**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


_______________





**Form
      10-K**





**ANNUAL
      REPORT**


**PURSUANT
      TO SECTION 13 OR 15(D)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**(Mark
      One)**





R
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE**
              **ACT
                OF 1934****For
                the fiscal year ended December 31, 2006****OR**£
            **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**


_______________





**iPass
      Inc.**


*(Exact
      name of Registrant as specified in its charter)*


_______________





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





**3800
      Bridge Parkway**


**Redwood
      Shores, California 94065**


*(Address
      of principal executive offices) (Zip Code)*








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


_______________





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





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





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


**None**





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


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





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes R No £





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





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


Large
      accelerated filer £ Accelerated filer R Non-accelerated filer £





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





Aggregate
      market value of the registrant’s common stock held by non-affiliates of the
      registrant, based upon the closing price of a share of the registrant’s common
      stock on June 30, 2006 as reported by the Nasdaq Global Market on that date:
      $232,908,754. The determination of affiliate status for the purposes of this
      calculation is not necessarily a conclusive determination for other purposes.
      The calculation excludes approximately 23,346,871 shares held by directors,
      officers and stockholders whose ownership exceeded five percent of the
      registrant’s outstanding Common Stock as of June 30, 2006. Exclusion of these
      shares should not be construed to indicate that such person controls, is
      controlled by or is under common control with the registrant.





The
      number of shares outstanding of the Registrant’s Common Stock, $0.001 par value,
      as of February 28, 2007 was 63,935,220





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the registrant’s definitive proxy statement in connection with our 2007
      Annual Meeting of Stockholders to be filed with the Securities and Exchange
      Commission not later than April 30, 2007, are incorporated by reference in
      Part
      III, Items 10-14 of this report on Form 10-K.


*Table
          of Contents*


**iPASS
      INC.**




**FORM
      10-K**


**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2006**





**TABLE
      OF CONTENTS**





**Page****PART
                I.**Item
                1.
            Business
            3Item
                1A.
            Risk
                Factors
            13Item
                1B.
            Unresolved
                Staff Comments
            18Item
                2.
            Properties
            18Item
                3.
            Legal
                Proceedings
            18Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            18**PART
                II.**Item
                5.
            Market
                For Registrant’s Common Equity, Related Stockholder
                Matters and Issuer Purchases of Equity Securities
            19Item
                6.
            Selected
                Financial Data
            20Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            20Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            28Item
                8.
            Financial
                Statements and Supplementary
                Data
            29Item
                9.
            Changes
                in and Disagreements With Accountants on Accounting
                and Financial Disclosure
            29Item
                9A.
            Controls
                and Procedures
            29Item
                9B.
            Other
                Information
            30**PART
                III.**Item
                10.
            Directors,
                Executive Officers and Corporate
                Governance
            30Item
                11.
            Executive
                Compensation
            31Item
                12.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters
            31Item
                13.
            Certain
                Relationships and Related Transactions, and
                Director Independence
            31Item
                14.
            Principal
                Accountant Fees and Services
            31**PART
                IV.**Item
                15.
            Exhibits
                and Financial Statement
                Schedules
            31SIGNATURES
            62EXHIBIT
                INDEX
            64





1
 *Table
          of Contents*


**Disclosure
      Regarding Forward-Looking Statements**





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


2
 *Table
          of Contents*


**PART
      I**





**Item
      1.*****Business***





**Overview**





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





To
      address this growing enterprise pain point, we provide software-enabled
      enterprise services that unify the management of remote and mobile connectivity
      and devices on a global basis. First, we offer a portfolio of connectivity
      services. Our flagship connectivity service, iPass Virtual Office, is designed
      to enable enterprises to provide their employees with secure internet and
      corporate network connectivity over any access network through a single
      easy-to-use interface. iPass Virtual office unifies access across more than
      150
      fixed broadband networks in the U.S. and approximately 400 dial-up or mobile
      broadband networks in over 160 countries that make up the iPass global virtual
      network. The service also gives customers the option to use the service for
      access over networks that are not yet part of the iPass global virtual network
      such as on-campus wireless local area networks (LANs) as well as third-party
      home broadband links, Wi-Fi hotspot networks, municipal Wi-Fi networks, 3G
      mobile data networks and hotel Ethernet links.





In
      addition, we provide device management services and software that enable better
      control over and protection of an enterprises’ remote and mobile computer
      systems. These products, which include systems management, patch management,
      and
      device authentication capabilities can be used in conjunction with iPass Mobile
      Office or on a stand-alone basis. Fundamental to all iPass services is enabling
      the IT Manager to maintain direct control of the determination and application
      of policies as part of a self-service management process.





***Software-Based
      Platform for Service Delivery***





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





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





***Revenue****Sources***





We
      derive
      revenues from usage of our networks, from service fees and from enterprise
      software licenses and maintenance fees. Our usage revenues are generated by
      providing enterprise connectivity services to customers using narrowband access
      technologies, such as modem dial-up, and from broadband access technologies,
      including Ethernet and Wireless-Fidelity (Wi-Fi) and Mobile Data Services such
      as 1xRTT and EV-DO. Revenues pertaining to usage represented 80% of our total
      revenues in 2006. Additionally, we receive revenue from fees and other services,
      including authentication services for channel partners, value-added reporting
      services and endpoint systems management services. In 2006, we generated
      approximately 20% of our revenues from fees and other services. We market and
      sell our services directly, as well as indirectly through channel partners,
      including network service providers, Internet service providers, systems
      integrators and value-added resellers. We were incorporated in California in
      July 1996 and reincorporated in Delaware in June 2000.







3
 *Table
          of Contents*




Our Strategy


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





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





*Increase
      User Penetration within our Existing Customer Base.* We seek
      to accelerate the adoption of our services by increasing usage of our services
      from the highly mobile business travelers who dominate our current user base
      to
      all customer employees who use laptop and handheld mobile devices at home,
      while
      traveling, or in the office over a wireless LAN. We intend to achieve this
      through the sale of services related to non-iPass networks, such as enterprise
      home broadband and on-campus wireless LANs as well as Wi-Fi hotspots, municipal
      Wi-Fi networks, mobile data networks and hotel Ethernet links. Additionally,
      we
      will promote our device management services into our existing customer
      base.





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





*Continue
      to Expand our Wired and Wireless Broadband Coverage and Service
      Offerings.* We
      believe that the improved security, ease of use and management control that
      our
      services provide can address many of the challenges presented by the emerging
      broadband markets, such as wireless security, lack of unified roaming standards
      and increased complexity driven by provider fragmentation. As such, we seek
      to
      continually expand the broadband coverage of our virtual network to venues
      attractive to business travelers, such as airports, hotels, convention centers,
      cafes, restaurants, and other retail locations. 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 plan to expand the
      network coverage through mobile data services based on 2.5G and 3G networks,
      that can help to keep these end users connected when a hotspot venue is not
      convenient. We also seek to continue evolving our back-end authentication,
      settlement and clearinghouse capabilities to support this expansion, developing
      our client software to both enrich and simplify the user experience, and
      improving our management capabilities to simplify management control for our
      customers.





*Continue
      to Enhance our Virtual Network.* We
      intend to continue to establish new relationships with network service providers
      to increase the coverage and redundancy of our virtual network. We intend to
      enhance the functionality and features of our software architecture and to
      address changing customer requirements and technologies through internal
      development, strategic partnerships and/or acquisitions. We also seek to expand
      our service offerings by supporting and integrating new access methods, devices,
      applications and operating systems, and by building additional relationships
      with systems integrators and technology providers and develop services that
      effectively leverage an enterprise’s existing infrastructure. We also intend to
      explore additional managed services that enhance our competitive advantage
      and
      provide us with new growth opportunities.  And
      web-enabling the business at every possible point, such that our Software as
      a
      Service nature is increasingly clear will provide the best leverage across
      the
      business model.





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





**Our
      Core Capabilities**





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





Our
      core
      assets and capabilities include:





*Global
      Virtual Network for Mobile Use.* Our
      virtual network aggregates over 104,000 access points in approximately 160
      countries. As of December 31, 2006, over 27,000 of these access points were
      dial-up connections and approximately 77,000 were broadband connections,
      comprised of approximately 75,000 Wi-Fi hotspots and approximately 2,000 wired
      hotspots as well as mobile data services in the United States, China, Japan,
      and
      Singapore. As a result, enterprises that use our services can provide their
      remote and mobile workers with access from these countries, in most instances
      with a local telephone or broadband connection.


4
 *Table
          of Contents*


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





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





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





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





*Authentication
      Security.* Unlike
      many network service providers, we securely route all credentials relating
      to
      our end users with 128-bit Secure Socket Layer, or SSL, protocols, ensuring
      the
      confidentiality of sensitive user information as it traverses the Internet.
      To
      defend against identity theft, an additional layer of authentication using
      131-bit ECC cryptography protects user credentials from the device over the
      local access link into the iPass virtual network.





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





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





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





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





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


5
 *Table
          of Contents*





**Services**





***iPass
      Virtual Office***




·
            Increase
                business productivity by giving workers seamless connectivity in
                the
                office, at home and on the road




·
            Extend
                ubiquitous broadband access to teleworkers across the U.S. and
                Canada




·
            Simplify
                remote access management by reducing your number of providers and
                leveraging the iPass Portal




**Unified,
      ubiquitous connectivity for teleworkers and mobile
      employees**




This
      first-of-its-kind solution gives remote and mobile workers a standardized way
      to
      gain Internet access in the office, at home or in the field. Through secure,
      unified access, these employees are able to stay connected to the people,
      information and resources they need to remain productive.




Included
      with the Virtual Office service is a pre-configured device that serves as both
      a
      Wi-Fi enabled gateway and hardware-based firewall. The device integrates an
      employee's home into the corporate connectivity solution and makes it available
      through the iPassConnectTM universal client.




**Benefits**




·
            **Enables
                a seamless user experience.**Users always connect to the Internet through the award-winning
                iPassConnect universal client.




·
            **Extends
                ubiquitous broadband access.**Teleworkers enjoy the aggregated connectivity of more than 150 cable
                and
                DSL providers in the U.S. and Canada. Mobile employees gain worldwide
                access through Wi-Fi, wired Ethernet, dial, GSM, ISDN, PHS and mobile
                data
                connections.




·
            **Simplifies
                remote access management.**IT
                staff benefit from aggregated connectivity, iPass-managed Wi-Fi gateways,
                the iPass Portal and a single, consolidated bill for all remote and
                mobile
                access.




***iPass
      Mobile Office (formerly Corporate Access)***





iPass
      Mobile Office offers our customers the ability to provide global dial-up, wired
      broadband and wireless access to their remote and mobile workers through the
      iPassConnect universal client and centralized management and billing for the
      IT
      department. We generally bill customers based on usage of the iPass virtual
      network, as well as additional monthly fees based on number of users for use
      of
      our client and management software over non-iPass networks. The process by
      which
      a mobile worker accesses their enterprise network through iPass virtual network
      is illustrated in the following diagram and described through the following
      steps:











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





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


6
 *Table
          of Contents*


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





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





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





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





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





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





***Additional
      Mobile Office features***





iPass
      Mobile Office includes the following features





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





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





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





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


7
 *Table
          of Contents*


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





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





**Device
      Management Services**





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





*iPass
      Device Management services (formerly Endpoint Policy
      Management).* This
      service provides automated security assessment, remediation and patch management
      capabilities. It can be purchased as standalone software or integrated into
      the
      iPass connectivity services. This service helps enterprise customers to
      discover, secure, and manage their laptops, desktops and handheld devices from
      any location via a single management console. When integrated with iPass
      connectivity services, users attempt to use the iPassConnect universal client
      to
      connect to the Internet and the corporate VPN, the iPass Device Management
      service will check to see that the user’s computer is running the proper
      versions of Microsoft Windows OS patches and anti-virus definition file updates
      for endpoint devices — prior to Internet access and the launching the VPN. This
      helps mitigate the effects of viruses and worms and allows the IT manager to
      remotely update laptops outside of the office.





*These
      services are* sold
      either on a per-seat fee-based model or through a perpetual license model with
      annually recurring maintenance fees.





iPass
      Device Management includes the following features:





•  allows
      IT
      to discover all mobile assets by gathering detailed hardware and software
      inventory on all mobile devices.





•  provides
      high-performance rules-based distribution of new software and updates to
      devices, automatically distributing software applications and system updates
      to
      all PCs and handheld devices via LAN, wide-area networks (WAN) and wireless
      networks. Includes special features to improve device management over remote
      and
      mobile connections.





•  patch
      automation features that speed the process of deploying Microsoft Windows OS
      and
      application patches across large populations of remote and mobile devices.
      IT
      staffs receive patches directly from Microsoft and apply them with no
      intermediate handling during the process. This minimizes the risk of inadvertent
      or intentional tampering with a patch, avoiding potential problems.





•  A
      Win32
      management console of user configurations and inventory information for rapid
      call resolution, all integrated with a customer’s existing Windows NT Domain,
      NDS or Active Directory security system. There is also a Web-based console
      with
      a limited view of the same data set that can be accessed remotely.





***Principal
      Components of the iPass Platform***





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


8
 *Table
          of Contents*




*iPassConnect
      Universal Client.* The
      iPassConnect universal 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 access methods including narrowband, integrated
      services digital network, or ISDN, wired and wireless broadband, GSM and 3G.
      The
      iPassConnect universal 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 universal client was designed with over seven years of experience
      and customer feedback, resulting in a user-friendly interface with many
      features.





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





•  *Central
      Policy Control.* iPassConnect universal 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.





•  *Dynamic
      Directory.* iPassConnect universal 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 universal client can be configured to automatically launch a
      variety of third party VPNs upon successful connection to the Internet.
      iPassConnect can also monitor anti-virus software, personal firewalls and VPNs
      and disconnect a user if there not running (based on the customer’s
      policy).





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





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





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





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





We
      have
      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 Mobile Office
      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.


9
 *Table
          of Contents*




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





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





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





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





**Customers**





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





International
      revenues accounted for approximately 40%, 45% and 41% of total revenues for
      the
      year ended December 31, 2006, 2005 and 2004, respectively. Revenues generated
      in
      the United Kingdom accounted for 11%, 14% and 11% of total revenues for the
      year
      ended December 31, 2006, 2005 and 2004, respectively. International revenues
      is
      determined by the location of the customer’s headquarters.





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





**Agreements
      with Network Service Providers**





We
      have
      relationships with over 550 telecommunications carriers, Internet service
      providers and other network service providers that enable us to offer our
      services in over 160 countries around the world. We pay network service
      providers for access to their network access points on a usage basis, in some
      cases, subject to minimum purchase commitments. Most of these contracts have
      a
      term of one year, after which either party can terminate the contract with
      six
      months notice. In 2006, two network service providers, Verizon Business Services
      (formerly MCI) and Equant, accounted for approximately 4% and 3% 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. Our contract with Equant expires in February 2007. The initial
      term of our contract with Verizon Business
      Services expired in November 2005. The contract with MCI is automatically
      renewed for successive periods of one or 12 month periods unless terminated
      by
      either party. In countries in which we have contracted with multiple network
      service providers, if one network service provider is no longer available,
      we
      can generally obtain alternative network access without significant disruption
      to our business. We are also able to direct users to the network of particular
      service providers to fulfill minimum purchase
      commitments.


10
 *Table
          of Contents*





**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, sales engineers and sales operations personnel.
      We
      maintain sales offices or personnel in a number of cities in the United States
      as well as Australia, the United Kingdom, Hong Kong, Japan, Korea, Germany,
      France, Singapore, Denmark, Sweden and The Netherlands. As of December 31,
      2006,
      our sales organization was comprised of 82 individuals in North America, 24
      individuals in Asia Pacific and 46 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 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 financial relationship
      with us.





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





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





To
      a
      lesser extent we also compete with other non-facilities-based software-enabled
      network operators. 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. We believe we compete favorably against these
      competitors in terms of the coverage, redundancy, security, quality and ease
      of
      use of our service offerings. Still, 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.





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







11
 *Table
          of Contents*


Research
      and Development




We
      believe that to compete favorably we must continue to invest in the research
      and
      development of our services. Our research and development efforts are focused
      on
      improving and enhancing our existing service offerings as well as developing
      new
      proprietary products and services. As of December 31, 2006, our research and
      development organization consisted of 168 employees. Our research and
      development expenses were $22.6 million, $17.7 million and $14.2 million in
      2006, 2005, and 2004, 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(R), iOQ(R) and the iPass
      logo are our U.S. registered trademarks. iPassConnect(TM), ExpressConnect(TM),
      iPassNet(TM), RoamServer(TM), NetServer(TM), iPass Alliance(R) and iPass Mobile
      Office(TM) are designations that we use. iPass has a patent portfolio of six
      US
      patents, one Australian patent and one Israeli patent.  We acquired two
      patents from the acquisition of GoRemote Internet Communications, Inc. in 2006,
      and we were granted an additional patent around our SQM technology.  We
      have twenty-four US patent applications pending, and thirty-five international
      patent applications pending (in the same subject areas as the US patent
      applications).The duration of a patent is 20 years from the date of issuance.
      We
      have also applied for or registered company trademarks in 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. Licenses from third party technologies may not continue to be
      available to us at a reasonable cost, or at all. Additionally, the steps we
      have
      taken to protect our intellectual property rights may not be adequate. Third
      parties may infringe or misappropriate our proprietary rights. Competitors
      may
      also independently develop technologies that are substantially equivalent or
      superior to the technologies we employ in our services. If we fail to protect
      our proprietary rights adequately, our competitors could offer similar services,
      potentially significantly harming our competitive position and decreasing our
      revenues.





**Employees**





As
      of
      December 31, 2006, we had 575 employees, consisting of 148 in network
      operations, 168 in research and development, 186 in sales and marketing and
      73
      in general and administrative. We consider our relationship with our employees
      to be good.





**Trademarks**





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





**Available
      Information**





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





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




12
 *Table
          of Contents*




**Item
      1A. Risk****Factors**





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


Risks
      Relating to Our Business




***Our
      business is in transition from a business reliant primarily on narrowband
      connectivity to one reliant primarily on broadband connectivity and services,
      and if we are unable to effectively manage this
      transition*** ***our business will be impaired.***





Historically we
      have
      generated the large majority of our revenues from
      the
      sale of enterprise connectivity services using narrowband technologies such
      as
      modem dial-up. For
      example ,
      in 2005
      we derived $138.1 million, or 82%, of our total revenues from our traditional
      dial-up business. In the United States as well as many other countries, the
      use
      of narrowband as a primary means of enterprise connectivity has declined and
      is
      expected to continue to decline at an accelerated rate over time as broadband
      access technologies, such as cable modem, DSL, Wi-Fi and other wireless
      technologies, including 3G, become more broadly used. In
      response to this market shift we have added broadband and services elements
      to
      our business and, as a result, in 2006 our
      revenue derived from the use of narrowband connectivity decreased to
      $105.7
      million or 57.9% of our revenue, and in the fourth quarter of 2006 had decreased
      to less than 50% of our revenue.





Because
      of the declining revenues associated with narrowband connectivity, the
      growth of our business will depend upon
      our
      ability to expand the broadband and
      services elements of our business at a pace faster than our narrowband
      connectivity business declines. In February 2006, we acquired GoRemote Internet
      Communications, Inc. as part of our strategy to grow our broadband business,
      and
      are also developing additional broadband products and services internally.
      To
      grow our broadband business, 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 or
      acquire additional
      technologies in order to integrate new broadband and
      security services
      into our service offering. If we are unable to develop these relationships
      or develop
      or acquire new technologies ,
      or if
      demand
      for broadband access does not materially increase ,
      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 or no
      access ,
      which
      could harm our operating results .





