Government agencies |       | $                          | 58,800 |        |  | $                 | 21,000 |            |  | $          |    |     |  | $ | 80,226 |        |  | $ | 80,661 |       
|Corporate notes          |       |                            | 920    |        |  |                   | 7,790  |            |  |            |    |     |  |   | 9,031  |        |  |   | 9,172  |       
|Asset backed             |       |                            | 3,000  |        |  |                   |       |            |  |            | 700 |     |  |   | 3,797  |        |  |   | 3,806  |       
|                         |       |                            |        |        |  |                   |        |            |  |            |     |     |  |   |        |        |  |   |        |       
|                         | Total |                            | $      | 62,720 |  |                   | $      | 28,790     |  |            | $   | 700 |  |   | $      | 93,054 |  |   | $      | 93,639 | 
|                         |       |                            |        |        |  |                   |        |            |  |            |     |     |  |   |        |        |  |   |        |       

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
amortized cost of debt securities is adjusted for amortization
of premiums and accretion of unrealized discounts to maturity.
Such amortization and accretion is included in interest income
and other, net. The cost of securities sold is based on the
specific identification method.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

Financial Statements

Our financial statements required by this item
are set forth as a separate section of this report. 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, 2003 (in thousands,
except per share amounts):

|                             |  |               |        |         |  |              |        |             |  |   |        |  |  |   |        | 
|---------------------------- |  | ------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------ |  |  | - | ------ | 
|                             |  |              
|                             |  | Quarter Ended
|                             |  |              
|                             |  | March 31      |        | June 30 |  | September 30 |        | December 31
|                             |  |               |        |         |  |              |        |            
|Year Ended December 31, 2003 |  |               |        |         |  |              |        |             |  |   |        |  |  |   |        | 
|Revenues                     |  | $             | 30,498 |         |  | $            | 33,103 |             |  | $ | 34,989 |  |  | $ | 37,488 | 
|Operating income             |  |               | 4,390  |         |  |              | 5,638  |             |  |   | 6,163  |  |  |   | 6,166  | 
|Net income                   |  |               | 2,310  |         |  |              | 2,952  |             |  |   | 4,461  |  |  |   | 4,179  | 
|Basic net income per share   |  | $             | 0.17   |         |  | $            | 0.21   |             |  | $ | 0.08   |  |  | $ | 0.07   | 
|Diluted net income per share |  | $             | 0.04   |         |  | $            | 0.05   |             |  | $ | 0.07   |  |  | $ | 0.06   | 

27



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|                                    |  |               |        |         |  |              |        |             |  |   |        |  |  |   |        |    
|----------------------------------- |  | ------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------ |  |  | - | ------ | ---
|                                    |  |              
|                                    |  | Quarter Ended
|                                    |  |              
|                                    |  | March 31      |        | June 30 |  | September 30 |        | December 31
|                                    |  |               |        |         |  |              |        |            
|Year Ended December 31, 2002        |  |               |        |         |  |              |        |             |  |   |        |  |  |   |        |    
|Revenues                            |  | $             | 19,317 |         |  | $            | 22,100 |             |  | $ | 24,007 |  |  | $ | 27,406 |    
|Operating income (loss)             |  |               | (620   | )       |  |              | 1,418  |             |  |   | 2,480  |  |  |   | 3,374  |    
|Net income (loss)                   |  |               | (791   | )       |  |              | 1,280  |             |  |   | 2,174  |  |  |   | 27,096 | (1)
|Basic net income (loss) per share   |  | $             | (0.06  | )       |  | $            | 0.10   |             |  | $ | 0.17   |  |  | $ | 2.04   |    
|Diluted net income (loss) per share |  | $             | (0.06  | )       |  | $            | 0.02   |             |  | $ | 0.04   |  |  | $ | 0.50   |    



---



|    |                                                                          
|--- | -------------------------------------------------------------------------
|(1) | Of this amount, $24.3 million was due to a
    non-recurring tax benefit.

28



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

None, other than previously reported.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

We carried out an evaluation, under the
supervision and with the participation of our principal
executive officer and principal 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 principal
executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective to provide
reasonable assurance that the information required to be
disclosed by us in our periodic SEC reports are recorded,
processed, summarized and reported within the time periods
specified in the in the SECs rules and the SEC reports. It
should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of
future events, and can therefore only provide reasonable, not
absolute, assurance that the design will succeed in achieving
its stated goals.

In addition, we reviewed our internal controls,
and there have been no changes in our internal controls over
financial reporting during the year ended December 31, 2003
that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial
reporting.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Information relating to our executive officers
and directors will be presented under the captions
Proposal 1  Election of Directors
and Executive Officers and Directors in our
definitive proxy statement in connection with our 2004 Annual
Meeting of Stockholders to be held in June 2004 to be filed with
the Securities and Exchange Commission not later than
April 30, 2004 (the Proxy Statement). That
information is incorporated into this report 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.

Code of Ethics

We have adopted a code of conduct and ethics that
applies to all of our employees, including the principal
executive officer, principal financial officer and principal
accounting officer. This code of conduct and ethics is posted on
our Website. The Internet address for our Website is
http://www.ipass.com, and the code of conduct and ethics may be
found as follows:



| |                                                           
| | ----------------------------------------------------------
| | 1. From our main Web page, first click on
    Investors.
|
| | 2. Next, click on Corporate
    Governance.             
|
| | 3. Then, click on Code of
    Conduct.                  
|
| | 4. Finally, click on Code of Conduct
    and Ethics.    

We intend to satisfy the disclosure requirement
under Item 10 of Form 8-K regarding an amendment to,
or waiver from, a provision of this code of conduct and ethics
by posting such information on our website, at the address and
location specified above.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Information relating to director and executive
compensation required by this Item 11 will be presented
under the captions Compensation of Directors,
Compensation of Executive Officers, and
Compensation

29



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##### Table of Contents



Committee Interlocks and Insider
Participation in the Proxy Statement. That information is
incorporated into this report by reference.







|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|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 Beneficial Owners and Management in the Proxy
Statement. That information is incorporated into this report 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 into this report by reference.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Information relating to certain relationships of
our directors and executive officers and related transactions
will be presented under the caption Certain Relationships
and Related Transactions in the Proxy Statement. That
information is incorporated into this report by reference.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information required by this item will be
included under the captions Proposal
No. 2  Ratification of Independent
Auditors  Principal Accountant Fees and
Services in the Proxy Statement. That information is
incorporated into this report by reference.




PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

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



|   |                     
|-- | --------------------
|1. | Financial Statements

|                                   |                                                                                             |      |    |    | 
|---------------------------------- | ------------------------------------------------------------------------------------------- | ---- | -- | -- | 
|                                   |                                                                                             | Page
|                                   |                                                                                             |     
|Report of Independent Auditors     |                                                                                             |      | 33 |   
|Consolidated Financial Statements: |                                                                                             |      |    |   
|                                   | Balance Sheets as of December 31, 2003 and
    2002                                         |      |    | 34 | 
|                                   | Statements of Operations for the years ended
    December 31, 2003, 2002 and 2001           |      |    | 35 | 
|                                   | Statements of Stockholders Equity for the
    years ended December 31, 2003, 2002 and 2001 |      |    | 36 | 
|                                   | Statements of Cash Flows for the years ended
    December 31, 2003, 2002 and 2001           |      |    | 37 | 
|                                   | Notes to Consolidated Financial Statements                                                  |      |    | 38 | 



|   |                              
|-- | -----------------------------
|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.

30



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|   |         
|-- | --------
|3. | Exhibits

|        |       |                         |  |                                                                                                                                                                                                                   
|------- | ----- | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                        
|Number  |       | Description of Document
|        |       |                        
|        | 3.1   |                         |  | Amended and Restated Certificate of
    Incorporation.(1)                                                                                                                                                         
|        | 3.2   |                         |  | Bylaws, as amended.(1)                                                                                                                                                                                            
|        | 4.1   |                         |  | Reference is made to Exhibits 3.1 and 3.2.                                                                                                                                                                        
|        | 4.2   |                         |  | Specimen stock certificate.(1)                                                                                                                                                                                    
|        | 10.1  |                         |  | 2003 Equity Incentive Plan and form of related
    agreements, as amended.(1)                                                                                                                                     
|        | 10.2  |                         |  | 2003 Non-Employee Directors Plan.(1)                                                                                                                                                                              
|        | 10.3  |                         |  | 1999 Stock Option Plan and form of related
    agreements.(1)                                                                                                                                                     
|        | 10.4  |                         |  | 1997 Stock Option Plan and form of related
    agreements.(1)                                                                                                                                                     
|        | 10.5  |                         |  | Interim 1999 Stock Option Plan.(1)                                                                                                                                                                                
|        | 10.6  |                         |  | Restricted Stock Purchase Agreement by and
    between the Registrant and Anurag Lal dated November 8,
    1999.(1)                                                                                               
|        | 10.7  |                         |  | 2003 Employee Stock Purchase Plan and form of
    related agreements, as amended.(1)                                                                                                                              
|        | 10.8  |                         |  | Lease Agreement, dated October 26, 1999
    between Registrant and Westport Joint Venture (as amended).(1)                                                                                                        
|        | 10.9  |                         |  | Amended and Restated Investor Rights Agreement
    dated August 8, 2000 between Registrant, founders and
    holders of the Registrants Preferred Stock.(1)                                                      
|        | 10.10 |                         |  | Form of Indemnity Agreement.(1)                                                                                                                                                                                   
|        | 10.11 |                         |  | Employment Agreement, dated November 13,
    2001 between Registrant and Kenneth D. Denman.(1)                                                                                                                    
|        | 10.12 |                         |  | Form of Offer Letter to Executive Officers.(1)                                                                                                                                                                    
|        | 10.13 |                         |  | OEM Service Provider License Agreement, dated
    February 29, 2000, between RSA Security, Inc. and the
    Registrant, and amendments thereto.(1)(3)                                                             
|        | 10.14 |                         |  | Support Agreement, dated February 29, 2000,
    by and between RSA Security, Inc. and the Registrant.(1)(3)                                                                                                       
|        | 10.15 |                         |  | Managed Data Network Services Agreement, dated
    September 17, 1996, between Equant, (formerly Scitor
    International Telecommunication Services, Inc.), and the
    Registrant, and amendments thereto.(1)(3)
|        | 10.16 |                         |  | Loan and Security Agreement dated
    September 4, 2001 between Silicon Valley Bank and the
    Registrant and modifications thereto.(1)                                                                          
|        | 10.17 |                         |  | Internet Service Agreement dated April 25,
    2001, by and between UUNET Technologies, Inc. and the
    Registrant, and amendment thereto.(1)(3)                                                                 
|        | 10.18 |                         |  | Virtual Internet Provider (VIP) Agreement dated
    January 9, 1997, by and between UUNET
    Technologies, Inc. and the Registrant and amendments
    thereto.(1)(3)                                             
|        | 21.1  |                         |  | Subsidiaries of the Registrant.(1)                                                                                                                                                                                
|        | 23.1  |                         |  | Consent of KPMG LLP, Independent Auditors.                                                                                                                                                                        
|        | 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 Executive Officer
    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                                                      

