UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549


_______________





Form
10-K





(Mark
One)





R
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE
              ACT
      OF 1934For
      the fiscal year ended December 31, 2008OR£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
              EXCHANGE
      ACT OF 1934For
      the transition period
      from                                                                                                to





Commission
File Number: 000-50327


_______________





iPass
Inc.


(Exact
name of Registrant as specified in its charter)


_______________





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





3800
Bridge Parkway


Redwood
Shores, California 94065


(Address
of principal executive offices) (Zip Code)








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


_______________





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





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





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


None





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





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





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





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





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




Large
accelerated filer £                                                      Accelerated
filer R


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





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





Aggregate
market value of the registrant’s common stock held by non-affiliates of the
registrant, based upon the closing price of a share of the registrant’s common
stock on June 30, 2008 as reported by the Nasdaq Global Market on that date:
$90,858,050.  The determination of affiliate status for the purposes
of this calculation is not necessarily a conclusive determination for other
purposes. The calculation excludes approximately 18,841,756 shares held by
directors, officers and stockholders whose ownership exceeded five percent of
the registrant’s outstanding Common Stock as of June 30, 2008. 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 27, 2009 was 61,281,344.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the registrant’s definitive proxy statement in connection with our 2009
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission not later than April 30, 2009, are incorporated by reference in Part
III, Items 10-14 of this report on Form 10-K.














iPASS
INC.




FORM
10-K


FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008





TABLE
OF CONTENTS





PagePART
      I.Item
    1.
            Business
            3Item
      1A.
            Risk
      Factors
            12Item
      1B.
            Unresolved Staff
      Comments
            17Item
    2.
            Properties
            17Item
    3.
            Legal
      Proceedings
            17Item
    4.
            Submission of Matters to a
      Vote of Security Holders
            17PART
      II.Item
    5.
            Market For Registrant’s Common
      Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities
            18Item
    6.
            Selected Financial
      Data
            19Item
    7.
            Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
            20Item
      7A.
            Quantitative and Qualitative
      Disclosures About Market Risk
            29Item
    8.
            Financial Statements and
      Supplementary Data
            30Item
    9.
            Changes in and Disagreements
      With Accountants on Accounting and Financial
      Disclosure
            30Item
      9A.
            Controls and
      Procedures
            30Item
      9B.
            Other
      Information
            30PART
      III.Item
      10.
            Directors, Executive Officers
      and Corporate Governance
            31Item
      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
            31PART
      IV.Item
      15.
            Exhibits and Financial
      Statement Schedules
            32SIGNATURES
            57EXHIBIT
      INDEX
            59




1


Disclosure
Regarding Forward-Looking Statements





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




2




PART
I





Item 1.Business





Overview





We offer
enterprise mobility services on a global basis and managed network services for
enterprise remote and branch office connectivity in North America.  We
were incorporated in California in July 1996 and reincorporated in Delaware in
June 2000.





Enterprise
Mobility Services





The
growth of remote and mobile workers combined with the proliferation of mobile
devices and remote and mobile broadband networks has created increasing
technical and security complexity for enterprises which can lead to increased
costs, increased risks, and lost workforce productivity.





To
address this growing enterprise pain point, we provide software-enabled
enterprise services that unify the management of remote and mobile connectivity
and devices on a global basis. First, we offer a portfolio of connectivity
services. Our flagship connectivity service, iPass Mobile Office, is designed to
enable enterprises to provide their employees with secure internet and corporate
network connectivity over multiple access networks through a single easy-to-use
interface and login experience, while the enterprise enjoys a global vendor
relationship with iPass that includes unified management, support and billing.
iPass Mobile Office unifies access across approximately 400 3G mobile broadband,
Wi-Fi hotspot and dial-up networks in over 160 countries that make up the iPass
global virtual network. The service also gives customers the option to use the
service for access over networks that are not part of the iPass global virtual
network including private networks such as on-campus wireless local area
networks (WLANs) and employees’ home networks, or public Wi-Fi hotspots,
municipal Wi-Fi networks, 3G mobile data networks and hotel Ethernet links
that are not currently in the iPass virtual network.





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





We also
offer the iPass Virtual Office service that combines iPass Mobile Office with
managed home broadband service in the US and Canada.  We aggregate
over 170 providers of cable, DSL and other home broadband services into the
industry’s most complete network, and then provision and manage these links for
the enterprise.





Managed
Network Services





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





Software-Based
Platform for Service Delivery





In
contrast 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 is composed of 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 key points in the platform. This allows us to deliver extremely
high service availability to our customers. Since 2000, there has been no
service-wide system down-time that impacted the platform and the services that
it provides.





In
addition, our platform allows us to present a simplified management console to
our customers, which helps them gain better control of remote and mobile
connectivity and makes their back-end operations more efficient. Customers can
configure and enforce network access policies based on financial and security
considerations. They also benefit from centralized delivery of detailed billing,
reporting and management information.





Revenue
Sources





We derive
revenues primarily from usage of our networks and service fees.  Our
revenues are generated by providing enterprise connectivity services to
customers using broadband access technologies, including hotel Ethernet, Wi-Fi
hotspots and mobile broadband services based on 2.5G and 3G technologies such as
1xRTT, EV-DO, GPRS and HSDPA as well as narrowband access technologies, such as
modem dial-up.  Additionally, we receive revenue from software and
services fees, including authentication services for channel partners, service
fees for use of our iPassConnect mobility manager software on private and 3rd-party networks, value-added
reporting services, endpoint systems management services and professional
services including service customization, service deployment and customer
training.  We market and sell our services directly, as well as indirectly
through channel partners, including network service providers, Internet service
providers, systems integrators and value-added resellers.  See our
Consolidated Financial Statements for our revenues and other financial
performance and condition for the past three years.





3


Our
Strategy





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





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





Increase User Penetration within our
Existing Customer Base. We seek to accelerate the adoption of our
services by broadening usage of our services to all customer employees who use
laptop and handheld mobile devices at home, while traveling, or in the office.
We intend to achieve this objective through a rollout of software value adds
that simplify the user experience around free Wi-Fi locations and the sale of
services related to the use of iPass software over non-iPass networks, such as
enterprise home broadband and on-campus wireless LANs as well as
Wi-Fi hotspots, municipal Wi-Fi networks, 3G mobile broadband networks and
hotel Ethernet links.  We intend to drive end users awareness and
usage within certain account marketing programs.  We also intend to
continue to add to our service connectivity footprint to address the needs of
users whom we do not yet serve.





Within
customers who only have implemented our services in a single division or
geographic region, 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 within
their organizations, continually assess the customers evolving needs and offer
new services for adoption, and provide ongoing account management.





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





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





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 131,000 access points in
approximately 160 countries. As of December 31, 2008, over 21,000 of these
access points were dial-up connections and approximately 110,000 were broadband
connections, comprised of approximately 108,000 Wi-Fi hotspots and approximately
2,000 wired hotspots as well as mobile data services in the United States,
China, Japan, UK, Netherlands, Hong Kong and Singapore. As a result, enterprises
that use our services can provide their remote and mobile workers with access
from these countries, in most instances with a local telephone or broadband
connection.





Virtual Fixed Broadband Network for
Use in Home, Branch and Retail Locations.In North America we have
contractual relationships with over 170 fixed broadband network providers,
allowing us to provide the region’s most complete fixed broadband coverage for
enterprises looking for a single source through which to connect home offices,
branch offices, and retail locations.





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





4


This
architecture also makes our virtual network scalable, allowing us to handle more
connections and users with a less than proportional increase in capital
expenditures.





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





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





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





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





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





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





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





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





5


Services





iPass
Mobile Office





iPass
Mobile Office offers our customers the ability to reduce their costs of
delivering mobility by providing unified global connectivity, connectivity
management and device management.  It delivers 3G mobile data, Wi-Fi
hotspot, wired broadband and dial-up access through the iPassConnect mobility
manager.  It unifies 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 his or her enterprise network through iPass virtual network is
illustrated in the following diagram and described through the following
steps:











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





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





6


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





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





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





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





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





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





Additional
Mobile Office features





iPass
Mobile Office includes the following features:





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





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





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





Virtual Office. iPass Virtual
Office adds managed fixed broadband for teleworkers to Mobile Office, providing
enterprise customers a method of outsourcing the broadband network design,
implementation and on-going support for their entire population of home
workers.  This service provides customers a managed service with a
single point of contact and single consolidated bill while supporting broadband
connections on different technologies and carriers. iPass maintains
relationships with over 170 cable and DSL providers to provide coverage in the
United States, Canada and the United Kingdom. The Virtual Office service comes
with a secured, managed Wi-Fi enabled router to allow a user the freedom to work
anywhere within the home.





iPass
Managed Network Services





Branch Office. This service
provides an organization with a managed wide-area network to connect hundreds of
small offices back to a corporate data center. It leverages iPass’ relationships
with over 170 cable, DSL and wireless providers to provide 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.  Secure
Franchise is an additional add-on offering to Retail Office which enables
franchise owners to access their Retail Office locations remotely.





Device
Authentication Service





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





7


Principal
Components of the iPass Platform





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





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





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





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





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





•
            Dynamic Directory.
      iPassConnect mobility manager enables enterprises to adjust the order of
      narrowband access points that are displayed to the end user, based on
      service quality. Customers also 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 mobility manager 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 mobility manager supports a
      wide range of computer operating systems, including Microsoft Windows
      2000, XP, Mac OS X and above, and Windows Mobile. Additionally,
      iPassConnect for Windows is localized in Brazilian Portuguese, Portuguese,
      Simplified Chinese, Traditional Chinese, French, German, Japanese, Korean
      and Spanish.





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





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





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





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





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





8


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





•
            Client-Side SQM.
      Client-side SQM captures detailed status and usage information from
      connection attempts and uploads this information to a central iPass
      database when a successful connection is made. SQM records and reports
      access points from which connections are made, client configuration, error
      codes, connection speeds, time to authenticate and 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 mobility manager 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
Transaction Centers are co-located across eight geographically diverse
facilities in the United States, the United Kingdom, The Netherlands, Australia,
Japan, and Hong Kong. Our Phonebook, Express Connect, Clearinghouse, Finance
systems, and corporate web services, are all co-located in United States
facilities. Should a primary facility experience an extended service outage, two
of our eight Transaction Centers also serve as standby and disaster recovery
facilities for these environments. 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.





Revenues
generated in the United States accounted for approximately 61%, 62% and 60% of
total revenues for the year ended December 31, 2008, 2007 and 2006,
respectively.  International revenues accounted for approximately 39%,
38% and 40% of total revenues for the year ended December 31, 2008, 2007 and
2006, respectively. Revenues generated in the United Kingdom accounted for 9%,
11% and 11% of total revenues for the year ended December 31, 2008, 2007 and
2006, respectively. International revenues are determined by the location of the
customer’s headquarters.





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





Agreements
with Network Service Providers





We have
relationships with over 550 telecommunications carriers, Internet service
providers and other network service providers that enable us to offer our
services in over 160 countries around the world. We pay network service
providers for access to their network on a usage or session basis, in some
cases, subject to minimum purchase commitments. Most of these contracts have a
one or two year term, after which either party can terminate the contract with
notice. In 2008, the largest network suppliers were Swisscom Hospitality
Services (SHS), Verizon Business Services (formally MCI),and
T-Mobile US,which
accounted for nearly 10%, approximately 7% and approximately 7% of our network
access expenses, respectively. The contracts we have entered into with providers
are non-exclusive and may contain minimum commitments for the purchase of
network access.  In countries in which we have contracted with
multiple network service providers, if one network service provider is no longer
available, we can generally obtain alternative network access without
significant disruption to our business. We are also able to direct users to the
network of particular service providers to fulfill minimum purchase
commitments.





Sales
and Marketing





We sell
our services directly through our sales force and indirectly through our channel
partners. Our sales organization is organized into regional account teams, which
include sales directors, sales managers, account executives, account managers,
sales engineers and sales operations personnel. We maintain sales offices or
personnel in a number of cities in the United States as well as Australia, the
United Kingdom, Hong Kong, Japan, Germany, France, Singapore, Denmark, Sweden
and The Netherlands. As of December 31, 2008, our sales organization was
comprised of 50 individuals in North America, 17 individuals in Asia Pacific and
43 individuals in Europe.





Our
channel partners include network service providers, telecommunications carriers,
systems integrators and value added resellers. A channel partner typically signs
a one to two year agreement with us through which we appoint the partner as a
nonexclusive reseller of our services. Channel partner responsibilities
vary and may include actively marketing and selling iPass services, deploying
and supporting customer accounts, and implementing and managing billing for
their customers. Selling through channel partners allows us to offer our
services without incurring the full cost of customer acquisition (sales and
marketing) or customer post-sales support. Our channel partners typically sell
complementary hardware, software, and services, and bundle our services with
their core offerings.  They may also have a base of existing customers
to whom they can efficiently sell our service.  In many cases our
salespeople do support the partner with closing new business, and once an
enterprise has signed a contract for our services through a channel partner, our
post-sales team may work with the channel partner to ensure successful
implementation of our services. However, the enterprise remains the customer of
the channel partner and has no direct financial relationship with
us.





9


We focus
our marketing efforts on establishing a strong corporate reputation in the
market, creating awareness and preference for our services and their benefits,
educating potential customers, generating new sales opportunities, generating
end-user awareness and demand within existing customer accounts and enabling our
sales force and channel partners to effectively sell and service our offerings .
We conduct a variety of marketing programs that may include advertising,
promotions, public relations, analyst relations, telemarketing, direct
marketing, web and e-mail marketing, collateral and sales tools creation,
seminars, events and trade shows, training, and co-operative channel marketing
and promotions.