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





We
      compete primarily with facilities-based carriers as well as with
      non-facilities-based software enabled network operators. Some of our competitors
      have substantially greater resources, larger customer bases, longer operating
      histories or greater name recognition than we have. Also, as
      a
      result of our provision
      of policy
      management services, we face competition from companies that provide security
      and policy-based services and software. 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 may be little incremental cost for them to provide additional hotspot
      or
      telephone connections. As a result, they may offer remote access services at
      little additional cost, and may be willing to discount or subsidize remote
      access services to capture other sources of revenue. In contrast, we have
      traditionally purchased network access from facilities-based network service
      providers to enable our remote access service. As a result, large carriers
      may
      sell their remote access services at a lower price. In addition, new
      non-facilities-based carriers may enter our market and compete on price. In
      either case, we may lose business or be forced to lower our prices to compete,
      which could reduce our revenues and
      operating margins .





*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 service s.
      Potential customers that desire these services on a bundled basis may choose
      to
      obtain remote access and policy management services from the competitor that
      provides these additional services.





*Our
      potential customers may have other business relationships with
      our*  *competitors
      and consider those relationships when deciding between our
      services*  *and
      those of our competitors.* Many
      of
      our competitors are large facilities-based carriers that purchase substantial
      amounts of products and services, or provide other services or goods unrelated
      to remote access services. As a result, if a potential customer is also a
      supplier to one of our large competitors, or purchases unrelated services or
      goods from our competitor, the potential customer may be motivated to purchase
      its remote access services from our competitor in order to maintain or enhance
      its business relationship with that competitor.





13
 *Table
          of Contents*


***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.***
   a key
      component in this regard is our
      policy management services. 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.





***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 cause
      current and potential customers to obtain connectivity services from our
      competitors, which would reduce demand for our services.





***If
      enterprise connectivity demand does not continue to
      expand,*** ****** ***our
      revenues and operating results may be negatively impacted.***





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, improve
      our operating results 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 are unable to meet the challenges related to the market acceptance
      and***  ***provision
      of our policy management services, our ability to grow the
      business***  ***may
      be harmed.***





The
      growth of our business d epends in part
      upon our
      ability of our
      policy management services to achieve
      and sustain expected levels of demand and market acceptance. If
      enterprises do not perceive our policy management services to have
      significant benefits, then we will be unable to grow this aspect of our
      business, or it will grow more
      slowly than we expect, either of which could significantly and adversely affect
      our growth. Key
      challenges that we face related to our provision of these services
      include :





**•**  the
      risk
      that we may encounter unexpected technical and other difficulties in further developing
      our policy management services , which
      could delay or prevent the enhancement of these
      services or certain features of these services;


**•**  the
      risk
      that the rate of adoption by enterprises of network security software or
      integrated secure connectivity solutions will not be as we anticipate, which
      if
      slow would reduce or eliminate the purchase of these services; and


**•**  the
      risk
      that security breaches may occur, notwithstanding the use of our policy
      management services, by hackers that develop new methods of avoiding security
      software.





If
      we do
      not adequately address these challenges, our growth and operating results may
      be
      negatively impacted.





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





Our
      business is characterized by a long sales cycle between the time a potential
      customer is contacted and a customer contract is signed. Once
      a
      customer contract is signed, 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.


14
 *Table
          of Contents*


***There
      are approximately*** ***26*** **** ***countries
      in which we provide dial-up access only***  ***through
      Equant. The loss of Equant as a dial-up network service provider
      would***  ***substantially
      diminish our ability to deliver global network
      access.***





In
      approximately 24 countries, our sole dial-up network service provider is Equant. Network usage
      from access within these countries accounted for less than 2% of our revenues
      in
      each of the years
      ended December 31, 2006,
      2005 and  2004. If we
      lose access to Equant’s network and are unable to replace this access in some or
      all of these countries, our ability
      to market our services as being global would be impaired, which could cause
      us
      to lose customers. If Equant were to cease operations or terminate its
      arrangements with us, we would be required to enter into arrangements with
      other
      dial-up network service providers, which may not be available. This process
      could be costly and time consuming, and we may not be able to enter into these
      arrangements on terms acceptable to us.





***The
      telecommunications industry has experienced a 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 experienced dramatic technological change and
      increased competition that have led to significant declines in network access
      pricing. Service
      providers have consolidated and may
      continue to
      consolidate ,
      which may
      continue to reduce
      the number of network service providers from which we are able to obtain network
      access. As this occurs, while we expect that we will still be able to maintain
      operations and provide enterprise connectivity services with a small number
      of
      network service providers, we would potentially not be able to provide
      sufficient redundant access points in some geographic areas, which could
      diminish our ability to provide broad, reliable, redundant coverage. Further,
      our ability to negotiate favorable access rates from network service providers
      could be impaired, which could increase our network access expenses and harm
      our
      operating results.





***If
      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 the success of these
      channel partners in marketing our services to their customers. Our own ability
      to promote our services directly to their customers is often limited. Many
      of
      our channel partners may offer services to their customers that may be similar
      to, or competitive with, our services. Therefore, these channel partners may
      be
      reluctant to promote our services. If our channel partners fail to market our
      services effectively, our ability to grow our revenue would be reduced and
      our
      business will be impaired.





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





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





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





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





15
 *Table
          of Contents*


***Because
        much of our business is international, we encounter additional
        risks,***  ***which
        may*** ***negatively
        impact*** ***our*** ***operating
        results*** ***.***
 
 We
        generate a substantial portion of our revenues from business conducted
        internationally. Revenues from customers domiciled outside of the United
        States
        were 38% of our
        revenues in 2006, of
        which approximately 26 %
        and 10%
        were
        generated in our EMEA





**•**  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.





***Acquisitions*** ****** ***could*** ***cause us to incur significant expenses or harm our***  ***operating
      results*** ***,
      and*** ***could dilute the ownership of***  ***our
      existing*** ***stockholders*** ***.***





Part
      of
      our growth strategy is to consider and, if we believe it is advantageous to
      our
      company, to acquire new businesses, technologies and services . For
      example, we completed the acquisitions of Safe3w, Inc. in September 2004, Mobile
      Automation, Inc. in October 2004 and GoRemote in February 2006. Integrating
      any newly acquired business, technology or service can be
      expensive and time-consuming . If
      we are
      unable to integrate and
      operate acquired businesses, technologies or services efficiently or otherwise
      realize the benefits of an acquisition that we envisioned when making the
      acquisition, the acquisition could have an unanticipated negative effect on
      our
      business and operating results. Acquisitions can also
      result in large and immediate write-offs or assumption of debt and contingent
      liabilities, any of which
      could harm our operating results. Further, 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 are unable to effectively manage future expansion, our business may
      be***  ***adversely
      impacted.***





We
      have
      experienced, and in the future may continue to experience, rapid growth in
      operations .
      This 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.





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





We
      are at
      risk of being subject to securities class action lawsuits if our stock price
      declines substantially. Securities class action litigation has often been
      brought against a company following a decline in the market price of its
      securities. For example, in June 2004, we announced that we would not meet
      market expectations regarding our financial performance in the second quarter,
      and our stock price declined.  In 2005,
      three purported class action complaints, which subsequently were
      consolidated, and two purported derivative actions, which also were consolidated,
      were filed against iPass and certain of our executive officers and
      directors. Although we were successful in our defense of these lawsuits, we
      may
      be subject to similar lawsuits in the future if our stock price were to decline
      substantially, and there is no guarantee that we would be successful in
      defending any such future lawsuits. Any future securities litigation could result in substantial costs and divert management’s
      attention and resources, and could seriously harm our business.





***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.


16
 *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.





***If
      licenses to third party technologie*** ***s*** ***do not continue to be available to us at a reasonable cost, or
      at***  ***all,
      our business and operations may be adversely
      affected.***





We
      license technologies from several software providers that are incorporated
      in
      our services. We anticipate that we will continue to license technology from
      third parties in the future. In particular, we license encryption technology
      from RSA Security. Our license agreement with RSA Security expired in February
      2006 and automatically renewed for an additional three-year period. This license
      will continue to automatically renew for additional three-year periods upon
      expiration, unless terminated by us or by RSA Security.





Licenses
      from third party technologies, including our license with RSA Security, may
      not
      continue to be available to us at a reasonable cost, or at all. The loss of
      these technologies or other technologies that we license could have an adverse
      effect on our services and increase our costs or cause interruptions or delays
      in our services until substitute technologies, if available, are developed
      or
      identified, licensed and successfully integrated into our services.





**Risks
      Relating to Our Industry**





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





The
      secure transmission of confidential information over public networks is a
      significant barrier to further adoption of the Internet as a business medium.
      The Internet is a public network and information is sent over this network
      from
      many sources. Advances in computer capabilities, new discoveries in the field
      of
      code breaking or other developments could result in compromised security on
      our
      network or the networks of others. Security and authentication concerns with
      respect to the transmission over the Internet of confidential information,
      such
      as corporate access passwords and the ability of hackers to penetrate online
      security systems may reduce the demand for our services. Further, new access
      methods, devices, applications and operating systems have also introduced
      additional vulnerabilities which have been actively exploited by hackers.
      Internet-based worms and viruses, computer programs that are created to slow
      Internet traffic or disrupt computer networks or files by replicating through
      software or operating systems, are examples of events or computer programs
      that
      can disrupt users from using our Internet-based services and reduce demand
      for
      our services, potentially affecting our business and financial performance.
      In
      particular, certain Internet worms and viruses affected some of our customers
      and their mobile users, which may have negatively impacted our revenues.
      Furthermore, any well-publicized compromises of confidential information may
      reduce demand for Internet-based communications, including our
      services.




***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.


17
 *Table
          of Contents*





**Item
      1B.*****Unresolved Staff Comments***





There
      are
      no unresolved written SEC comments received at least 180 days prior to December
      31, 2006.





**Item
      2.*****Properties***





We
      lease
      approximately 74,000 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
      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***





Beginning
      on January 14, 2005, three purported class action complaints were filed against
      the Company and certain of its executive officers in the United States District
      Court for the Northern District of California. On March 2, 2005, these cases
      were consolidated as In re iPass Securities Litigation, Case No.
      3:05-cv-00228-MHP. On April 22, 2005, David Lutzke and Rhonda Lutzke were named
      lead plaintiffs. On July 5, 2005, plaintiffs filed a Consolidated Amended
      Complaint. Named as defendants together with the Company are officers Kenneth
      D.
      Denman, Donald C. McCauley, Anurag Lal, and Jon M. Russo. The Consolidated
      Amended Complaint (“CAC”) alleged that the defendants violated Sections 10(b)
      and 20(a) of the Securities Exchange Act of 1934 during an alleged “class
      period” from April 22, 2004 to June 30, 2004 by failing to inform investors of
      certain operational issues that allegedly led to declines in the Company’s
      revenue, earnings and growth prospects. Defendants moved to dismiss the CAC,
      and
      on February 28, 2006, the court granted the motion with leave to amend. On
      March
      30, 2006, plaintiffs filed a Second Consolidated Amended Complaint (“SCAC”),
      which set forth the same claims against the same defendants relating to the
      same
      alleged class period. Defendants filed a motion to dismiss the SCAC on May
      1,
      2006 and that motion was granted with prejudice on September 6,
      2006.  On September 7, 2006, final judgment was entered in
      favor of the defendants.  Plaintiffs failed to file a timely notice of
      appeal.





Beginning
      on March 25, 2005, two stockholders filed separate derivative actions in
      California Superior Court for the County of San Mateo, purporting to state
      claims on behalf of the Company against Kenneth D. Denman, Donald C. McCauley,
      Anurag Lal, Jon M. Russo, Peter G. Bodine, Arthur C. Patterson, John D. Beletic,
      A. Gary Ames, Cregg B. Baumbaugh and Allan R. Spies. The complaints purport
      to
      arise out of the same alleged nondisclosures set forth in the Consolidated
      Amended Complaint set forth in the shareholder class action, and purport to
      set
      forth claims for breach of fiduciary duty, abuse of process, gross
      mismanagement, waste, unjust enrichment, and violation of California
      Corporations Code 25402. On May 5, 2005, the actions were consolidated as In
      re
      iPass, Inc. Derivative Litigation, Case No. CIV445765. On April 6, 2006, the
      court granted the joint motion of all parties to have the case designated as
      "complex litigation."  By agreement of the parties, the time to file
      plaintiffs’ consolidated complaint was extended several times, and a
      Consolidated Derivative Complaint ("CDC") was filed on February 21, 2006. On
      March 28, 2006, defendants filed a demurrer to the CDC, in response to which
      plaintiffs stated that they intend to further amend the CDC. The further amended
      complaint was filed on May 19, 2006.  Defendants demurred to the
      amended CDC and on September 1, 2006 the court sustained that
      demurrer with leave to amend.  On October 6, 2006, plaintiffs
      filed a consolidated second amended complaint ("CSAC").  On October 24,
      2006 defendants filed a demurrer as to the CSAC. On November 27, 2006,
      plaintiffs voluntarily dismissed the action without prejudice.





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





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





No
      matters were submitted to a vote of our stockholders during the fiscal quarter
      ended December 31, 2006.


18
 *Table
          of Contents*


**PART
      II**





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





**Price
      Range of Common Stock**





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





**Low
                Sale Price**
            
            **High
                Sale Price****Fiscal
                year ended December 31, 2006:**First
                Quarter
            
            $
            6.40
            
            $
            8.01Second
                Quarter
            
            
            5.11
            
            
            8.52Third
                Quarter
            
            
            4.16
            
            
            5.75Fourth
                Quarter
            
            
            4.25
            
            
            5.92**Fiscal
                year ended December 31, 2005:**First
                Quarter
            
            $
            5.87
            
            $
            7.08Second
                Quarter
            
            
            5.17
            
            
            6.60Third
                Quarter
            
            
            5.08
            
            
            6.40Fourth
                Quarter
            
            
            5.32
            
            
            7.00





We
      had
      63,935,220 shares of our common stock outstanding held by 260 stockholders
      of
      record as of February 28, 2007.




**Performance
      Measurement
      Comparison**




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







7/24/03
              
              9/30/03
              
              12/31/03
              
              3/31/04
              
              6/30/04
              
              9/30/04
              
              12/31/04
              
              3/31/05
              
              6/30/05
              
              9/30/05
              
              12/31/05
              
              3/31/06
              
              6/30/06
              
              9/30/06
              
              12/31/06iPass
                  Inc.
              
              
              100.00
              
              
              125.87
              
              
              85.75
              
              
              58.54
              
              
              56.72
              
              
              32.08
              
              
              39.64
              
              
              32.78
              
              
              32.46
              
              
              28.82
              
              
              35.14
              
              
              42.90
              
              
              29.99
              
              
              25.07
              
              
              31.49Russell
                  2000 Index
              
              
              100.00
              
              
              102.45
              
              
              116.99
              
              
              124.01
              
              
              124.79
              
              
              120.87
              
              
              137.46
              
              
              129.76
              
              
              134.95
              
              
              140.89
              
              
              142.03
              
              
              161.42
              
              
              152.98
              
              
              153.17
              
              
              166.28Nasdaq
                  Market Index
              
              
              100.00
              
              
              103.26
              
              
              115.67
              
              
              115.43
              
              
              118.83
              
              
              110.28
              
              
              126.78
              
              
              116.78
              
              
              120.85
              
              
              126.26
              
              
              129.82
              
              
              137.70
              
              
              128.54
              
              
              133.67
              
              
              143.27
  We
        do not
        believe that there are any published industry or line of business indices
        that
        are directly relevant to our line of business. In addition, we do not believe
        that we can construct a peer group index as many of the services similar
        to ours
        comprise a small portion of the business of the companies providing the
        services. Consequently, in addition to the NASDAQ Composite Index, we are
        comparing our stock price performance to the Russell 2000 Index as it is
        an
        index of businesses with an average market capitalization similar to
        ours.




**Stock
      Repurchases**





On
      May 9,
      2006, we announced that our Board of Directors approved a two-year stock
      repurchase program which authorizes us to repurchase up to $30.0 million of
      our
      outstanding common stock. A total of $6.2 million of stock was repurchased
      in
      the fourth quarter of 2006, leaving approximately $13.8 million that may be
      used
      for future repurchases, as set forth in the table below:





**Total
                Number of****Shares
                Purchased**
            
            **Average
                Price Paid per****Share**
            
            **Total
                Number of****Shares
                Purchased as****Part
                of Publicly****Announced
                Program**
            
            **Approximate
                Dollar****Value
                of Shares that****May
                Yet Be Purchased****under
                the Program**October
                1, 2006 to October 31, 2006
            
            
            407,000
            
            $
            4.97
            
            
            2,225,474
            
            $
            18,026November
                1, 2006 to November 30, 2006
            
            
            325,000
            
            $
            5.50
            
            
            2,550,474
            
            $
            16,238December
                1, 2006 to December 31, 2006
            
            
            425,000
            
            $
            5.65
            
            
            2,975,474
            
            $
            13,835Total
            
            
            1,157,000
            
            $
            5.37
            
            
            2,975,474
            
            $
            13,835





**Dividend
      Policy**





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





**Equity
      Compensation Plan Information**





Information
      regarding our equity compensation plans will be presented under the caption
      “Securities Authorized For Issuance Under Equity Compensation Plans” in our
      definitive proxy statement in connection with our 2007 Annual Meeting of
      Stockholders to be filed not later than April 30, 2007 (the “Proxy Statement”).
      That information is incorporated into this report by reference.





**Recent
      Sales of Unregistered Securities**





We
      have
      not made any sales of unregistered securities following the date of our initial
      public offering.


19
 *Table
          of Contents*


**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,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(In
                thousands, except per share data)****Statement
                of Operations Data**Revenues
            
            $
            182,711
            
            $
            169,373
            
            $
            166,319
            
            $
            136,078
            
            $
            92,830Total
                operating expenses
            
            
            202,001
            
            
            151,474
            
            
            137,353
            
            
            113,721
            
            
            86,178Operating
                income (loss)
            
            
            (19,290
            )
            
            17,899
            
            
            28,966
            
            
            22,357
            
            
            6,652Net
                income (loss)
            
            
            (8,089
            )
            
            12,895
            
            
            19,068
            
            
            13,902
            
            
            29,759
            (1)Net
                income (loss) per share:Basic
            
            
            (0.13
            )
            
            0.20
            
            
            0.31
            
            
            0.26
            
            
            2.34Diluted
            
            
            (0.13
            )
            
            0.19
            
            
            0.29
            
            
            0.23
            
            
            0.57


__________


(1)  Of
      this
      amount, $24.3 million was due to a tax benefit, resulting from the reversal
      of
      deferred tax valuation allowances.





**As
                of December 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(In
                thousands)****Balance
                Sheet Data**Total
                assets
            
            $
            263,467
            
            $
            254,474
            
            $
            230,513
            
            $
            190,117
            
            $
            75,442Line
                of credit and loans payable
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            10,375Total
                stockholders’ equity
            
            
            223,307
            
            
            226,251
            
            
            207,222
            
            
            171,722
            
            
            49,600





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





**Company
      Overview**





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





**Overview
      of 2006**





In
      2006,
      we continued to experience a decline in revenues derived from our traditional
      dial-up business as dial-up revenue decreased 23% to $105.7 million in 2006
      as
      compared to $138.1 million in 2005. This decrease was offset in part by revenues
      generated from fees and usage of our broadband service. However, we continued
      to
      add new customers during 2006, including 86 from the Forbes Global 2000,
      bringing our total Forbes Global 2000 customers to 377 as of December 31,
      2006.





As
      we
      continued to increase the number of broadband access points during the year,
      increasing our global broadband footprint was a priority for us in 2006. We
      ended 2006 with approximately 77,000 Wi-Fi and wired hotspots worldwide,
      approximately 75,000 of which were Wi-Fi hotspots and approximately 2,000 of
      which were wired hotspots. This enabled our customers to remotely access their
      corporate networks from more locations, at higher speeds and contributed to
      a
      $30.9 million or 351% increase in broadband usage revenue in 2006 over
      2005.