31



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---



|    |                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Previously filed as the like-numbered exhibit to
    our Registration Statement on Form S-1, as amended, File
    No. 333-102715, originally filed on January 24, 2003,
    as amended, and incorporated by reference herein.
|   
|(2) | Previously filed as the like-numbered exhibit to
    our Quarterly Report on Form 10-Q filed with the Securities
    and Exchange Commission on November 13, 2003, and
    incorporated by reference herein.                 
|   
|(3) | Confidential treatment has been grated for a
    portion of the exhibit.                                                                                                                                                     

(b) Reports on Form 8-K

On October 16, 2003, we filed a Current
Report on Form 8-K dated October 16, 2003, that
furnished (not filed) under Item 12 the press release
entitled iPass Reports Strong Third Quarter 2003 Results;
Revenues up 46%, Operating Income up 149% Over Third Quarter
2002 announcing our results for the fiscal quarter
ended September 30, 2003.

32



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REPORT OF INDEPENDENT AUDITORS

The Board of Directors of iPass Inc.:

We have audited the accompanying consolidated
balance sheets of iPass Inc. and subsidiaries (the Company) as
of December 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the years in the three-year period ended
December 31, 2003. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United
States of America.



| |             
| | ------------
| | /s/ KPMG LLP

Mountain View, CA

January 29, 2004


33



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iPASS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                                               |                                                                                                                                 |       |         |         |  |        |         |        | 
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ----- | ------- | ------- |  | ------ | ------- | ------ | 
|                                         |                                                                                                                                                                               |                                                                                                                                
|                                         |                                                                                                                                                                               | As of December 31,                                                                                                             
|                                         |                                                                                                                                                                               |                                                                                                                                
|                                         |                                                                                                                                                                               | 2003                                                                                                                            |       | 2002   
|                                         |                                                                                                                                                                               |                                                                                                                                 |       |        
|                                         |                                                                                                                                                                               |                                                                                                                                
|                                         |                                                                                                                                                                               | (In thousands, except share                                                                                                    
|                                         |                                                                                                                                                                               | and per share amounts)                                                                                                         
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                               |                                                                                                                                 |       |         |         |  |        |        
|                                         | Cash and cash equivalents                                                                                                                                                     |                                                                                                                                 | $     | 45,646  |         |  | $      | 27,916  |       
|                                         | Short-term investments                                                                                                                                                        |                                                                                                                                 |       | 93,639  |         |  |        |        |       
|                                         | Accounts receivable, net of allowance for
    doubtful accounts of $2,348 and $1,500, respectively                                                                            |                                                                                                                                 |       | 20,658  |         |  |        | 14,227  |       
|                                         | Prepaid expenses and other current assets                                                                                                                                     |                                                                                                                                 |       | 3,310   |         |  |        | 1,379   |       
|                                         | Deferred income tax asset                                                                                                                                                     |                                                                                                                                 |       | 17,341  |         |  |        | 10,155  |       
|                                         |                                                                                                                                                                               |                                                                                                                                 |       |         |         |  |        |        
|                                         |                                                                                                                                                                               | Total current assets                                                                                                            |       |         | 180,594 |  |        |         | 53,677 | 
|Property and equipment, net              |                                                                                                                                                                               |                                                                                                                                 | 8,288 |         |         |  | 6,408  |        
|Other assets                             |                                                                                                                                                                               |                                                                                                                                 | 1,235 |         |         |  | 1,213  |        
|Deferred income tax asset                |                                                                                                                                                                               |                                                                                                                                 |      |         |         |  | 14,144 |        
|                                         |                                                                                                                                                                               |                                                                                                                                 |       |         |         |  |        |        
|                                         |                                                                                                                                                                               | Total assets                                                                                                                    |       | $       | 190,117 |  |        | $       | 75,442 | 
|                                         |                                                                                                                                                                               |                                                                                                                                 |       |         |         |  |        |        
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                               |                                                                                                                                 |       |         |         |  |        |        
|                                         | Accounts payable                                                                                                                                                              |                                                                                                                                 | $     | 7,421   |         |  | $      | 6,979   |       
|                                         | Accrued liabilities                                                                                                                                                           |                                                                                                                                 |       | 10,974  |         |  |        | 8,488   |       
|                                         | Current portion of loans payable                                                                                                                                              |                                                                                                                                 |       |        |         |  |        | 1,827   |       
|                                         | Line of credit                                                                                                                                                                |                                                                                                                                 |       |        |         |  |        | 6,794   |       
|                                         |                                                                                                                                                                               |                                                                                                                                 |       |         |         |  |        |        
|                                         |                                                                                                                                                                               | Total current liabilities                                                                                                       |       |         | 18,395  |  |        |         | 24,088 | 
|Loans payable, net of current portion    |                                                                                                                                                                               |                                                                                                                                 |      |         |         |  | 1,754  |        
|                                         |                                                                                                                                                                               |                                                                                                                                 |       |         |         |  |        |        
|                                         |                                                                                                                                                                               | Total liabilities                                                                                                               |       |         | 18,395  |  |        |         | 25,842 | 
|                                         |                                                                                                                                                                               |                                                                                                                                 |       |         |         |  |        |        
|Commitments (Note 7)                     |                                                                                                                                                                               |                                                                                                                                 |       |         |         |  |        |        
|Stockholders equity:                    |                                                                                                                                                                               |                                                                                                                                 |       |         |         |  |        |        
|                                         | Convertible preferred stock, $.001 par value:                                                                                                                                 |                                                                                                                                 |       |         |         |  |        |         |       
|                                         |                                                                                                                                                                               | authorized 25,000,000 and 40,000,000 shares,
    respectively; issued and outstanding 0 and
    35,273,169 shares, respectively |       |         |        |  |        |         | 35     | 
|                                         | Common stock, $.001 par value; authorized
    250,000,000 and 120,000,000 shares, respectively; issued
    and outstanding 60,483,432 and 16,013,240 shares,
    respectively |                                                                                                                                 |       | 60      |         |  |        | 16      |       
|                                         | Additional paid-in capital                                                                                                                                                    |                                                                                                                                 |       | 229,026 |         |  |        | 119,268 |       
|                                         | Notes receivable from stockholders                                                                                                                                            |                                                                                                                                 |       | (2,831  | )       |  |        | (2,644  | )     
|                                         | Deferred stock-based compensation                                                                                                                                             |                                                                                                                                 |       | (4,326  | )       |  |        | (2,841  | )     
|                                         | Accumulated other comprehensive income                                                                                                                                        |                                                                                                                                 |       | 125     |         |  |        |        |       
|                                         | Accumulated deficit                                                                                                                                                           |                                                                                                                                 |       | (50,332 | )       |  |        | (64,234 | )     
|                                         |                                                                                                                                                                               |                                                                                                                                 |       |         |         |  |        |        
|                                         |                                                                                                                                                                               | Total stockholders equity                                                                                                      |       |         | 171,722 |  |        |         | 49,600 | 
|                                         |                                                                                                                                                                               |                                                                                                                                 |       |         |         |  |        |        
|                                         |                                                                                                                                                                               | Total liabilities and stockholders equity                                                                                      |       | $       | 190,117 |  |        | $       | 75,442 | 
|                                         |                                                                                                                                                                               |                                                                                                                                 |       |         |         |  |        |        