Competition





We
compete primarily with large, facilities-based carriers and software-enabled
virtual network operators. We compete based on a number of factors including
geographic network coverage, pricing, multiple network technology support,
network reliability, quality of service, ease of implementation, ease of use and
ease of management.  We believe that we compete favorably in
terms of geographic network coverage, pricing, network reliability, quality of
service, ease of implementation and ease of use.





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





To a
lesser extent we also compete with software-enabled virtual network operators.
In some cases, our service offerings may be offered at a price premium
to those offered by our competitors, which may put us at a competitive
disadvantage.  These companies are typically smaller and less
well-known than iPass, which can give us an advantage in the
market.  We believe we compete favorably against these competitors in
terms of geographic network coverage, pricing, multiple network technology
support quality and ease of management of our service offerings as well as our
corporate reputation and global account support capabilities. Still,
software-based virtual network operators may also provide managed services such
as VPNs and firewalls, and additional telecommunications services such as local
exchange and long distance services, voicemail and DSL services.  We
do have channel partners that offer these types of services in conjunction
with our service, but we do not offer these additional services directly, which
may put us at a competitive disadvantage when competing for potential
customers.





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





Research
and Development




We
believe that to compete favorably we must continue to invest in the research and
development of our services. Our research and development efforts are focused on
improving and enhancing our existing service offerings as well as developing new
proprietary products and services. As of December 31, 2008, our research and
development organization consisted of 172 employees. Our research and
development expenses were $16.5 million, $21.1 million and $22.6 million in
2008, 2007, and 2006, respectively.  Our restructuring plan announced
in February 2009 resulted in layoffs affecting 30 employees in our research and
development organization.





Intellectual
Property





We rely
on a combination of trademark, copyright, trade secret laws, patents and
disclosure restrictions to protect our intellectual property rights. We also
enter into confidentiality and proprietary rights agreements with our employees,
consultants and other third parties and control access to software,
documentation and other proprietary information. iPass has a patent portfolio of
nine US patents, two Australian patents, one Israeli patent and three European
patents (UK, Germany and France).  Our patents expire between 2016 and
2025.  In 2008 we were granted one new US patent and three European
patents around the application of our device ID technology for performing secure
network purchases. We were also granted one new patent in Australia on our
Device ID technology.  We currently have twenty-two US patent applications
pending, and twenty-three international patent applications pending (in the same
subject areas as the US patent applications). If a claim is asserted that we
have infringed the intellectual property of a third party, we may be required to
seek licenses to that technology. In addition, we license third-party
technologies that are incorporated into our services, including our license for
encryption granted by RSA Security. Licenses from third party technologies may
not continue to be available to us at a reasonable cost, or at all.
Additionally, the steps we have taken to protect our intellectual property
rights may not be adequate. Third parties may infringe or misappropriate our
proprietary rights. Competitors may also independently develop technologies that
are substantially equivalent or superior to the technologies we employ in our
services. If we fail to protect our proprietary rights adequately, our
competitors could offer similar services, potentially significantly harming our
competitive position and decreasing our revenues.





Employees





As of
December 31, 2008, we had 508 employees, consisting of 108 in network
operations, 172 in research and development, 149 in sales and marketing and 79
in general and administrative. We consider our relationship with our employees
to be good.





Our
restructuring plan announced in February 2009 resulted in layoffs affecting
approximately 70 employees in our sales, marketing, research and development,
operations and general and administrative departments.





10


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. We rely on our trademarks in combination
with copyright, trade secret laws, patents, and disclosure restrictions to
protect our intellectual property rights.  These trademarks are
currently due to be renewed in the differing jurisdictions at various times
commencing in 2009 and ending in 2017




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.





11




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.





Recent
worldwide market turmoil may adversely affect our customers which directly
impacts our business and results of operations.





Our
operations and performance depend on our customers having adequate resources to
purchase our products and services. The unprecedented turmoil in the global and
credit markets and the global economic downturn generally continues to adversely
impact our customers and potential customers. These market and economic
conditions have continued to deteriorate despite government intervention
globally, and may remain volatile and uncertain for the foreseeable future.
Customers have altered and may continue to alter their purchasing and payment
activities in response to deterioration in their businesses, lack of credit,
economic uncertainty and concern about the stability of markets in general, and
these customers may reduce, delay or terminate purchases of, and payment for,
our products and services. Certain of our current and prospective customers may
go out of business, may merge with others, or may be forced to drastically cut
expenditures, which may result in less demand for our products and services.
Further, we may not be able to collect our accounts receivables from customers
that do go out of business.  If we are unable to protect against these
events or adequately respond to changes in demand resulting from deteriorating
market and economic conditions, our financial condition and operating results
may be materially and adversely affected.





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





A
substantial portion of the growth of our business has depended, and will
continue to depend, in part upon our ability to expand the broadband elements of
our virtual network to address broadband access technologies, such as cable
modem, DSL, Wi-Fi, 3G data, Wi-Max and other wireless technologies, including
3G. Such an expansion may not result in additional revenues to us. Key
challenges in expanding the broadband elements of our virtual network
include:




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





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





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





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





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





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





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




12


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


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


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





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





•
            
            the
      willingness of enterprises to make additional information technology
      expenditures;•
            
            the
      availability of security products necessary to ensure data privacy over
      the public networks;•
            
            the
      quality, cost and functionality of these services and competing
      services;•
            
            the
      increased adoption of wired and wireless broadband access
      methods;•
            
            the
      proliferation of electronic devices such as handhelds and smart-phones and
      related applications; and•
            
            the
      willingness of enterprises to invest in our services during the current
      world-wide economic crisis.





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





We
compete primarily with facilities-based carriers as well as with other
non-facilities-based network operators. Some of our competitors have
substantially greater resources, larger customer bases, longer operating
histories or greater name recognition than we have.  In addition, we
face the following challenges:





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





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





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




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





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





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




13


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


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


If
we are unable to effectively manage our India-based research and development
operation, our business may be adversely impacted.





Much of
our research and development activity occurs in India.  The remoteness
of our India operation to corporate headquarters, as well as difficulty of
acquiring and retaining talent in India, could impact our ability to release
planned new products on time, which could adversely impact our
business.





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





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





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





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





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





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





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





We
generate a substantial portion of our revenues from business conducted
internationally.  Revenues from customers domiciled outside of the United
States were 39% of our revenues in 2008, of which approximately 28% and 8% were
generated in our EMEA (Europe, Middle East and Africa) and Asia Pacific regions,
respectively.  Although we currently bill for our services in U.S.
dollars, our international operations subject our business to specific risks.
These risks include:





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





Any of
these factors could negatively impact our business.





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





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




14


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





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





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





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




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





Litigation
arising out of intellectual property infringement could be expensive and disrupt
our business.





We cannot
be certain that our products do not, or will not, infringe upon patents,
trademarks, copyrights or other intellectual property rights held by third
parties, or that other parties will not assert infringement claims against us.
From time to time we have been, and we may continue to be, involved in disputes
with these third parties. Any claim of infringement of proprietary rights of
others, even if ultimately decided in our favor, could result in substantial
costs and diversion of our resources. Successful claims against us may result in
an injunction or substantial monetary liability, which in either case 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.





In
periods of worsening economic conditions, our exposure to credit risk and
payment delinquencies on our accounts receivable significantly
increases.





A
substantial majority of our outstanding accounts receivables are not secured. In
addition, our standard terms and conditions permit payment within a specified
number of days following the receipt of our product. While we have procedures to
monitor and limit exposure to credit risk on our receivables, there can be no
assurance such procedures will effectively limit our credit risk and avoid
losses. As economic conditions deteriorate, certain of our customers have faced
and may face liquidity concerns and have delayed and may delay or may be unable
to satisfy their payment obligations, which would have a material adverse effect
on our financial condition and operating results.





Our
cash and cash equivalents could be adversely affected if the financial
institutions in which we hold our cash and cash equivalents fail.





Our cash
and cash equivalents are highly liquid investments with original maturities of
three months or less at the time of purchase. We maintain the cash and cash
equivalents with reputable major financial institutions. Deposits with these
banks exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits
or similar limits in foreign jurisdictions. While we monitor daily the cash
balances in the operating accounts and adjust the balances as appropriate, these
balances could be impacted if one or more of the financial institutions with
which we deposit fails or is subject to other adverse conditions in the
financial or credit markets. To date we have experienced no loss or lack of
access to our invested cash or cash equivalents (other than our auction rate
securities); however, we can provide no assurance that access to our invested
cash and cash equivalents will not be impacted by adverse conditions in the
financial and credit markets.




15


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.


16


Item 1B.Unresolved Staff Comments





Not
applicable





Item 2.Properties





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





Item 3.Legal
Proceedings





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





In October 2002, GoRemote's officers
and directors were dismissed without prejudice pursuant to a stipulated
dismissal and tolling agreement with the plaintiffs.  In February 2003, the
court dismissed the section 10(b) claim against GoRemote without leave to amend,
but declined to dismiss the section 11 claim.  In June 2004, GoRemote and
almost all of the other Issuers executed a settlement agreement with the
plaintiffs.  In February 2005, the court certified the litigation as a
class action for settlement purposes and granted preliminary approval of the
settlement, subject to modification of certain bar orders contemplated by the
settlement.  In August 2005, the court reaffirmed class certification and
preliminary approval of the modified settlement.  On February 24, 2006, the
Court dismissed litigation filed against certain underwriters in connection with
the claims to be assigned to the plaintiffs under the settlement.  On April
24, 2006, the Court held a Final Fairness Hearing to determine whether to grant
final approval of the settlement.  On December 5, 2006, the Second Circuit
Court of Appeals vacated the lower Court's earlier decision certifying as class
actions the six IPO Lawsuits designated as "focus cases."  Thereafter, the
district court ordered a stay of all proceedings in all of the IPO Cases pending
the outcome of plaintiffs’ petition to the Second Circuit for rehearing en
banc.  On April 6, 2007, the Second Circuit denied plaintiffs’ rehearing
petition, but clarified that the plaintiffs may seek to certify a more limited
class in the district court. Accordingly, the settlement was terminated pursuant
to stipulation and will not receive final approval.





Plaintiffs filed amended complaints in
the six cases designated as “focus cases” on or about August 14, 2007. 
GoRemote is not a focus case.  In September 2007, GoRemote's named officers
and directors again extended the tolling agreement with plaintiffs.  On or
about September 27, 2007, plaintiffs moved to certify the classes alleged in the
“focus cases” and to appoint class representatives and class counsel in those
cases. The “focus case” issuers filed motions to dismiss the claims against them
in November 2007 and an opposition to plaintiffs' motion for class certification
in December 2007.  The Court denied the motions to dismiss on March 16,
2008.  On October 2, 2008, the plaintiffs withdrew their
class certification motion.  On
February 25, 2009, liaison counsel for plaintiffs informed the district court
that a settlement of the IPO cases had been agreed to in principle, subject to
formal approval by the parties and preliminary and final approval by the
court.




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, 2008.




17


PART
II





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





Price
Range of Common Stock





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





Low
      Sale Price
            
            
            High
      Sale PriceFiscal
      year ended December 31, 2008:First
      Quarter
            
            $
            2.43
            
            
            $
            4.10Second
      Quarter
            
            
            1.95
            
            
            
            3.14Third
      Quarter
            
            
            1.57
            
            
            
            2.50Fourth
      Quarter
            
            
            1.01
            
            
            
            2.19Fiscal
      year ended December 31, 2007:First
      Quarter
            
            $
            4.76
            
            
            $
            6.07Second
      Quarter
            
            
            4.98
            
            
            
            5.69Third
      Quarter
            
            
            3.92
            
            
            
            5.62Fourth
      Quarter
            
            
            3.88
            
            
            
            4.86





We had
61,281,344 shares of our common stock outstanding held by 262 stockholders of
record as of February 27, 2009.




Performance
Measurement Comparison(1)




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









18







12/31/03
            
            
            12/31/04
            
            
            12/31/05
            
            
            12/31/06
            
            
            12/31/07
            
            
            12/31/08iPass
      Inc.
            
            
            100.00
            
            
            
            46.22
            
            
            
            40.97
            
            
            
            36.73
            
            
            
            25.36
            
            
            
            7.62Russell
      2000 Index
            
            
            100.00
            
            
            
            117.49
            
            
            
            121.40
            
            
            
            142.12
            
            
            
            135.10
            
            
            
            88.09Nasdaq
      Market Index
            
            
            100.00
            
            
            
            108.41
            
            
            
            110.79
            
            
            
            122.16
            
            
            
            134.29
            
            
            
            79.25





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




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





Stock
Repurchases





On
February 12, 2008, we announced that our Board of Directors approved a stock
repurchase program which authorizes us to repurchase up to $30 million of
outstanding common stock.  Through December 31, 2008, we repurchased
and retired a total of approximately 1.3 million shares of common stock for an
aggregate purchase price of $3.7 million, leaving approximately $26.3 million
that may be used for future repurchases.  There was no stock
repurchase activity during the third or fourth quarter of 2008.