Going
      forward, we will continue to focus on delivering innovative services and
      solutions for our customers, increasing the number of end users of our services
      for both dial-up and broadband access, as well as continue to increase fee
      revenues from device management and other fee based services. In 2007, we expect
      to see continued growth in our business. However, our success could be limited
      by several factors, including the timely release of new products, continued
      market acceptance of our products and the introduction of new products by
      existing or new competitors. For a further discussion of these and other risk
      factors, see the section below entitled “Risk Factors.”


20
 *Table
          of Contents*


**Sources
      of Revenues**





We
      derive
      our revenues primarily from providing enterprise connectivity services through
      our virtual network. We sell these services directly, as well as indirectly
      through our channel partners. We bill substantially all customers on a time
      basis for usage based on negotiated rates. We bill the remaining customers
      based
      on a fixed charge per active user per month with additional charges for excess
      time. Substantially all enterprise customers commit to a one to three year
      contract term. Most of our contracts with enterprise customers contain minimum
      usage levels. We bill customers for minimum commitments when actual usage is
      less than their monthly minimum commitment amount. We recognize the difference
      between the minimum commitment and actual usage as fee revenue once the cash
      for
      such fee has been collected. Our usage-based revenues, which consists of dial-up
      and broadband usage, represented 80%, 87% and 92% of our total revenues for
      the
      years ended December 31, 2006, 2005 and 2004, respectively.





We
      have
      incurred expenses to expand our broadband coverage and are seeking to generate
      additional revenues from our broadband wired and wireless coverage. Revenues
      from usage of our broadband services were 22%, 5.2% and 1.4% of our total
      revenues for the years ended December 31, 2006, 2005 and 2004,
      respectively.





We
      also
      provide customers with deployment services and technical support throughout
      the
      term of the contract. We typically charge fees for these services on a one-time
      or annual basis, depending on the service provided and the nature of the
      relationship. In addition, we also offer customers additional services for
      which
      we generally bill on a monthly basis. With the acquisition of Mobile Automation,
      Inc. in October 2004, we also began generating license and maintenance revenue
      through software licensing agreements. Revenues generated from license and
      maintenance fees, together with revenues generated from deployment services
      and
      technical support, represented approximately 20%, 13% and 8% of our revenues
      for
      the years ended December 31, 2006, 2005 and 2004, respectively.





**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***





*Services
      and Fees*





We
      derive
      substantially all of our revenues from usage fees. We recognize revenues when
      persuasive evidence of an arrangement exists, service has been provided to
      the
      customer, the price to the customer is fixed or determinable, and collectibility
      is reasonably assured.





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




21
 *Table
          of Contents*




*License
      and Maintenance*




We
        recognize revenue in accordance with Statement of Position (“SOP”)
        No. 97-2, “ *Software
        Revenue Recognition* ,”
as
        amended by SOP No. 98-9, “ *Modification
        of 97-2 Software Revenue Recognition, With Respect to Certain
        Transactions* ,”
and
        generally recognize revenue when all of the following criteria are met as
        set
        forth in paragraph 8 of SOP No. 97-2:  (1) persuasive
        evidence of an arrangement exists, (2) delivery has occurred, (3) the
        fee is fixed or determinable and (4) collectibility is probable.
  One
        of
        the critical judgments that we make is the assessment that “collectibility is
        probable.” Our recognition of revenue is based on our assessment of the
        probability of collecting the related accounts receivable balance on a
        customer-by-customer basis. As a result, the timing or amount of revenue
        recognition may have been different if different assessments of the probability
        of collection had been made at the time the transactions were recorded in
        revenue.  If
        we
        determine that collectibility is not probable, revenue is recognized as cash
        is
        collected.
  Another
        critical judgment that we make involves the “fixed or determinable” criterion.
        We consider payment terms where arrangement fees are due within three
        months from delivery to be normal contractual terms. Payment terms beyond
        three
        months from delivery are considered extended and not fixed or determinable.
        For
        arrangements with extended payment terms, arrangement fee revenues are
        recognized when fees become due, assuming all other revenue recognition criteria
        have been met.


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





Payments
      received in advance of services are deferred until services are performed.
      Allowances for estimated future returns and discounts are provided for upon
      recognition of revenue.




***Accounting
      for Income Taxes***





In
      preparing our consolidated financial statements, we assess the likelihood that
      our deferred tax assets will be realized from future taxable income. We
      establish a valuation allowance if we determine that it is more likely than
      not
      that some portion of the net deferred tax assets will not be realized. 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.





When
      we
      assess the likelihood that we will be able to recover our deferred tax assets,
      we consider all available evidence, both positive and negative, including
      historical levels of income, expectations and risks associated with estimates
      of
      future taxable income and ongoing prudent and feasible tax planning strategies
      in assessing the need for a valuation allowance. If recovery is not likely,
      we
      would increase our provision for taxes by recording a valuation allowance
      against the deferred tax assets that we estimate will not ultimately be
      recoverable. The available positive evidence at December 31, 2006 included
      cumulative taxable income during the last three years and a projection of future
      income limited to three years. We continue to closely monitor available evidence
      and may adjust our valuation allowance in future periods.




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 reassess
      our
      ability to realize our net operating losses. If we conclude it is more likely
      than not that we would not realize the benefit of our net operating losses,
      we
      may have to re-establish all or a portion of the valuation allowance and
      therefore record a significant charge to our results of operations.





***Stock-Based
      Compensation***




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


22
 *Table
            of Contents*





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





***Restructuring***





Restructuring
      charges are comprised primarily of costs for abandonment of excess facilities,
      severance and associated employee termination costs related to redundancies
      resulting from our acquisition of GoRemote in the first quarter of 2006. These
      charges have been recorded in accordance with SFAS 146, *Accounting
      for Costs Associated with Exit or Disposal Activities* ,
      which
      requires that the recognition and measurement of termination costs be recorded
      when the liability is incurred. Costs for the abandonment of excess facilities
      has been reduced by estimated income from the sublease of the vacated
      facilities. If we are unable to sublease the facilities within the timeframe
      and
      for the rates anticipated, we may need to revise our estimates and record
      additional restructuring charges.





***Allowance
      for Doubtful Accounts***





Our
      allowance for doubtful accounts is based on a detailed assessment of accounts
      receivable for specific, as well as anticipated, uncollectible accounts
      receivable. Our estimate for the allowance for doubtful accounts is based on
      credit profiles of our customers, current economic trends, contractual terms
      and
      conditions, and historical payment experience. We have an allowance for doubtful
      accounts of $3.3 million, $2.0 million and $2.1 million as of December 31,
      2006,
      2005 and 2004, respectively, for estimated losses resulting from the inability
      of our customers to make their required payments. If the financial condition
      of
      our customers were to deteriorate, resulting in an impairment of their ability
      to make payments, or if we underestimated the allowances required, additional
      allowances may be required, which would result in an increased general and
      administrative expense in the period such determination was made.





**RESULTS
      OF OPERATIONS**





**Revenue**





**December
                31,****Change**
            
            
            
            **Change****2006**
            
            $
            
            **%**
            
            **2005**
            
            $
            
            **%**
            
            **2004****(In
                thousands, except percentages)**Total
                Revenue
            
            $
            182,711
            
            $
            13,338
            
            
            7.9
            %
            $
            169,373
            
            $
            3,054
            
            
            1.8
            %
            $
            166,319





Total
      revenue increased in 2006 as compared to 2005 due to offsetting factors.
      Revenues generated from dial up usage decreased from $138.1 million in 2005
      to
      $105.7 million in 2006. This represents a decrease of $32.4 million or 23%.
      This
      was offset in part by increases in revenues generated from broadband usage
      and
      fees. Revenues generated from usage of our broadband services were $39.7 million
      and $8.8 million dollars for the years ended December 31, 2006 and 2005
      respectively. Fee revenue increased from $22.5 million in 2005 to $37.3 million
      in 2006. We expect revenue from dial up usage to continue to decrease in
      absolute dollars as well as a percentage of total revenue as the use of
      narrowband as a primary means of enterprise connectivity is expected to continue
      to decline, but we can not reasonably estimate if the decline will be consistent
      with that seen from 2005 to 2006. No individual customer accounted for 10%
      or
      more of total revenues for the years ended December 31, 2006, 2005 or 2004.
      Revenues from software and service fees represented approximately 20%, 13%
      and
      8% of our total revenue in 2006, 2005, and 2004, respectively.


23
 *Table
          of Contents*


International
      revenues, which are revenues generated from customers domiciled outside the
      United States, accounted for approximately 40%, 45% and 41% of total revenues
      in
      2006, 2005 and 2004, respectively. Substantially all of our international
      revenues are generated in the EMEA (Europe, Middle East and Africa) and Asia
      Pacific regions. Revenues in the EMEA region represented 26%, 29% and 24% of
      total revenues in 2006, 2005 and 2004, respectively. The increase in EMEA as
      a
      percent of revenues has been driven by the expansion of our sales force in
      the
      region. Revenues in the Asia Pacific region represented 10%, 12% and 13% of
      total revenues in 2006, 2005 and 2004, respectively. Revenues in the United
      Kingdom accounted for 11%, 14% and 11% of total revenues in 2006, 2005 and
      2004,
      respectively. To date, substantially all of our revenues have been denominated
      in U.S. dollars, although in the future some portion of revenues may be
      denominated in foreign currencies.





**Operating
      Expenses**





***Network
      Access***





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





**December
                31,****Change**
            
            
            
            **Change****2006**
            
            $
            
            **%**
            
            **2005**
            
            $
            
            **%**
            
            **2004****(In
                thousands, except percentages)**Network
                access expenses
            
            $
            56,929
            
            $
            14,820
            
            
            35.2
            %
            $
            42,109
            
            $
            4,770
            
            
            12.8
            %
            $
            37,339As
                a percent of revenue
            
            
            31.2
            %
            
            —
            
            
            6.3
            %
            
            24.9
            %
            
            —
            
            
            2.4
            %
            
            22.5
            %





The
      growth in network access expenses in 2006 over 2005 was due primarily to
      increased usage of our virtual network with respect to our broadband services.
      For our dial-up access costs, we continued to purchase network access from
      additional service providers at a lower cost and to renegotiate a number of
      our
      existing network service provider contracts in 2006. While network access costs
      for broadband access are higher than those for dial-up, we believe that going
      forward, we will have the ability to negotiate lower rates for access to
      broadband networks. We expect network access expenses to continue to increase
      in
      absolute dollars and increase as a percentage of revenues as usage shifts from
      higher margin dial to lower margin broadband.





The
      growth in network access expenses in 2005 over 2004 was due primarily to
      increased usage of our virtual network. In 2005, we continued to purchase
      network access from additional service providers at a lower cost and to
      renegotiate a number of our network service provider contracts, resulting in
      lower network access costs for dial-up. This was offset in part by an increase
      in network access expenses for broadband usage.





***Network
      Operations***





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





**December
                31,****Change**
            
            
            
            **Change****2006**
            
            **$**
            
            **%**
            
            **2005**
            
            $
            
            **%**
            
            **2004****(In
                thousands, except percentages)**Network
                operations expenses
            
            $
            32,013
            
            $
            11,067
            
            
            52.8
            %
            $
            20,946
            
            $
            1,570
            
            
            8.1
            %
            $
            19,376As
                a percent of revenue
            
            
            17.5
            %
            
            —
            
            
            5.1
            %
            
            12.4
            %
            
            —
            
            
            0.8
            %
            
            11.6
            %





The
      increase in network operations expenses from 2005 to 2006 in absolute dollars
      was due primarily to $5.6 million in additional compensation and benefits
      expense related to increased headcount from the acquisition of GoRemote Internet
      Communications, Inc., $1.0 million related to the adoption of SFAS 123(R),
      $1.2
      million in mobile data card costs, $433,000 to write-down obsolete mobile data
      cards and $1.4 million for external consulting and contractor support. To the
      extent that we continue to expand our operations, we expect that our network
      operations expenses will increase in absolute dollars, and increase slightly
      as
      a percentage of total revenue.





The
      increase in network operations expenses in 2005 over 2004 in absolute dollars
      was due primarily to $1.1 million in additional compensation and benefits
      expense due to an increase in personnel, $497,000 additional depreciation
      expense on network operations equipment in support and expansion of our virtual
      network and $404,000 of additional transaction center fees and
      communication


24
 *Table
          of Contents*


lines
      expenses. This was offset in part by a $443,000 decrease in fees paid to
      consultants. Network operations expenses increased slightly as a percentage
      of
      total revenue as we continued to increase both the capacity and redundancy
      of
      our virtual network.





***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****2006**
            
            **$**
            
            **%**
            
            **2005**
            
            **$**
            
            **%**
            
            **2004****(In
                thousands, except percentages)**Research
                and development expenses
            
            $
            22,557
            
            $
            4,811
            
            
            27.1
            %
            $
            17,746
            
            $
            3,590
            
            
            25.4
            %
            $
            14,156As
                a percent of revenue
            
            
            12.3
            %
            
            —
            
            
            1.8
            %
            
            10.5
            %
            
            —
            
            
            2.0
            %
            
            8.5
            %





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





The
      increase in research and development expenses from 2004 to 2005 was due
      primarily to an additional $2.6 million of compensation and benefits expenses
      related to an increase in headcount, $160,000 in fees paid to consultants to
      further develop our service and $171,000 in technology association fees. The
      increase as a percentage of revenues was due to the continued acceleration
      of
      our development of new products, the integration of technology acquired into
      existing products and services as a result of our two acquisitions of Safe3w
      and
      Mobile Automation in third and fourth quarters of 2004, respectively, as well
      as
      the increase in research and development personnel as a result of those
      acquisitions.





***Sales
      and Marketing***





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





**December
                31,****Change**
            
            
            
            **Change****2006**
            
            $
            
            **%**
            
            **2005**
            
            $
            
            **%**
            
            **2004****(In
                thousands, except percentages)**Sales
                and marketing expenses
            
            $
            58,620
            
            $
            7,907
            
            
            15.6
            %
            $
            50,713
            
            $
            3,579
            
            
            7.6
            %
            $
            47,134As
                a percent of revenue
            
            
            31.9
            %
            
            —
            
            
            2.0
            %
            
            29.9
            %
            
            —
            
            
            1.6
            %
            
            28.3
            %





The
      increase in sales and marketing expenses in 2006 over 2005 in absolute dollars
      was due primarily to approximately $4.8 million in additional compensation
      and
      benefits expenses due to additional sales personnel related to the acquisition
      of GoRemote and expansion of the sales organization in the EMEA region, and
      an
      additional $2.2 million related to the adoption of SFAS 123(R). The remaining
      portion of the increase was due to individually insignificant items. We expect
      that sales and marketing expenses will remain relatively constant in absolute
      dollars and, to the extent revenues increase, will decrease as a percentage
      of
      revenues.





The
      increase in sales and marketing expenses in 2005 over 2004 in absolute dollars
      was due primarily to an additional $2.6 million in compensation and benefits
      expenses due to the additional sales personnel from the Mobile Automation
      acquisition as well as the expansion of the sales organization in the EMEA
      region. There was also an increase of $406,000 in marketing programs, including
      trade shows and promotions. The increase also included $977,000 in compensation
      and benefits expenses for existing marketing personnel. The remaining portion
      of
      the increase was due to individually insignificant items.


25
 *Table
          of Contents*


***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****2006**
            
            $
            
            **%**
            
            **2005**
            
            $
            
            **%**
            
            **2004****(In
                thousands, except percentages)**General
                and administrative expenses
            
            $
            23,178
            
            $
            5,585
            
            
            31.7
            %
            $
            17,593
            
            $
            (1,298
            )
            
            (6.9
            )%
            $
            18,891As
                a percent of revenue
            
            
            12.7
            %
            
            —
            
            
            2.3
            %
            
            10.4
            %
            
            —
            
            
            (1.0
            )%
            
            11.4
            %





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





A
      significant part of the decrease in general and administrative expenses in
      2005
      was a $937,000 decrease in bad debt expense offset in part by $275,000 in
      compensation and benefits expenses. The remaining portion of the change from
      2004 to 2005 was due to a net decrease of various individually insignificant
      accounts.





***Amortization
      of Acquired Tangibles***





Amortization
      of acquired intangibles was $4.0 million, $2.4 million and $457,000 for the
      years ended December 31, 2006, 2005 and 2004, respectively. The increase from
      2005 to 2006 was due to the impact of amortization of intangibles related to
      the
      GoRemote acquisition in February 2006. The increase from 2004 to 2005 was due
      to
      the full amortization impact of intangible assets related to the Safe3w and
      Mobile Automation acquisitions during 2004 being amortized over the entire
      year
      in 2005 as they were acquired during 2004.





**Non-Operating
      Income and Expenses**





***Interest
      Income***





Interest
      income includes interest income on cash, cash equivalents, and short-term
      investment balances. Interest income and other was $3.7 million, $3.9 million
      and $2.3 million for the years ended December 31, 2006, 2005 and 2004,
      respectively. The decrease in interest and other income in 2006 was due to
      the
      net use of $72.2 million of cash, cash equivalents and short-term investment
      balances for the acquisition of GoRemote in February 2006.





***Provision
      for Income Taxes***





The
      benefit from income taxes was $7.2 million in 2006, compared to a provision
      of
      $8.9 million in 2005. The change from provision to benefit is due to a loss
      before income taxes of $15.6 million in 2006 as compared to income before taxes
      of $21.8 million in 2005. The decrease in provision for income taxes in 2005
      compared to 2004 was due to a decrease in income for taxes from $31.3 million
      in
      2004 to $21.8 million in 2005. The effective tax rate was (46)% for the year
      ended December 31, 2006 and 41% and 39% for the years ended December 31, 2005
      and 2004, respectively.





**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, which includes 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.


26
 *Table
          of Contents*


Net
      cash
      provided by operating activities was $361,000 for the year ended December 31,
      2006, compared to $32.1 million for the year ended December 31, 2005 and $38.1
      million for the year ended December 31, 2004. The decrease in cash provided
      by
      operating activities in 2006 is due primarily to operating expenses increasing
      by $50.5 million while our total revenues increased approximately $13.3 million,
      as compared to 2005.





Net
      cash
      used in investing activities in 2006 was $16.0 million compared to $32.5 million
      in 2005 and $60.2 million in 2004, respectively. Net cash used in investing
      activities in 2006 was primarily from the acquisition of GoRemote, which net
      of
      cash acquired was $78.0 million offset by the net maturities of short term
      investments of $67.2 million. In 2005, net cash used in investing activities
      related to purchases of $170.4 million in short-term investments, offset by
      the
      maturities of short-term investments in the amount of $141.8 million as well
      as
      $3.9 million for the purchases of property and equipment. Net cash used in
      investing activities in 2004 was from the purchases of $156.3 million in
      short-term investments, $28.4 million for the acquisition of Safe3w and Mobile
      Automation and $6.2 million for the purchases of property and equipment, offset
      by the maturities of short-term investments in the amount of $130.7
      million.





Net
      cash
      used in financing activities in 2006 was $6.7 million which was comprised of
      $16.2 million of cash used for repurchases of common stock offset by $7.5
      million of cash received for stock option exercises. Net cash provided by
      financing activities in 2005 was $3.8 million, compared to $10.9 million in
      2004, respectively. Cash provided by financing activities in 2005 was from
      proceeds from the issuance of common stock for employee stock options and
      through the employee stock purchase program. Cash provided by financing
      activities in 2004 was the result of proceeds from the issuance of common stock
      for employee stock options plus the receipt of payment of shareholder notes
      receivable.