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

34



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iPASS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                          |                                          |                                                |         |            |         |      |         |            |        |   |         |            |         |  
|--------------------------------------------------------- | ---------------------------------------- | ---------------------------------------------- | ------- | ---------- | ------- | ---- | ------- | ---------- | ------ | - | ------- | ---------- | ------- | -
|                                                          |                                          |                                               
|                                                          |                                          | For the Year Ended December 31,               
|                                                          |                                          |                                               
|                                                          |                                          | 2003                                           |         | 2002       |         | 2001
|                                                          |                                          |                                                |         |            |         |     
|                                                          |                                          |                                               
|                                                          |                                          | (In thousands, except share                   
|                                                          |                                          | and per share amounts)                        
|Revenues                                                  |                                          | $                                              | 136,078 |            |         | $    | 92,830  |            |        | $ | 53,164  |           
|                                                          |                                          |                                                |         |            |         |      |         |            |        |   |         |           
|Operating expenses:                                       |                                          |                                                |         |            |         |      |         |            |        |   |         |           
|                                                          | Network access                           |                                                |         | 30,121     |         |      |         | 23,323     |        |   |         | 19,476     |        
|                                                          | Network operations                       |                                                |         | 14,306     |         |      |         | 10,459     |        |   |         | 9,700      |        
|                                                          | Research and development                 |                                                |         | 9,944      |         |      |         | 7,070      |        |   |         | 5,429      |        
|                                                          | Sales and marketing                      |                                                |         | 41,049     |         |      |         | 32,931     |        |   |         | 29,956     |        
|                                                          | General and administrative               |                                                |         | 14,232     |         |      |         | 9,630      |        |   |         | 9,577      |        
|                                                          | Restructuring charges                    |                                                |         |           |         |      |         |           |        |   |         | 1,110      |        
|                                                          | Amortization of stock-based compensation |                                                |         | 4,069      |         |      |         | 2,765      |        |   |         | 5,650      |        
|                                                          |                                          |                                                |         |            |         |      |         |            |        |   |         |           
|                                                          |                                          | Total operating expenses                       |         |            | 113,721 |      |         |            | 86,178 |   |         |            | 80,898  |  
|                                                          |                                          |                                                |         |            |         |      |         |            |        |   |         |           
|                                                          |                                          | Operating income (loss)                        |         |            | 22,357  |      |         |            | 6,652  |   |         |            | (27,734 | )
|                                                          |                                          |                                                |         |            |         |      |         |            |        |   |         |           
|Other income (expense):                                   |                                          |                                                |         |            |         |      |         |            |        |   |         |           
|                                                          | Interest income and other                |                                                |         | 1,133      |         |      |         | 440        |        |   |         | 895        |        
|                                                          | Interest expense                         |                                                |         | (620       | )       |      |         | (1,026     | )      |   |         | (852       | )      
|                                                          |                                          |                                                |         |            |         |      |         |            |        |   |         |           
|                                                          |                                          | Total other income (expense)                   |         |            | 513     |      |         |            | (586   | ) |         |            | 43      |  
|                                                          |                                          |                                                |         |            |         |      |         |            |        |   |         |           
|Income (loss) before income taxes                         |                                          |                                                | 22,870  |            |         |      | 6,066   |            |        |   | (27,691 | )         
|Provision for (benefit from) income taxes                 |                                          |                                                | 8,968   |            |         |      | (23,693 | )          |        |   | 110     |           
|                                                          |                                          |                                                |         |            |         |      |         |            |        |   |         |           
|Net income (loss)                                         |                                          | $                                              | 13,902  |            |         | $    | 29,759  |            |        | $ | (27,801 | )         
|                                                          |                                          |                                                |         |            |         |      |         |            |        |   |         |           
|Net income (loss) per share:                              |                                          |                                                |         |            |         |      |         |            |        |   |         |           
|                                                          | Basic                                    |                                                | $       | 0.26       |         |      | $       | 2.34       |        |   | $       | (2.43      | )      
|                                                          | Diluted                                  |                                                | $       | 0.23       |         |      | $       | 0.57       |        |   | $       | (2.43      | )      
|Number of shares used in per share calculations:          |                                          |                                                |         |            |         |      |         |            |        |   |         |           
|                                                          | Basic                                    |                                                |         | 53,474,537 |         |      |         | 12,742,068 |        |   |         | 11,443,250 |        
|                                                          | Diluted                                  |                                                |         | 60,622,040 |         |      |         | 51,873,067 |        |   |         | 11,443,250 |        
|Amortization of stock-based compensation consists
    of: |                                          |                                                |         |            |         |      |         |            |        |   |         |           
|                                                          | Network operations                       |                                                | $       | 551        |         |      | $       | 302        |        |   | $       | 576        |        
|                                                          | Research and development                 |                                                |         | 468        |         |      |         | 219        |        |   |         | 398        |        
|                                                          | Sales and marketing                      |                                                |         | 984        |         |      |         | 571        |        |   |         | 1,171      |        
|                                                          | General and administrative               |                                                |         | 2,066      |         |      |         | 1,673      |        |   |         | 3,505      |        
|                                                          |                                          |                                                |         |            |         |      |         |            |        |   |         |           
|                                                          |                                          | Total amortization of stock-based compensation |         | $          | 4,069   |      |         | $          | 2,765  |   |         | $          | 5,650   |  
|                                                          |                                          |                                                |         |            |         |      |         |            |        |   |         |           

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

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iPASS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                                          |  |                 |             |              |  |            |     |            |  |             |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |         |   |  |   |         |   |  |   |     |  |  |   |         |  
|----------------------------------------------------------------------------------------- |  | --------------- | ----------- | ------------ |  | ---------- | --- | ---------- |  | ----------- | ---------- | ------------ |  | ------------- | -- | ------------- |  | ------ | ------- | ------ |  | - | ------ | - |  | - | ------- | - |  | - | ------- | - |  | - | --- |  |  | - | ------- | -
|                                                                                          |  |                 |             |              |  |            |     |            |  |             |            |              |  |               |    |               |  |       
|                                                                                          |  | Convertible     |             |              |  |            |     | Notes      |  |             |            |              |  |               |    |              
|                                                                                          |  | Preferred Stock |             | Common Stock |  | Additional |     | Receivable |  | Deferred    |            |              |  | Accumulated   |    | Total        
|                                                                                          |  |                 |             |              |  | Paid-in    |     | from       |  | Stock-Based |            | Accumulated  |  | Comprehensive |    | Stockholders
|                                                                                          |  | Shares          |             | Amount       |  | Shares     |     | Amount     |  | Capital     |            | Stockholders |  | Compensation  |    | Deficit       |  | Income |         | Equity
|                                                                                          |  |                 |             |              |  |            |     |            |  |             |            |              |  |               |    |               |  |        |         |       
|                                                                                          |  |                
|                                                                                          |  | (In thousands) 
|Balances, December 31, 2000                                                               |  |                 | 35,273,169  |              |  | $          | 35  |            |  |             | 13,056,781 |              |  | $             | 13 |               |  | $      | 116,864 |        |  | $ | (1,863 | ) |  | $ | (10,563 | ) |  | $ | (66,192 | ) |  | $ |    |  |  | $ | 38,294  |  
|Exercise of stock options                                                                 |  |                 |            |              |  |            |    |            |  |             | 228,581    |              |  |               |   |               |  |        | 97      |        |  |   |       |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   | 97      |  
|Payment of stockholder notes receivable                                                   |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        |        |        |  |   | 80     |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   | 80      |  
|Repurchase of unvested common stock                                                       |  |                 |            |              |  |            |    |            |  |             | (94,792    | )            |  |               |   |               |  |        | (95     | )      |  |   | 95     |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   |        |  
|Warrants                                                                                  |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        | 39      |        |  |   |       |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   | 39      |  
|Interest earned on stockholder note receivable                                            |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        |        |        |  |   | (97    | ) |  |   |        |   |  |   |        |   |  |   |    |  |  |   | (97     | )
|Cancellation of unvested stock options                                                    |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        | (1,035  | )      |  |   |       |   |  |   | 1,035   |   |  |   |        |   |  |   |    |  |  |   |        |  
|Amortization of stock-based compensation                                                  |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   | 5,650   |   |  |   |        |   |  |   |    |  |  |   | 5,650   |  
|Net loss                                                                                  |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   |        |   |  |   | (27,801 | ) |  |   |    |  |  |   | (27,801 | )
|                                                                                          |  |                 |             |              |  |            |     |            |  |             |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |         |   |  |   |         |   |  |   |     |  |  |   |         |  
|Balances, December 31, 2001                                                               |  |                 | 35,273,169  |              |  |            | 35  |            |  |             | 13,190,570 |              |  |               | 13 |               |  |        | 115,870 |        |  |   | (1,785 | ) |  |   | (3,878  | ) |  |   | (93,993 | ) |  |   |    |  |  |   | 16,262  |  
|Exercise of stock options                                                                 |  |                 |            |              |  |            |    |            |  |             | 3,240,697  |              |  |               | 3  |               |  |        | 1,673   |        |  |   | (1,485 | ) |  |   |        |   |  |   |        |   |  |   |    |  |  |   | 191     |  
|Payment of stockholder notes receivable                                                   |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        |        |        |  |   | 625    |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   | 625     |  
|Repurchase of unvested common stock                                                       |  |                 |            |              |  |            |    |            |  |             | (418,027   | )            |  |               |   |               |  |        | (109    | )      |  |   | 87     |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   | (22     | )
|Warrants                                                                                  |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        | 46      |        |  |   |       |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   | 46      |  
|Interest earned on stockholder note receivable                                            |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        |        |        |  |   | (86    | ) |  |   |        |   |  |   |        |   |  |   |    |  |  |   | (86     | )
|Cancellation of unvested stock options                                                    |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        | (572    | )      |  |   |       |   |  |   | 572     |   |  |   |        |   |  |   |    |  |  |   |        |  
|Deferred stock-based compensation                                                         |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        | 2,300   |        |  |   |       |   |  |   | (2,300  | ) |  |   |        |   |  |   |    |  |  |   |        |  
|Amortization of stock-based compensation                                                  |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   | 2,765   |   |  |   |        |   |  |   |    |  |  |   | 2,765   |  
|Fair value of options for accelerated vesting                                             |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        | 44      |        |  |   |       |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   | 44      |  
|Fair value of options issued to non-employees                                             |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        | 16      |        |  |   |       |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   | 16      |  
|Net income                                                                                |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   |        |   |  |   | 29,759  |   |  |   |    |  |  |   | 29,759  |  
|                                                                                          |  |                 |             |              |  |            |     |            |  |             |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |         |   |  |   |         |   |  |   |     |  |  |   |         |  
|Balances, December 31, 2002                                                               |  |                 | 35,273,169  |              |  |            | 35  |            |  |             | 16,013,240 |              |  |               | 16 |               |  |        | 119,268 |        |  |   | (2,644 | ) |  |   | (2,841  | ) |  |   | (64,234 | ) |  |   |    |  |  |   | 49,600  |  
|Issuance of common stock in initial public
    offering, net of issuance costs of $10,043 |  |                 |            |              |  |            |    |            |  |             | 8,050,000  |              |  |               | 8  |               |  |        | 102,649 |        |  |   |       |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   | 102,657 |  
|Conversion of convertible preferred stock into
    common stock                           |  |                 | (35,273,169 | )            |  |            | (35 | )          |  |             | 35,273,169 |              |  |               | 35 |               |  |        |         |        |  |   |       |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   |        |  
|Exercise of stock options                                                                 |  |                 |            |              |  |            |    |            |  |             | 661,550    |              |  |               | 1  |               |  |        | 962     |        |  |   |       |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   | 963     |  
|Exercise of warrants                                                                      |  |                 |            |              |  |            |    |            |  |             | 485,473    |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   |        |  
|Interest earned on stockholder note receivable                                            |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        |        |        |  |   | (187   | ) |  |   |        |   |  |   |        |   |  |   |    |  |  |   | (187    | )
|Cancellation of unvested stock options                                                    |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        | (282    | )      |  |   |       |   |  |   | 282     |   |  |   |        |   |  |   |    |  |  |   |        |  
|Deferred stock-based compensation                                                         |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        | 5,836   |        |  |   |       |   |  |   | (5,836  | ) |  |   |        |   |  |   |    |  |  |   |        |  
|Amortization of stock-based compensation                                                  |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   | 4,069   |   |  |   |        |   |  |   |    |  |  |   | 4,069   |  
|Fair value of options issued to non-employees                                             |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        | 392     |        |  |   |       |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   | 392     |  
|Tax benefit from employee stock option plans                                              |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        | 201     |        |  |   |       |   |  |   |        |   |  |   |        |   |  |   |    |  |  |   | 201     |  
|                                                                                          |  |                 |             |              |  |            |     |            |  |             |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |         |   |  |   |         |   |  |   |     |  |  |   |         |  
|Net income                                                                                |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   |        |   |  |   | 13,902  |   |  |   |     |  |  |   | 13,902  |  
|Unrealized gain on available-for-sale
    investments, net                                |  |                 |            |              |  |            |    |            |  |             |           |              |  |               |   |               |  |        |        |        |  |   |       |   |  |   |        |   |  |   |        |   |  |   | 125 |  |  |   | 125     |  
|                                                                                          |  |                 |             |              |  |            |     |            |  |             |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |         |   |  |   |         |   |  |   |     |  |  |   |         |  
|Comprehensive income                                                                      |  |                 |             |              |  |            |     |            |  |             |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |         |   |  |   |         |   |  |   |     |  |  |   | 14,027  |  
|                                                                                          |  |                 |             |              |  |            |     |            |  |             |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |         |   |  |   |         |   |  |   |     |  |  |   |         |  
|Balances, December 31, 2003                                                               |  |                 |            |              |  |            |    |            |  |             | 60,483,432 |              |  |               | 60 |               |  | $      | 229,026 |        |  | $ | (2,831 | ) |  | $ | (4,326  | ) |  | $ | (50,332 | ) |  | $ | 125 |  |  | $ | 171,722 |  
|                                                                                          |  |                 |             |              |  |            |     |            |  |             |            |              |  |               |    |               |  |        |         |        |  |   |        |   |  |   |         |   |  |   |         |   |  |   |     |  |  |   |         |  