Dividend
Policy





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





Item 6.Selected
Financial Data





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





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004(In
      thousands, except per share data)Statement
      of Operations DataRevenues
            
            $
            191,
      368
            
            
            $
            191,732
            
            
            $
            182,711
            
            
            $
            169,373
            
            
            $
            166,319Total
      operating expenses
            
            
            284,767
            
            
            
            206,077
            
            
            
            202,001
            
            
            
            151,474
            
            
            
            137,353Operating
      income (loss)
            
            
            (93,399
            )
            
            
            (14,345
            )
            
            
            (19,290
            )
            
            
            17,899
            
            
            
            28,966Net
      income (loss)
            
            
            (91,968
            )
            
            
            (34,214
            )
            
            
            (8,089
            )
            
            
            12,895
            
            
            
            19,068Net
      income (loss) per share:Basic
            
            
            (1.50
            )
            
            
            (0.54
            )
            
            
            (0.13
            )
            
            
            0.20
            
            
            
            0.31Diluted
            
            
            (1.50
            )
            
            
            (0.54
            )
            
            
            (0.13
            )
            
            
            0.19
            
            
            
            0.29





As
      of December 31,2008
            
            2007
            
            2006
            
            2005
            
            2004(In
      thousands)Balance
      Sheet DataTotal
      assets
            
            $
            125,328
            
            
            $
            221,898
            
            
            $
            263,602
            
            
            $
            254,474
            
            
            $
            230,513Total
      stockholders’ equity
            
            
            89,797
            
            
            
            181,108
            
            
            
            221,389
            
            
            
            226,251
            
            
            
            207,222





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


19




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 2008





In 2008,
we continued to add new customers, including 30 from the Forbes Global 2000,
bringing our total Forbes Global 2000 customers to 447 as of December 31,
2008.  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 2008.  We ended 2008 with approximately 110,000 Wi-Fi and
wired hotspots worldwide, approximately 108,000 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 $28.7 million or 38.1% increase in broadband usage revenue
to 103.7 million in 2008 over 2007.





The
global economic downturn, which has led to a substantial spike in corporate
layoffs and a sharp drop-off in business travel in our enterprise customer base
adversely impacted our business, particularly in the fourth quarter of 2008 in
which we experienced an overall revenue decline of approximately 4% from
previous quarter.





While
broadband usage revenue increased in 2008, the decline in revenues from our
traditional dial-up business and the economic downturn offset the increased
revenues, resulting in full year 2008 revenues that were essentially flat as
compared to 2007.  In 2008, dial-up revenue decreased 45% to $37.1
million in 2008 as compared to $67.8 million in 2007 and $105.7 million in
2006.  This decrease was offset in part by an increase in revenues
generated from usage of our broadband service as well as fee-based services.
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 fee based services. In 2009, we expect to see continued growth in
new customers.  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 above entitled “Risk Factors.”





Sources
of Revenues





We derive
our revenues primarily from providing enterprise connectivity services through
our virtual network. We sell these services directly, as well as indirectly
through our channel partners. We bill the majority of our customers on a time
basis for usage based on negotiated rates. We bill the remaining customers based
on a fixed charge per user per month.  Substantially all enterprise
customers commit to a one to three year contract term.  Most of our
contracts with enterprise customers contain minimum usage levels. We bill
customers for minimum commitments when actual usage is less than their monthly
minimum commitment amount. The difference between the minimum commitment and
actual usage is recognized as fee revenue based on our estimate of cash that
will ultimately be collected related to the minimum commitment.




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 54%, 39% and 22% of our total revenues
for the years ended December 31, 2008, 2007 and 2006, respectively.





We
provide customers with deployment services and technical support throughout the
term of the contract.  For customers on usage based pricing plans 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.  For customers on flat rate pricing we charge for these
services as part of our monthly per user fee.  We also offer customers
additional services for which we generally bill on a monthly basis. In addition,
we generate license and maintenance revenue through software licensing
agreements.  Revenues generated from license and maintenance fees, together
with revenues generated from deployment services, technical support,
minimum commitment shortfall and enterprise flat rate fees, represented
approximately 27%, 26% and 20% of our revenues for the years ended December 31,
2008, 2007 and 2006, respectively.





Recent
Acquisitions





In
February 2006, we acquired all the outstanding shares of GoRemote, a provider of
managed virtual business network services for approximately $78.9 million in
cash.  This acquisition allowed us to expand our product offering to
include GoRemote’s managed broadband services for branch offices and
teleworkers.





Critical
Accounting Policies and Estimates





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





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





20


Revenue
Recognition





Usage
and Services Fees





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





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




License,
Maintenance and Training




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




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




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




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





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





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





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.  The allowance for
doubtful accounts was $927,000, $2.8 million and $3.1 million as of December 31,
2008, 2007 and 2006, 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.





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. 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.  In the fourth quarter of 2008, our life as a publicly
traded entity exceeded the historical average term of our options,
indicating that we have sufficient historical option data to cease use of the
“simplified” method, as described in SEC Staff Accounting Bulletin No. 107,
“Share-Based Payment.”
for purposes of valuing options.  Accordingly, our estimate of
expected term of options granted was derived from the historical average
expected term in 2008.




Upon
adoption, we elected the alternative transition method provided in the Financial
Accounting Standards Board (“FASB”) Staff Position for calculating the tax
effects of equity-based compensation. The alternative transition method includes
simplified methods to establish the beginning balance of the additional paid-in
capital pool (APIC pool) related to the tax effects of employee equity-based
compensation, and to determine the subsequent impact on the APIC pool and
Consolidated Statement of Cash Flows of the tax effects of employee equity-based
compensation awards that are outstanding upon the implementation of
SFAS 123(R). As of December 31, 2008, there was $3.1million of unrecognized
compensation cost, adjusted for estimated forfeitures, related to non-vested
stock-based payments granted to employees.  We will adjust total
unrecognized compensation cost for future changes in estimated
forfeitures.




21


Restructuring




Restructuring charges are comprised
primarily of costs for abandonment of excess facilities, severance and
associated employee termination costs.  We record severance costs
pursuant to Statement of Financial Accounting Standard ("SFAS") No. 112, “Employers' Accounting for
Postemployment Benefits—an amendment of FASB Statements No. 5 and 43” and
the excess facility costs are recorded pursuant to SFAS No. 146, “Accounting for Costs Associated with
Exit or Disposal Activities” ("SFAS No. 146").  SFAS No. 146
requires that liabilities be recorded at fair value.  The difference
between the fair value of the liability at the time it was recorded and the
total cash liability is accreted ratably over the expected term.  This
accretion is reported in the restructuring expense line on the condensed
consolidated statements of operations.  We reduce costs for the
abandonment of excess facilities by estimated income from the sublease of the
vacated facilities. As of December 31, 2008, we have estimated $875,000 in
sublease income through the end of the sublease lease term in April
2010.  If we are unable to sublease the facilities within the
timeframe and for the rates anticipated, we may need to revise our estimates and
record additional restructuring charges.




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





Impairment
Assessments of Goodwill and Long-lived Assets





When we
acquire businesses, we allocate the purchase price to tangible assets and
liabilities and identifiable intangible assets acquired. Any residual purchase
price is recorded as goodwill. The allocation of the purchase price requires
management to make significant estimates in determining the fair values of
assets acquired and liabilities assumed, especially with respect to intangible
assets. These estimates are based on historical experience and information
obtained from the management of the acquired companies. These estimates can
include, but are not limited to, the cash flows that an asset is expected to
generate in the future, the appropriate weighted-average cost of capital, and
the cost savings expected to be derived from acquiring an asset. These estimates
are inherently uncertain and unpredictable. In addition, unanticipated events
and circumstances may occur which may affect the accuracy or validity of such
estimates.




We review
goodwill for impairment on an annual basis and whenever events or changes in
circumstances indicate the carrying value of goodwill may not be recoverable.
The first step in the goodwill impairment analysis is to determine if the
estimated fair value is less than the carrying value of the company, as we have
one reporting unit.  If the estimated fair value is less than the
carrying value of the company, then we perform a second step to measure the
amount of the impairment loss by estimating the fair value of all identifiable
assets and liabilities of the company, in a manner similar to a purchase price
allocation for an acquired business.





In
determining the fair value of the reporting unit as well as the tangible and
intangible assets, management must make complex and often subjective estimates
and assumptions about the future cash flows of the company. These estimates and
assumptions include operating forecasts, revenue projections, and risk-based
discount rates and may change due to changes in the economy, industry or our own
strategy and internal forecasts.  However, we believe that these
estimates and assumptions are reasonable.





We also
review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount is not recoverable, if they are
abandoned or if we are required to perform the second step in the goodwill
impairment analysis described above.  The carrying amount of an asset
group is compared to the expected future undiscounted cash flows expected from
the use and final disposal of that asset group to assess its
recoverability.  Any impairment of an asset is measured as the excess
of the carrying amount over the fair market value of the asset.  These
assessments require management to make significant estimates and assumptions
including the identification of any triggering event, operating forecasts,
estimated life and cash flows from the use of the assets, and the proceeds from
disposal.




Accounting
for Income Taxes





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





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





Financial
Accounting Standards Board Statement No. 109, “Accounting for Income Taxes”
provides for the recognition of deferred tax assets if realization of such
assets is more likely than not. Based upon the weight of available evidence,
which includes our historical operating performance and the reported cumulative
net losses to date, we have provided a full valuation allowance of $60.0 million
against the majority of our deferred tax assets at December 31, 2008, compared
to $56.0 million at December 31, 2007.  At each period end, we
reassess our ability to realize our deferred tax assets, including net operating
losses.  In the event we were to determine that we would be able to realize
our deferred income tax assets in the future in excess of their net recorded
amount, we would make an adjustment to the valuation allowance which would
reduce the provision for income taxes.





22


RESULTS
OF OPERATIONS





Revenue




December
      31,Change
            
            
            
            
            
            Change2008
            
            
            $
            
            
            
            %
            
            
            2007
            
            
            $
            
            
            
            %
            
            
            2006(In
      thousands, except percentages)Total
      Revenue
            
            $
            191,368
            
            
            $
            (364
            )
            
            
            (0.2
            %)
            
            $
            191,732
            
            
            $
            9,021
            
            
            
            4.9
            %
            
            $
            182,711




Full year
2008 revenues were essentially flat as compared to 2007, at $191.4 million and
$191.7 million, respectively.  The 2008 revenues reflect a 38% growth
in broadband revenues to $103.7 million and a 4% growth in software and service
fee revenues to $50.5 million offset by the continued decline in dial-up
revenues by 45% to $37.1 million.  The growth
in broadband revenue was primarily due to our customers' increased ability to
remotely access their corporate networks from more locations and at higher
speeds.The decrease in dial-up revenue was due to a continuation
of customer migration from dial up to broadband as a preferred method of
connectivity.  Included in 2007 software and service fees revenues was $3.1
million related to a change in estimate for the recognition of minimum
commitment billings.





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





A
breakdown of revenue by type is as follows:


December
      31,2008
              
              
              Change
      $
              
              
              Change
      %
              
              
              2007
              
              
              Change
      $
              
              
              Change
      %
              
              
              2006(In
      thousands, except percentages)Broadband
              
              $
              103,712
              
              
              $
              28,639
              
              
              
              38.1
              %
              
              $
              75,073
              
              
              $
              35,137
              
              
              
              88.0
              %
              
              $
              39,936As
      a percent of revenue
              
              
              54.2
              %
              
              
              —
              
              
              
              15.0
              %
              
              
              39.2
              %
              
              
              —
              
              
              
              17.3
              %
              
              
              21.9
              %Dial-up
              
              $
              37,115
              
              
              
              (30,711
              )
              
              
              (45.3
              %)
              
              $
              67,826
              
              
              $
              (37,856
              )
              
              
              (35.8
              %)
              
              $
              105,682As
      a percent of revenue
              
              
              19.4
              %
              
              
              —
              
              
              
              (16.0
              %)
              
              
              35.4
              %
              
              
              —
              
              
              
              (22.5
              %)
              
              
              57.8
              %Service
      fees and other
              
              $
              50,541
              
              
              
              1,708
              
              
              
              3.5
              %
              
              $
              48,833
              
              
              $
              11,740
              
              
              
              31.7
              %
              
              $
              37,093As
      a percent of revenue
              
              
              26.4
              %
              
              
              —
              
              
              
              0.9
              %
              
              
              25.5
              %
              
              
              —
              
              
              
              5.2
              %
              
              
              20.3
              %


While we
anticipate broadband revenues will continue to increase in absolute dollars and
as a percentage of total revenues, the current global economic downturn may
adversely impact this growth as a result of corporate layoffs and restriction on
business travel in our enterprise customer base.





We expect
revenue from dial-up usage to continue to decrease in absolute dollars as well
as a percentage of total revenue as we expect the use of dial-up as a
primary means of enterprise connectivity to continue to decline, although we
expect the rate of decline to decrease.





International
revenues, which are revenues generated from customers domiciled outside the
United States, accounted for approximately 39%, 38% and 40% of total revenues in
2008, 2007 and 2006, 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 28%, 27% and 26% of
total revenues in 2008, 2007 and 2006, 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 8%, 7% and 10% of total
revenues in 2008, 2007 and 2006, respectively. Revenues in the United Kingdom
accounted for 9%, 11% and 11% of total revenues in 2008, 2007 and 2006,
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.  No individual customer accounted
for 10% or more of total revenues for the years ended December 31, 2008, 2007 or
2006.





23


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
      31,2008
            
            
            Change
      $
            
            
            Change
      %
            
            
            2007
            
            
            Change
      $
            
            
            Change
      %
            
            
            2006(In
      thousands, except percentages)Network
      access expenses
            
            $
            81,961
            
            
            $
            12,818
            
            
            
            18.5
            %
            
            $
            69,143
            
            
            $
            12,214
            
            
            
            21.5
            %
            
            $
            56,929As
      a percent of revenue
            
            
            42.8
            %
            
            
            —
            
            
            
            6.7
            %
            
            
            36.1
            %
            
            
            —
            
            
            
            4.9
            %
            
            
            31.2
            %




The
growth in network access expenses from 2007 to 2008 was due primarily to
the continuing increased usage of our virtual network with respect to our
broadband services as well as an increase in European Wi-Fi revenues and a
decline in North American Wi-Fi revenues in the second half of 2008. Network
access costs are considerably higher in Europe than in North
America.  While network access costs for broadband access are higher
than those for dial-up, we expect that as broadband usage continues to increase
we may be in a better position to negotiate lower rates for access to broadband
networks.