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, 2006, our principal source of liquidity was $100.0 million of
      cash,
      cash equivalents and short-term investments.





***Off-Balance
      Sheet Arrangements***





At
      December 31, 2006 and 2005, we did not have any off-balance sheet arrangements
      or relationships with unconsolidated entities or financial partnerships, such
      as
      entities often referred to as structured finance or special purpose entities,
      which are typically established for the purpose of facilitating off-balance
      sheet arrangements or other contractually narrow or limited
      purposes.





***Commitments***





At
      December 31, 2006, 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 December 2007. Other
      than in the approximately 24 countries in which our sole dial-up network service
      provider is Equant, we have contracted with multiple network service providers
      to provide alternative access points in a given geographic area. In those
      geographic areas where we provide access through multiple providers, we are
      able
      to direct users to the network of particular service providers.





Consequently,
      we believe we have the ability to fulfill our minimum purchase commitments
      in
      these geographic areas. In May 2005, we consolidated several term license
      agreements that were set to expire into a single, long-term operating lease
      with
      a vendor. Future minimum purchase commitments under these agreements as of
      December 31, 2006 are as follows (in thousands):




Year
                ending December 31:2007
            
            $
            1,9012008
            
            
            1,0662009
            
            
            266$
            3,233





27
 *Table
          of Contents*


We
      lease
      our facilities under non-cancelable operating leases that expire at various
      dates through October 2016. Future minimum lease payments under these operating
      leases as of December 31, 2006 are as follows (in thousands):





Year
                ending December 31:2007
            
            $
            7,4442008
            
            
            6,1132009
            
            
            5,7182010
            
            
            2,7552011
                and thereafter
            
            
            3,456$
            25,486





***Tabular
      Disclosure of Contractual Obligations***





**Payments
                Due by Period****Contractual
                Obligations**
            
            **Total**
            
            **Less
                Than****1
                Yr**
            
            **1-3
                Years**
            
            **3-5
                Years**
            
            **More
                Than****5
                Yrs**Operating
                Lease Obligations
            
            $
            25,486
            
            $
            7,444
            
            $
            14,586
            
            $
            1,797
            
            $
            1,659Purchase
                Obligations
            
            
            3,233
            
            
            1,901
            
            
            1,332
            
            
            —
            
            
            —Total
                Contractual Obligations
            
            $
            28,719
            
            $
            9,345
            
            $
            15,918
            
            $
            1,797
            
            $
            1,659





**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, 2006, we had cash, cash equivalents, and short-term investments
      totaling $100.0 million. Our investment portfolio consists of auction rate
      and
      money market securities, asset backed securities, corporate securities, and
      government securities, generally due within one to two years. All of our
      instruments are classified as available for sale. We place investments with
      high
      quality issuers and limit the amount of credit exposure to any one issuer.
      These
      securities are subject to interest rate risks. Based on our portfolio content
      and our ability to hold investments to maturity, we believe that, a hypothetical
      10% increase or decrease in current interest rates would not materially affect
      our interest income.





As
      of
      December 31, 2005, we had cash and cash equivalents of $184.6 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.





The
      following is a chart of the principal amounts of short-term investments by
      expected maturity as of December 31, 2006 (in thousands):





**Expected
                Maturity Date for Par Value Amounts**
              **for
                the Year Ended****December 31,**
            
            **As
                of****Dec. 31, 2006****2007**
            
            **2008**
            
            **2009**
            
            **Total
                Cost****Value**
            
            **Total
                Fair Value**Government
                agencies
            
            $
            32,205
            
            $
            23,990
            
            $
            1,770
            
            $
            58,818
            
            $
            58,656Auction
                rate and money market securities
            
            
            25,100
            
            
            —
            
            
            —
            
            
            25,051
            
            
            25,052Total
            
            $
            57,305
            
            $
            23,990
            
            $
            1,770
            
            $
            83,869
            
            $
            83,708







28
 *Table
          of Contents*


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





**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, 2006 (in thousands, except
      per share amounts):





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





**Quarter
                Ended****March
                31**
            
            **June
                30**
            
            **September
                30**
            
            **December
                31****Year
                Ended December 31, 2005**Revenues
            
            $
            44,072
            
            $
            43,125
            
            $
            41,881
            
            $
            40,295Operating
                income
            
            
            5,961
            
            
            4,536
            
            
            4,683
            
            
            2,719Net
                income
            
            
            4,089
            
            
            3,331
            
            
            4,210
            
            
            1,265Basic
                net income per share
            
            $
            0.07
            
            $
            0.05
            
            $
            0.07
            
            $
            0.02Diluted
                net income per share
            
            $
            0.06
            
            $
            0.05
            
            $
            0.06
            
            $
            0.02





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





None.





**Item
      9A.*****Controls and Procedures***





**Controls
      and Procedures**





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





**Changes
      in Internal Control Over Financial Reporting**





In
      addition, there have been no changes in our internal controls over financial
      reporting during the quarter ended December 31, 2006 that have materially
      affected, or are reasonably likely to materially affect, our internal controls
      over financial reporting.





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


29
 *Table
          of Contents*




**Management’s
      Report on Internal Control Over Financial Reporting**





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting (as defined in Rule 13a-15(f) under the
      Securities Exchange Act of 1934, as amended). Our management assessed the
      effectiveness of our internal control over financial reporting as of December
      31, 2006. In making this assessment, our management used the criteria set forth
      by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
      in *Internal
      Control-Integrated Framework* .
      Our
      management has concluded that, as of December 31, 2006, our internal control
      over financial reporting is effective based on these criteria. Our independent
      registered public accounting firm, KPMG LLP, have issued an audit report on
      our
      assessment of our internal control over financial reporting, which is included
      herein.





We
      have
      excluded certain portions of GoRemote Internet Communications, Inc. (“GoRemote”)
      from our assessment of internal control over financial reporting as of December
      31, 2006 because it was acquired by the Company in a purchase business
      combination during fiscal 2006 and the excluded portions had not yet been fully
      integrated into the Company’s existing operations.




**Item
      9B.*****Other Information***





None.





**PART
      III**





**Item
      10.*****Directors. Executive Officers and Corporate
      Governance***





Information
      relating to our executive officers and directors will be presented under the
      captions “Proposal 1 — Election of Directors” and “Executive Officers and
      Directors” in our definitive proxy statement in connection with our 2007 Annual
      Meeting of stockholders to be filed with the Securities and Exchange Commission
      not later than April 30, 2007 (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 5.05 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.





Information
      relating to our audit committee and the audit committee financial expert
      required by this Item 10 will be presented under the caption “Audit Committee”
in the Proxy Statement. That information is incorporated into this report by
      reference.


30
 *Table
          of Contents*


**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,”, “Compensation Committee Interlocks and Insider
      Participation” and “Compensation Committee Report” 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, and Director
      Independence***





Information
      relating to certain relationships of our directors and executive officers and
      related transactions and the independence of our directors will be presented
      under the caption “Certain Relationships and Related Transactions” and
“Independence of the Board of Directors” 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 and Financial Statement Schedules***





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





**1.
      Financial Statements**





**Page**Reports
                of Independent Registered Public Accounting
                Firm
            34Consolidated
                Financial Statements:Balance
                Sheets as of December 31, 2006 and
                2005
            36Statements
                of Operations for the years ended December 31, 2006,
                2005 and 2004
            37Statements
                of Stockholders’ Equity and Comprehensive Income
                (Loss) for the years ended December 31, 2006, 2005 and
                2004
            38Statements
                of Cash Flows for the years ended December 31, 2006,
                2005 and 2004
            39Notes
                to Consolidated Financial
                Statements
            40





**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.


31
 *Table
          of Contents*


**3.
      Exhibits**





**Exhibit**
              **Number**
            **Description
                of Document**2.1
            Agreement
                and Plan of Merger dated October 26, 2004 by and among iPass Inc.,
                Montage
                Acquisition Corp., Mobile Automation, Inc. and David Strohm, as
                Stockholders’ Agent.(1)2.2
            Agreement
                of Merger among iPass Inc., Keystone Acquisition Sub, Inc. and GoRemote
                Internet Communications, Inc. dated December 9,
                2005.(2)3.1
            Amended
                and Restated Certificate of Incorporation.(3)3.2
            Bylaws,
                as amended.(3)4.1
            Reference
                is made to Exhibits 3.1 and 3.24.2
            Specimen
                stock certificate.(3)10.1*
            2003
                Equity Incentive Plan and form of related agreements, as
                amended.(3)10.1.1*
            Form
                of Stock Option Grant Notice under the 2003 Equity Incentive Plan
                (containing additional vesting terms).(4)10.2*
            2003
                Non-Employee Directors Plan, as amended.(5)10.2.1*
            Forms
                of Restricted Stock Award Grant
                Notice and Restricted Stock Award Agreement under the 2003 Non-Employee
                Directors Plan10.2.2*
            Forms
                of Stock Option Grant Notice and
                Stock Option Agreement under the 2003 Non-Employee Directors
                Plan10.3*
            1999
                Stock Option Plan and form of related agreements.(3)10.4*
            1997
                Stock Option Plan and form of related agreements.(3)10.5*
            Interim
                1999 Stock Option Plan.(3)10.6*
            Restricted
                Stock Purchase Agreement by and between the Registrant and Anurag
                Lal
                dated November 8, 1999.(3)10.7*
            2003
                Employee Stock Purchase Plan and form of related agreements, as
                amended.(3)10.8
            Lease
                Agreement, dated October 26, 1999, between Registrant and Westport
                Joint
                Venture (as amended).(3)10.9
            Amended
                and Restated Investor Rights Agreement, dated August 8, 2000, between
                Registrant, founders and holders of the Registrant’s Preferred
                Stock.(3)10.10
            Form
                of Indemnity Agreement.(3)10.11*
            Employment
                Agreement, dated November 13, 2001, between Registrant and Kenneth
                D.
                Denman.(3)10.12*
            Form
                of Offer Letter to Executive Officers.(3)10.13
            OEM
                Service Provider License Agreement, dated February 29, 2000, between
                RSA
                Security, Inc. and the Registrant, and amendments
                thereto.(4)10.14
            Support
                Agreement, dated February 29, 2000, by and between RSA Security,
                Inc.(4)10.15
            Loan
                and Security Agreement dated September 4, 2001 between Silicon Valley
                Bank
                and the Registrant, and modifications thereto.(3)10.16*
            2007
                Annual Executive Management Bonus Plan.(6)10.17*
            Outside
                Director Compensation Arrangement.(7)10.18*
            Executive
                Officer Cash Compensation Arrangement.(8)10.19*
            Offer
                Letter to Thomas Thimot dated December 9, 2005.(9)10.20*
            Transition
                Agreement with John Thuma dated January 20, 2006.(10)10.21*
            Letter
                Agreement pursuant to which Michael J. McConnell and Peter C. Clapman
                were
                elected to Registrant’s Board of Directors.(11)21.1
            Subsidiaries
                of the
                Registrant.23.1
            Consent
                of Independent Registered Public
                Accounting Firm.24.1
            Power
                of Attorney (reference is made to the signature page of this Form
                10-K).31.1
            Certification
                of the Chief Executive Officer
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.2
            Certification
                of the Chief Financial Officer
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32.1
            Certification
                of the Chief 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.


__________





(1)  Previously
      filed as the like-numbered exhibit to our Annual Report on Form 10-K filed
      with
      the Securities and Exchange Commission on March 15, 2005, and incorporated
      by
      reference herein.





(2)  Previously
      filed as exhibit 10.22 on our Current Report on Form 8-K filed with the
      Securities and Exchange Commission on December 12, 2005, and incorporated by
      reference herein.





(3)  Previously
      filed as the like-numbered exhibit to our Registration Statement on Form S-1,
      as
      amended, originally filed with the Securities and Exchange Commission on January
      24, 2003, as amended, and incorporated by reference herein.





(4)  Previously
      filed as the like-numbered exhibit to our Annual Report on form 10-K filed
      with
      the Securities and Exchange Commission on March 16, 2006, and incorporated
      by
      reference herein





(5)  Previously
      filed as exhibit 10.1 on our Current Report on Form 8-K filed with the
      Securities and Exchange Commission on August 16, 2006, and incorporated by
      reference herein.


32
 *Table
          of Contents*


(6)  Previously
      filed as Item 5.02 on our Current Report on Form 8-K filed with the Securities
      and Exchange Commission on February 13, 2007, and incorporated by reference
      herein.




(7)  Previously
      disclosed under the caption “Compensation of Directors” in our Definitive Proxy
      Statement on Schedule 14A filed with the Securities and Exchange Commission
      on
      April 26, 2004, and incorporated by reference herein.





(8)  Previously
      disclosed under the caption “Compensation of Executive Officers” in our
      Definitive Proxy Statement on Schedule 14A filed with the Securities and
      Exchange Commission on April 26, 2004, and incorporated by reference
      herein.





(9)  Previously
      filed as exhibit 10.23 on our Current Report on Form 8-K filed with the
      Securities and Exchange Commission on February 16, 2006, and incorporated by
      reference herein.





(10)  Previously
      filed as exhibit 10.24 on our Current Report on Form 8-K filed with the
      Securities and Exchange Commission on February 16, 2006, and incorporated by
      reference herein.





(11)  Previously
      filed as exhibit 9.9.1 on our Current Report on Form 8-K filed with the
      Securities and Exchange Commission on February 21, 2007.





*  Indicates
      a management contract or compensatory plan or arrangement.


33
 *Table
          of Contents*


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM**




The
      Board
      of Directors and Stockholders


iPass
      Inc.:




We
      have
      audited the accompanying consolidated balance sheets of iPass
      Inc. and subsidiaries (the Company) as of
      December 31, 2006 and December 31, 2005, and the related consolidated
      statements of operations, stockholders’ equity and comprehensive income (loss),
      and cash flows for each of the years in the three-year period ended
      December 31, 2006. 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 the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of the Company as of
      December 31, 2006 and December 31, 2005, and the results of their
      operations and their cash flows for each of the years in the three-year period
      ended December 31, 2006, in conformity with U.S. generally accepted
      accounting principles.




As
      discussed in Note 2 to the Consolidated Financial Statements, effective January
      1, 2006, the Company adopted the provision of Statement of Financial Accounting
      Standards No. 123 (revised 2004), *Share-Based
      Payment.*




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of the Company’s internal
      control over financial reporting as of December 31, 2006, based on the
      criteria established in *Internal Control—Integrated Framework* issued by
      the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
      and
      our report dated March 28, 2007, expressed an unqualified opinion on
      management’s assessment of, and the effective operation of, internal control
      over financial reporting.




/s/ KPMG
      LLP


Mountain
      View, California


March
      28,
      2007





34
 *Table
          of Contents*


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





The
      Board
      of Directors and Stockholders


iPass
      Inc.:





We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Control Over Financial Reporting, that iPass Inc. maintained
      effective internal control over financial reporting as of December 31, 2006,
      based on criteria established in *Internal
      Control — Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      Management of iPass is responsible for maintaining effective internal control
      over financial reporting and for its assessment of the effectiveness of internal
      control over financial reporting. Our responsibility is to express an opinion
      on
      management’s assessment and an opinion on the effectiveness of the Company’s
      internal control over financial reporting based on our audit.





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





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





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





In
      our
      opinion, management’s assessment that iPass Inc. maintained effective internal
      control over financial reporting as of December 31, 2006, is fairly stated,
      in
      all material respects, based on criteria established in *Internal
      Control — Integrated Framework* issued
      by COSO. Also, in our opinion, iPass Inc. maintained, in all material respects,
      effective internal control over financial reporting as of December 31, 2006,
      based on criteria established in *Internal
      Control — Integrated Framework* issued
      by COSO.





iPass
      Inc. acquired GoRemote Internet Communications, Inc. (“GoRemote”) during
      2006, and management excluded from its assessment of the effectiveness of iPass
      Inc.’s internal control over financial reporting as of December 31, 2006,
      GoRemote’s internal control over financial reporting associated with total
      assets of $4.8 million and total revenues of $30.8 million included in the
      consolidated financial statements of iPass Inc. (and subsidiaries) as of and
      for
      the year ended December 31, 2006. Our audit of internal control over financial
      reporting of iPass Inc. also excluded an evaluation of the internal control
      over financial reporting of GoRemote.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of iPass Inc.
      and subsidiaries as of December 31, 2006 and 2005, and the related consolidated
      statements of operations, stockholders’ equity and comprehensive income (loss),
      and cash flows for each of the years in the three-year period ended December
      31,
      2006, and our report dated March 28, 2007 expressed an unqualified opinion
      on
      those consolidated financial statements.








/s/
      KPMG
      LLP


Mountain
      View, California


March
      28,
      2007


35
 *Table
          of Contents*


**iPASS
      INC. AND SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**





**(In
      thousands, except share and per share amounts)**





**As
                of December 31,****2006**
            
            **2005****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            15,492
            
            $
            37,829Short-term
                investments
            
            
            83,708
            
            
            145,473Accounts
                receivable, net of allowance for doubtful accounts of $3,282 and
                $2,040,
                respectively
            
            
            28,579
            
            
            23,347Prepaid
                expenses and other current assets
            
            
            6,341
            
            
            5,031Deferred
                tax assets
            
            
            8,070
            
            
            4,555Total
                current assets
            
            
            142,190
            
            
            216,235Property
                and equipment, net
            
            
            10,519
            
            
            9,210Other
                assets
            
            
            3,344
            
            
            1,561Long-term
                deferred tax assets
            
            
            14,952
            
            
            —Acquired
                intangibles, net
            
            
            13,705
            
            
            8,776Goodwill
            
            
            78,757
            
            
            18,692Total
                assets
            
            $
            263,467
            
            $
            254,474**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            14,830
            
            $
            12,669Accrued
                liabilities
            
            
            16,482
            
            
            12,523Deferred
                revenue—short term
            
            
            5,411
            
            
            3,031Total
                current liabilities
            
            
            36,723
            
            
            28,223Deferred
                revenue—long term
            
            
            1,468
            
            
            —Other
                long term liabilities
            
            
            1,969
            
            
            —Total
                liabilities
            
            
            40,160
            
            
            28,223Commitments
                (Note 13)Stockholders’
                equity:Common
                stock, $.001 par value; authorized 250,000,000 shares; issued and
                outstanding 63,467,796 and 64,202,765 shares, respectively
            
            
            63
            
            
            64Additional
                paid-in capital
            
            
            249,800
            
            
            245,456Deferred
                stock-based compensation
            
            
            —
            
            
            (593
            )Accumulated
                other comprehensive loss
            
            
            (98
            )
            
            (307
            )Accumulated
                deficit
            
            
            (26,458
            )
            
            (18,369
            )Total
                stockholders’ equity
            
            
            223,307
            
            
            226,251Total
                liabilities and stockholders’ equity
            
            $
            263,467
            
            $
            254,474





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


36
 *Table
          of Contents*


**iPASS
      INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**(In
      thousands, except share and per share amounts)**





**For
                the Year Ended December 31,****2006**
            
            **2005**
            
            **2004**Revenues
            
            $
            182,711
            
            $
            169,373
            
            $
            166,319Operating
                expenses (1):Network
                access
            
            
            56,929
            
            
            42,109
            
            
            37,339Network
                operations
            
            
            32,013
            
            
            20,946
            
            
            19,376Research
                and development
            
            
            22,557
            
            
            17,746
            
            
            14,156Sales
                and marketing
            
            
            58,620
            
            
            50,713
            
            
            47,134General
                and administrative
            
            
            23,178
            
            
            17,593
            
            
            18,891Restructuring
                charges
            
            
            4,733
            
            
            —
            
            
            —Amortization
                of acquired intangibles
            
            
            3,971
            
            
            2,367
            
            
            457Total
                operating expenses
            
            
            202,001
            
            
            151,474
            
            
            137,353Operating
                income (loss)
            