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

36



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##### Table of Contents



iPASS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                       |                                                                                            |                                                          |        |         |         |      |        |         |        |   |         |        |         |  
|------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------ | -------------------------------------------------------- | ------ | ------- | ------- | ---- | ------ | ------- | ------ | - | ------- | ------ | ------- | -
|                                                                                                       |                                                                                            |                                                         
|                                                                                                       |                                                                                            | For the Year Ended December 31,                         
|                                                                                                       |                                                                                            |                                                         
|                                                                                                       |                                                                                            | 2003                                                     |        | 2002    |         | 2001
|                                                                                                       |                                                                                            |                                                          |        |         |         |     
|                                                                                                       |                                                                                            |                                                         
|                                                                                                       |                                                                                            | (In thousands)                                          
|Cash flows from operating
    activities:                                                              |                                                                                            |                                                          |        |         |         |      |        |         |        |   |         |       
|Net income (loss)                                                                                      |                                                                                            | $                                                        | 13,902 |         |         | $    | 29,759 |         |        | $ | (27,801 | )     
|Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities: |                                                                                            |                                                          |        |         |         |      |        |         |        |   |         |       
|                                                                                                       | Amortization of stock-based compensation for
    employees                                 |                                                          |        | 4,069   |         |      |        | 2,765   |        |   |         | 5,650  |        
|                                                                                                       | Amortization of warrants issued                                                            |                                                          |        | 8       |         |      |        | 64      |        |   |         | 13     |        
|                                                                                                       | Depreciation and amortization                                                              |                                                          |        | 3,810   |         |      |        | 3,549   |        |   |         | 3,233  |        
|                                                                                                       | Stock-based compensation                                                                   |                                                          |        | 392     |         |      |        | 60      |        |   |         |       |        
|                                                                                                       | Tax benefit from employee stock option plans                                               |                                                          |        | 201     |         |      |        |        |        |   |         |       |        
|                                                                                                       | Deferred income tax                                                                        |                                                          |        | 6,958   |         |      |        | (24,299 | )      |   |         |       |        
|                                                                                                       | Interest on shareholder notes receivable                                                   |                                                          |        | (187    | )       |      |        | (86     | )      |   |         | (97    | )      
|                                                                                                       | Provision for doubtful accounts                                                            |                                                          |        | 1,176   |         |      |        | 1,250   |        |   |         | 734    |        
|                                                                                                       | Loss on disposals of property and equipment                                                |                                                          |        | 45      |         |      |        |        |        |   |         |       |        
|Changes in operating assets and liabilities:                                                           |                                                                                            |                                                          |        |         |         |      |        |         |        |   |         |       
|                                                                                                       | Accounts receivable                                                                        |                                                          |        | (7,607  | )       |      |        | (5,961  | )      |   |         | (3,192 | )      
|                                                                                                       | Prepaid expenses and other current assets                                                  |                                                          |        | (1,991  | )       |      |        | 183     |        |   |         | (610   | )      
|                                                                                                       | Other assets                                                                               |                                                          |        | (22     | )       |      |        | 52      |        |   |         | 342    |        
|                                                                                                       | Accounts payable                                                                           |                                                          |        | 442     |         |      |        | 1,521   |        |   |         | 607    |        
|                                                                                                       | Accrued liabilities                                                                        |                                                          |        | 2,486   |         |      |        | 1,719   |        |   |         | 408    |        
|                                                                                                       |                                                                                            |                                                          |        |         |         |      |        |         |        |   |         |       
|                                                                                                       |                                                                                            | Net cash provided by (used in) operating
    activities  |        |         | 23,682  |      |        |         | 10,576 |   |         |        | (20,713 | )
|                                                                                                       |                                                                                            |                                                          |        |         |         |      |        |         |        |   |         |       
|Cash flows from investing
    activities:                                                              |                                                                                            |                                                          |        |         |         |      |        |         |        |   |         |       
|                                                                                                       | Purchases of short-term investments                                                        |                                                          |        | (98,854 | )       |      |        |        |        |   |         |       |        
|                                                                                                       | Maturities of short-term investments                                                       |                                                          |        | 5,340   |         |      |        |        |        |   |         |       |        
|                                                                                                       | Purchases of property and equipment                                                        |                                                          |        | (5,683  | )       |      |        | (3,533  | )      |   |         | (1,258 | )      
|                                                                                                       |                                                                                            |                                                          |        |         |         |      |        |         |        |   |         |       
|                                                                                                       |                                                                                            | Net cash used in investing activities                    |        |         | (99,197 | )    |        |         | (3,533 | ) |         |        | (1,258  | )
|                                                                                                       |                                                                                            |                                                          |        |         |         |      |        |         |        |   |         |       
|Cash flows from financing
    activities:                                                              |                                                                                            |                                                          |        |         |         |      |        |         |        |   |         |       
|                                                                                                       | Net proceeds from initial public offering                                                  |                                                          |        | 102,657 |         |      |        |        |        |   |         |       |        
|                                                                                                       | Proceeds from loans payable                                                                |                                                          |        | 1,483   |         |      |        | 2,418   |        |   |         | 2,903  |        
|                                                                                                       | Payments on loans payable                                                                  |                                                          |        | (5,064  | )       |      |        | (1,128  | )      |   |         | (3,581 | )      
|                                                                                                       | Payments on line of credit, net                                                            |                                                          |        | (6,794  | )       |      |        |        |        |   |         | 6,713  |        
|                                                                                                       | Proceeds from issuance of common stock                                                     |                                                          |        | 963     |         |      |        | 191     |        |   |         | 97     |        
|                                                                                                       | Proceeds from payment of stockholder notes
    receivable                                  |                                                          |        |        |         |      |        | 625     |        |   |         | 80     |        
|                                                                                                       | Payments for repurchase of unvested restricted
    stock                                   |                                                          |        |        |         |      |        | (22     | )      |   |         |       |        
|                                                                                                       |                                                                                            |                                                          |        |         |         |      |        |         |        |   |         |       
|                                                                                                       |                                                                                            | Net cash provided by financing activities                |        |         | 93,245  |      |        |         | 2,084  |   |         |        | 6,212   |  
|                                                                                                       |                                                                                            |                                                          |        |         |         |      |        |         |        |   |         |       
|                                                                                                       |                                                                                            | Net increase (decrease) in cash and cash
    equivalents |        |         | 17,730  |      |        |         | 9,127  |   |         |        | (15,759 | )
|Cash and cash equivalents at beginning of year                                                         |                                                                                            |                                                          | 27,916 |         |         |      | 18,789 |         |        |   | 34,548  |       
|                                                                                                       |                                                                                            |                                                          |        |         |         |      |        |         |        |   |         |       
|Cash and cash equivalents at end of year                                                               |                                                                                            | $                                                        | 45,646 |         |         | $    | 27,916 |         |        | $ | 18,789  |       
|                                                                                                       |                                                                                            |                                                          |        |         |         |      |        |         |        |   |         |       
|Supplemental disclosures of cash flow
    information:                                                 |                                                                                            |                                                          |        |         |         |      |        |         |        |   |         |       
|                                                                                                       | Cash paid for interest during year                                                         |                                                          | $      | 486     |         |      | $      | 799     |        |   | $       | 659    |        
|                                                                                                       | Cash paid for taxes                                                                        |                                                          | $      | 1,362   |         |      | $      | 378     |        |   | $       | 110    |        
|Non-cash investing and financing
    activities:                                                       |                                                                                            |                                                          |        |         |         |      |        |         |        |   |         |       
|                                                                                                       | Issuance of stockholder notes receivable for
    exercise of stock options                 |                                                          | $      |        |         |      | $      | 1,485   |        |   | $       |       |        
|                                                                                                       | Cancellation of stockholder notes receivable for
    unvested restricted stock repurchases |                                                          | $      |        |         |      | $      | 87      |        |   | $       | 95     |        

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

37



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##### Table of Contents



iPASS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|        |                        
|------- | -----------------------
|Note 1. | Description of Business

iPass, Inc. (the Company)
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 over 150 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 280 telecommunications
carriers, internet service providers and other network service
providers around the globe. 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.