The
growth in network access expenses from 2006 to 2007 was due primarily to
increased usage of our virtual network with respect to our broadband services.
For our dial-up access costs, we continued to purchase network access from
additional service providers at a lower cost and to renegotiate a number of our
existing network service provider contracts.





Network
Operations





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




December
      31,2008
            
            
            Change
      $
            
            
            Change
      %
            
            
            2007
            
            
            Change
      $
            
            
            Change
      %
            
            
            2006(In
      thousands, except percentages)Network
      operations expense
            
            $
            34,770
            
            
            $
            512
            
            
            
            1.5
            %
            
            $
            34,258
            
            
            $
            2,245
            
            
            
            7.0
            %
            
            $
            32,013As
      a percent of revenue
            
            
            18.2
            %
            
            
            —
            
            
            
            0.3
            %
            
            
            17.8
            %
            
            
            —
            
            
            
            0.3
            %
            
            
            17.5
            %





Network
operations expenses increased slightly from 2007 to 2008.  There were
no significant fluctuations, offsetting or otherwise.  We expect that
our network operations expenses will increase as a percentage of revenue in the
first quarter of 2009 and will decrease in absolute dollars and as a percentage
of revenue beginning in the second quarter of 2009 as a result of our
restructuring announced in February 2009.





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





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
      31,2008
            
            
            Change
      $
            
            
            Change
      %
            
            
            2007
            
            
            Change
      $
            
            
            Change
      %
            
            
            2006(In
      thousands, except percentages)Research
      and development expenses
            
            $
            16,381
            
            
            $
            (4,760
            )
            
            
            (22.5)
            %
            
            $
            21,141
            
            
            $
            (1,416
            )
            
            
            (6.3)
            %
            
            $
            22,557As
      a percent of revenue
            
            
            8.6
            %
            
            
            —
            
            
            
            (2.6)
            %
            
            
            11.0
            %
            
            
            —
            
            
            
            (1.3)
            %
            
            
            12.3
            %





The
decrease in research and development expenses, in both absolute dollars and
percent of revenue from 2007 to 2008 resulted primarily from $4.2 million lower
compensation, benefits and outside contractor expenses resulting from the
restructuring plan in 2007.  We expect that our research and
development expenses will remain relatively constant in absolute dollars and to
the extent revenues increase, will decrease slightly as a percentage of
revenues.  The restructuring plan announced in February 2009 includes
the redeployment of research and development resources from India to the U.S.
This is expected to improve operational efficiencies but is not expected to have
a significant impact on expenses.





The
decrease in research and development expenses from 2006 to 2007 was due
primarily to transition of research and development work to
India.  This resulted in a reduction in consulting costs of
approximately $879,000 and a reduction in incentive compensation of
approximately $422,000 due to lower incentive compensation rates for India-based
employees.  The remaining portion of the decrease was due to
individually insignificant items.





24


Sales
and Marketing





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




December
      31,2008
            
            
            Change
      $
            
            
            Change
      %
            
            
            2007
            
            
            Change
      $
            
            
            Change
      %
            
            
            2006(In
      thousands, except percentages)Sales
      and marketing expenses
            
            $
            41,140
            
            
            $
            (11,669
            )
            
            
            (22.1)
            %
            
            $
            52,809
            
            
            $
            (5,811
            )
            
            
            (9.9)
            %
            
            $
            58,620As
      a percent of revenue
            
            
            21.5
            %
            
            
            —
            
            
            
            (6.0)
            %
            
            
            27.5
            %
            
            
            —
            
            
            
            (4.4)
            %
            
            
            31.9
            %




The
decrease in sales and marketing expenses in absolute dollars and percent of
revenue from 2007 to 2008 was due primarily to approximately $9.3 million in
decreased compensation, commission, benefits related and outside contractor
expenses resulting from decreased sales personnel as part of our restructuring
activities in 2007.  The decreased sales personnel resulted in an
additional $930,000 reduction in travel costs and $759,000 in stock-based
compensation expense expense.  Targeted reductions in specific
marketing programs further reduced sales and marketing expenses by
$422,000.  The remaining portion of the decrease was due to
individually insignificant items.  We expect that our sales and
marketing expenses will increase as a percentage of revenue in the first quarter
of 2009 and will decrease in absolute dollars and as a percentage of revenue
beginning in the second quarter of 2009 as a result of our restructuring
announced in February 2009.





The
decrease in sales and marketing expenses from 2006 to 2007 in absolute
dollars was due primarily to approximately $2.4 million decrease in commission,
compensation and benefits expenses resulting from sales personnel terminated as
part of our 2006 and 2007 restructuring activities.  The decreased
sales personnel resulted in an additional $960,000 reduction in stock-based
compensation expense and $875,000 reduction in travel costs.  Targeted
reductions in specific marketing programs further reduced sales and marketing
expenses by approximately $1.0 million.  The remaining portion of the
decrease was due to individually insignificant items.





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
      31,2008
            
            
            Change
      $
            
            
            Change
      %
            
            
            2007
            
            
            Change
      $
            
            
            Change
      %
            
            
            2006(In
      thousands, except percentages)General
      and administrative expenses
            
            $
            21,262
            
            
            $
            (96
            )
            
            
            (0.4)
            %
            
            $
            21,358
            
            
            $
            (1,820
            )
            
            
            (7.9)
            %
            
            $
            23,178As
      a percent of revenue
            
            
            11.1
            %
            
            
            —
            
            
            
            (0.0)
            %
            
            
            11.1
            %
            
            
            —
            
            
            
            (1.6)
            %
            
            
            12.7
            %




General
and administrative expenses decreased slightly from 2007 to
2008.  There were no significant fluctuations, offsetting or
otherwise.  We expect that our general and administrative expenses
will increase as a percentage of revenue in the first quarter of 2009 and will
decrease in absolute dollars and as a percentage of revenue beginning in the
second quarter of 2009 as a result of our restructuring announced in
February 2009.





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





Impairment
of goodwill and long-lived assets





We
evaluate goodwill for impairment on an annual basis or more frequently if
changes in facts and circumstances indicate that impairment in the value of
goodwill recorded on our balance sheet may exist.  Our stock price has
been negatively impacted by the current economic environment, resulting in an
83% decline over the twelve months ended December 31, 2008. This decline was
considered a triggering event which led management to perform a valuation
analysis to determine whether and to what extent goodwill may have been impaired
as of December 31, 2008.  As a result of this analysis, we recorded a
charge of $79.8 million related to goodwill impairment in the fourth quarter of
fiscal 2008.





As part
of the goodwill impairment analysis, we are required to assess our long-lived
assets for impairment, pursuant to SFAS No. 144. During the fourth quarter of
fiscal 2008, we recorded a charge of $4.7 million related to the impairment
of certain of its long-lived assets.





25


Restructuring
and Other Charges





In
November 2007, we recorded a restructuring charge of approximately $3.2 million
related to a workforce reduction of 72 employees, the abandonment of certain
facilities and the write off of certain capitalized assets totaling
$900,000.  As of December 31, 2008, management finalized all of the
employment terminations, settled all negotiations and paid out the
remaining severance resulting in a credit to the restructuring expense of
approximately $25,000 in the first quarter of 2008.  We also adjusted
the accrual for abandoned facilities, primarily due to increased common area
maintenance charges (“CAM charges”), resulting in additional restructuring
expense of approximately $8,000 and $183,000 in the first and fourth quarters of
2008.





In June
and September 2006, we recorded restructuring charges totaling approximately
$1.7 million related to the workforce reduction of 58 employees, across all
functions.  In November 2006, we recorded an additional restructuring
charge of $3.0 million related to excess facilities. By June 2007, we finalized
the aforementioned terminations, settled all negotiations and paid out the
remaining severance.  As a result of finalizing all such terminations,
we adjusted the accrual for the difference between initial estimates of
severance liability and the final payments ultimately made.  This
adjustment of approximately $179,000 was credited to the restructuring expense
in the second quarter of 2007.





The
severance costs were recorded pursuant to Statement of Financial Accounting
Standard ("SFAS") No. 112, Employers' Accounting for
Postemployment Benefits—an amendment of FASB Statements No. 5 and 43
and the excess facility costs were recorded pursuant to SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (SFAS No. 146).  SFAS No. 146
requires that liabilities be recorded at fair value.  The difference
between the fair value of the liability at the time it was recorded and the
total cash liability is accreted ratably over the expected
term.  This accretion is reported in the restructuring expense line on
the condensed consolidated statements of operations.





In
addition, we recorded a charge of $580,000 for severance costs related to the
departure of our former Chief Executive Officer in the fourth quarter of
2008.  These costs are comprised of $310,000 for lump-sum cash
payment, $243,000 for the acceleration of stock options and stock awards and
$27,000 for continuation of health insurance benefits.  All cash
severance was fully paid by December 31, 2008 and the health insurance benefits
are expected to be paid over the next 17 months.





Amortization
of Acquired Intangibles





Amortization
of acquired intangibles was $3.9 million, $4.2 million and $4.0 million for the
years ended December 31, 2008, 2007 and 2006, respectively.  Some of our
acquired intangibles have reached the end of their estimated useful lives
starting in the fourth quarter of 2008.  As discussed in “Critical
Accounting Policies and Estimates” above, we recorded an intangible impairment
charge of $3.4 million during the fourth quarter of 2008.





Non-Operating
Income and Expenses





Interest
Income




Interest
income includes primarily interest income on cash, cash equivalents, and
short-term investment balances.  Interest income was $2.0 million,
$3.4 million and $3.7 million for the years ended December 31, 2008, 2007 and
2006, respectively.  Interest income declined from 2006 to 2007 and
from 2007 to 2008 primarily due to a decreased investment balance resulting from
funds used for stock repurchases over the past year and a decrease in the rate
of return on our investments.





Foreign
exchange losses and other income
(expense)





Foreign
exchange losses and other income (expense) includes primarily losses on
foreign currency transactions and foreign currency forward
contracts.  Conversion of foreign currencies resulted in losses
of $1.1 million, $246,000 and $121,000 for the years ended December 31,
2008, 2007 and 2006, respectively.  The increased loss on foreign
currency exchange is primarily due to the strengthening of the US dollar against
Euros and British Pounds in 2008.





Provision
for Income Taxes





The
benefit for income taxes was $581,000 in 2008, compared to a provision of $23.2
million in 2007. The change from provision to benefit is primarily due to the
settlement of a California income tax audit of $676,000, receipt of state income
tax refunds expensed in previous periods of $163,000, recognition of accelerated
R&D credit refund claims for federal income tax purposes under theHousing Assistance Tax Act of 2008
of$141,000, foreign rate differential related to liquidation of a
foreign affiliate of $448,000, establishment of deferred tax assets for a
foreign affiliate not subject to valuation allowance of $180,000, plus the
impact of foreign taxes of $660,000, the establishment of new FIN 48 reserves of
$302,000, state minimum franchise taxes of $65,000, and the fact that in 2007 a
full valuation allowance was established against the majority of our net
deferred tax assets as a result of continued losses.  The change from
benefit to provision for income taxes in 2007 compared to 2006 was due to an
increase in the valuation allowance against net deferred tax assets to $56.0
million in 2007 as compared to $28.0 million in 2006.  The effective tax
rate was (1.0%) for the year ended December 31, 2008 and 209% and (46%) for the
years ended December 31, 2007 and 2006, respectively.





26


Liquidity
and Capital Resources




Sources of Cash


We have
historically relied on cash flow from operations for our liquidity
needs.  Key sources of cash are provided by operations, existing cash,
cash equivalents and short-term investments.  As of December 31, 2008,
we had cash and cash equivalents of $33.1 million and short-term investments of
$35.3 million resulting in a net liquidity position, defined as unused
availability of the credit facility, cash and cash equivalents and short-term
investments, of approximately $68.4 million. We use a professional
investment management firm to manage a large portion of our invested
cash.  The external firm managed approximately 81% of our total cash
equivalents and short term investment balances as of December 31,
2008.  The portfolio is invested primarily in money market funds,
commercial paper, commercial paper guaranteed under a government program and
government securities for working capital purposes.




While our
existing cash, cash equivalents and investment balances may decline during 2009
as a result of a further weakening of the economy or changes in our planned cash
outlay, we believe that, based on our current business plan and revenue
prospects, our existing cash balances and our anticipated cash flows from
operations will be sufficient to meet our working capital and operating resource
expenditure requirements for the next twelve months.




Uses of Cash


Our principal use of cash
is for payroll related expenses; general operating expenses including marketing,
travel and office rent; network access costs; and stock repurchase.





Stock Repurchases. During the
first quarter of fiscal 2008, we repurchased approximately 1.1 million shares of
common stock for an aggregate purchase price of $3.2 million.  And, in the
second quarter of fiscal 2008, we repurchased approximately 229,000 shares of
common stock for an aggregate purchase price of $500,000.  There was
no stock repurchases during the third and fourth quarter of 2008.





Restructuring. In February of
2009, we announced a restructuring plan in order to reduce our operating costs
and focus our resources on key strategic priorities. See Note 18, Subsequent
Event, of our Notes to Consolidated Financial Statements for further information
regarding this restructuring.