            
            (19,290
            )
            
            17,899
            
            
            28,966Interest
                income
            
            
            3,659
            
            
            3,899
            
            
            2,298Income
                (loss) before income taxes
            
            
            (15,631
            )
            
            21,798
            
            
            31,264Provision
                for (benefit from) income taxes
            
            
            (7,195
            )
            
            8,903
            
            
            12,196Net
                income (loss) before cumulative effect of change in accounting
                principle
            
            
            (8,436
            )
            
            12,895
            
            
            19,068Cumulative
                effect of change in accounting principle, net of zero tax
                effect
            
            
            (347
            )
            
            —
            
            
            —Net
                income (loss)
            
            $
            (8,089
            )
            $
            12,895
            
            $
            19,068Net
                income (loss) per share before cumulative effect of change in accounting
                principle:Basic
            
            $
            (0.13
            )
            $
            0.20
            
            $
            0.31Diluted
            
            $
            (0.13
            )
            $
            0.19
            
            $
            0.29Per
              share effect of cumulative change in accounting principle:Basic
            
            $
            —
            
            $
            —
            
            $
            —Diluted
            
            $
            —
            
            $
            —
            
            $
            —Net
              income (loss) per share:Basic
            
            $
            (0.13
            )
            $
            0.20
            
            $
            0.31Diluted
            
            $
            (0.13
            )
            $
            0.19
            
            $
            0.29Number
                of shares used in per share calculations:Basic
            
            
            64,572,603
            
            
            63,353,779
            
            
            60,770,680Diluted
            
            
            64,572,603
            
            
            66,277,342
            
            
            65,645,757(1)
                Stock-based compensation is included in the following expense line
                items:Network
                operations
            
            $
            1,031
            
            $
            163
            
            $
            335Research
                and development
            
            
            1,235
            
            
            175
            
            
            352Sales
                and marketing
            
            
            2,206
            
            
            265
            
            
            554General
                and administrative
            
            
            1,706
            
            
            534
            
            
            1,101





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


37
 *Table
          of Contents*


**iPASS
      INC. AND SUBSIDIARIES**





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





**(In
      thousands)**


**Common
                  Stock**
              
              **Additional**
                **Paid-In**
                **Capital**
              
              **Notes**
                **Receivable**
                **from**
                **Stock-**
                **holders**
              
              **Deferred**
                **Stock-Based**
                **Compensation**
              
              **Accumulated**
                **Comprehensive**
                **Income**
                **(Loss)**
              
              **Accumulated**
                **Deficit**
              
              **Total
                  Stock-**
                **holders’**
                **Equity**
              
              **Comprehensive**
                **Income
                  (loss)****Shares**
              
              **Amount**Balances,
                  December 31, 2003
              
              
              60,483
              
              $
              60
              
              $
              229,026
              
              $
              (2,831
              )
              $
              (4,326
              )
              $
              125
              
              $
              (50,332
              )
              $
              171,722
              
              $
              14,027Exercise
                  of stock options
              
              
              1,886
              
              
              2
              
              
              5,239
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              5,241
              
              
              —Employee
                  stock purchase plan — common stock issued
              
              
              388
              
              
              1
              
              
              2,735
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              2,736
              
              
              —Payment
                  of stockholder notes receivable
              
              
              —
              
              
              —
              
              
              —
              
              
              2,887
              
              
              —
              
              
              —
              
              
              —
              
              
              2,887
              
              
              —Interest
                  earned on stockholder note receivable
              
              
              —
              
              
              —
              
              
              —
              
              
              (56
              )
              
              —
              
              
              —
              
              
              —
              
              
              (56
              )
              
              —Cancellation
                  of unvested stock options
              
              
              —
              
              
              —
              
              
              (202
              )
              
              —
              
              
              202
              
              
              —
              
              
              —
              
              
              —
              
              
              —Amortization
                  of stock-based compensation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              2,342
              
              
              —
              
              
              —
              
              
              2,342
              
              
              —Tax
                  benefit from employee stock option plans
              
              
              —
              
              
              —
              
              
              3,831
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              3,831
              
              
              —Unrealized
                  loss on available-for-sale investments, net
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (549
              )
              
              —
              
              
              (549
              )
              
              (549
              )Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              19,068
              
              
              19,068
              
              
              19,068Balances,
                  December 31, 2004
              
              
              62,757
              
              $
              63
              
              $
              240,629
              
              
              —
              
              $
              (1,782
              )
              $
              (424
              )
              $
              (31,264
              )
              $
              207,222
              
              $
              18,519Exercise
                  of stock options
              
              
              1,041
              
              
              1
              
              
              1,960
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,961
              
              
              —Employee
                  stock purchase plan — common stock issued
              
              
              405
              
              
              —
              
              
              1,840
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,840
              
              
              —Cancellation
                  of unvested stock options
              
              
              —
              
              
              —
              
              
              (52
              )
              
              —
              
              
              52
              
              
              —
              
              
              —
              
              
              —
              
              
              —Amortization
                  of stock-based compensation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,137
              
              
              —
              
              
              —
              
              
              1,137
              
              
              —Tax
                  benefit from employee stock option plans
              
              
              —
              
              
              —
              
              
              1,079
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,079
              
              
              —Unrealized
                  gain on available-for-sale investments, net
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              117
              
              
              —
              
              
              117
              
              
              117Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              12,895
              
              
              12,895
              
              
              12,895Balances,
                  December 31, 2005
              
              
              64,203
              
              $
              64
              
              $
              245,456
              
              
              —
              
              $
              (593
              )
              $
              (307
              )
              $
              (18,369
              )
              $
              226,251
              
              $
              13,012Exercise
                  of stock options
              
              
              1,831
              
              
              2
              
              
              5,622
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              5,624
              
              
              —Employee
                  stock purchase plan — common stock issued
              
              
              409
              
              
              —
              
              
              1,884
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,884
              
              
              —Outstanding
                  common stock repurchased and retired
              
              
              (2,975
              )
              
              (3
              )
              
              (16,188
              )
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (16,191
              )
              
              —Reversal
                  of unearned stock-based compensation upon adoption of SFAS No.
                  123(R)
              
              
              —
              
              
              —
              
              
              (593
              )
              
              —
              
              
              593
              
              
              —
              
              
              —
              
              
              —
              
              
              —Cumulative
                  effect of change in accounting principle
              
              
              —
              
              
              —
              
              
              (347
              )
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (347
              )
              
              —Fair
                  value of options assumed in acquisition of GoRemote
              
              
              —
              
              
              —
              
              
              5,826
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              5,826
              
              
              —Stock-based
                  compensation
              
              
              —
              
              
              —
              
              
              6,178
              
              
              —
              
              
              
              
              
              —
              
              
              —
              
              
              6,178
              
              
              —Excess
                  tax benefit from employee stock option plans
              
              
              —
              
              
              —
              
              
              1,962
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,962
              
              
              —Unrealized
                  gain on available-for-sale investments, net
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              209
              
              
              —
              
              
              209
              
              
              209Net
                  income (loss)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (8,089
              )
              
              (8,089
              )
              
              (8,089
              )Balances,
                  December 31, 2006
              
              
              63,468
              
              $
              63
              
              $
              249,800
              
              $
              —
              
              $
              —
              
              $
              (98
              )
              $
              (26,458
              )
              $
              223,307
              
              $
              (7,880
              )
 
  The
      accompanying notes are an integral part of these consolidated financial
      statements.


38
 *Table
          of Contents*


**iPASS
      INC. AND SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**(In
      thousands)**





**For
                the Year Ended December 31,****2006**
            
            **2005**
            
            **2004****Cash
                flows from operating activities:**Net
                income (loss)
            
            $
            (8,089
            )
            $
            12,895
            
            $
            19,068Adjustments
                to reconcile net income to net cash provided by operating
                activities:Amortization
                of stock-based compensation for employees
            
            
            6,178
            
            
            1,137
            
            
            2,342Amortization
                of acquired intangibles
            
            
            3,971
            
            
            2,367
            
            
            457Depreciation
                and amortization
            
            
            5,989
            
            
            4,732
            
            
            4,762Tax
                benefit from employee stock option plans
            
            
            —
            
            
            1,079
            
            
            3,831Excess
                tax benefit from employee stock option plans
            
            
            (1,962
            )
            
            —
            
            
            —Deferred
                income taxes
            
            
            (6,739
            )
            
            5,700
            
            
            10,842Interest
                on shareholder notes receivable
            
            
            —
            
            
            —
            
            
            (56
            )Provision
                for doubtful accounts
            
            
            1,056
            
            
            163
            
            
            1,100Cumulative
                effect of change in accounting principle
            
            
            (347
            )
            
            —
            
            
            —Realized
                loss on investments, net
            
            
            —
            
            
            31
            
            
            98Changes
                in operating assets and liabilities, net of assets acquired and
                liabilities assumed:Accounts
                receivable
            
            
            868
            
            
            374
            
            
            (3,433
            )Prepaid
                expenses and other current assets
            
            
            (1,102
            )
            
            (616
            )
            
            250Other
                assets
            
            
            (1,015
            )
            
            (337
            )
            
            30Accounts
                payable
            
            
            (38
            )
            
            3,515
            
            
            1,733Accrued
                liabilities
            
            
            (4,226
            )
            
            1,011
            
            
            (4,026
            )Deferred
                revenue
            
            
            3,848
            
            
            47
            
            
            1,132Other
                liabilities
            
            
            1,969
            
            
            —
            
            
            —Net
                cash provided by operating activities
            
            
            361
            
            
            32,098
            
            
            38,130**Cash
                flows from investing activities:**Purchases
                of short-term investments
            
            
            (140,490
            )
            
            (170,422
            )
            
            (156,310
            )Maturities
                of short-term investments
            
            
            207,695
            
            
            141,839
            
            
            130,696Purchases
                of property and equipment
            
            
            (5,222
            )
            
            (3,882
            )
            
            (6,186
            )Acquisition
                of GoRemote, net of cash acquired
            
            
            (77,960
            )
            
            —
            
            
            —Acquisition
                of Safe3w, net of cash acquired
            
            
            —
            
            
            —
            
            
            (8,481
            )Acquisition
                of Mobile Automation, net of cash acquired
            
            
            —
            
            
            —
            
            
            (19,964
            )Net
                cash used in investing activities
            
            
            (15,977
            )
            
            (32,465
            )
            
            (60,245
            )**Cash
                flows from financing activities:**Proceeds
                from issuance of common stock
            
            
            7,508
            
            
            3,801
            
            
            7,977Cash
                used in repurchase of common stock
            
            
            (16,191
            )
            
            —
            
            
            —Tax
                benefit from employee stock option plans
            
            
            1,962
            
            
            —
            
            
            —Proceeds
                from payment of stockholder notes receivable
            
            
            —
            
            
            —
            
            
            2,887Net
                cash provided by (used in) financing activities
            
            
            (6,721
            )
            
            3,801
            
            
            10,864Net
                increase (decrease) in cash and cash equivalents
            
            
            (22,337
            )
            
            3,434
            
            
            (11,251
            )Cash
                and cash equivalents at beginning of year
            
            
            37,829
            
            
            34,395
            
            
            45,646Cash
                and cash equivalents at end of year
            
            $
            15,492
            
            $
            37,829
            
            $
            34,395**Supplemental
                disclosures of cash flow information:**Cash
                paid for interest
            
            $
            —
            
            $
            —
            
            $
            —Assumption
                of GoRemote options
            
            $
            5,826
            
            $
            —
            
            $
            —Cash
                paid for taxes
            
            $
            1,471
            
            $
            1,094
            
            $
            1,485





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


39
 *Table
          of Contents*


**iPASS
      INC. AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Note
      1. Description of Business**





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





**Note
      2. Summary of Significant Accounting Policies**





***Use
      of Estimates***





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





***Principles
      of Consolidation***





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





***Reclassifications***





Amortization
      of deferred stock-based compensation expense in prior years has been has been
      reclassified to conform to current year presentation. The reclassifications
      are
      as follows (in thousands):





Consolidated
                Statements of Operations**Network
                operations**
            
            **Research
                and development**
            
            **Sales
                and marketing**
            
            **General
                and administrative****2005**
            
            **2004**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004**As
                previously reported
            
            $
            20,783
            
            $
            19,041
            
            $
            17,571
            
            $
            13,804
            
            $
            50,448
            
            $
            46,580
            
            $
            17,059
            
            $
            17,790Reclassification
            
            
            163
            
            
            335
            
            
            175
            
            
            352
            
            
            265
            
            
            554
            
            
            534
            
            
            1,101As
                reported
            
            
            20,946
            
            
            19,376
            
            
            17,746
            
            
            14,156
            
            
            50,713
            
            
            47,134
            
            
            17,593
            
            
            18,891





Certain
      cash flows related to the amortization of premium on available for sale
      securities have been reclassified between Net cash provided by operating
      activities and Net cash used in investing activities for the years ended
      December 31, 2005 and 2004, respectively.  Additionally, amounts related to
      interest earned on short-term investments but not received have been
      reclassified from short-term investments to prepaid expenses and other current
      assets.  The reclassifications are as follows (in thousands):





**Consolidated
                Statements of Cash Flows**
            
            **Consolidated
                Balance Sheet****Depreciation
                and amortization**
            
            **Net
                cash provided by operating activities**
            
            **Maturities
                of short term investments**
            
            **Net
                cash used in investing activities**
            
            **Short
                term investments**
            
            **Prepaid
                expenses and other current assets****2005**
            
            **2004**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2004**
            
            **2005**
            
            **2005**As
                previously reported
            
            $
            4,783
            
            $
            4,386
            
            $
            32,149
            
            $
            37,754
            
            $
            141,788
            
            $
            131,072
            
            $
            (32,516
            )
            $
            (59,869
            )
            $
            146,727
            
            $
            3,777Reclassification
            
            
            (51
            )
            
            376
            
            
            (51
            )
            
            376
            
            
            51
            
            
            (376
            )
            
            51
            
            
            (376
            )
            
            (1,254
            )
            
            1,254As
                reported
            
            
            4,732
            
            
            4,762
            
            
            32,098
            
            
            38,130
            
            
            141,839
            
            
            130,696
            
            
            (32,465
            )
            
            (60,245
            )
            
            145,473
            
            
            5,031





40
 *Table
          of Contents*


***Foreign
      Currency Transactions***




Substantially
      all revenues and network access expenses are denominated in U.S. dollars.
      Therefore, the Company considers the functional currency of its foreign
      subsidiaries to be the U.S. dollar. Foreign currency transaction gains and
      losses are included in the accompanying Consolidated Statements of Operations.
      Foreign currency gains and losses were not significant for the years ended
      December 31, 2006, 2005 and 2004.





***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 is the total of net income
      and all other non-owner changes in equity. Comprehensive income (loss) includes
      net income and unrealized gains and losses on available-for-sale
      securities.





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





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Net
                income (loss)
            
            $
            (8,089
            )
            $
            12,895
            
            $
            19,068Comprehensive
                income (loss):Change
                in accumulated unrealized gain (loss) on available-for-sale securities,
                net of taxes
            
            
            209
            
            
            117
            
            
            (549
            )Total
                comprehensive income (loss)
            
            $
            (7,880
            )
            $
            13,012
            
            $
            18,519




***Cash
      Equivalents and Short-term Investments***





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





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





***Concentrations
      of Risk***





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





The
      Company provides credit to its customers in the normal course of business,
      performs ongoing credit evaluations of its customers, and maintains an allowance
      for doubtful accounts. The Company provides reserves based on the combination
      of
      the age of the receivables, historical writeoffs and reserves for specific
      customer balances. As of December 31, 2006 and 2005, no individual customer
      represented 10% or more of accounts receivable. For the years ended December
      31,
      2006, 2005 and 2004, no customer represented more than 10% of total
      revenues.





For
      the
      three years ended December 31, 2006, 2005 and 2004, one supplier represented
      4.2%, 9.4% and 16.8% of network access expenses. In addition, the Company has
      entered into contracts with certain access providers that contain minimum
      purchase commitments (see Note 13).


.


***Fair
      Value of Financial Instruments***





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


41
 *Table
          of Contents*


***Property
      and Equipment***





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





Equipment
      (Three years)


Furniture
      and fixtures (Five years)


Computer
      software and equipment (Three years)


Leasehold
      improvements (Shorter of useful life or lease term)





***Goodwill
      and Other Intangible Assets***





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





***Impairment
      of Long-Lived Assets***





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





*Change
      in Accounting Principle*





On
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123 (revised 2004), Share-Based Payment, (“SFAS 123(R)”) which requires the
      measurement and recognition of compensation expense for all share-based payment
      awards made to employees and directors including employee stock options and
      employee stock purchases related to the ESPP based on estimated fair values.
      SFAS 123(R) supersedes the Company’s previous accounting under Accounting
      Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB
      25”). In March 2005, the Securities and Exchange Commission issued Staff
      Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has
      applied the provisions of SAB 107 in its adoption of SFAS 123(R). Using the
      modified prospective transition method of adopting SFAS 123(R), the Company
      began recognizing compensation expense for stock-based awards granted or
      modified after December 31, 2005 and awards that were granted prior to the
      adoption of SFAS 123(R) but were still unvested at December 31, 2005. Under
      this
      method of implementation, no restatement of prior periods has been
      made.


42
 *Table
          of Contents*


Total
      stock-based compensation expense, including stock options, ESPP and restricted
      stock awards, recognized under SFAS 123(R) in the condensed consolidated
      statements of operations for the year ended December 31, 2006 was $6.2 million.
      The income related tax benefit totaled $220,000 for the same period. The
      estimated fair value of the Company’s stock-based awards, less expected
      forfeitures, is amortized over the awards’ vesting period on a straight-line
      basis. In addition, the Company has recorded a $(347,000) cumulative effect
      of a
      change in accounting principle in the condensed consolidated statement of
      operations for the three months ended March 31, 2006. Prior to adopting SFAS
      123(R) the Company did not reduce stock-based compensation expense by estimated
      forfeitures; rather the Company reduced stock-based compensation only upon
      actual forfeiture.  The cumulative effect adjustment is equal to the
      difference between previously recorded stock-based compensation expense
      associated with unvested options at January 1, 2006 and the amount that would
      have been recognized had the Company estimated forfeitures.





As
      a
      result of adopting SFAS 123(R), the Company’s loss before income taxes and net
      loss were increased by $5.7 million and $5.2 million, respectively, for the
      year
      ended December 31, 2006. The implementation of SFAS 123(R) reduced basic and
      fully diluted earnings per share by $0.08 for the year ended December 31, 2006.
      The implementation of SFAS 123(R) did not have a significant impact on cash
      flows from operations for the ended December 31, 2006.





SFAS
      123(R) requires companies to estimate the fair value of share-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as
      expense over the requisite service periods in the Company’s income statements.
      Prior to January 1, 2006, the Company measured compensation expense for its
      employee stock-based compensation plans using the intrinsic value method under
      APB 25 and related interpretations. In accordance with APB 25, no stock-based
      compensation expense was recognized in the Company’s income statements for stock
      options granted to employees and directors that had an exercise price equal
      to
      the deemed fair value of the underlying common stock on the date of
      grant.





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





Pursuant
      to the income tax provisions included in SFAS 123(R), the Company has elected
      to
      adopt the alternative transition method provided in the FASB Staff Position
      for
      calculating the tax effects of equity-based compensation. The alternative
      transition method includes simplified methods to establish the beginning balance
      of the additional paid-in capital pool (APIC pool) related to the tax effects
      of
      employee equity-based compensation, and to determine the subsequent impact
      on
      the APIC pool and Consolidated Statement of Cash Flows of the tax effects of
      employee equity-based compensation awards that are outstanding upon the
      implementation of SFAS 123(R). As of December 31, 2006, there was $8.7
      million of unrecognized compensation cost, adjusted for estimated forfeitures,
      related to non-vested stock-based payments granted to employees. Total
      unrecognized compensation cost will be adjusted for future changes in estimated
      forfeitures.