In July 2003, the Company closed the sale of
8,050,000 shares of common stock, including the
underwriters exercise of an over-allotment option, at a
price of $14 per share in an initial public offering (IPO).
A total of $112.7 million in gross proceeds was raised from
these transactions. After deducting the underwriting discount of
approximately $7.9 million, and offering expenses of
approximately $2.1 million, net proceeds were
$102.7 million.

Upon the closing of the Companys IPO,
35,273,169 shares of the Companys convertible
preferred stock converted into common shares.



|        |                                               
|------- | ----------------------------------------------
|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.



| |                             
| | ----------------------------
| | Foreign Currency Translation

All revenues and substantially all network access
expenses are denominated in U.S. dollars. Therefore, the
Company considers all 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 income. Foreign currency transaction
gains and losses were not significant for the years ended
December 31, 2003, 2002 and 2001.



| |                            
| | ---------------------------
| | 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 and all other non-owner changes in equity.
Comprehensive income (loss) includes net income and unrealized
gains on available-for-sale securities.

38



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##### Table of Contents



iPASS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

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

|                             |                                                                            |                                   |        |      |        |      |        |   |        |   |         |   |         |  
|---------------------------- | -------------------------------------------------------------------------- | --------------------------------- | ------ | ---- | ------ | ---- | ------ | - | ------ | - | ------- | - | ------- | -
|                             |                                                                            |                                  
|                             |                                                                            | Year Ended December 31,          
|                             |                                                                            |                                  
|                             |                                                                            | 2003                              |        | 2002 |        | 2001
|                             |                                                                            |                                   |        |      |        |     
|Net income (loss)            |                                                                            | $                                 | 13,902 |      |        | $    | 29,759 |   |        | $ | (27,801 | )
|Comprehensive income (loss): |                                                                            |                                   |        |      |        |      |        |   |        |   |         |  
|                             | Change in accumulated unrealized gain on
    available-for-sale securities |                                   |        | 125  |        |      |        |  |        |   |         |  |        
|                             |                                                                            |                                   |        |      |        |      |        |   |        |   |         |  
|                             |                                                                            | Total comprehensive income (loss) |        | $    | 14,027 |      |        | $ | 29,759 |   |         | $ | (27,801 | )
|                             |                                                                            |                                   |        |      |        |      |        |   |        |   |         |  



| |                                                
| | -----------------------------------------------
| | Cash Equivalents and Short-term
    Investments

Cash equivalents consist of highly liquid
investments including money market funds and corporate debt
securities 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 comprehensive income (loss). The
amortized cost of debt securities is adjusted for amortization
of premiums and accretion of unrealized discounts to maturity.
Such amortization and accretion is included in interest income
and other, net. 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
financial institutions.

The Company provides credit to its customers in
the normal course of business, performs ongoing credit
evaluations of its customers, and maintains an adequate
allowance for doubtful accounts. As of December 31, 2003
and 2002, no individual customer represented 10% or more of
accounts receivable.

For the three years ended December 31,
2003, 2002 and 2001, suppliers representing greater than 10% of
network access expenses were as follows:

|                 |  |      |       |      |  |      |       |  |  |  |       | 
|---------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|Access Provider: |  | 2003 |       | 2002 |  | 2001
|                 |  |      |       |      |  |     
|A                |  |      | 14.2% |      |  |      | 19.0% |  |  |  | 20.0% | 
|B                |  |      | %    |      |  |      | %    |  |  |  | 13.1% | 
|C                |  |      | 21.3% |      |  |      | 21.1% |  |  |  | 25.7% | 

In addition, the contracts the Company has
entered into with some of these access providers contain minimum
purchase commitments (see Note 7).



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

For the Companys financial instruments,
including cash, cash equivalents, short-term available-for-sale
investments, accounts receivable, accounts payable, and accrued
liabilities, carrying amounts approximate fair value due to the
relatively short maturities of the financial instruments.

39



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##### Table of Contents



iPASS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are recorded at cost less
accumulated depreciation and amortization. Depreciation of
property and equipment 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
    lease term)



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

The Company periodically evaluates the carrying
amount of its property and equipment, annually or 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 discounted future cash flows resulting from
the use of the assets over their remaining useful lives. There
have been no such impairment charges during any of the periods
presented.



| |             
| | ------------
| | 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.



| |                         
| | ------------------------
| | Stock-Based Compensation

Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure an Amendment
of FASB Statement No. 123, amends the disclosure
requirements of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based
Compensation (SFAS 123), to require more
prominent disclosures in both interim and annual financial
statements regarding the method of accounting for stock-based
employee compensation and the effect of the method used on
reported results.

The Company accounts for stock-based awards to
employees and directors using the intrinsic value method of
accounting in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). Under the intrinsic
value method, when the exercise price of the Companys
employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is
recognized in the Companys Consolidated Statements of
Operations.

40



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##### Table of Contents



iPASS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

The Company is required under SFAS 123, to
disclose pro forma information regarding option grants made to
its employees based on specified valuation techniques that
produce estimated compensation charges. The pro forma
information is as follows (in thousands, except per-share
amounts):

|                                                                                                                              |             |                                 |        |      |  |      |        |      |  |   |         |       |  
|----------------------------------------------------------------------------------------------------------------------------- | ----------- | ------------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------- | ----- | -
|                                                                                                                              |             |                                
|                                                                                                                              |             | For the Year Ended December 31,
|                                                                                                                              |             |                                
|                                                                                                                              |             | 2003                            |        | 2002 |  | 2001
|                                                                                                                              |             |                                 |        |      |  |     
|Net income (loss)  as reported                                                                                               |             | $                               | 13,902 |      |  | $    | 29,759 |      |  | $ | (27,801 | )    
|Add: Stock-based employee compensation expense
    included in the reported net income (loss), net of related tax
    effects |             |                                 | 2,523  |      |  |      | 1,714  |      |  |   | 5,650   |      
|Deduct: Stock-based employee compensation expense
    using the fair value method, net of related tax effects                 |             |                                 | (3,029 | )    |  |      | (2,265 | )    |  |   | (7,032  | )    
|                                                                                                                              |             |                                 |        |      |  |      |        |      |  |   |         |      
|Pro forma net income (loss)                                                                                                   |             | $                               | 13,396 |      |  | $    | 29,208 |      |  | $ | (29,183 | )    
|                                                                                                                              |             |                                 |        |      |  |      |        |      |  |   |         |      
|Basic net income (loss) per common share:                                                                                     |             |                                 |        |      |  |      |        |      |  |   |         |      
|                                                                                                                              | As reported |                                 | $      | 0.26 |  |      | $      | 2.34 |  |   | $       | (2.43 | )
|                                                                                                                              | Pro forma   |                                 | $      | 0.25 |  |      | $      | 2.29 |  |   | $       | (2.55 | )
|Diluted net income (loss) per common share:                                                                                   |             |                                 |        |      |  |      |        |      |  |   |         |      
|                                                                                                                              | As reported |                                 | $      | 0.23 |  |      | $      | 0.57 |  |   | $       | (2.43 | )
|                                                                                                                              | Pro forma   |                                 | $      | 0.22 |  |      | $      | 0.56 |  |   | $       | (2.55 | )

The weighted average fair value of options
granted during fiscal 2003, 2002 and 2001 was $4.35, $1.35
and $0.15, respectively.

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, 2003,
2002 and 2001:

|                        |  |                                 |         |      |  |      |         |    |  |  |         |   
|----------------------- |  | ------------------------------- | ------- | ---- |  | ---- | ------- | -- |  |  | ------- | --
|                        |  |                                
|                        |  | For the Year Ended December 31,
|                        |  |                                
|                        |  | 2003                            |         | 2002 |  | 2001
|                        |  |                                 |         |      |  |     
|Risk-free rate          |  |                                 | 2.0     | %    |  |      | 3.0     | %  |  |  | 3.8     | % 
|Expected dividend yield |  |                                 | 0       | %    |  |      | 0       | %  |  |  | 0       | % 
|Expected volatility     |  |                                 | 43      | %    |  |      | 0       | %* |  |  | 0       | %*
|Expected life           |  |                                 | 3 Years |      |  |      | 3 Years |    |  |  | 3 Years |   



---



|  |                                                                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Note that all stock option grants issued during
    the years ended December 31, 2002 and 2001 were issued
    prior to the Companys initial public offering, therefore
    0% volatility has been used.



| |                                               
| | ----------------------------------------------
| | 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, including stock
options and warrants using the treasury-stock method and from
convertible preferred stock using the if converted
method.



| |                    
| | -------------------
| | Revenue Recognition

The Company derives substantially all of its
revenues from usage fees. The Company recognizes 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 collectibility is probable.

41



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##### Table of Contents



iPASS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

Revenues are recognized during the period the
services are rendered to end users based on usage at negotiated
rates. The Company typically requires its 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 Company recognizes the difference between the
actual usage and the minimum commitment as revenues when cash is
collected because the Company cannot reasonably estimate the
amount of the difference that will be collected. The Company
cannot reasonably estimate the amount of the difference to be
collected because it has 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 the Company has determined that it would
be in its best interest to do so. Customers are not
contractually entitled to use or otherwise receive benefit for
unused service in subsequent periods.

The Company typically provides its customers with
deployment services, technical support 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. Revenues relating to one-time fees are recognized
on a straight-line basis over the term of the initial contract,
generally one to three years. Revenues relating to annual fees
are recognized on a straight-line basis. Revenues for monthly
services are recognized during the month that these services are
provided.

The Company generally performs credit reviews to
evaluate the customers ability to pay. If the Company
determines that collectibility is not probable, revenue is
recognized as cash is collected.



| |               
| | --------------
| | 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 is 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 through December 31, 2003.



| |                    
| | -------------------
| | Sales and Marketing

Advertising and promotional costs for the years
ended December 31, 2003, 2002 and 2001 were approximately
$1.4 million, $370,000 and $186,000, 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 has been
established. To date, the Companys software has been
available for general release concurrent with the establishment
of technological feasibility, and accordingly, no costs have
been capitalized.

The Company capitalizes the costs of computer
software developed or obtained for internal use. During the
years ended December 31, 2003, 2002 and 2001, the Company
capitalized software development costs of approximately $0, $0,
and $304,000, respectively. Development costs are amortized over
the estimated useful life of the software developed, which is
generally six years. As of December 31, 2003 and 2002, the
Company had no capitalized software development costs.