Cash Flows


Operating
Activities


Net cash
provided by operating activities in 2008 was $999,000 compared to net cash used
in operating activities of $7.3 million in 2007 and net cash provided by
operating activities of $2.3 million in 2006.  The increase in cash
provided by operating activities in 2008 primarily relates to a net loss of
$92.0 million adjusted for non-cash charges of $98.5 million including $84.5
million related to the impairment of goodwill and long-lived assets, $3.8
million in stock based compensation charges, $3.9 million for the amortization
of acquired intangibles and $5.5 million in depreciation and amortization of
property and equipment and a $1.5 million decrease in accounts receivable
resulting from increased cash collections during the year as well as the
write-off of accounts identified as uncollectable.  These were offset
by an increase in prepaids and other assets of $1.2 million and a decrease in
accrued liabilities of $4.4 million attributable to lower accrued commissions
due to a reduced sales force in 2008 and the overall reduction in restructuring
and severance accruals as a result of the restructuring activities in the fourth
quarter of 2007.  The decrease in cash provided by operating
activities in 2007 as compared to 2006 is due primarily to an increase in
accounts receivable resulting from increased billings and slower than expected
collections from customers.




Investing
Activities





Net cash
used in investing activities in 2008 was $35.8 million compared to net cash
provided by investing activities in 2007 of $73.8 million in 2007 and net cash
used in investing activities of $16.0 million in 2006. In 2008, net cash used in
investing activities related to purchases of short-term investments, net of
maturities, of $30.8 million and $4.6 million for the purchases of property and
equipment.  In 2007, net cash provided by investing activities related
to maturities of short-term investments net of purchases in the amount of $80.4
million, as well as $5.1 million for the purchases of property and equipment.
The $89.1 million increase of cash provided by investing activities in 2007 as
compared to 2006 primarily relates to $78.0 million of cash used for the
acquisition of GoRemote in 2006.   Net cash used in investing
activities in 2006 was primarily from the acquisition of GoRemote, which net of
cash acquired was $78.0 million, which we funded primarily by liquidating short
term investments.


Financing
Activities


Net cash
used in financing activities in 2008 was $3.0 million primarily due to $3.7
million used for the repurchases of common stock offset by $631,000 of cash
received for stock option exercises and stock purchases through our employee
stock purchase plan (ESPP).  Net cash used in financing activities in
2007 was $11.1 million which was comprised of $13.8 million of cash used for
repurchases of common stock offset in part by $2.7 million of cash received for
stock option exercises and stock purchases through our ESPP.  Net cash
used in financing activities in 2006 was $8.7 million which was comprised of
$16.2 million of cash used for repurchases of common stock offset by $7.5
million of cash received for stock option exercises and stock purchases through
our ESPP.





Off-Balance
Sheet Arrangements





At
December 31, 2008 and 2007, 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.





27


Commitments





At
December 31, 2008, we had no material commitments for capital
expenditures.





We have
signed contracts with certain network service and mobile data providers under
which we have minimum purchase commitments that expire on various dates through
June 2011.  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 2008,
we paid $476,000 related to minimum purchase commitments shortfall with two
suppliers.  We accrued an additional $94,000 for a minimum purchase
commitment with an international mobile broadband supplier.  Future
minimum purchase commitments under these agreements as of December 31, 2008 are
as follows (in thousands):





Year
      ending December 31:2009
            
            $
            11,2972010
            
            
            10,1282011
            
            
            2,550$
            23,975





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, 2008 are as follows (in thousands):


Year
      ending December 31:
              
              Operating
      Leases
              
              
              Sublease
      Income
              
              
              Net
      Operating Leases2009
              
              $
              6,986
              
              
              $
              (653
              )
              
              $
              6,3332010
              
              
              4,472
              
              
              
              (222
              )
              
              
              4,2502011
              
              
              3,309
              
              
              
              —
              
              
              
              3,3092012
              
              
              2,552
              
              
              
              —
              
              
              
              2,5522013
      and thereafter
              
              
              6,091
              
              
              
              —
              
              
              
              6,091$
              23,410
              
              
              $
              (875
              )
              
              $
              22,535


Tabular
Disclosure of Contractual Obligations





Payments
      Due by PeriodContractual
      Obligations
            
            Total
            
            
            Less
      Than 1 Yr
            
            
            1-3
      Years
            
            
            3-5
      Years
            
            
            More
      Than 5 YrsOperating
      Lease Obligations
            
            $
            23,410
            
            
            $
            6,986
            
            
            $
            7,781
            
            
            $
            4,868
            
            
            $
            3,775Purchase
      Obligations
            
            
            23,975
            
            
            
            11,297
            
            
            
            12,678
            
            
            
            —
            
            
            
            —Total
      Contractual Obligations
            
            $
            47,385
            
            
            $
            18,283
            
            
            $
            20,459
            
            
            $
            4,868
            
            
            $
            3,775





We
identified unrecognized tax benefits in accordance with FASB Interpretation No.
48, Accounting for Uncertainty
in Income Taxes – An Interpretation of FASB Statement No. 109 (“FIN
48”).  The balance of unrecognized tax benefits at December 31, 2008
is $2.5 million compared to $3.8 million at December 31,
2007.  Included in the unrecognized tax benefits at December 31, 2008
is $28,000 for accrued interest related to U.S. jurisdictions, and $297,000
for accrued interest and penalties related to India.




28




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 the majority 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.  Foreign currency fluctuations are
discussed in Foreign exchange losses and other income (expense)underItem 7. “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.”





Interest
Rate Sensitivity





As of
December 31, 2008, we had cash, cash equivalents, and short-term investments
totaling $68.4 million. Our investment portfolio consists of cash, commercial
paper, commercial paper guaranteed by a government program 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, 2007, we had cash, cash equivalents, and short-term investments
totaling $75.2 million. Our investment portfolio consisted of cash and
government securities, generally due within one to two years. All of our
instruments were classified as available for sale.





The
following is a chart of the principal amounts of short-term investments by
expected maturity as of December 31, 2008 (in thousands):




Expected
      Maturity Date for Par Value Amounts For the Year Ended December
      31,
              
              
              As
      of December 31, 20082009
              
              
              Total
      Cost Value
              
              
              Total
      Fair ValueCommercial
      paper
              
              $
              7,750
              
              
              $
              7,726
              
              
              $
              7,743Commercial
      paper guaranteed by a government program
              
              
              1,650
              
              
              
              1,638
              
              
              
              1,642Federal
      agency discount notes
              
              
              21,450
              
              
              
              21,258
              
              
              
              21,417U.S.
      Government securities
              
              
              4,500
              
              
              
              4,479
              
              
              
              4,507Total
              
              $
              35,350
              
              
              $
              35,101
              
              
              $
              35,309
 Our general
policy is to limit the risk of principal loss and ensure the safety of invested
funds by limiting market and credit risk.  We consider all investments to
be short-term investments, which are classified in the balance sheet as current
assets, because (1) the investments can be readily converted at any time into
cash or into securities with a shorter remaining time to maturity and (2) the
investments are selected for yield management purposes only and we are not
committed to holding the investments until maturity.  We determine the
appropriate classification of our investments at the time of purchase and
re-evaluate such designations as of each balance sheet date. All short-term
investments and cash equivalents in our portfolio are classified as
“available-for-sale” and are stated at fair market value, with the unrealized
gains and losses reported as a component of accumulated other comprehensive
income (loss). The cost of securities sold is based on the specific
identification method.  We evaluate the individual securities in our
portfolio that are in an unrealized loss position for other-than-temporary
impairment.  As of December 31, 2008 we had one security in an
unrealized loss position, totaling less than $1,000.  We do not
believe that this unrealized loss constitutes an other-than temporary
impairment.





29


Item 8.Financial
Statements and Supplementary Data





Financial
Statements





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





Supplementary
Data





The
following tables set forth unaudited quarterly supplementary data for each of
the years in the two-year period ended December 31, 2008 (in thousands, except
per share amounts):





Quarter
      EndedMarch
      31
            
            
            June
      30
            
            
            September
      30
            
            
            December
      31Year
      Ended December 31, 2008Revenues
            
            $
            48,112
            
            
            $
            48,616
            
            
            $
            48,371
            
            
            $
            46,269Operating
      loss
            
            
            (2,200
            )
            
            
            (2,290
            )
            
            
            (1,743
            )
            
            
            (87,166
            )Net
      loss
            
            
            (1,373
            )
            
            
            (1,445
            )
            
            
            (2,098
            )
            
            
            (87,052
            )Basic
      net loss per share
            
            $
            (0.02
            )
            
            $
            (0.02
            )
            
            $
            (0.03
            )
            
            $
            (1.41
            )Diluted
      net loss per share
            
            $
            (0.02
            )
            
            $
            (0.02
            )
            
            $
            (0.03
            )
            
            $
            (1.41
            )





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





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





None.





Item 9A.Controls
and Procedures





Controls
and Procedures





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





Changes
in Internal Control Over Financial Reporting





There
have been no changes in our internal controls over financial reporting during
the quarter ended December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.





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




Management’s
Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended) for iPass. Our management assessed
the effectiveness of our internal control over financial reporting as of
December 31, 2008. 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, 2008,
our internal control over financial reporting is effective based on these
criteria. Our independent registered public accounting firm, KPMG LLP, that
audited our financial statements included in this annual report containing the
disclosure required by this item has issued an audit report on the effectiveness
of our internal control over financial reporting.





Item
9A(T).Control and
Procedures





Not
applicable.





Item 9B.Other
Information





None.




30




PART
III





Item 10.Directors, Executive Officers and Corporate Governance





Information
relating to our executive officers and directors will be presented under the
captions “Executive Officers” and “Proposal 1 — Election of Directors” in our
definitive proxy statement in connection with our 2009 Annual Meeting of
stockholders to be filed with the Securities and Exchange Commission not later
than April 30, 2009 (the “Proxy Statement”). That information is incorporated
here by reference.





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





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





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





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





Item 11.Executive
Compensation





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





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 here by reference.





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





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





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





Item 14.Principal Accounting Fees and
Services





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


31





PART
IV





Item 15.Exhibits,
Financial Statement Schedules





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





1.
Financial Statements




PageReports of Independent
      Registered Public Accounting Firm
            33Consolidated
      Financial Statements:Balance Sheets as of
      December 31, 2008 and 2007
            35Statements of
      Operations for the years ended December 31, 2008, 2007 and
      2006
            36Statements of
      Stockholders’ Equity and Comprehensive Income (Loss) for the years ended
      December 31, 2008, 2007 and 2006
            37Statements of Cash Flows
      for the years ended December 31, 2008, 2007 and
      2006
            38Notes to Consolidated
      Financial Statements
            39





2.
Financial Statement Schedules





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





3.
Exhibits





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


32





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, 2008 and December 31, 2007,
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, 2008. 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 iPass, Inc. and subsidiaries
as of December 31, 2008 and December 31, 2007, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.




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




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 16, 2009 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.




/s/ KPMG
LLP


Mountain
View, California


March 16,
2009




33




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





The Board
of Directors and Stockholders


iPass,
Inc.:




We have
audited iPass, Inc.’s (the Company) internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control — Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal
Control over Financial Reportingappearing in Item 9A. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.




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




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




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




In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal
Control — Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of iPass, Inc.
as of December 31, 2008 and December 31, 2007, 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, 2008, and our report dated March 16, 2009 expressed an
unqualified opinion on those consolidated financial statements.




/s/ KPMG
LLP


Mountain
View, California


March 16,
2009




34




iPASS
INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS





(In
thousands, except share and per share amounts)





As
      of December 31,2008
            
            
            2007ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            33,077
            
            
            $
            70,907Short-term
      investments
            
            
            35,309
            
            
            
            4,258Accounts
      receivable, net of allowance for doubtful accounts of $927 and $2,792 in
      2008 and 2007, respectively
            
            
            33,756
            
            
            
            35,938Prepaid
      expenses and other current assets
            
            
            7,
      225
            
            
            
            7,116Deferred
      tax assets
            
            
            101
            
            
            
            575Total
      current assets
            
            
            109,468
            
            
            
            118,794Property
      and equipment, net
            
            
            7,201
            
            
            
            9,272Other
      assets
            
            
            6,364
            
            
            
            4,876Long-term
      deferred tax assets
            
            
            79
            
            
            
            —Acquired
      intangibles, net
            
            
            2,216
            
            
            
            9,504Goodwill
            
            
            —
            
            
            
            79,543Total
      assets
            
            $
            125,328
            
            
            $
            221,989LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
            
            $
            15,406
            
            
            $
            15,923Accrued
      liabilities
            
            
            12,176
            
            
            
            15,788Deferred
      revenue—short term
            
            
            5,736
            
            
            
            6,606Total
      current liabilities
            
            
            33,318
            
            
            
            38,317Deferred
      tax liability
            
            
            —
            
            
            
            575Deferred
      revenue—long term
            
            
            1,958
            
            
            
            949Other
      long term liabilities
            
            
            255
            
            
            
            1,040Total
      liabilities
            
            
            35,531
            
            
            
            40,881Commitments
      and contingencies (Note 14)Stockholders’
      equity:Common stock, $0.001
      par value (250,000,000 shares authorized; 61,251,523 and 61,812,598 shares
      issued and outstanding in 2008 and 2007, respectively)
            
            
            61
            
            
            
            62Additional
      paid-in capital
            
            
            242,160
            
            
            
            241,703Accumulated
      other comprehensive income
            
            
            216
            
            
            
            15Accumulated
      deficit
            
            
            (152,640
            )
            
            
            (60,672
            )Total
      stockholders’ equity
            
            
            89,797
            
            
            