43
 *Table
          of Contents*


*Pro
      Forma Information under SFAS 123 for Periods Prior to 2006*





Prior
      to
      January 1, 2006, the Company followed the disclosure-only provisions under
      SFAS
      123, as amended. The following table illustrates the effect on net income and
      earnings per share for the years ended December 31, 2005 and 2004 if the Company
      had applied the fair value recognition provisions of SFAS 123 to stock-based
      employee compensation (in thousands, except per share data):





**For
                the Year Ended December 31,****2005**
            
            **2004**Net
                income — as reported
            
            $
            12,895
            
            $
            19,068Add:
                Stock-based employee compensation expense included in the reported
                net
                income, net of related tax effects
            
            
            671
            
            
            1,429Deduct:
                Stock-based employee compensation expense using the fair value method,
                net
                of related tax effects
            
            
            (3,570
            )
            
            (3,699
            )Pro
                forma net income
            
            $
            9,996
            
            $
            16,798Basic
                net income per common share:As
                reported
            
            $
            0.20
            
            $
            0.31Pro
                forma
            
            $
            0.16
            
            $
            0.28Diluted
                net income per common share:As
                reported
            
            $
            0.19
            
            $
            0.29Pro
                forma
            
            $
            0.15
            
            $
            0.26





Based
      on
      the Black-Scholes option pricing model, the weighted average fair value of
      options granted during fiscal 2005 and 2004 was $1.54 and $2.05, respectively.
      The total intrinsic value of options exercised during fiscal 2005 and 2004
      was
      $4.2 million and $15.1 million, respectively.





Prior
      to
      January 1, 2006, the expected life and expected volatility of the stock options
      were based upon historical data and other relevant factors. Forfeitures of
      employee stock options were accounted for on an as-incurred basis. Amortization
      of deferred compensation expense for the years ended December 31, 2005 and
      2004
      was approximately $1,137,000 and $2,342,000, 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, 2005 and 2004:





**Employee
                Stock Options****For
                the Year Ended December 31,**
            
            **Employee
                Stock Purchase Plan****For
                the Year Ended December 31,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Risk-free
                rate
            
            
            3.9
            %
            
            3.0
            %
            
            3.7
            %
            
            1.6
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            35-41
            %
            
            41-47
            %
            
            36-41
            %
            
            32-52
            %Expected
                life
            
            
            3
                Years
            
            
            3
                Years
            
            
            .5
                Years
            
            
            .5
                Years


__________


*  Note
      that
      the employee stock purchase plan commenced on July 23, 2003 with the first
      purchase occurring on April 30, 2004.





***Computation
      of Net Income (Loss) per Share***





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





***Revenue
      Recognition***





We
      derive
      our revenues primarily from providing enterprise connectivity services through
      our virtual network. We sell these services directly, as well as indirectly
      through our channel partners. We bill substantially all customers on a time
      basis for usage based on negotiated rates. We bill the remaining customers
      based
      on a fixed charge per active user per month with additional charges for excess
      time. Substantially all enterprise customers commit to a one to three year
      contract term. Most of our contracts with enterprise customers contain minimum
      usage levels. We bill customers for minimum commitments when actual usage is
      less than their monthly minimum commitment amount.


44
 *Table
          of Contents*





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





*Usage
      Fees*





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





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





Through
      the acquisition of GoRemote Internet Communications, Inc., the Company provides
      services over a heterogeneous virtual network, which was created by forming
      contractual relationships with approximately 550 access providers, including
      Internet service providers, cable companies, DSL companies and
      telecommunications companies. These companies may provide us their services
      under either a reseller or an agency arrangement. In applying our revenue
      recognition policy we must make judgments with regard to the specific facts
      and
      circumstances surrounding each provider relationship to determine which portion
      of our revenues we provide under a reseller arrangement, where we would record
      gross revenues and cost of revenues, and which portion of our revenues we
      provide as an agent, where we would record revenues and cost of revenues
      combined on a net basis. In exercising our judgment, we evaluate the contractual
      arrangements and de facto relationships with each provider, together with
      various other assumptions believed to be applicable and reasonable under the
      circumstances, to determine whether revenues are gross versus net. We have
      one
      significant provider arrangement under which we account for revenues on a net
      basis. All other provider arrangements are accounted for on a gross basis,
      by
      initially deferring the costs associated with deploying each endpoint and
      amortizing the costs over the estimated life of an endpoint, typically 30
      months. Our judgments may change as new events occur, as additional information
      is obtained and as our operating environment changes, any of which could cause
      a
      material impact on the revenues that we have reported. These revenues related
      to
      fixed broadband are included in broadband usage fees.





*License
      and Maintenance*





With
      the
      acquisition of Mobile Automation, Inc. in October 2004, we began generating
      license and maintenance revenue through software licensing agreements. License
      revenue is generally recognized when a signed contract or other persuasive
      evidence of an arrangement exists, the software has been shipped or
      electronically delivered, the license fee is fixed or determinable, and
      collection of the resulting receivable is probable as prescribed by AICPA
      Statement of Position (“SOP”) 97-2. We enter into revenue arrangements in which
      a customer may purchase a combination of software, upgrades and maintenance
      and
      support (multiple-element arrangements). When vendor-specific objective evidence
      (“VSOE”) of fair value exists for all elements, we allocate revenue to each
      element based on the relative fair value of each of the elements. VSOE of fair
      value is established by the price charged when that element is sold separately.
      When contracts contain multiple elements wherein VSOE of fair value exists
      for
      all undelivered elements, we account for the delivered elements in accordance
      with the “residual method” prescribed by SOP 98-9. Revenue from subscription
      license agreements, which include software, rights to future products on a
      when-and-if available basis and maintenance, is recognized ratably over the
      term
      of the subscription period. Revenue on shipments to resellers, which is
      generally subject to certain rights of return and price protection, is
      recognized when the products are sold by the resellers to the end-user
      customer.





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


45
 *Table
          of Contents*


***Services***





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. The Company recognizes revenues relating to one-time fees on a
      straight-line basis over the term of the initial contract, generally one to
      three years. The Company recognizes revenues relating to annual fees on a
      straight-line basis and revenues for monthly services during the month that
      these services are provided.





***Network
      Access***





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





If
      the
      Company estimates that the revenues derived from the purchase commitment will
      be
      less than the purchase commitment, the Company recognizes a loss on that
      purchase commitment to the extent of that difference. No such loss has been
      recognized regarding such costs through December 31, 2006.





***Advertising***





Advertising
      and promotional costs are expensed as incurred. For the years ended December
      31,
      2006, 2005 and 2004 these costs totaled approximately $533,000, $435,000 and
      $989,000, respectively.





***Software
      Development Costs***





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





Costs
      related to software purchased to be sold are capitalized at the lower of
      unamortized cost or net realizable value. The Company has approximately $900,000
      of capitalized purchase software included in property and equipment, net on
      the
      consolidated balance sheets as of December 31, 2006 and 2005. Capitalized costs
      are amortized based on current and future revenue related to each product.
      To
      date, the Company has not sold any purchased software and therefore has not
      amortized any of the capitalized costs.





The
      Company capitalizes the costs of computer software developed or obtained for
      internal use. During the year ended December 31, 2006, the Company had
      approximately $300,000 of capitalized software development costs. 
During the years ended December 31, 2005 and 2004, the Company had no
      capitalized software development costs.  Development costs are amortized
      over the estimated useful life of the software developed.





***Recent
      Accounting Pronouncements***





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, *Accounting
      for Uncertainty in Income Taxes — an interpretation of FASB Statement No.
      109* ;
      (“FIN
      48”). FIN 48 provides guidance on recognition and measurement of uncertainties
      in income taxes recognized in financial statements by prescribing a recognition
      threshold and measurement attribute of tax positions taken or expected to be
      taken on a tax return. FIN 48 is applicable for fiscal years beginning after
      December 15, 2006. The Company is currently assessing the impact that the
      adoption of FIN 48 will have on its consolidated results of operations and
      financial position.





In
      June
      2006, the FASB reached consensus on Emerging Issues Task Force (“EITF”) No.
      06-3, *How
      Taxes Collected from Customers and Remitted to Governmental Authorities Should
      be Presented in the Income Statement* (“EITF
      06-3”). The scope of EITF 06-3 includes any tax assessed by a governmental
      authority that is directly imposed on a revenue-producing transaction between
      a
      seller and a customer and may include, but is not limited to, sales, use, value
      added, and excise taxes. The Task Force affirmed its conclusion that entities
      should present these taxes in the income statement on either a gross or a net
      basis, based on their accounting policy, which should be disclosed pursuant
      to
      Accounting Principles Board Opinion (“APB”) No. 22, *Disclosure
      of Accounting*


46
 *Table
          of Contents*


*Policies* .
      If such
      taxes are significant, and are presented on a gross basis, the amounts of those
      taxes should be disclosed. The consensus on EITF 06-3 will be effective for
      interim and annual reporting periods beginning after December 15, 2006. The
      Company currently records transaction-based taxes on a net basis, in its
      condensed consolidated statements of operations. The Company is currently
      evaluating the impact of the adoption of EITF 06-3 however should the Company
      conclude that such amounts are more appropriately presented on a gross basis,
      it
      could have a material impact on total net revenues and cost of sales, although
      income or loss from operations and net income or loss would not be
      affected.





In
      September 2006, the SEC released Staff Accounting Bulletin No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* (“SAB 108”). SAB 108 provides guidance on the process of quantifying
      materiality of financial statement misstatements. Under SAB 108 registrants
      are
      required to consider both a “rollover” method which focuses primarily on the
      income statement impact of misstatements and the “iron curtain” method which
      focuses primarily on the balance sheet impact of misstatements. The transition
      provisions of SAB 108 permit a registrant to adjust retained earnings for the
      cumulative effect of immaterial errors relating to prior periods. The Company’s
      adoption of SAB 108 did not have a material impact in the current fiscal
      year.





In
      September 2006, the FASB issued Statement No. 157, *Fair
      Value Measurements* (“SFAS 157”). SFAS 157 defines fair value, establishes a framework and
      guidance regarding the methods for measuring fair value, and expands related
      disclosures about those measurements. SFAS 157 is effective for financial
      statements issued for fiscal years beginning after November 15, 2007, and
      interim periods within those fiscal years. The Company is currently assessing
      the impact that SFAS 157 will have on its consolidated results of operations
      and
      financial position.





In
      February, 2007, the FASB issued Statement No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* (“SFAS
      159”). SFAS 159 permits entities to choose to measure many financial assets and
      financial liabilities at fair value. Unrealized gains and losses on items for
      which the fair value option has been elected are reported in earnings. SFAS
      159
      is effective for fiscal years beginning after November 15, 2007. The
      Company is currently assessing the impact of SFAS 159 on its consolidated
      financial position and results of operations.





**Note
      3. Business Combinations**





***GoRemote***





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





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





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





47
 *Table
          of Contents*


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





Cash
                acquired
            
            $
            6,706Accounts
                receivable
            
            
            7,138Other
                tangible assets acquired
            
            
            2,550Deferred
                tax assets, net
            
            
            11,011Amortizable
                intangible assets:Customer
                relationships
            
            
            7,600Supplier
                contracts
            
            
            950Internally
                developed software
            
            
            350Goodwill
            
            
            60,578Deferred
                revenues
            
            
            (1,025
            )Restructuring
                liabilities
            
            
            (1,249
            )Other
                liabilities assumed
            
            
            (9,880
            )Total
                purchase price
            
            $
            84,729





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





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





Amortization
      of other intangibles has been provided over the following estimated useful
      lives: customer relationships (Mobile Office) — 4 years, supplier contracts — 4
      years; customer relationships (Fixed Broadband) — 7 years; internally developed
      software — 7 years. The following represents the estimated annual amortization
      of acquired intangibles (in thousands):





**Fiscal
                Year**2007
            
            $
            1,8342008
            
            
            1,8342009
            
            
            1,8342010
            
            
            6852011
            
            
            5212012
            
            
            5212013
            
            
            66$
            7,295





48
 *Table
          of Contents*


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





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





***Mobile
      Automation***





In
      October 2004, the Company completed its acquisition of Mobile Automation, Inc.,
      a privately-held Westlake Village, California company that has developed
      solutions that help enterprise IT departments protect and manage their remote
      and mobile devices such as computers and personal data assistants (PDAs). The
      Company acquired 100% of the interest in Mobile Automation in a cash transaction
      for approximately $20.0 million. The Company plans to enhance its product
      offering to its customers who use remote and mobile devices. The total purchase
      price includes $187,000 in direct transactions costs, including legal and
      valuation fees.





The
      results of operations of Mobile Automation are included in the Company’s
      Consolidated Statement of Operations beginning October 29, 2004, the date of
      the
      transaction closing. The following table summarizes the allocation of the
      purchase price based on the estimated fair values of the tangible assets
      acquired and the liabilities assumed at the date of acquisition (in
      thousands):





Cash
                acquired
            
            $
            37Accounts
                receivable
            
            
            893Other
                tangible assets acquired
            
            
            52Amortizable
                intangible assets:Existing
                technology
            
            
            5,000Patent/core
                technology
            
            
            1,700Maintenance
                agreements and certain relationships
            
            
            400Customer
                relationships
            
            
            500Goodwill
            
            
            14,228Total
                assets acquired
            
            
            22,810Deferred
                tax liability, net
            
            
            (1,297
            )Liabilities
                assumed
            
            
            (1,326
            )Transaction
                costs
            
            
            (187
            )Net
                assets acquired
            
            $
            20,000





Identifiable
      intangible assets, including existing technology, patents/core technology and
      customer relationships are being amortized over their useful lives of four
      years. Maintenance agreements and certain relationships are being amortized
      over
      their useful lives of six years.





Developed
      technology was identified and valued through interviews, analysis of data
      provided by Mobile Automation concerning development projects, their stage
      of
      development, the time and resources needed to complete them, if applicable,
      and
      their expected income generating ability and associated risks. All development
      projects had reached technological feasibility and were classified as developed
      technology with the value assigned to existing technology capitalized. The
      income approach, which includes an analysis of the cash flows and risks
      associated with achieving such cash flows, was the primary technique utilized
      in
      valuing acquired intangible assets. Key assumptions included a discount rate
      of
      21.2% and estimates of revenue growth, operating expenses and
      taxes.





In
      completing the pre-acquisition tax return of Mobile Automation, Inc. during
      2005, additional tax basis in assets was identified and additional tax net
      operating loss carryforward was also identified. The net increase to deferred
      tax assets resulting from these


49
 *Table
          of Contents*


items,
      after adjustment to valuation allowance, was credited against goodwill initially
      recorded as a result of the acquisition in the amount of $359,000. In 2006,
      Mobile Automation goodwill was further adjusted as a result of changes in
      estimates of future utilization of deferred tax assets related to net operating
      losses for which a valuation allowance was recorded upon acquisition in the
      amount of $144,000.




***Safe3w***





In
      September 2004, the Company completed its acquisition of Safe3w, Inc., a
      privately-held Woodbury, New York company that has developed patented dynamic
      device “fingerprinting” technology. The Company acquired 100% of the interest in
      Safe3w in a cash transaction for approximately $8.5 million. The Company plans
      to incorporate Safe3w’s technology into its existing products. The total
      purchase price includes $300,000 in direct transactions costs, including legal
      and valuation fees.





The
      results of operations of Safe3w are included in the Company’s Consolidated
      Statement of Operations beginning September 16, 2004, the date of the
      transaction closing. The following table summarizes the allocation of the
      purchase price based on the estimated fair values of the tangible assets
      acquired and the liabilities assumed at the date of acquisition (in
      thousands):





Cash
                acquired
            
            $
            7Other
                tangible assets acquired
            
            
            96Amortizable
                intangible assets:Existing
                technology
            
            
            2,900Patent/core
                technology
            
            
            1,100Goodwill
            
            
            5,785Total
                assets acquired
            
            
            9,888Deferred
                tax liability, net
            
            
            (953
            )Liabilities
                assumed
            
            
            (135
            )Transaction
                costs
            
            
            (300
            )Net
                assets acquired
            
            $
            8,500





Identifiable
      intangible assets, including existing technology and patents/core technology
      are
      being amortized over their useful lives of eight years.





Developed
      technology was identified and valued through interviews, analysis of data
      provided by Safe3w concerning development projects, their stage of development,
      the time and resources needed to complete them, if applicable, and their
      expected income generating ability and associated risks. All development
      projects had reached technological feasibility and were classified as developed
      technology with the value assigned to existing technology capitalized. The
      income approach, which includes an analysis of the cash flows and risks
      associated with achieving such cash flows, was the primary technique utilized
      in
      valuing acquired intangible assets. Key assumptions included a discount rate
      of
      21.0% and estimates of revenue growth, operating expenses and
      taxes.





Uncertainties
      about tax bases or about pre-acquisition tax returns are, when resolved
      subsequent to the business combination, applied to reduce or increase goodwill
      in accordance with FAS 109, paragraph 30. In completing the pre-acquisition
      tax
      return of Safe3W, Inc. during 2005, additional tax basis in assets was
      identified and additional tax net operating loss carryforward was also
      identified. The net increase to deferred tax assets resulting from these items,
      after adjustment to valuation allowance, was credited against goodwill initially
      recorded as a result of the acquisition in the amount of $491,000. Safe3W
      goodwill was further adjusted as a result changes in the estimated future
      utilization of deferred tax assets related to net operating losses for which
      a
      valuation allowance was recorded upon acquisition in the amount of
      $369,000.





**Note
      4. Short-Term Investments**





The
      following tables summarize the Company’s short-term investments as of December
      31, 2006 and 2005 (in thousands):





**Short-Term
                Investments****December
                31, 2006**
            
            **Cost**
            
            **Unrealized****Gains**
            
            **Unrealized****Losses**
            
            **Fair****Value**Government
                agencies
            
            $
            58,818
            
            $
            19
            
            $
            (181
            )
            $
            58,656Auction
                rate and money market securities
            
            
            25,051
            
            
            1
            
            
            —
            
            
            25,052$
            83,869
            
            $
            20
            
            $
            (181
            )
            $
            83,708





**Short-Term
                Investments****December
                31, 2005**
            
            **Cost**
            
            **Unrealized****Gains**
            
            **Unrealized****Losses**
            
            **Fair****Value**Government
                agencies
            
            $
            119,012
            
            $
            —
            
            $
            (473
            )
            $
            118,539Corporate
                notes
            
            
            15,991
            
            
            —
            
            
            (57
            )
            
            15,934Auction
                rate and money market securities
            
            
            10,972
            
            
            28
            
            
            —
            
            
            11,000$
            145,975
            
            $
            28
            
            $
            (530
            )
            $
            145,473





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





**Expected
                Maturity Date for Par Value Amounts**
              **for
                the Year Ended****December 31,**
            
            **As
                of****Dec. 31, 2006****2007**
            
            **2008**
            
            **2009**
            
            **Total
                Cost****Value**
            
            **Total
                Fair Value**Government
                agencies
            
            $
            32,205
            
            $
            23,990
            
            $
            1,770
            
            $
            58,818
            
            $
            58,656Auction
                rate and money market securities
            
            
            25,100
            
            
            —
            
            
            —
            
            
            25,051
            
            
            25,052Total
            
            $
            57,305
            
            $
            23,990
            
            $
            1,770
            
            $
            83,869
            
            $
            83,708





The
      Company recognized gross realized losses of $10,000 and $6,000 gross realized
      gains for the year ended December 31, 2006. We recognized gross realized gains
      of $17,000 and gross realized losses of $115,000 for the year ended December
      31,
      2005. There were no recognized gains or losses on short-term investments for
      the
      year ended December 31, 2004. The Company recognized $3.7 million, $3.9 million
      and $2.3 million in interest income for the years ended December 31, 2006,
      2005
      and 2004, respectively.