42



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##### Table of Contents



iPASS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)



|        |                                
|------- | -------------------------------
|Note 3. | Allowance for Doubtful Accounts

Changes in the Companys allowance for
doubtful accounts for the year ended December 31, 2001,
2002 and 2003 are as follows (in thousands):

|                             |  |           |       |            |  |        |       |         |  |   |      |   |  |   |       | 
|---------------------------- |  | --------- | ----- | ---------- |  | ------ | ----- | ------- |  | - | ---- | - |  | - | ----- | 
|                             |  | Beginning |       |            |  | Charge |       | Ending 
|                             |  | Balance   |       | Provisions |  | Offs   |       | Balance
|                             |  |           |       |            |  |        |       |        
|Year ended December 31, 2001 |  | $         | 952   |            |  | $      | 734   |         |  | $ | (572 | ) |  | $ | 1,114 | 
|Year ended December 31, 2002 |  | $         | 1,114 |            |  | $      | 1,250 |         |  | $ | (864 | ) |  | $ | 1,500 | 
|Year ended December 31, 2003 |  | $         | 1,500 |            |  | $      | 1,176 |         |  | $ | (328 | ) |  | $ | 2,348 | 



|        |                       
|------- | ----------------------
|Note 4. | Property and Equipment

Property and equipment consisted of:

|                                                |                             |                |         |              |  |   |        |       | 
|----------------------------------------------- | --------------------------- | -------------- | ------- | ------------ |  | - | ------ | ----- | 
|                                                |                             | December 31,   |         | December 31,
|                                                |                             | 2003           |         | 2002        
|                                                |                             |                |         |             
|                                                |                             |               
|                                                |                             | (In thousands)
|Equipment                                       |                             | $              | 13,694  |              |  | $ | 9,842  |      
|Furniture and fixtures                          |                             |                | 2,456   |              |  |   | 1,939  |      
|Computer software and equipment                 |                             |                | 2,213   |              |  |   | 1,593  |      
|Leasehold improvements                          |                             |                | 1,443   |              |  |   | 1,290  |      
|                                                |                             |                |         |              |  |   |        |      
|                                                |                             |                | 19,806  |              |  |   | 14,664 |      
|Less: Accumulated depreciation and amortization |                             |                | (11,518 | )            |  |   | (8,256 | )    
|                                                |                             |                |         |              |  |   |        |      
|                                                | Property and equipment, net |                | $       | 8,288        |  |   | $      | 6,408 | 
|                                                |                             |                |         |              |  |   |        |      

Depreciation expense was $3,711,000, $3,396,000
and $3,062,000 for the years ended December 31, 2003, 2002
and 2001, respectively.



|        |                    
|------- | -------------------
|Note 5. | Accrued Liabilities

Accrued liabilities consisted of:

|                          |  |                |        |              |  |   |       | 
|------------------------- |  | -------------- | ------ | ------------ |  | - | ----- | 
|                          |  | December 31,   |        | December 31,
|                          |  | 2003           |        | 2002        
|                          |  |                |        |             
|                          |  |               
|                          |  | (In thousands)
|Accrued commissions       |  | $              | 2,979  |              |  | $ | 3,134 | 
|Deferred rent             |  |                | 1,504  |              |  |   | 1,284 | 
|Deferred revenues         |  |                | 1,852  |              |  |   | 1,179 | 
|PTO payable               |  |                | 1,274  |              |  |   | 972   | 
|Other accrued liabilities |  |                | 3,365  |              |  |   | 1,919 | 
|                          |  |                |        |              |  |   |       | 
|                          |  | $              | 10,974 |              |  | $ | 8,488 | 
|                          |  |                |        |              |  |   |       | 

43



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##### Table of Contents



iPASS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)



|        |                                 
|------- | --------------------------------
|Note 6. | Loans Payable and Line of Credit

Loans payable and line of credit consisted of:

|                        |                     |                |   |              |  |   |        |       | 
|----------------------- | ------------------- | -------------- | - | ------------ |  | - | ------ | ----- | 
|                        |                     | December 31,   |   | December 31,
|                        |                     | 2003           |   | 2002        
|                        |                     |                |   |             
|                        |                     |               
|                        |                     | (In thousands)
|Secured loan agreements |                     | $              |  |              |  | $ | 3,581  |      
|                        |                     |                |   |              |  |   |        |      
|                        | Total loans payable |                |   |             |  |   |        | 3,581 | 
|Less current portion    |                     |                |  |              |  |   | (1,827 | )    
|                        |                     |                |   |              |  |   |        |      
|                        | Long-term portion   |                | $ |             |  |   | $      | 1,754 | 
|                        |                     |                |   |              |  |   |        |      
|Line of credit          |                     | $              |  |              |  | $ | 6,794  |      
|                        |                     |                |   |              |  |   |        |      

During July and August of 2003, all outstanding
balances on loans payable and the Companys line of credit
were paid in full. As of December 31, 2003 there were no
outstanding balances on loans payable or line of credit.



|        |            
|------- | -----------
|Note 7. | Commitments

The Company leases its facilities under
non-cancelable operating lease agreements that expire at various
dates through February 2010. Future minimum lease payments under
all non-cancelable operating leases as of December 31, 2003
are as follows (in thousands):

|                         |                     |   |        |       | 
|------------------------ | ------------------- | - | ------ | ----- | 
|Year ending December 31: |                     |   |        |      
|                         | 2004                |   | $      | 3,671 | 
|                         | 2005                |   |        | 3,799 | 
|                         | 2006                |   |        | 3,927 | 
|                         | 2007                |   |        | 4,055 | 
|                         | 2008                |   |        | 4,183 | 
|                         | 2009 and thereafter |   |        | 5,764 | 
|                         |                     |   |        |      
|                         |                     | $ | 25,399 |      
|                         |                     |   |        |      

Rent expense under operating leases for the years
ended December 31, 2003, 2002, and 2001 was $4,349,000,
$4,210,000 and $4,000,000, respectively (net of sublease income
of $111,000, $415,000 and $2,800,000, respectively).

As of December 31, 2003, the Company had
minimum purchase commitments with network service providers that
expire at various dates through 2006. Future minimum purchase
commitments under all agreements are as follows
(in thousands):

|                         |      |   |       |       | 
|------------------------ | ---- | - | ----- | ----- | 
|Year ending December 31: |      |   |       |      
|                         | 2004 |   | $     | 3,504 | 
|                         | 2005 |   |       | 2,935 | 
|                         | 2006 |   |       | 208   | 
|                         |      |   |       |      
|                         |      | $ | 6,647 |      
|                         |      |   |       |      

44



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##### Table of Contents



iPASS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)



|        |            
|------- | -----------
|Note 8. | 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.
There were no matching contributions for the year ended
December 31, 2003.



|        |             
|------- | ------------
|Note 9. | Income Taxes

The provision for (benefit from) income taxes
consisted of the following for the years ended December 31,
2003, 2002 and 2001 (in thousands):

|         |                                                 |      |       |       |   |      |         |         |   |  |     |     | 
|-------- | ----------------------------------------------- | ---- | ----- | ----- | - | ---- | ------- | ------- | - |  | --- | --- | 
|         |                                                 | 2003 |       | 2002  |   | 2001
|         |                                                 |      |       |       |   |     
|Current  |                                                 |      |       |       |   |      |         |         |   |  |     |    
|         | U.S. federal                                    |      | $     | 518   |   |      | $       |        |   |  | $   |    | 
|         | State                                           |      |       | 1,285 |   |      |         | 531     |   |  |     | 110 | 
|         | Foreign                                         |      |       | 207   |   |      |         | 75      |   |  |     |    | 
|         |                                                 |      |       |       |   |      |         |         |   |  |     |    
|         |                                                 |      | 2,010 |       |   |      | 606     |         |   |  | 110 |    
|Deferred |                                                 |      |       |       |   |      |         |         |   |  |     |    
|         | U.S. federal                                    |      |       | 7,451 |   |      |         | (22,245 | ) |  |     |    | 
|         | State                                           |      |       | (493  | ) |      |         | (2,054  | ) |  |     |    | 
|         |                                                 |      |       |       |   |      |         |         |   |  |     |    
|         |                                                 |      | 6,958 |       |   |      | (24,299 | )       |   |  |    |    
|         |                                                 |      |       |       |   |      |         |         |   |  |     |    
|         | Total provision for (benefit from) income taxes |      | $     | 8,968 |   |      | $       | (23,693 | ) |  | $   | 110 | 
|         |                                                 |      |       |       |   |      |         |         |   |  |     |    

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. Net
deferred income tax assets consisted of the following as of
December 31, 2003 and 2002 (in thousands):

|                                 |                           |      |        |        |  |   |        |        | 
|-------------------------------- | ------------------------- | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                 |                           | 2003 |        | 2002  
|                                 |                           |      |        |       
|Net operating loss carryforwards |                           | $    | 13,104 |        |  | $ | 22,140 |       
|Reserves and accruals            |                           |      | 3,082  |        |  |   | 2,282  |       
|Other                            |                           |      | 1,155  |        |  |   | (123   | )     
|                                 |                           |      |        |        |  |   |        |       
|                                 | Deferred income tax asset |      | $      | 17,341 |  |   | $      | 24,299 | 
|                                 |                           |      |        |        |  |   |        |       

For the years ended December 31, 2003, 2002
and 2001, 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:

|                                         |                                           |      |    |      |   |      |      |      |    |  |     |   |  
|---------------------------------------- | ----------------------------------------- | ---- | -- | ---- | - | ---- | ---- | ---- | -- |  | --- | - | -
|                                         |                                           | 2003 |    | 2002 |   | 2001
|                                         |                                           |      |    |      |   |     
|Federal statutory rate                   |                                           |      | 34 | %    |   |      | 34   | %    |    |  | 34  | %
|State taxes, net of federal benefit      |                                           |      | 2  |      |   |      | 6    |      |    |  |    |  
|Foreign taxes                            |                                           |      |   |      |   |      | 1    |      |    |  |    |  
|Amortization of stock-based compensation |                                           |      | 6  |      |   |      | 14   |      |    |  |    |  
|Research and development benefit         |                                           |      | (3 | )    |   |      |     |      |    |  |    |  
|Other                                    |                                           |      |   |      |   |      | 1    |      |    |  |    |  
|Change in valuation allowance            |                                           |      |   |      |   |      | (447 | )    |    |  | (34 | )
|                                         |                                           |      |    |      |   |      |      |      |    |  |     |  
|                                         | Provision for (benefit from) income taxes |      |    | 39   | % |      |      | (391 | )% |  |     |  | %
|                                         |                                           |      |    |      |   |      |      |      |    |  |     |  

45



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##### Table of Contents



iPASS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

As of December 31, 2003, the Company had
cumulative net operating loss carryforwards for federal and
state tax reporting purposes of approximately $32.8 million
and $34.9 million, respectively, which expire in various
periods through 2021. 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. As of December 31,
2003, the Company has determined that any annual limitation on
the future utilization of its net operating loss carryforwards
will not be significant.