            181,108Total
      liabilities and stockholders’ equity
            
            $
            125,328
            
            
            $
            221,989





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




35




iPASS
INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF
OPERATIONS





(In
thousands, except share and per share amounts)





For
      the Year Ended December 31,2008
            
            
            2007
            
            
            2006Revenues
            
            $
            191,368
            
            
            $
            191,732
            
            
            $
            182,711Operating
      expenses:Network
      access
            
            
            81,961
            
            
            
            69,143
            
            
            
            56,929Network
      operations
            
            
            34,770
            
            
            
            34,258
            
            
            
            32,013Research
      and development
            
            
            16,381
            
            
            
            21,141
            
            
            
            22,557Sales
      and marketing
            
            
            41,140
            
            
            
            52,809
            
            
            
            58,620General
      and administrative
            
            
            21,262
            
            
            
            21,358
            
            
            
            23,178Restructuring
      and other charges
            
            
            858
            
            
            
            3,167
            
            
            
            4,733Amortization
      of acquired intangibles
            
            
            3,901
            
            
            
            4,201
            
            
            
            3,971Impairment
      of goodwill and long-lived assets
            
            
            84,494
            
            
            
            —
            
            
            
            —Total
      operating expenses
            
            
            284,767
            
            
            
            206,077
            
            
            
            202,001Operating
      loss
            
            
            (93,399
            )
            
            
            (14,345
            )
            
            
            (19,290
            )Interest
      income
            
            
            2,003
            
            
            
            3,395
            
            
            
            3,721Foreign
      exchange losses and other income (expense)
            
            
            (1,153
            )
            
            
            (113
            )
            
            
            (62
            )Loss
      before income taxes
            
            
            (92,549
            )
            
            
            (11,063
            )
            
            
            (15,631
            )Provision
      for (benefit from) income taxes
            
            
            (581
            )
            
            
            23,151
            
            
            
            (7,195
            )Net
      loss before cumulative effect of change in accounting
      principle
            
            
            (91,968
            )
            
            
            (34,214
            )
            
            
            (8,436
            )Cumulative
      effect of change in accounting principle, net of zero tax
      effect
            
            
            —
            
            
            
            —
            
            
            
            (347
            )Net
      loss
            
            $
            (91,968
            )
            
            $
            (34,214
            )
            
            $
            (8,089
            )Net
      loss per share before cumulative effect of change in accounting
      principle:
            
            $
            (1.50
            )
            
            $
            (0.54
            )
            
            $
            (0.13
            )Per
      share effect of cumulative change in accounting principle:
            
            $
            —
            
            
            $
            —
            
            
            $
            —Net
      loss per share:
            
            $
            (1.50
            )
            
            $
            (0.54
            )
            
            $
            (0.13
            )Number
      of shares used in per share calculations:
            
            
            61,179,969
            
            
            
            62,828,202
            
            
            
            64,572,603





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




36




iPASS
INC. AND SUBSIDIARIES





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





(In
thousands)





Common
    StockShares
            
            
            Amount
            
            
            Additional
      Paid-In Capital
            
            
            Deferred
      Stock-Based Compensation
            
            
            Accumulated
      Comprehensive Income (Loss)
            
            
            Accumulated
      Deficit
            
            
            Total
      Stockholders' Equity
            
            
            Comprehensive
      Income (Loss)Balances,
      December 31, 2005
            
            
            64,203
            
            
            $
            64
            
            
            $
            245,456
            
            
            $
            (593
            )
            
            $
            (307
            )
            
            $
            (18,369
            )
            
            $
            226,251
            
            
            $
            13,012Exercise
      of stock options — common stock issued
            
            
            1,831
            
            
            
            2
            
            
            
            5,622
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,624
            
            
            
            —Employee
      stock purchase plan — common stock issued
            
            
            409
            
            
            
            —
            
            
            
            1,884
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,884
            
            
            
            —Outstanding
      common stock repurchased and retired
            
            
            (2,975
            )
            
            
            (3
            )
            
            
            (16,188
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (16,191
            )
            
            
            —Reversal
      of unearned stock-based compensation upon adoption of SFAS No.
      123(R)
            
            
            —
            
            
            
            —
            
            
            
            (593
            )
            
            
            593
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Cumulative
      effect of change in accounting principle
            
            
            —
            
            
            
            —
            
            
            
            (347
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (347
            )
            
            
            —Fair
      value of options assumed in acquisition of GoRemote
            
            
            —
            
            
            
            —
            
            
            
            5,826
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,826
            
            
            
            —Stock-based
      compensation
            
            
            —
            
            
            
            —
            
            
            
            6,178
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            6,178
            
            
            
            —Tax
      benefit from employee stock option plans
            
            
            —
            
            
            
            —
            
            
            
            44
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            44
            
            
            
            —Unrealized
      gain on available-for-sale investments, net
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            209
            
            
            
            —
            
            
            
            209
            
            
            
            209Net
      income (loss)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (8,089
            )
            
            
            (8,089
            )
            
            
            (8,089
            )Balances,
      December 31, 2006
            
            
            63,468
            
            
            $
            63
            
            
            $
            247,882
            
            
            $
            —
            
            
            $
            (98
            )
            
            $
            (26,458
            )
            
            $
            221,389
            
            
            $
            (7,880
            )Exercise
      of stock options — common stock issued
            
            
            473
            
            
            
            1
            
            
            
            879
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            880
            
            
            
            —Restricted
      stock vested
            
            
            42
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Employee
      stock purchase plan — common stock issued
            
            
            425
            
            
            
            1
            
            
            
            1,822
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,823
            
            
            
            —Outstanding
      common stock repurchased and retired
            
            
            (2,595
            )
            
            
            (3
            )
            
            
            (13,798
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (13,801
            )
            
            
            —Stock-based
      compensation
            
            
            —
            
            
            
            —
            
            
            
            4,918
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            4,918
            
            
            
            —Unrealized
      gain on available-for-sale investments, net
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            113
            
            
            
            —
            
            
            
            113
            
            
            
            113Net
      income (loss)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (34,214
            )
            
            
            (34,214
            )
            
            
            (34,214
            )Balances,
      December 31, 2007
            
            
            61,813
            
            
            $
            62
            
            
            $
            241,703
            
            
            $
            —
            
            
            $
            15
            
            
            $
            (60,672
            )
            
            $
            181,108
            
            
            $
            (34,101
            )Exercise
      of stock options — common stock issued
            
            
            123
            
            
            
            —
            
            
            
            90
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            90
            
            
            
            —Restricted
      stock vested
            
            
            375
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Employee
      stock purchase plan — common stock issued
            
            
            254
            
            
            
            —
            
            
            
            541
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            541
            
            
            
            —Outstanding
      common stock repurchased and retired
            
            
            (1,313
            )
            
            
            (1
            )
            
            
            (3,672
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (3,673
            )
            
            
            —Stock-based
      compensation
            
            
            —
            
            
            
            —
            
            
            
            3,794
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            3,794
            
            
            
            —Acceleration
      of stock-based compensation included in restructuring and other
      expense
            
            
            —
            
            
            
            —
            
            
            
            243
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            243
            
            
            
            —APIC
      pool adjustment
            
            
            —
            
            
            
            —
            
            
            
            (539)
            
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            (539)
            
            
            
            —Unrealized
      gain on available-for-sale investments, net
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            201
            
            
            
            —
            
            
            
            201
            
            
            
            201Net
      income (loss)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (91,968
            )
            
            
            (91,968
            )
            
            
            (91,968
            )Balances,
      December 31, 2008
            
            
            61,252
            
            
            $
            61
            
            
            $
            242,160
            
            
            $
            —
            
            
            $
            216
            
            
            $
            (152,640
            )
            
            $
            89,797
            
            
            $
            (91,767
            )





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




37




iPASS
INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS





(In
thousands)





For
      the Year Ended December 31,2008
            
            
            2007
            
            
            2006Cash
      flows from operating activities:Net
      loss
            
            $
            (91,968
            )
            
            $
            (34,214
            )
            
            $
            (8,089
            )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Stock-based
      compensation
            
            
            3,794
            
            
            
            4,918
            
            
            
            6,178Acceleration
      of stock-based compensation included in restructuring and other
      expense
            
            
            243
            
            
            
            —
            
            
            
            —Amortization
      of acquired intangibles
            
            
            3,901
            
            
            
            4,201
            
            
            
            3,971Depreciation,
      amortization and accretion
            
            
            5,533
            
            
            
            4,414
            
            
            
            5,989Loss on
      disposal of property and equipment
            
            
            25
            
            
            
            1,149
            
            
            
            —Impairment
      of goodwill and long-lived assets
            
            
            84,494
            
            
            
            —
            
            
            
            —Tax
      benefit from employee stock option plans
            
            
            —
            
            
            
            —
            
            
            
            27Deferred
      income taxes
            
            
            (180
            )
            
            
            22,310
            
            
            
            (6,739
            )Provision
      for doubtful accounts
            
            
            717
            
            
            
            29
            
            
            
            1,056Cumulative
      effect of change in accounting principle
            
            
            —
            
            
            
            —
            
            
            
            (347
            )Realized
      (gain) loss on investments, net
            
            
            (29
            )
            
            
            52
            
            
            
            —Changes
      in operating assets and liabilities, net of assets acquired and
      liabilities assumed:Accounts
      receivable
            
            
            1,465
            
            
            
            (7,388
            )
            
            
            868Prepaid
      expenses and other current assets
            
            
            (109
            )
            
            
            (775
            )
            
            
            (1,102
            )Other
      assets
            
            
            (1,066
            )
            
            
            (62
            )
            
            
            (1,015
            )Accounts
      payable
            
            
            (781
            )
            
            
            1,093
            
            
            
            (38
            )Accrued
      liabilities
            
            
            (4,394
            )
            
            
            (2,747
            )
            
            
            (4,253
            )Deferred
      revenue
            
            
            139
            
            
            
            676
            
            
            
            3,848Other
      liabilities
            
            
            (785
            )
            
            
            (929
            )
            
            
            1,969Net
      cash provided by (used in) operating activities
            
            
            999
            
            
            
            (7,273
            )
            
            
            2,323Cash
      flows from investing activities:Purchases
      of short-term investments
            
            
            (230,192
            )
            
            
            (440,294
            )
            
            
            (140,490
            )Maturities
      of short-term investments
            
            
            199,378
            
            
            
            520,658
            
            
            
            207,695Purchases
      of property and equipment
            
            
            (4,551
            )
            
            
            (5,108
            )
            
            
            (5,222
            )Restricted
      cash pledged for letter of credit
            
            
            (422
            )
            
            
            (1,470
            )
            
            
            —Acquisition
      of GoRemote, net of cash acquired
            
            
            —
            
            
            
            —
            
            
            
            (77,960
            )Net
      cash provided by (used in) investing activities
            
            
            (35,787
            )
            
            
            73,786
            
            
            
            (15,977
            )Cash
      flows from financing activities:Proceeds
      from issuance of common stock
            
            
            631
            
            
            
            2,703
            
            
            
            7,508Cash
      used in repurchase of common stock
            
            
            (3,673
            )
            
            
            (13,801
            )
            
            
            (16,191
            )Net
      cash used in financing activities
            
            
            (3,042
            )
            
            
            (11,098
            )
            
            
            (8,683
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            (37,830
            )
            
            
            55,415
            
            
            
            (22,337
            )Cash
      and cash equivalents at beginning of year
            
            
            70,907
            
            
            
            15,492
            
            
            
            37,829Cash
      and cash equivalents at end of year
            
            $
            33,077
            
            
            $
            70,907
            
            
            $
            15,492Supplemental
      disclosures of cash flow information:Cash
      paid for taxes
            
            $
            727
            
            
            $
            929
            
            
            $
            1,471Non-cash
      investing and financing activities:Assumption
      of GoRemote options
            
            $
            —
            
            
            $
            —
            
            
            $
            5,826FAS123R APIC pool adjustment
            
            
            539
            
            
            
            —
            
            
            
            —Accrued payments for acquisition of property and
      equipment
            
            
            264
            
            
            
            —
            
            
            
            —





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




38




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
Mobile Office, 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 550
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 Mobile Office 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 about future
events.  These estimates and the underlying assumptions affect the
amounts of assets and liabilities reported, disclosure about contingent assets
and liabilities, and reported amounts of revenues and expenses.  Such
estimates include the value of purchase consideration, valuation of accounts
receivables, inventories, goodwill, intangibles assets, and other long-lived
assets, legal contingencies, guarantee obligations, indemnifications, and
assumptions used in the calculation of income taxes, retirement and other
post-employment benefits, and customer incentives, among
others.  These estimates and assumptions are based on management’s
best estimates and judgment.  Management evaluates its estimates and
assumptions on an ongoing basis using historical experience and other factors,
including the current economic environment, which management believes to be
reasonable under the circumstances.  We adjust such estimates and
assumptions when facts and circumstances dictate. Illiquid credit markets,
volatile equity, foreign currency, and energy markets, and declines in consumer
spending have combined to increase the uncertainty inherent in such estimates
and assumptions.  As future events and their effects cannot be
determined with precision, actual results could differ significantly from these
estimates.  Changes in those estimates resulting from continuing
changes in the economic environment will be reflected in the financial
statements in future periods.





Principles
of Consolidation





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





Foreign
Currency 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 losses were $1.1
million, $246,000 and $121,000 for the years ended December 31, 2008, 2007
and 2006 and are included in Foreign exchange losses and other income
(expense) in the accompanying Consolidated Statements of
Operations.