The
      Company had unrealized losses related to its auction rate and government
      securities at December 31, 2006. These securities are subject to interest rate
      risk, which resulted in the unrealized losses. In accordance with FASB Staff
      Position (“FSP”) FAS115-1, *The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments* ,
      the
      following table summarizes the fair value and gross unrealized losses related
      to
      available-for-sale securities, aggregated by investment category and length
      of
      time that individual securities have been in a continuous unrealized loss
      position, as of December 31, 2006 (in thousands):


**Less
                  than 12 Months**
              
              **12
                  Months or More**
              
              **Total****Fair
                  Value**
              
              ******Gross
                  Unrealized Losses**
              
              **Fair
                  Value**
              
              ******Gross
                  Unrealized Losses**
              
              **Fair
                  Value**
              
              **Gross
                  Unrealized Losses**Government
                  agencies
              
              $
              4,511
              
              $
              (7
              )
              $
              54,145
              
              $
              (174
              )
              $
              58,656
              
              $
              (181
              )Auction
                  rate and money market securities
              
              
              25,052
              
              
              -
              
              
              -
              
              
              -
              
              
              25,052
              
              
              -Total
              
              $
              29,563
              
              $
              (7
              )
              $
              54,145
              
              $
              (174
              )
              $
              83,708
              
              $
              (181
              )


Market
      values were determined for each individual security in the investment portfolio.
      There were 278 securities in total which had market values less than amortized
      cost. These securities were comprised primarily of state or municipal
      bonds.





In
      determining whether the decline in the value of these securities was temporary
      the Company considered the following factors:





-
            The
                length of time and extent to which the market value has been less
                than
                cost


-
            The
                financial condition and near-term prospects of the
                issuer


-
            The
                Company’s intent and ability to retain its investment in the issuer for a
                period of time sufficient to allow for any anticipated recovery in
                market
                value





The
      Company’s analysis led to the following conclusions:





-
            The
                magnitude of the unrealized losses is such that they could be reversed
                with a modest change in interest
                rates


-
            The
                probability that any of the issuers of these securities would be
                unable to
                meet its obligations to meet principal or interest payments is
                negligible


-
            Based
                on both the length of time and extent to which the market value has
                been
                less than cost and the financial condition and near-term prospects
                of the
                issuer, the Company concluded that none of the unrealized losses
                at
                December 31, 2006 constituted other-than-temporary
                impairment.


50
 *Table
          of Contents*


**Note
      5. Allowance for Doubtful Accounts**





Changes
      in the Company’s allowance for doubtful accounts, including acquired amounts,
      for the years ended December 31, 2006, 2005 and 2004 are as follows (in
      thousands):





**Beginning****Balance**
            
            **Provisions**
            
            **Charge
                Offs**
            
            **Ending****Balance**Year
                ended December 31, 2004
            
            $
            2,348
            
            $
            1,100
            
            $
            (1,377
            )
            $
            2,071Year
                ended December 31, 2005
            
            $
            2,071
            
            $
            163
            
            $
            (194
            )
            $
            2,040Year
                ended December 31, 2006
            
            $
            2,040
            
            $
            1,860
            
            $
            (618
            )
            $
            3,282





**Note
      6. Property and Equipment**





Property
      and equipment consisted of (in thousands):





**December
                31,****2006**
            
            **December
                31,****2005**Equipment
            
            $
            30,283
            
            $
            19,839Furniture
                and fixtures
            
            
            3,794
            
            
            3,498Computer
                software and equipment
            
            
            10,705
            
            
            4,919Leasehold
                improvements
            
            
            2,502
            
            
            2,00247,284
            
            
            30,258Less:
                Accumulated depreciation and amortization
            
            
            (36,765
            )
            
            (21,048
            )Property
                and equipment, net
            
            $
            10,519
            
            $
            9,210





Depreciation
      expense was $5.3 million, $4.9 million and $4.4 million for the years ended
      December 31, 2006, 2005 and 2004, respectively.





**Note
      7. Goodwill and Acquired Intangibles**





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





**December
                31,****2005**
            
            **Adjustment**
            
            **Acquisition**
            
            **Amortization**
            
            **December
                31,****2006**Goodwill
            
            $
            18,692
            
            $
            (513
            )
            $
            60,578
            
            $
            —
            
            $
            78,757Intangibles:Existing
                technology
            
            
            5,973
            
            
            —
            
            
            —
            
            
            (1,612
            )
            
            4,361Patent/Core
                technology
            
            
            2,127
            
            
            —
            
            
            —
            
            
            (563
            )
            
            1,564Maintenance
                agreements and certain relationships
            
            
            322
            
            
            —
            
            
            —
            
            
            (66
            )
            
            256Customer
                relationships
            
            
            354
            
            
            —
            
            
            7,600
            
            
            (1,478
            )
            
            6,476Supplier
                contracts
            
            
            —
            
            
            —
            
            
            950
            
            
            (208
            )
            
            742Internally
                developed software
            
            
            —
            
            
            —
            
            
            350
            
            
            (44
            )
            
            306$
            27,468
            
            $
            (513
            )
            $
            69,478
            
            $
            (3,971
            )
            $
            92,462





The
      beginning balance of goodwill related the the Safe3w and Mobile Automation
      acquisitions was adjusted for changes in estimates of future utilization of
      deferred tax assets related to net operating losses for which a valuation
      allowance was recorded upon acquisition in the amount of $369,000 and $144,000,
      respectively.


51
 *Table
          of Contents*


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


**Twelve
                  Months Ended December 31,****2006**
              
              **2005**
              
              **2004**Intangibles:Existing
                  technology
              
              $
              (1,612
              )
              $
              (1,613
              )
              $
              (314
              )Patent/Core
                  technology
              
              
              (563
              )
              
              (563
              )
              
              (111
              )Maintenance
                  agreements and certain relationships
              
              
              (66
              )
              
              (67
              )
              
              (11
              )Customer
                  relationships
              
              
              (1,478
              )
              
              (125
              )
              
              (21
              )Supplier
                  contracts
              
              
              (208
              )
              
              —
              
              
              —Internally
                  developed software
              
              
              (44
              )
              
              —
              
              
              —$
              (3,971
              )
              $
              (2,367
              )
              $
              (457
              )




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





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





**December
                31, 2005****Amortization****Life**
            
            **Gross****Carrying****Amount**
            
            **Accumulated****Amortization**
            
            **Net
                Carrying****Amount**Intangibles:Existing
                technology
            
            
            4-8
                yrs
            
            $
            7,900
            
            $
            (1,927
            )
            $
            5,973Patent/Core
                technology
            
            
            4-8
                yrs
            
            
            2,800
            
            
            (673
            )
            
            2,127Maintenance
                agreements and certain relationships
            
            
            6
                yrs
            
            
            400
            
            
            (78
            )
            
            322Customer
                relationships
            
            
            4
                yrs
            
            
            500
            
            
            (146
            )
            
            354$
            11,600
            
            $
            (2,824
            )
            $
            8,776





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





**Fiscal
                Year**2007
            
            $
            4,2012008
            
            
            3,9012009
            
            
            2,4012010
            
            
            1,2412011
            
            
            1,021Thereafter
            
            
            940$
            13,705





Prior
      to
      the acquisition of Safe3w and Mobile Automation in 2004, the Company had no
      acquired intangibles balances or expenses relating to the amortization of
      acquired intangibles.


52
 *Table
          of Contents*


**Note
      8. Accrued Liabilities**





Accrued
      liabilities consisted of (in thousands):





**December
                31,****2006**
            
            **December
                31,****2005**Accrued
                commissions
            
            $
            3,899
            
            $
            3,067Accrued
                liabilities
            
            
            5,809
            
            
            4,399Deferred
                rent
            
            
            1,013
            
            
            1,618Paid
                time off payable
            
            
            1,960
            
            
            1,715Income
                taxes payable
            
            
            1,504
            
            
            1,724Accrued
                restructuring liabilities
            
            
            2,297
            
            
            --$
            16,482
            
            $
            12,523





**Note
      9. Accrued Restructuring**




In
          March
          2006, the Company recorded a restructuring charge totaling approximately
          $1.7
          million related to the workforce reduction of 58 iPass employees, across
          all
          functions. In November 2006, the Company recorded an additional restructuring
          charge of $3.0 million related to excess iPass facilities. The restructurings
          were recorded pursuant to FASB No. 146, *Accounting
          for Costs Associated with Exit or Disposal Activities.*
  The
          following is a summary of restructuring activities for the year ended December
          31, 2006 (in thousands):
 **Excess****Facility****Costs**
              
              **Severance****Costs**
              
              **Total
                  Restructuring****Accrual**Balance
                  as of December 31, 2005
              
              $
              —
              
              $
              —
              
              $
              —Restructuring
                  charges
              
              
              3,028
              
              
              1,705
              
              
              4,733Reclassification
                  of deferred rent
              
              
              461
              
              
              —
              
              
              461Payments
              
              
              (444
              )
              
              (1,302
              )
              
              (1,746
              )Balance
                  as of December 31, 2006
              
              $
              3,045
              
              $
              403
              
              $
              3,448
 
 In
          February 2006, in connection with the acquisition of GoRemote, the Company
          recorded an accrual of $1.2 million for the lease costs associated with
          the
          acquired GoRemote corporate facilities that were expected to be abandoned.
          The
          accrual was recognized as part of the purchase price allocation pursuant
          to
          Emerging Issues Task Force Issue No. 95-3, *Recognition
          of Liabilities in Connection with a Purchase Business
          Combination* .
          The
          Company completed the relocation of employees and vacated facilities by
          April
          2006. The accrued costs are expected to be fully utilized by the second
          quarter
          of 2008. The following is a summary of the acquisition-related restructuring
          activities for the year ended December 31, 2006 (in thousands):
 **Excess****Facility****Costs**Balance
                  as of December 31, 2005
              
              $
              —Accrued
                  acquisition-related restructuring costs
              
              
              1,249Payments
              
              
              (432
              )Balance
                  as of December 31, 2006
              
              $
              817
 
  53
 *Table
            of Contents*
  As
          of
          December 31, 2006, the Company has classified $2.3 million of the restructuring
          liability in accrued liabilities and remaining $2.0 million in long-term
          liabilities based on the Company’s expectation that the remaining lease payments
          will be paid over the remaining term of the related leases (net of expected
          sublease income).


**Note
      10. Income Taxes**





Income
      (loss) before income taxes includes net income (loss) from foreign operations
      of
      approximately $750,000, $120,000 and $968,000 for the years ended December
      31,
      2006, 2005 and 2004, respectively.





The
      provision for (benefit from) income taxes consisted of the following for the
      years ended December 31, 2006, 2005 and 2004 (in thousands):





**2006**
            
            **2005**
            
            **2004**CurrentU.S.
                federal
            
            $
            (600
            )
            $
            1,972
            
            $
            584State
            
            
            (364
            )
            
            828
            
            
            583Foreign
            
            
            507
            
            
            402
            
            
            187(457
            )
            
            3,202
            
            
            1,354DeferredU.S.
                federal
            
            
            (5,966
            )
            
            5,182
            
            
            9,371State
            
            
            (772
            )
            
            518
            
            
            1,471(6,738
            )
            
            5,700
            
            
            10,842Total
                provision for (benefit from) income taxes
            
            $
            (7,195
            )
            $
            8,902
            
            $
            12,196





54
 *Table
          of Contents*


Deferred
      income taxes reflect the net tax effects of temporary differences between
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes and net loss carryforwards.  As of
      December 31, 2006, the Company believes it is more likely than not that the
      Company will be able to realize its net deferred tax assets.  A partial
      valuation allowance was placed on the deferred tax assets relating to the net
      operating loss carryforwards obtained as a result of the acquisition of Safe3w
      and Mobile Automation in 2004, a portion of which was subsequently released
      in
      2005. The components of deferred tax assets (liabilities) consisted of the
      following as of December 31, 2006 and 2005 (in thousands):





**2006**
            
            **2005**Deferred
                tax assets:Net
                operating loss carryforwards
            
            $
            41,641
            
            $
            5,777Reserves
                and accruals
            
            
            8,401
            
            
            4,304Research
                and development credits
            
            
            4,907
            
            
            1,667Fixed
                assets
            
            
            1,679
            
            
            77Total
                deferred tax assets
            
            
            56,628
            
            
            11,825Valuation
                allowance
            
            
            (28,289
            )
            
            (3,582
            )Net
                deferred tax assets
            
            $
            28,339
            
            $
            8,243Deferred
                tax liabilities:Acquired
                intangibles
            
            $
            (5,316
            )
            $
            (3,689
            )Total
                net deferred tax assets
            
            $
            23,023
            
            $
            4,555




During
        2006, the Company increased the valuation allowance by approximately $24.7
        million related to net operating losses attributable to acquired entities. 
As of December 31, 2006, approximately $28.3 million of the valuation allowance
        for deferred tax assets relates to net operating loss carryforwards attributable
        to acquired entities, the benefit from which will be allocated to goodwill
        rather than current earnings when and if subsequently realized. These net
        operating loss carryforwards are subject to an annual limitation under Internal
        Revenue Code Section 382, but are expected to be fully realized.
  For
        the
        years ended December 31, 2006, 2005 and 2004, 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:





**2006**
            
            **2005**
            
            **2004**Federal
                statutory rate
            
            
            (35
            )%
            
            35
            %
            
            34
            %State
                taxes, net of federal benefit
            
            
            (4
            )
            
            5
            
            
            6Foreign
                taxes
            
            
            2
            
            
            2
            
            
            —Amortization
                of stock-based compensation
            
            
            2
            
            
            1
            
            
            (1
            )Research
                and development benefit
            
            
            (7
            )
            
            (4
            )
            
            (2
            )Tax
                exempt interest
            
            
            (6
            )
            
            —
            
            
            —Other
            
            
            2
            
            
            2
            
            
            2Provision
                for (benefit from) income taxes
            
            
            (46)
            %
            
            41
            %
            
            39
            %





As
      of
      December 31, 2006, the Company had gross cumulative net operating loss
      carryforwards for federal and state tax reporting purposes of approximately
      $102.2 million and $63.4 million, respectively, which expire in various periods
      through 2026. Under current tax law, net operating loss carryforwards available
      in any given year may be limited upon the occurrence of certain events,
      including significant changes in ownership interest such as an IPO. In addition,
      the Company has federal net operating losses of $5.2 million and state net
      operating losses of $5.4 million related to the deduction of stock options
      vested prior to the adoption of FAS 123(R).





The
      Company also has research and development tax credit carryforwards of
      approximately $4.4 million and $3.8 million for federal and state income tax
      purposes, respectively. If not utilized, the federal carryforwards will expire
      in various amounts through 2026. The state tax credits can be carried forward
      indefinitely.




U.S.
        income taxes were not provided for on a cumulative total of $4.4 million
        of
        undistributed earnings for certain foreign subsidiaries. The Company intends
        to
        reinvest these earnings indefinitely in its foreign subsidiaries. If these
        earnings were distributed to the U.S. in the form of dividends or otherwise,
        or
        if the shares of the relevant foreign subsidiaries were sold or otherwise
        transferred, the Company would be subject to additional U.S. income taxes
        (subject to an adjustment for foreign tax credits). It is not practicable
        to
        estimate the amount of additional income tax that might be payable upon
        distribution of the earnings.


**Note
      11. Common Stock**





***Stock
      Option Plans***





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


55
 *Table
          of Contents*


The
      exercise price per share for nonstatutory stock options cannot be less than
      85%
      of the fair market value, as determined by the board of directors, on the date
      of grant. The exercise price per share for incentive stock options cannot be
      less than the fair market value, as determined by the board of directors on
      the
      date of grant. Options generally vest 25% on the first anniversary of the grant
      date with the remainder vesting ratably over the following 36 months; options
      generally expire 10 years after the date of grant. 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. As of December 31, 2006, 23,088,834 shares were authorized for
      grant
      under all plans, including those assumed in the acquisition of GoRemote and
      there were no shares of common stock subject to repurchase.





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





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





***Stock-Based
      Compensation***





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




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




56
 *Table
          of Contents*


Stock
      option activity under the Plans for the three years ended December 31, 2006
      is
      summarized below:




**Shares****Available
                  for****Grant**
              
              **Options****Outstanding**
              
              **Weighted
                  Average****Exercise
                  Price**Balance
                  as of December 31, 2003
              
              
              8,467,166
              
              
              7,887,573
              
              $
              3.46Authorized
              
              
              3,024,171
              
              
              —
              
              
              —Granted
              
              
              (4,497,933
              )
              
              4,497,933
              
              
              6.10Exercised
              
              
              —
              
              
              (1,885,253
              )
              
              2.75Cancelled
              
              
              385,267
              
              
              (385,267
              )
              
              3.11Balance
                  as of December 31, 2004
              
              
              7,378,671
              
              
              10,114,986
              
              $
              4.78Authorized
              
              
              3,637,835
              
              
              —
              
              
              —Granted
              
              
              (1,045,300
              )
              
              1,045,300
              
              
              5.88Exercised
              
              
              —
              
              
              (1,041,176
              )
              
              1.88Cancelled
              
              
              771,085
              
              
              (771,085
              )
              
              6.09Balance
                  as of December 31, 2005
              
              
              10,742,291
              
              
              9,348,025
              
              $
              5.12Authorized
              
              
              3,248,060
              
              
              —
              
              
              —Options
                  granted
              
              
              (2,071,823
              )
              
              2,071,823
              
              
              6.85Awards
                  granted
              
              
              (446,303
              )
              
              —
              
              
              —Assumed
                  in acquisition of GoRemote
              
              
              —
              
              
              1,710,353
              
              
              18.58Exercised
              
              
              —
              
              
              (1,831,995
              )
              
              3.03Cancelled
              
              
              1,897,781
              
              
              (1,897,781
              )
              
              7.09Balance
                  at December 31, 2006
              
              
              13,370,006
              
              
              9,400,425
              
              $
              7.96Exercisable
                  as of December 31, 2004
              
              
              
              
              
              4,055,123
              
              $
              3.83Exercisable
                  as of December 31, 2005
              
              
              
              
              
              4,945,870
              
              $
              4.39Exercisable
                  as of December 31, 2006
              
              
              
              
              
              5,703,614
              
              $
              8.85




**Shares**
            
            **Weighted****Average****Exercise****Price
                per Share**
            
            **Weighted****Average****Remaining****Contractual****Term
                (Years)**
            
            **Aggregate****Intrinsic****Value****(In
                thousands, except share and per share amounts)**Options
                outstanding at December 31, 2006
            
            
            9,400,425
            
            $
            7.96
            
            $
            7.11
            
            $
            9,161Options
                vested and expected to vest at December, 31, 2006
            
            
            8,972,276
            
            $
            8.03
            
            $
            7.03
            
            $
            9,103Options
                exercisable at December 31, 2006
            
            
            5,703,614
            
            $
            8.85
            
            $
            6.22
            
            $
            8,349





The
      weighted average grant date fair value of options granted during the year ended
      December 31, 2006 was $3.70. The following is a summary of the weighted average
      exercise price on the date of grant for all options granted during the year
      ended December 31, 2006:





**Shares**
            
            **Weighted****Average****Exercise****Price
                per Share**Exercise
                price less than fair value
            
            
            6,786
            
            $
            7.03Exercise
                price equal to fair value
            
            
            2,065,037
            
            $
            6.85Exercise
                price more than fair value
            
            
            —
            
            
            —




The
      total
      intrinsic value of options exercised during the year ended December 31, 2006
      was
      $6.1 million. At December 31, 2006, the Company had $7.4 million of total
      unrecognized compensation expense, net of estimated forfeitures, related to
      stock options, ESPP and options assumed in business combinations that will
      be
      recognized over the weighted average period of 1.11 years. Cash received from
      stock option exercises was $5.6 million during the twelve months ended December
      31, 2006. The Company issues new shares of common stock upon exercise of stock
      options.