As of December 31, 2002, the Company
determined that it was more likely than not that it would
realize all of the available net deferred income tax assets in
the carry forward period of up to 19 years. As a result,
the Company determined that it was no longer necessary or
appropriate to maintain a valuation allowance, and accordingly,
during the year ended December 31, 2002 recorded a benefit
from income taxes of $24.3 million which is included in the
Statement of Operations.



|         |             
|-------- | ------------
|Note 10. | 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 Plans. Under the Plans, as amended, the
Company is authorized to issue shares to employees, directors
and consultants. 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 over a four-year period and generally expire
10 years after the date of grant. Certain options can be
exercised prior to vesting in exchange for restricted stock.
Should the option holder subsequently terminate employment prior
to vesting, the Company has the right to repurchase unvested
shares at the lower of original exercise price or fair value. At
December 31, 2003, 1,467,190 shares of common stock
were subject to repurchase at a weighted average exercise price
of $0.54 per share.

46



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##### Table of Contents



iPASS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

Stock option activity under the Plans for the
three years ended December 31, 2003 is summarized below:

|                                    |            |               |           |            |   |                |           |            |   |   |      |      | 
|----------------------------------- | ---------- | ------------- | --------- | ---------- | - | -------------- | --------- | ---------- | - | - | ---- | ---- | 
|                                    |            | Shares        |           |            |   | Weighted      
|                                    |            | Available for |           | Number of  |   | Average       
|                                    |            | Grant         |           | Shares     |   | Exercise Price
|                                    |            |               |           |            |   |               
|Balance as of December 31, 2000     |            |               | 1,580,251 |            |   |                | 4,546,290 |            |   | $ | 4.67 |     
|                                    | Authorized |               |           | 5,500,000  |   |                |           |           |   |   |      |     | 
|                                    | Granted    |               |           | (6,587,250 | ) |                |           | 6,587,250  |   |   |      | 1.28 | 
|                                    | Exercised  |               |           |           |   |                |           | (228,581   | ) |   |      | 0.44 | 
|                                    | Cancelled  |               |           | 1,121,663  |   |                |           | (1,121,663 | ) |   |      | 6.14 | 
|                                    |            |               |           |            |   |                |           |            |   |   |      |     
|Balance as of December 31, 2001     |            |               | 1,614,664 |            |   |                | 9,783,296 |            |   |   | 2.32 |     
|                                    | Granted    |               |           | (1,800,000 | ) |                |           | 1,800,000  |   |   |      | 0.83 | 
|                                    | Exercised  |               |           |           |   |                |           | (3,240,697 | ) |   |      | 0.52 | 
|                                    | Cancelled  |               |           | 1,334,281  |   |                |           | (1,334,281 | ) |   |      | 3.19 | 
|                                    |            |               |           |            |   |                |           |            |   |   |      |     
|Balance as of December 31, 2002     |            |               | 1,148,945 |            |   |                | 7,008,318 |            |   |   | 2.60 |     
|                                    |            |               |           |            |   |                |           |            |   |   |      |     
|                                    | Authorized |               |           | 8,859,026  |   |                |           |           |   |   |      |     | 
|                                    | Granted    |               |           | (1,792,200 | ) |                |           | 1,792,200  |   |   |      | 6.00 | 
|                                    | Exercised  |               |           |           |   |                |           | (661,550   | ) |   |      | 4.55 | 
|                                    | Cancelled  |               |           | 251,395    |   |                |           | (251,395   | ) |   |      | 2.79 | 
|                                    |            |               |           |            |   |                |           |            |   |   |      |     
|Balance at December 31, 2003        |            |               | 8,467,166 |            |   |                | 7,887,573 |            |   | $ | 3.46 |     
|                                    |            |               |           |            |   |                |           |            |   |   |      |     
|Exercisable as of December 31, 2001 |            |               |           |            |   |                | 1,452,275 |            |   | $ | 4.21 |     
|Exercisable as of December 31, 2002 |            |               |           |            |   |                | 2,576,460 |            |   | $ | 3.75 |     
|Exercisable as of December 31, 2003 |            |               |           |            |   |                | 3,891,821 |            |   | $ | 3.45 |     

The following table summarizes the options
outstanding as of December 31, 2003:

|                |  |                     |           |                     |  |                  |      |           |  |                  |       |  |  |  |           |  |  |   |      | 
|--------------- |  | ------------------- | --------- | ------------------- |  | ---------------- | ---- | --------- |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ---- | 
|                |  |                     |           |                    
|                |  | Options Outstanding |           | Options Exercisable
|                |  |                     |           |                    
|                |  |                     |           | Weighted Average    |  |                  |      |          
|                |  |                     |           | Remaining           |  |                  |      |          
|                |  | Number of           |           | Contractual Life    |  | Weighted Average |      | Number of |  | Weighted Average
|Exercise Prices |  | Options             |           | (Years)             |  | Exercise Price   |      | Options   |  | Exercise Price  
|                |  |                     |           |                     |  |                  |      |           |  |                 
|$0.06-0.50      |  |                     | 2,082,015 |                     |  |                  | 7.85 |           |  | $                | 0.49  |  |  |  | 1,030,897 |  |  | $ | 0.47 | 
|$0.75-1.50      |  |                     | 1,376,330 |                     |  |                  | 7.73 |           |  | $                | 0.98  |  |  |  | 485,000   |  |  | $ | 1.08 | 
|$2.00-4.75      |  |                     | 3,414,528 |                     |  |                  | 6.66 |           |  | $                | 3.86  |  |  |  | 1,869,127 |  |  | $ | 4.40 | 
|$5.00-20.02     |  |                     | 1,014,700 |                     |  |                  | 7.86 |           |  | $                | 11.60 |  |  |  | 506,797   |  |  | $ | 8.32 | 
|                |  |                     |           |                     |  |                  |      |           |  |                  |       |  |  |  |           |  |  |   |      | 
|                |  |                     | 7,887,573 |                     |  |                  | 7.31 |           |  | $                | 3.46  |  |  |  | 3,891,821 |  |  | $ | 3.45 | 
|                |  |                     |           |                     |  |                  |      |           |  |                  |       |  |  |  |           |  |  |   |      | 

As of December 31, 2003, 1,467,190 options
ranging in exercise price from $0.50 to $2.10 were exercised and
are currently unvested and subject to repurchase by the Company.

The Companys board of directors adopted the
2003 Employee Stock Purchase Plan, the 2003 Equity Incentive
Plan and the 2003 Non-employee Directors Plan on
January 15, 2003, subject to stockholder approval.



| |                         
| | ------------------------
| | Stock-Based Compensation

The Company records stock-based compensation
charges in the amount, if any, by which the option exercise
price or the restricted stock purchase price is less than the
deemed fair value of our common stock at

47



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##### Table of Contents



iPASS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

the date of grant. Prior to the Companys
IPO, the Companys board of directors determined the fair
value of common stock based upon several factors, including
operating performance, issuances of convertible preferred stock,
liquidation preferences of preferred stockholders, and
valuations of other publicly-traded companies. The Company
recorded deferred stock-based compensation totaling
approximately $5,836,000 and $2,300,000 and $0 for the years
ended December 31, 2003, 2002 and 2001, that is being
amortized on an accelerated basis over the corresponding vesting
period, using the method outlined in FASB Interpretation
No. 28. Deferred stock-based compensation was decreased by
approximately $282,000, $572,000 and $1,035,000 for the years
ended December 31, 2003, 2002 and 2001, due to forfeiture
of accrued but unvested deferred stock-based compensation
arising from the termination of employees. Amortization of
deferred compensation expense for the years ended
December 31, 2003, 2002 and 2001, was approximately
$4,069,000, $2,765,000 and $5,650,000, respectively.
Non-employee equity transactions were accounted for at fair
value at each grant date pursuant to SFAS No. 123. The
amount of deferred stock-based compensation expense to be
recorded in future periods could decrease if options for which
accrued but unvested compensation has been recorded are
forfeited.



|         |                      
|-------- | ---------------------
|Note 11. | Restructuring Charges

During 2001, the Company incurred approximately
$1,110,000 of expenses to reduce its headcount and for lease
obligations related to excess office space. The workforce
reduction totaled 30 employees. The Company recorded a charge of
$440,000 for severance expense related to this reduction. The
severance expense was primarily paid during fiscal 2001.

The Company settled a lese obligation and entered
into a sublease agreement for vacant space at its headquarters
for a total estimated cost of $670,000, net of estimated
sublease income. The lease obligation expired during 2003.



|         |                    
|-------- | -------------------
|Note 12. | Segment Information

SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Informationestablishes 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 financial 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 39.0%, 38.6%, and 44.4% of
total revenues for the years ended December 31, 2003, 2002,
and 2001, respectively. No individual foreign country
represented 10% or more of total revenues for the years ended
December 31, 2003, 2002, and 2001.