Comprehensive
Loss





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





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





Year
      Ended December 31,2008
            
            
            2007
            
            
            2006Net
      loss
            
            $
            (91,968
            )
            
            $
            (34,214
            )
            
            $
            (8,089
            )Comprehensive
      loss:Change
      in accumulated unrealized gain on available-for-sale securities, net of
      taxes
            
            
            201
            
            
            
            113
            
            
            
            209Total
      comprehensive loss
            
            $
            (91,767
            )
            
            $
            (34,101
            )
            
            $
            (7,880
            )




39


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





The
Company’s cash, cash equivalents, short-term investments and accounts receivable
are potentially subject to concentration of credit
risk.  Substantially all of the Company’s cash, cash equivalents and
short-term investments are held by two 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.  See Note 4 for a discussion of the fair value of these
financial instruments.





The
Company’s receivables are derived from revenue earned from customers located
primarily in the United States and Europe.  The Company provides
credit to its customers in the normal course of business, performs ongoing
credit evaluations of its customers’ financial condition, and maintains an
allowance for doubtful accounts. The allowance for doubtful accounts is based on
customer-specific identification, which encompasses various factors, including
the Company’s review of credit profiles of its customers, contractual terms and
conditions, current economic trends, and historical payment
experience.  While the Company has not experienced material credit
losses in any of the periods presented, there can be no assurance that the
Company will not experience material credit losses in the future.





As of
December 31, 2008 and 2007, no individual customer represented 10% or more of
accounts receivable. For the years ended December 31, 2008, 2007 and 2006, no
customer represented more than 10% of total revenues.





For the
years ended December 31, 2008, 2007 and 2006, no individual supplier represented
10% or more of total network access expenses.




Fair Value of Financial
Instruments





For the
Company’s financial instruments, including cash, cash equivalents, accounts
receivable, accounts payable, and accrued liabilities, carrying amounts
approximate fair value due to the relatively short maturities of the financial
instruments.  The fair value of the Company’s investments and
marketable equity securities is determined using quoted market prices for those
securities or similar financial instruments.





Property
and Equipment





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





Equipment
(Three years)


Furniture
and fixtures (Five years)


Computer
software and equipment (Three years)


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





The
Company reviews long-lived tangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset or asset
group may not be recoverable in accordance with SFAS No. 144. An asset is
considered impaired if its carrying amount exceeds the undiscounted future net
cash flows the asset is expected to generate. If an asset or asset group is
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair value.





Goodwill
and Acquired Intangibles





The
Company records goodwill when consideration paid in a purchase acquisition
exceeds the fair value of the net tangible assets and the identified intangible
assets acquired. Goodwill is not amortized, but rather is tested for impairment
annually in the Company’s fiscal fourth quarter, or more frequently if facts and
circumstances warrant a review. With the adoption of SFAS 142, management
determined that the Company has a single reporting unit for the purpose of
goodwill impairment tests under SFAS 142.





The
Company evaluates acquired intangibles for impairment in accordance with SFAS
No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets(“SFAS 144”).  SFAS
142 also requires that intangible assets with finite lives be amortized over
their estimated useful lives and reviewed for impairment whenever an impairment
indicator exists under SFAS 144. The Company periodically evaluates the carrying
amount of its long-lived assets and when events or changes in business
circumstances have occurred which indicate the carrying amount of such assets
may not be fully realizable. Determination of impairment is based on an
estimate of undiscounted future cash flows resulting from the use of the assets
and their eventual disposition.  If the Company determines these assets
have been impaired, the impairment charge is recorded based on a comparison of
the net book value of the assets and the fair value of the assets.




40


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.





The
Company recorded net deferred tax assets to the extent management believes these
assets will more likely than not be realized. In making such determination,
management considers all available positive and negative evidence, including
scheduled reversals of deferred tax liabilities, projected future taxable
income, tax planning strategies and recent financial operations.  In the
event management were to determine that the Company would be able to realize the
deferred income tax assets in the future in excess of their net recorded amount,
the Company would make an adjustment to the valuation allowance which would
reduce the provision for income taxes.





On
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes,
and prescribes a recognition threshold and measurement attributes for financial
statement purposes of tax positions taken or expected to be taken on a tax
return. Under FIN 48, the benefit of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position is not recognized if it has less
than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.





Stock-Based
Compensation





Change
in Accounting Principle




On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment, (“SFAS
123(R)”) which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors including
employee stock options and employee stock purchases related to the Employee
Stock Purchase Plan (“ESPP”) be based on estimated fair values. SFAS 123R
requires companies to estimate the fair value of share-based payment awards on
the date of grant using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as expense over the
requisite service periods in the Company’s statements of
operations.





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.  The
Company recorded a $(347,000) cumulative effect of a change in accounting
principle in the condensed consolidated statement of operations upon adoption.
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.





Total
stock-based compensation expense, including stock options, ESPP and restricted
stock awards, recognized under SFAS 123(R) for the year ended December 31, 2008,
2007 and 2006 was $3.8 million, $4.9 million and $6.2 million, respectively. The
income related tax benefit totaled $0 for the years ended December 31, 2008
and 2007 and $220,000 for the year ended December 31, 2006.  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
November 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) No. FAS 123(R)-3, Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards. This FSP
provides an alternative method for calculating the historical additional paid-in
capital pool (APIC pool) available to absorb tax deficiencies as required under
SFAS No. 123(R) 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).   We have elected to utilize the transition method
outlined in this FSP in accounting for the income tax consequences of employee
share-based compensation awards.







When the
Company applied the tax ordering provisions prescribed by SFAS 123(R), it
determined that no excess tax benefits would likely be realized.  As
of December 31, 2008, there was $3.1 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.





41


Revenue
Recognition





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




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




Usage
Fees




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





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




The
Company provides services over a heterogeneous virtual network, which was
created by forming contractual relationships with approximately 550 access
providers, including Internet service providers, cable companies, DSL companies
and telecommunications companies. These companies may provide us their services
under either a reseller or an agency arrangement. In applying our revenue
recognition policy we consider the factors prescribed by EITF 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent, and must make judgments with regard to
the specific facts and circumstances surrounding each provider relationship to
determine which portion of our revenues we provide under a reseller arrangement,
where we would record gross revenues and cost of revenues, and which portion of
our revenues we provide as an agent, where we would record revenues and cost of
revenues combined on a net basis. In exercising our judgment, we evaluate the
contractual arrangements and de facto relationships with each provider, together
with various other assumptions believed to be applicable and reasonable under
the circumstances, to determine whether revenues are gross versus net. We have
one significant provider arrangement under which we account for revenues on a
net basis as the arrangement is considered an agency relationship and the
Company primarily acts only as a billing agent. All other provider arrangements
are accounted for on a gross basis.





For
arrangements accounted for on a gross basis, the Company defers the costs
associated with deploying each endpoint and amortizing the costs over the
estimated life of an endpoint, typically 21 to 41 months. Our judgments may
change as new events occur, as additional information is obtained and as our
operating environment changes, any of which could cause a material impact on the
revenues that we have reported.




Services
Fees





The
Company typically provides its customers with deployment services, technical
support and training. 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 fees relating to deployment services and technical
support on a straight-line basis over the term of the contract, generally
one to three years.  Training revenue consists of fees for training
services, generally provided to customer’s technical teams to help support their
own end-users.  Our training rates are generally based on a fixed rate
per day and revenue is recognized as training services are
delivered.





License
and Maintenance Fees




The
Company generates license and maintenance revenue through the licensing of its
Device Management and DeviceID automated systems management and security
software products. License revenue is generally recognized when a signed
contract or other persuasive evidence of an arrangement exists, the software has
been shipped or electronically delivered, the license fee is fixed or
determinable, and collection of the resulting receivable is probable as
prescribed by AICPA Statement of Position (“SOP”) 97-2. We enter into
revenue arrangements in which a customer may purchase a combination of software,
upgrades and maintenance and support (multiple-element arrangements). When
vendor-specific objective evidence (“VSOE”) of fair value exists for all
elements, we allocate revenue to each element based on the relative fair value
of each of the elements. VSOE of fair value is established by the price charged
when that element is sold separately. When contracts contain multiple elements
wherein VSOE of fair value exists for all undelivered elements, but not the
delivered 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. License revenue on shipments to resellers, which is
generally subject to certain rights of return and price protection, is
recognized when the products are sold by the resellers to the end-user
customer.




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





42


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.





Advertising





Advertising
and promotional costs are expensed as incurred. For the years ended December 31,
2008, 2007 and 2006 these costs totaled approximately $45,000, $259,000 and
$533,000, 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.  Costs incurred subsequent
to technological feasibility have not been material.





Recent
Accounting Pronouncements





In
September 2008, the FASB issued FASB Staff Position (“FSP”) No. 133-1 and FIN
45-4 (“FSP FAS 133-1 and FIN 45-4”), “Disclosures about Credit Derivatives and
Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB Statement
No. 161”.  FSP FAS 133-1 and FIN 45-4 amends FASB Statement No. 133
(“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities”, to
require disclosures by sellers of credit derivatives, including credit
derivatives embedded in hybrid instruments.  FSP FAS 133-1 and FIN
45-4 also amend FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others”, to require additional disclosure about the current
status of the payment/performance risk of a guarantee.  The provisions
of the FSP that amend SFAS 133 and FIN 45 are effective for reporting periods
ending after November 15, 2008. FSP FAS 133-1 and FIN 45-4 also clarifies the
effective date in FASB Statement No. 161 (“SFAS 161”), “Disclosures about
Derivative Instruments and Hedging Activities”. Disclosures required by SFAS 161
are effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. Because FSP FAS 133-1 and FIN 45-4
only require additional disclosures, the adoption will not impact the Company’s
consolidated financial position, results of operations or cash
flows.





In April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets.”  FSP 142-3 amends the factors
an entity should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under FASB Statement
No. 142, “Goodwill and Other Intangible Assets.”  This new guidance
applies prospectively to intangible assets that are acquired individually or
with a group of other assets in business combinations and asset acquisitions.
FSP 142-3 is effective for financial statements issued for fiscal years and
interim periods beginning after December 15, 2008.  Early adoption is
prohibited.  The impact of FSP 142-3 will depend on the Company’s
future acquisition activity.





In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB Statement
No. 133.Statement 161 requires disclosures of how
and why an entity uses derivative instruments, how derivative instruments and
related hedged items are accounted for and how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance, and cash flows.  Statement 161 is effective for fiscal years
beginning after November 15, 2008, with early adoption
permitted.  Because Statement No. 161 only requires
additional disclosures, the adoption will not impact the Company’s consolidated
financial position, results of operations or cash flows.




In
September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (SFAS
157).  SFAS 157 defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. SFAS 157
applies under other accounting pronouncements that require or permit fair value
measurements, as the FASB had previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157
is effective for fiscal years beginning after November 15, 2007.  However,
in February 2008, the FASB issued FSP FAS 157-2, which delays the effective date
of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except items
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). This FSP partially defers the effective date of SFAS
157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of this
FSP.  Effective January 1, 2008, the Company adopted SFAS 157 for
financial assets and liabilities recognized at fair value on a recurring
basis.  The partial adoption of SFAS 157 for financial assets and
liabilities did not have a material impact on our consolidated financial
position, results of operations or cash flows. Effective January 1, 2009, the
company will adopt SFAS 157 for all nonfinancial assets and
nonfinancial liabilities. Since the adoption of SFAS 157 for
nonfinancial assets and liabilities will be applied prospectively, the Company
believes there will not be a material impact on its consolidated financial
position, results of operations or cash flows upon adoption.





In
October 2008, the FASB issued FSP 157-3 (“FSP 157-3”), “Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active.”
FSP 157-3 clarifies the application of SFAS No. 157 in a market that is not
active and addresses application issues such as the use of internal assumptions
when relevant observable data does not exist, the use of observable market
information when the market is not active and the use of market quotes when
assessing the relevance of observable and unobservable data. FSP 157-3 is
effective for all periods presented in accordance with SFAS No. 157. The
guidance in FSP 157-3 is effective immediately and did not have an impact on the
Company upon adoption.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007)
("SFAS 141R"), Business
Combinations, and SFAS No. 160 ("SFAS 160"), Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No. 51. SFAS 141R will change how business acquisitions are
accounted for and will impact financial statements both on the acquisition date
and in subsequent periods. SFAS 160 will change the accounting and
reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity.  SFAS
141R and SFAS 160 are effective for fiscal years beginning after December 15,
2008.  The impact of the implementation of SFAS 141R will depend upon
the nature, terms and size of the acquisitions the Company consummates after the
effective date of January 1, 2009.





43


In
November 2008, the FASB ratified EITF Issue No. 08-7, “Accounting for
Defensive Intangible Assets” (“EITF 08-7”). EITF 08-7 applies to defensive
intangible assets, which are acquired intangible assets that the acquirer does
not intend to actively use but intends to hold to prevent its competitors from
obtaining access to them. As these assets are separately identifiable, EITF 08-7
requires an acquiring entity to account for defensive intangible assets as a
separate unit of accounting. Defensive intangible assets must be recognized at
fair value in accordance with SFAS 141R and SFAS 157. EITF 08-7 is effective for
defensive intangible assets acquired in fiscal years beginning on or after
December 15, 2008. The Company does not expect EITF 08-7 will have an
impact on its consolidated financial statements when effective, but there could
be a material impact depending on the nature and magnitude of any defensible
intangible assets purchased after the effective date of January 1,
2009.





Note
3. Business Combinations





GoRemote





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




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





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





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





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





Goodwill
represents the excess of the purchase price over the fair value of tangible and
identifiable intangible assets. The consolidated statements of operations do not
reflect the amortization of goodwill acquired in the proposed merger, consistent
with the guidance in the Financial Accounting Standards Board Statement No. 142,
Goodwill and OtherIntangible
Assets.