57
 *Table
          of Contents*


The
      following table summarizes the options outstanding as of December 31,
      2006:





**Options
                Outstanding**
            
            **Options
                Exercisable****Range
                of****Exercise
                Prices**
            
            **Number****Outstanding**
            
            **Weighted-****Average**
              **Remaining****Contractual****Life
                (in Years)**
            
            **Weighted-****Average**
              **Exercise****Price
                per****Share**
            
            **Number****Exercisable**
            
            **Weighted-****Average**
              **Exercise****Price
                per****Share**$
                0.10 — 2.00
            
            
            1,051,462
            
            
            5.37
            
            $
            0.97
            
            
            1,047,995
            
            $
            0.972.01
                — 4.75
            
            
            1,136,599
            
            
            4.81
            
            
            3.79
            
            
            1,100,154
            
            
            3.804.86
                — 5.30
            
            
            809,330
            
            
            7.60
            
            
            5.07
            
            
            406,677
            
            
            5.055.33
                — 5.35
            
            
            1,487,321
            
            
            7.57
            
            
            5.35
            
            
            862,709
            
            
            5.355.38
                — 5.87
            
            
            1,064,995
            
            
            8.30
            
            
            5.71
            
            
            624,921
            
            
            5.695.91
                — 6.36
            
            
            961,247
            
            
            8.64
            
            
            6.24
            
            
            186,329
            
            
            6.206.44
                — 7.38
            
            
            1,097,323
            
            
            8.76
            
            
            6.71
            
            
            234,764
            
            
            6.637.40
                — 10.60
            
            
            1,015,301
            
            
            6.73
            
            
            8.69
            
            
            558,591
            
            
            8.5810.93
                — 160.00
            
            
            768,797
            
            
            6.04
            
            
            35.39
            
            
            673,464
            
            
            37.95250.00
                — 250.00
            
            
            8,050
            
            
            3.07
            
            
            250.00
            
            
            8,050
            
            
            250.00Total
            
            
            9,400,425
            
            
            7.11
            
            
            7.96
            
            
            5,703,614
            
            
            8.85





***Employee
      Stock Awards***




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





A
      summary
      of the changes in stock awards outstanding under the Company’s equity-based
      compensation plan during the twelve months ended December 31, 2006 is presented
      below:





**Shares**
            
            **Weighted
                Average Grant Date Fair Value**Nonvested
                at December 31, 2005
            
            
            —
            
            
            —Granted
            
            
            446,303
            
            $
            6.32Vested
            
            
            —
            
            
            —Forfeited
            
            
            (33,950
            )
            $
            6.39Nonvested
                at December 31, 2006
            
            
            412,353
            
            $
            6.31





The
      fair
      value of the Company’s stock awards was calculated based upon the fair market
      value of the Company’s stock at the date of grant. As of December 31, 2006,
      there was $1.2 million of total unrecognized compensation cost related to the
      unvested restricted stock awards granted, which is expected to be recognized
      over the remaining weighted average vesting period of 1.55 years.





***Employee
      Stock Purchase Plan***





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





**For
                the year ended**
              **December
                31, 2006,**Risk-free
                rate
            
            
            4.95
            %Expected
                dividend yield
            
            
            0
            %Expected
                volatility
            
            
            55
            %Expected
                life
            
            
            0.5
                to 1 year





The
      weighted-average fair value of the purchase rights granted under the ESPP during
      the year ended December 31, 2006 was $1.82. During the twelve months ended
      December 31, 2006 and 2005, 408,510 and 404,871 shares, respectively, were
      issued pursuant to the plan.


58
 *Table
          of Contents*





**Note
      12. Stock Repurchase Program**





In
      May
      2006, the Company’s Board of Directors approved a two-year stock repurchase
      program which authorizes the Company to repurchase up to $30.0 million of
      outstanding common stock from time to time on the open market or through
      privately negotiated transactions. The timing and amount of any repurchases
      will
      depend upon market conditions and other corporate considerations.





Through
      December 31, 2006, the Company repurchased and retired approximately 2.2 million
      shares of common stock for an aggregate purchase price of $12.0 million. In
      November and December 2006, the Company made additional repurchases of
      approximately 750,000 shares for an aggregate purchase price of $4.2 million
      with the intent to retire the shares by the end of the first quarter of fiscal
      2007.





**Note
      13. Commitments and Contingencies**





We
      lease
      our facilities under non-cancelable operating leases that expire at various
      dates through March 2016. Future minimum lease payments under these operating
      leases, including payments on leases accounted for under our restructuring
      plan,
      as of December 31, 2006 are as follows (in thousands):





Year
                ending December 31:2007
            
            $
            7,4442008
            
            
            6,1132009
            
            
            5,7182010
            
            
            2,7552011
                and thereafter
            
            
            3,456$
            25,486





Rent
      expense under operating leases for the years ended December 31, 2006, 2005,
      and
      2004 was $6.8 million, $6.0 million and $5.7 million, respectively.





As
      of
      December 31, 2006, the Company had minimum purchase commitments with network
      service providers and vendor operating leases that expire at various dates
      through 2009. Future minimum purchase commitments and operating lease
      payments under all agreements are as follows (in thousands):





Year
                ending December 31:2007
            
            $
            1,9012008
            
            
            1,0662009
            
            
            266$
            3,233





***Legal
      Actions***





Beginning
      on January 14, 2005, three purported class action complaints were filed against
      the Company and certain of its executive officers in the United States District
      Court for the Northern District of California. On March 2, 2005, these cases
      were consolidated as In re iPass Securities Litigation, Case No.
      3:05-cv-00228-MHP. On April 22, 2005, David Lutzke and Rhonda Lutzke were named
      lead plaintiffs. On July 5, 2005, plaintiffs filed a Consolidated Amended
      Complaint. Named as defendants together with the Company are officers Kenneth
      D.
      Denman, Donald C. McCauley, Anurag Lal, and Jon M. Russo. The Consolidated
      Amended Complaint (“CAC”) alleged that the defendants violated Sections 10(b)
      and 20(a) of the Securities Exchange Act of 1934 during an alleged “class
      period” from April 22, 2004 to June 30, 2004 by failing to inform investors of
      certain operational issues that allegedly led to declines in the Company’s
      revenue, earnings and growth prospects. Defendants moved to dismiss the CAC,
      and
      on February 28, 2006, the court granted the motion with leave to amend. On
      March
      30, 2006, plaintiffs filed a Second Consolidated Amended Complaint (“SCAC”),
      which set forth the same claims against the same defendants relating to the
      same
      alleged class period. Defendants filed a motion to dismiss the SCAC on May
      1,
      2006 and that motion was granted with prejudice on September 6,
      2006.  On September 7, 2006, final judgment was entered in
      favor of the defendants.  Plaintiffs failed to file a timely notice of
      appeal. No loss has been accrued as of December 31, 2006.




59
 *Table
          of Contents*


Beginning
      on March 25, 2005, two stockholders filed separate derivative actions in
      California Superior Court for the County of San Mateo, purporting to state
      claims on behalf of the Company against Kenneth D. Denman, Donald C. McCauley,
      Anurag Lal, Jon M. Russo, Peter G. Bodine, Arthur C. Patterson, John D. Beletic,
      A. Gary Ames, Cregg B. Baumbaugh and Allan R. Spies. The complaints purport
      to
      arise out of the same alleged nondisclosures set forth in the Consolidated
      Amended Complaint set forth in the shareholder class action, and purport to
      set
      forth claims for breach of fiduciary duty, abuse of process, gross
      mismanagement, waste, unjust enrichment, and violation of California
      Corporations Code 25402. On May 5, 2005, the actions were consolidated as In
      re
      iPass, Inc. Derivative Litigation, Case No. CIV445765. On April 6, 2006, the
      court granted the joint motion of all parties to have the case designated as
      "complex litigation."  By agreement of the parties, the time to file
      plaintiffs’ consolidated complaint was extended several times, and a
      Consolidated Derivative Complaint ("CDC") was filed on February 21, 2006. On
      March 28, 2006, defendants filed a demurrer to the CDC, in response to which
      plaintiffs stated that they intend to further amend the CDC. The further amended
      complaint was filed on May 19, 2006.  Defendants demurred to the
      amended CDC and on September 1, 2006 the court sustained that
      demurrer with leave to amend.  On October 6, 2006, plaintiffs
      filed a consolidated second amended complaint ("CSAC").  On October 24,
      2006 defendants filed a demurrer as to the CSAC. However, on November 27, 2006,
      plaintiffs voluntarily dismissed the action without prejudice. No loss has
      been accrued as of December 31, 2006.





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





**Note
      14. Employee 401(k) Plan**





Substantially
      all of the Company’s employees are eligible to participate in the Company’s
      401(k) plan, which provides for discretionary Company matching contributions.
      There were no matching contributions for the years ended December 31, 2005
      or
      2004. Beginning January 1, 2006, the Company provided a 50% match to employee
      contributions up to 6% of an employee’s total compensation. The Company’s
      matching contributions to the plan totaled $792,000 for the year ended December
      31, 2006. Beginning January 1, 2007, the Company will provide a 50% match to
      employee contributions up to 6% of an employee’s salary.





**Note
      15. Net Income (Loss) Per Common Share**





In
      accordance with SFAS 128, “Earnings Per Share,” basic net income (loss) per
      share is computed by dividing net income (loss) by the weighted daily average
      number of shares of common stock outstanding during the period. The weighted
      daily average number of shares of common stock excludes shares that have been
      exercised prior to vesting and are subject to repurchase by the company. As
      such, basic net income (loss) per share excludes 352,778 and 635,113 shares
      subject to repurchase for the years ended December 31, 2005 and 2004,
      respectively. There were no shares subject to repurchase for the year ended
      December 31, 2006. These shares have been included in diluted net income (loss)
      per share to the extent that the inclusion of such shares is not anti-dilutive.
      Diluted net income (loss) per share is based upon the weighted daily average
      number of shares of common stock outstanding for the period plus dilutive
      potential common shares, including stock options using the treasury-stock
      method.





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





**For
                the Year Ended December 31,****2006**
            
            **2005**
            
            **2004**Numerator:Net
                income (loss)
            
            $
            (8,089
            )
            $
            12,895
            
            $
            19,068Denominator:Denominator
                for basic net income per common shareWeighted
                average shares outstanding
            
            
            64,572,603
            
            
            63,353,779
            
            
            60,770,680Effect
                of dilutive securities:Stock
                options
            
            
            --
            
            
            2,923,563
            
            
            4,875,077Denominator
                for diluted net income (loss) per common share — adjusted
            
            
            64,572,603
            
            
            66,277,342
            
            
            65,645,757Basic
                net income (loss) per common share
            
            $
            (0.13
            )
            $
            0.20
            
            $
            0.31Diluted
                net income (loss) per common share
            
            $
            (0.13
            )
            $
            0.19
            
            $
            0.29





60
 *Table
          of Contents*


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





**For
                the Year Ended December 31,****2006**
            
            **2005**
            
            **2004**Options
                to purchase common stock
            
            
            9,400,425
            
            
            1,904,406
            
            
            804,250Unvested
                restricted stock awards
            
            
            323,303
            
            
            --
            
            
            --





The
      weighted-average exercise price of options to purchase common stock excluded
      from the computation was $7.70, $10.00 and $14.56 for the years ended December
      31, 2006, 2005 and 2004, respectively.





**Note
      16. Segment Information**





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





International
      revenue is determined by the location of the customer’s headquarters.
      International revenue accounted for approximately 40%, 45% and 41% of total
      revenues for the years ended December 31, 2006, 2005 and 2004, respectively.
      Revenues in the United Kingdom accounted for 11%, 14% and 11% of total revenues
      for the years ended December 31, 2006, 2005 and 2004, respectively.





Substantially
      all of the Company’s long-lived assets are located in the United States.
      Revenues in the United States were $109.9 million for the year ended December
      31, 2006.





61
 *Table
          of Contents*


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934,
      the registrant has duly caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.




/s/ Kenneth
              D. Denman
            
            
            /s/ Frank
              E.
              VerdecannaKenneth
              D.
              DenmanChairman, President and Chief Executive
              Officer*(Principal Executive Officer)*
            
            
            Frank
              E.
              VerdecannaVice President and Chief Financial Officer*(Principal
              Financial Officer)*


62
 *Table
          of Contents*





**POWER
      OF ATTORNEY**





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




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





**Signature**
            **Title**
            **Date**/s/
                Kenneth D. Denman
            Chairman,
                President, Chief Executive Officer and Director
            March
                28, 2007Kenneth
                D. Denman/s/
                Frank E. Verdecanna
            Vice
                President and Chief Financial Officer (Principal Financial
                Officer)
            March
                28, 2007Frank
                E. Verdecanna/s/
                A. Gary Ames
            Director
            March
                28, 2007A.
                Gary Ames/s/
                John D. Beletic
            Director
            March
                28, 2007John
                D. Beletic/s/
                Peter G. Bodine
            Director
            March
                28, 2007Peter
                G. Bodine/s/
                Peter C. Clapman
            Director
            March
                28, 2007Peter
                C. Clapman/s/
                Michael J. McConnell
            Director
            March
                28, 2007Michael
                J. McConnell/s/
                Arthur C. Patterson
            Director
            March
                28, 2007Arthur
                C. Patterson/s/
                Olof Pripp
            Director
            March
                28, 2007Olof
                Pripp/s/
                Allan R. Spies
            Director
            March
                28, 2007Allan
                R. Spies





63
 *Table
          of Contents*


**INDEX
      TO EXHIBITS**





**Exhibit**
              **Number**
            **Description
                of Document**2.1
            Agreement
                and Plan of Merger dated October 26, 2004 by and among iPass Inc.,
                Montage
                Acquisition Corp., Mobile Automation, Inc. and David Strohm, as
                Stockholders’ Agent.(1)2.2
            Agreement
                of Merger among iPass Inc., Keystone Acquisition Sub, Inc. and GoRemote
                Internet Communications, Inc. dated December 9,
                2005.(2)3.1
            Amended
                and Restated Certificate of Incorporation.(3)3.2
            Bylaws,
                as amended.(3)4.1
            Reference
                is made to Exhibits 3.1 and 3.24.2
            Specimen
                stock certificate.(3)10.1*
            2003
                Equity Incentive Plan and form of related agreements, as
                amended.(3)10.1.1*
            Form
                of Stock Option Grant Notice under the 2003 Equity Incentive Plan
                (containing additional vesting terms).(4)10.2*
            2003
                Non-Employee Directors Plan, as amended.(5)10.2.1*
            Forms
                of Restricted Stock Award Grant
                Notice and Restricted Stock Award Agreement under the 2003 Non-Employee
                Directors Plan10.2.2*
            Forms
                of Stock Option Grant Notice and
                Stock Option Agreement under the 2003 Non-Employee Directors
                Plan10.3*
            1999
                Stock Option Plan and form of related agreements.(3)10.4*
            1997
                 Stock Option Plan and form of related agreements.(3)10.5*
            Interim
                1999 Stock Option Plan.(3)10.6*
            Restricted
                Stock Purchase Agreement by and between the Registrant and Anurag
                Lal
                dated November 8, 1999.(3)10.7*
            2003
                Employee Stock Purchase Plan and form of related agreements, as
                amended.(3)10.8
            Lease
                Agreement, dated October 26, 1999, between Registrant and Westport
                Joint
                Venture (as amended).(3)10.9
            Amended
                and Restated Investor Rights Agreement, dated August 8, 2000, between
                Registrant, founders and holders of the Registrant’s Preferred
                Stock.(3)10.10
            Form
                of Indemnity Agreement.(3)10.11*
            Employment
                Agreement, dated November 13, 2001, between Registrant and Kenneth
                D.
                Denman.(3)10.12*
            Form
                of Offer Letter to Executive Officers.(3)10.13
            OEM
                Service Provider License Agreement, dated February 29, 2000, between
                RSA
                Security, Inc. and the Registrant, and amendments
                thereto.(4)10.14
            Support
                Agreement, dated February 29, 2000, by and between RSA Security,
                Inc.(4)10.15
            Loan
                and Security Agreement dated September 4, 2001 between Silicon Valley
                Bank
                and the Registrant, and modifications thereto.(3)10.16*
            2007
                Annual Executive Management Bonus Plan.(6)10.17*
            Outside
                Director Compensation Arrangement.(7)10.18*
            Executive
                Officer Cash Compensation Arrangement.(8)10.19*
            Offer
                Letter to Thomas Thimot dated December 9, 2005.(9)10.20*
            Transition
                Agreement with John Thuma dated January 20, 2006.(10)10.21*
            Letter
                Agreement pursuant to which Michael J. McConnell and Peter C. Clapman
                were
                elected to Registrant’s Board of Directors.(11)21.1
            Subsidiaries
                of the
                Registrant.23.1
            Consent
                of Independent Registered Public
                Accounting Firm.24.1
            Power
                of Attorney (reference is made to the signature page of this Form
                10-K).31.1
            Certification
                of the Chief Executive Officer
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.2
            Certification
                of the Chief Financial Officer
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32.1
            Certification
                of the Chief 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.


__________


(1)  Previously
      filed as the like-numbered exhibit to our Annual Report on Form 10-K filed
      with
      the Securities and Exchange Commission on March 15, 2005, and incorporated
      by
      reference herein.





(2)  Previously
      filed as exhibit 10.22 on our Current Report on Form 8-K filed with the
      Securities and Exchange Commission on December 12, 2005, and incorporated by
      reference herein.





(3)  Previously
      filed as the like-numbered exhibit to our Registration Statement on Form S-1,
      as
      amended, originally filed with the Securities and Exchange Commission on January
      24, 2003, as amended, and incorporated by reference herein.





(4)  Previously
      filed as the like-numbered exhibit to our Annual Report on form 10-K filed
      with
      the Securities and Exchange Commission on March 16, 2006, and incorporated
      by
      reference herein





(5)  Previously
      filed as exhibit 10.1 on our Current Report on Form 8-K filed with the
      Securities and Exchange Commission on August 16, 2006, and incorporated by
      reference herein.





(6)  Previously
      filed as Item 5.02 on our Current Report on Form 8-K filed with the Securities
      and Exchange Commission on February 13, 2007, and incorporated by reference
      herein.


64
 *Table
          of Contents*





(7)  Previously
      disclosed under the caption “Compensation of Directors” in our Definitive Proxy
      Statement on Schedule 14A filed with the Securities and Exchange Commission
      on
      April 26, 2004, and incorporated by reference herein.





(8)  Previously
      disclosed under the caption “Compensation of Executive Officers” in our
      Definitive Proxy Statement on Schedule 14A filed with the Securities and
      Exchange Commission on April 26, 2004, and incorporated by reference
      herein.





(9)  Previously
      filed as exhibit 10.23 on our Current Report on Form 8-K filed with the
      Securities and Exchange Commission on February 16, 2006, and incorporated by
      reference herein.





(10)  Previously
      filed as exhibit 10.24 on our Current Report on Form 8-K filed with the
      Securities and Exchange Commission on February 16, 2006, and incorporated by
      reference herein.





(11)  Previously
      filed as exhibit 9.9.1 on our Current Report on Form 8-K filed with the
      Securities and Exchange Commission on February 21, 2007.





*  Indicates
      a management contract or compensatory plan or arrangement.


65
 *Table
          of Contents*