Substantially all of the Companys
long-lived assets are located in the United States.



|         |                                   
|-------- | ----------------------------------
|Note 13. | Net Income (Loss) Per Common Share

In accordance with SFAS 128, Earnings
Per Share, basic net (loss) income 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 such, basic net
income (loss)

48



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##### Table of Contents



iPASS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

per share excludes 3,646,891, 4,509,378 and
2,948,385 shares subject to repurchase for the years ended
December 31, 2003, 2002 and 2001, 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
and from convertible stock using the if converted
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,    
|                                           |                                                                |                                    
|                                           |                                                                | 2003                                |      | 2002       |            | 2001
|                                           |                                                                |                                     |      |            |            |     
|Numerator:                                 |                                                                |                                     |      |            |            |      |      |            |            |   |       |        
|                                           | Net income (loss)                                              |                                     | $    | 13,902     |            |      | $    | 29,759     |            |   | $     | (27,801 | )         
|                                           |                                                                |                                     |      |            |            |      |      |            |            |   |       |        
|Denominator:                               |                                                                |                                     |      |            |            |      |      |            |            |   |       |        
|                                           | Denominator for basic net income (loss) per
    common share   |                                     |      |            |            |      |      |            |            |   |       |         |           
|                                           |                                                                | Weighted average shares outstanding |      |            | 53,474,537 |      |      |            | 12,742,068 |   |       |         | 11,443,250 | 
|                                           | Effect of dilutive securities:                                 |                                     |      |            |            |      |      |            |            |   |       |         |           
|                                           |                                                                | Preferred stock                     |      |            |           |      |      |            | 35,273,169 |   |       |         |           | 
|                                           |                                                                | Stock options                       |      |            | 7,147,503  |      |      |            | 3,835,170  |   |       |         |           | 
|                                           |                                                                | Warrants                            |      |            |           |      |      |            | 22,660     |   |       |         |           | 
|                                           | Denominator for diluted net income (loss) per
    common share |                                     |      | 60,622,040 |            |      |      | 51,873,067 |            |   |       |        |           
|                                           |                                                                |                                     |      |            |            |      |      |            |            |   |       |        
|Basic net income (loss) per common share   |                                                                | $                                   | 0.26 |            |            | $    | 2.34 |            |            | $ | (2.43 | )      
|                                           |                                                                |                                     |      |            |            |      |      |            |            |   |       |        
|Diluted net income (loss) per common share |                                                                | $                                   | 0.23 |            |            | $    | 0.57 |            |            | $ | (2.43 | )      
|                                           |                                                                |                                     |      |            |            |      |      |            |            |   |       |        

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

|                                   |       |                                 |         |         |  |      |           |           |  |  |           |            | 
|---------------------------------- | ----- | ------------------------------- | ------- | ------- |  | ---- | --------- | --------- |  |  | --------- | ---------- | 
|                                   |       |                                
|                                   |       | For the Year Ended December 31,
|                                   |       |                                
|                                   |       | 2003                            |         | 2002    |  | 2001
|                                   |       |                                 |         |         |  |     
|Options to purchase common stock   |       |                                 | 351,200 |         |  |      | 2,914,281 |           |  |  | 9,783,296 |           
|Common stock subject to repurchase |       |                                 |        |         |  |      | 27,500    |           |  |  | 1,145,073 |           
|Warrants                           |       |                                 |        |         |  |      | 535,601   |           |  |  | 605,346   |           
|                                   |       |                                 |         |         |  |      |           |           |  |  |           |           
|                                   | Total |                                 |         | 351,200 |  |      |           | 3,477,382 |  |  |           | 11,533,715 | 
|                                   |       |                                 |         |         |  |      |           |           |  |  |           |           

The weighted-average exercise price of options to
purchase common stock excluded from the computation was $18.12,
$5.30 and $2.32 for the years ended December 31, 2003, 2002
and 2001, respectively. The weighted-average repurchase price of
common stock excluded was $2.00 and $0.59 for the years ended
December 31, 2002 and 2001, respectively. The
weighted-average exercise price of warrants excluded was $4.88
and $4.39 for the years ended December 31, 2002 and 2001,
respectively.

49



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##### Table of Contents



iPASS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)



|         |                           
|-------- | --------------------------
|Note 14. | Related Party Transactions

During 2002, the Company entered into two full
recourse notes receivable for $1,484,675 with two executives for
the exercise of stock options. The notes have a market rate of
7%. The notes and accrued interest are due and payable by
July 23, 2004.

Cisco Systems, Inc., a holder of 5.8% of our
outstanding common stock as of December 31, 2003 is one of
our indirect customers through our channel partner, Equant. In
2003 and 2002 we billed approximately $770,000 and $963,000 to
Equant relating to our services purchased by Cisco from Equant.

50



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##### Table of Contents






SIGNATURE

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/ DONALD C. MCCAULEY

| |                                               
| | ----------------------------------------------
| |                                               
| | Donald C. McCauley                            
| | Vice President and Chief Financial
    Officer
| | (duly authorized officer and                  
| | principal financial officer)                  

Date: March 30, 2004

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENT, that each
person whose signature appears below constitutes and appoints
Donald C. McCauley 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 requisite 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. DENMANKenneth D. Denman     |  | Chairman, President, Chief Executive Officer and
    Director                              |  | March 30, 2004
|                                          
|/s/ DONALD C. MCCAULEYDonald C. McCauley   |  | Vice President, Finance, and
    Chief Financial Officer
    (Principal Financial Officer) |  | March 30, 2004
|                                          
|/s/ FRANK E. VERDECANNAFrank E. Verdecanna |  | Corporate Controller
    (Principal Accounting Officer)                                    |  | March 30, 2004
|                                          
|/s/ A. GARY AMESA. Gary Ames               |  | Director                                                                                   |  | March 30, 2004
|                                          
|/s/ CREGG B. BAUMBAUGHCregg B. Baumbaugh   |  | Director                                                                                   |  | March 30, 2004

51



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##### Table of Contents



|                                           |  |          |  |                |  | 
|------------------------------------------ |  | -------- |  | -------------- |  | 
|                                           |  |          |  |               
|Signature                                  |  | Title    |  | Date          
|                                           |  |          |  |               
|                                          
|/s/ JOHN D. BELETICJohn D. Beletic         |  | Director |  | March 30, 2004
|                                          
|/s/ PETER G. BODINEPeter G. Bodine         |  | Director |  | March 30, 2004
|                                          
|/s/ ARTHUR C. PATTERSONArthur C. Patterson |  | Director |  | March 30, 2004
|                                          
|/s/ ALLAN R. SPIESAllan R. Spies           |  | Director |  | March 30, 2004

52



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##### Table of Contents






INDEX TO EXHIBITS

|        |    |                         |  |                                                                                                                                                                                                                   
|------- | -- | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|Number  |    | Description of Document
|        |    |                        
|        | 3  | .1                      |  | Amended and Restated Certificate of
    Incorporation.(1)                                                                                                                                                         
|        | 3  | .2                      |  | Bylaws, as amended.(1)                                                                                                                                                                                            
|        | 4  | .1                      |  | Reference is made to Exhibits 3.1 and 3.2.                                                                                                                                                                        
|        | 4  | .2                      |  | Specimen stock certificate.(1)                                                                                                                                                                                    
|        | 10 | .1                      |  | 2003 Equity Incentive Plan and form of related
    agreements, as amended.(1)                                                                                                                                     
|        | 10 | .2                      |  | 2003 Non-Employee Directors Plan.(1)                                                                                                                                                                              
|        | 10 | .3                      |  | 1999 Stock Option Plan and form of related
    agreements.(1)                                                                                                                                                     
|        | 10 | .4                      |  | 1997 Stock Option Plan and form of related
    agreements.(1)                                                                                                                                                     
|        | 10 | .5                      |  | Interim 1999 Stock Option Plan.(1)                                                                                                                                                                                
|        | 10 | .6                      |  | Restricted Stock Purchase Agreement by and
    between the Registrant and Anurag Lal dated November 8,
    1999.(1)                                                                                               
|        | 10 | .7                      |  | 2003 Employee Stock Purchase Plan and form of
    related agreements, as amended.(1)                                                                                                                              
|        | 10 | .8                      |  | Lease Agreement, dated October 26, 1999
    between Registrant and Westport Joint Venture (as amended).(1)                                                                                                        
|        | 10 | .9                      |  | Amended and Restated Investor Rights Agreement
    dated August 8, 2000 between Registrant, founders and
    holders of the Registrants Preferred Stock.(1)                                                      
|        | 10 | .10                     |  | Form of Indemnity Agreement.(1)                                                                                                                                                                                   
|        | 10 | .11                     |  | Employment Agreement, dated November 13,
    2001 between Registrant and Kenneth D. Denman.(1)                                                                                                                    
|        | 10 | .12                     |  | Form of Offer Letter to Executive Officers.(1)                                                                                                                                                                    
|        | 10 | .13                     |  | OEM Service Provider License Agreement, dated
    February 29, 2000, between RSA Security, Inc. and the
    Registrant, and amendments thereto.(1)(3)                                                             
|        | 10 | .14                     |  | Support Agreement, dated February 29, 2000,
    by and between RSA Security, Inc. and the Registrant.(1)(3)                                                                                                       
|        | 10 | .15                     |  | Managed Data Network Services Agreement, dated
    September 17, 1996, between Equant, (formerly Scitor
    International Telecommunication Services, Inc.), and the
    Registrant, and amendments thereto.(1)(3)
|        | 10 | .16                     |  | Loan and Security Agreement dated
    September 4, 2001 between Silicon Valley Bank and the
    Registrant and modifications thereto.(1)                                                                          
|        | 10 | .17                     |  | Internet Service Agreement dated April 25,
    2001, by and between UUNET Technologies, Inc. and the
    Registrant, and amendment thereto.(1)(3)                                                                 
|        | 10 | .18                     |  | Virtual Internet Provider (VIP) Agreement dated
    January 9, 1997, by and between UUNET
    Technologies, Inc. and the Registrant and amendments
    thereto.(1)(3)                                             
|        | 21 | .1                      |  | Subsidiaries of the Registrant.(1)                                                                                                                                                                                
|        | 23 | .1                      |  | Consent of KPMG LLP, Independent Auditors.                                                                                                                                                                        
|        | 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 Executive Officer
    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                                                      

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---



|    |                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Previously filed as the like-numbered exhibit to
    our Registration Statement on Form S-1, as amended, File
    No. 333-102715, originally filed on January 24, 2003,
    as amended, and incorporated by reference herein.
|   
|(2) | Previously filed as the like-numbered exhibit to
    our Quarterly Report on Form 10-Q filed with the Securities
    and Exchange Commission on November 13, 2003, and
    incorporated by reference herein.                 
|   
|(3) | Confidential treatment has been grated for a
    portion of the exhibit.                                                                                                                                                     

54