44


Note
4. Financial Instruments





SFAS 157,
Fair Value
Measurements, clarifies that fair value is an exit price, representing
the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. As such, fair
value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or liability.
As a basis for considering such assumptions, SFAS 157 establishes a three-tier
value hierarchy, which prioritizes the inputs used in measuring fair value as
follows: (Level 1) observable inputs such as quoted prices in active markets;
(Level 2) inputs other than the quoted prices in active markets that are
observable either directly or indirectly; and (Level 3) unobservable inputs in
which there is little or no market data, which require us to develop our own
assumptions. This hierarchy requires the use of observable market
data, when available, and the minimization of the use of unobservable
inputs when determining fair value.




Certain
financial assets and liabilities are measured at fair value on a recurring
basis, including available-for-sale fixed income and equity securities. 
The fair value of these financial assets was determined using the following
inputs at December 31, 2008 (in thousands):




Fair
      Value Measurements at Reporting Date UsingTotal
            
            
            Quoted
      Prices in Active Markets for Identical Assets (Level 1)
            
            
            Significant
      Other Observable Inputs (Level 2)
            
            
            Significant
      Unobservable Inputs (Level 3)Money
      market funds (1)
            
            $
            13,309
            
            
            $
            13,309
            
            
            $
            —
            
            
            $
            —Fixed
      income available-for-sale securities (2)
            
            $
            41,949
            
            
            $
            —
            
            
            $
            41,949
            
            
            $
            —Total
            
            $
            55,258
            
            
            $
            13,309
            
            
            $
            41,949
            
            
            $
            —





(1)
Included in cash and cash equivalents on the Company’s consolidated balance
sheet.


(2) Fixed
income available-for-sale securities include commercial paper (86% of total) and
bonds of government agencies (8% of total) and commercial paper guaranteed by a
government program (6% of total). Included in fixed income available-for-sale
securities is approximately $6.6 million of cash equivalents. Cash
equivalents consist of instruments with remaining maturities of three months or
less at the date of purchase.





Note
5. Short-Term Investments





The
following tables summarize the Company’s short-term investments as of December
31, 2008 and 2007 (in thousands):




Short-Term
      InvestmentsAs
      of December 31, 2008
            
            Cost
            
            
            Unrealized
      Gains
            
            
            Unrealized
      Losses
            
            
            Fair
      ValueCommercial
      paper
            
            $
            7,726
            
            
            $
            17
            
            
            $
            —
            
            
            $
            7,743Commercial
      paper guaranteed by government program
            
            
            1,638
            
            
            
            5
            
            
            
            (1)
            
            
            
            1,642Federal
      agency discount notes
            
            
            21,258
            
            
            
            159
            
            
            
            —
            
            
            
            21,417U.S.
      Government securities
            
            
            4,479
            
            
            
            28
            
            
            
            —
            
            
            
            4,507Total
            
            $
            35,101
            
            
            $
            209
            
            
            $
            (1
            )
            
            $
            35,309





Short-Term
      InvestmentsAs
      of December 31, 2007
            
            Cost
            
            
            Unrealized
      Gains
            
            
            Unrealized
      Losses
            
            
            Fair
      ValueU.S.
      Government securities
            
            $
            4,256
            
            
            $
            2
            
            
            $
            —
            
            
            $
            4,258Total
            
            $
            4,256
            
            
            $
            2
            
            
            $
            —
            
            
            $
            4,258





The
following table summarizes the principal amounts of the Company’s short-term
investments by expected maturity date as of December 31, 2008 (in
thousands):





Expected
      Maturity Date for Par Value Amounts For the Year Ended December
      31,
            
            
            As
      of December 31, 20082009
            
            
            Total
      Cost Value
            
            
            Total
      Fair ValueCommercial
      paper
            
            $
            7,750
            
            
            $
            7,726
            
            
            $
            7,743Commercial
      paper guaranteed by a government program
            
            
            1,650
            
            
            
            1,638
            
            
            
            1,642Federal
      agency discount notes
            
            
            21,450
            
            
            
            21,258
            
            
            
            21,417U.S.
      Government securities
            
            
            4,500
            
            
            
            4,479
            
            
            
            4,507Total
            
            $
            35,350
            
            
            $
            35,101
            
            
            $
            35,309




45


As of
December 31, 2008, the Company has no short-term investments with maturities
dates beyond 2009 year-end date.




The
following table summarizes the gross gains and losses realized which are
included in Interest income in the Company’s Consolidated Statements of
Operations for the years ending December 31, 2008, 2007 and 2006 (in
thousands):





Twelve
      Months Ended December 31,2008
            
            
            2007
            
            
            2006Gross
      realized gains
            
            $
            29
            
            
            $
            8
            
            
            $
            6Gross
      realized losses
            
            
            —
            
            
            
            (60
            )
            
            
            (6
            )Net
      realized gains/(losses)
            
            $
            29
            
            
            $
            (52
            )
            
            $
            —





Note
6. Allowance for Doubtful Accounts





Changes
in the Company’s allowance for doubtful accounts, including acquired amounts,
for the years ended December 31, 2008, 2007 and 2006 are as follows (in
thousands):




Beginning
      Balance
              
              
              Acquired
              
              
              Provisions
              
              
              Charge
      Offs
              
              
              Ending
      BalanceYear
      ended December 31, 2006
              
              $
              2,040
              
              
              $
              611
              
              
              $
              1,056
              
              
              $
              (618
              
              
              $
              3,089Year
      ended December 31, 2007
              
              $
              3,089
              
              
              
              —
              
              
              $
              29
              
              
              $
              (326
              
              
              $
              2,792Year
      ended December 31, 2008
              
              $
              2,792
              
              
              
              —
              
              
              $
              717
              
              
              $
              (2,582
              
              
              $
              927




Note
7. Property and Equipment





Property
and equipment consisted of (in thousands):





December
      31, 2008
            
            
            December
      31, 2007Equipment
            
            $
            15,240
            
            
            $
            32,390Furniture
      and fixtures
            
            
            3,542
            
            
            
            4,297Computer
      software and equipment
            
            
            7,425
            
            
            
            10,138Leasehold
      improvements
            
            
            2,764
            
            
            
            3,88228,971
            
            
            
            50,707Less:
      Accumulated depreciation and amortization
            
            
            (21,770
            )
            
            
            (41,435
            )Property
      and equipment, net
            
            $
            7,201
            
            
            $
            9,272





Depreciation
expense was $5.5 million, $5.2 million and $5.3 million for the years ended
December 31, 2008, 2007 and 2006, respectively.





In the
fourth quarter of fiscal 2008, as part of the goodwill and long-lived assets
impairment, the Company recorded a charge of $1.3 million related to the
impairment of fixed assets.  As part of the Company’s restructuring
and reorganization activities in the fourth quarter of 2007, management
abandoned certain assets and recorded a $900,000 impairment.





Note
8. Goodwill and Acquired Intangibles





In
accordance with SFAS No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”), the Company analyzes the carrying value of goodwill
for impairment annually or more frequently if there are changes in facts and
circumstances indicating that the fair value may be less than its carrying
amount.  The Company uses both the income and the market valuation
approaches to assessing the enterprise’s fair value.  The Company
considers the estimated values derived from both the income and market valuation
approaches equally in arriving at the final conclusion of reporting unit fair
value.  The income approach provides an estimate of fair value based
on discounted expected future cash flows. The estimates and assumptions used to
determine the fair value include operating forecasts, revenue projections and
risk-based discount rates.  These estimates are based on historical
data, management estimates and projections as well as reputable external
sources.  The market approach estimates fair value by applying various
price or market multiples to the reporting unit’s operating results and then
adjusting for an appropriate control premium. The control premium is derived
from control premiums offered as part of acquisitions in comparable market
segments.





The
Company performed its annual impairment analysis of goodwill during the fourth
quarter of 2008, and concluded that the fair value of the enterprise was less
than the carrying amount of net assets indicating a possible impairment of
goodwill.  As such, the Company completed a full goodwill impairment
test as described above.  The Company established the fair value of
its goodwill by allocating the estimated fair value of its reporting unit to its
assets and liabilities, including the estimated fair value of its unrecorded
intangible assets, on a fair value basis.  As a result of the fair
value analysis and allocation, the Company determined that the full carrying
value of goodwill was impaired and recorded an impairment charge of $79.8
million.  In conjunction with the goodwill impairment testing, the
Company also analyzed the current fair values of its acquired intangible assets
and concluded that certain of those assets were also impaired resulting in an
additional $3.4 million impairment charge.





46


Allocating
assets and liabilities on a fair value basis and determining the fair value of
unrecorded intangible assets required that management make assumptions and
estimates about the fair value of assets and liabilities where the fair values
of those assets and liabilities were not readily available or observable. In
addition, management made estimates regarding its forecasted revenue, expenses
and cash flows, its research and development activities, its customer turnover
rates, applicable discount rates and costs of capital and the marketability of
its current and future technology.





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





December
      31, 2007
            
            
            Adjustment
            
            
            Impairment
            
            
            Amortization
            
            
            December
      31,2008Goodwill
            
            $
            79,543
            
            
            $
            243
            
            
            $
            (79,786
            )
            
            $
            —
            
            
            $
            —Intangibles:Existing
      technology
            
            
            2,749
            
            
            
            —
            
            
            
            (970
            )
            
            
            (1,404
            )
            
            
            375Patent/Core
      technology
            
            
            1,001
            
            
            
            —
            
            
            
            —
            
            
            
            (491
            )
            
            
            510Maintenance
      agreements and certain relationships
            
            
            189
            
            
            
            —
            
            
            
            —
            
            
            
            (67
            )
            
            
            122Customer
      relationships
            
            
            4,805
            
            
            
            —
            
            
            
            (1,945
            )
            
            
            (1,651
            )
            
            
            1,209Supplier
      contracts
            
            
            504
            
            
            
            —
            
            
            
            (266
            )
            
            
            (238
            )
            
            
            —Internally
      developed software
            
            
            256
            
            
            
            —
            
            
            
            (206
            )
            
            
            (50
            )
            
            
            —$
            89,047
            
            
            $
            243
            
            
            $
            (83,173
            )
            
            $
            (3,901
            )
            
            $
            2,216





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





Twelve
      Months Ended December 31,2008
            
            
            2007
            
            
            2006Intangibles:Existing
      technology
            
            $
            (1,404
            )
            
            $
            (1,612
            )
            
            $
            (1,612
            )Patent/Core
      technology
            
            
            (491
            )
            
            
            (563
            )
            
            
            (563
            )Maintenance
      agreements and certain relationships
            
            
            (67
            )
            
            
            (67
            )
            
            
            (66
            )Customer
      relationships
            
            
            (1,651
            )
            
            
            (1,671
            )
            
            
            (1,478
            )Supplier
      contracts
            
            
            (238
            )
            
            
            (238
            )
            
            
            (208
            )Internally
      developed software
            
            
            (50
            )
            
            
            (50
            )
            
            
            (44
            )$
            (3,901
            )
            
            $
            (4,201
            )
            
            $
            (3,971
            )




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





December
      31, 2008Amortization
      Life
            
            Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            
            Net
      Carrying AmountIntangibles:Existing
      technology
            4-8
      yrs
            
            $
            5,375
            
            
            $
            (5,000
            )
            
            $
            375Patent/Core
      technology
            4-8
      yrs
            
            
            2,800
            
            
            
            (2,290
            )
            
            
            510Maintenance
      agreements and certain relationships
            5
      yrs
            
            
            400
            
            
            
            (278
            )
            
            
            122Customer
      relationships
            4-7
      yrs
            
            
            4,800
            
            
            
            (3,591
            )
            
            
            1,209$
            13,375
            
            
            $
            (11,159
            )
            
            $
            2,216





47


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





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





Fiscal
      Year2009
            
            $
            1,3802010
            
            
            4282011
            
            
            2392012
            
            
            169$
            2,216





Note
9. Accrued Liabilities





Accrued
liabilities consisted of (in thousands):





December
      31, 2008
            
            
            December
      31, 2007Accrued
      commissions
            
            $
            2,700
            
            
            $
            4,613Accrued
      liabilities
            
            
            5,906
            
            
            
            5,582Deferred
      rent
            
            
            34
            
            
            
            945Paid
      time off payable
            
            
            1,538
            
            
            
            1,301Taxes
      payable
            
            
            1,198
            
            
            
            1,553Accrued
      restructuring liabilities - current
            
            
            800
            
            
            
            1,794$
            12,176
            
            
            $
            15,788





Note
10. Restructuring and Other





In
November 2007, the Company recorded a restructuring charge of approximately $3.2
million related to (i) a workforce reduction of 72 employees spread across all
functions though focused on sales and marketing, (ii) the abandonment of certain
facilities and (iii) abandonment of certain capitalized assets totaling
$900,000.  As of December 31, 2008, the Company finalized all of the
employment terminations, settled all negotiations and paid out the
remaining severance resulting in a credit to the restructuring expense of
approximately $25,000 in the first quarter of 2008.  The Company also
adjusted the accrual for abandoned facilities, primarily due to increased common
area maintenance charges (“CAM charges”), resulting in additional restructuring
expense of approximately $8,000 and $183,000 in the first and fourth quarters of
2008.





In June
and September 2006, the Company recorded restructuring charges totaling
approximately $1.7 million related to the workforce reduction of 58 employees,
across all functions. In November 2006, the Company recorded an additional
restructuring charge of $3.0 million related to excess facilities. By June 2007,
the Company finalized the aforementioned terminations, settled all
negotiations and paid out the remaining severance resulting in a credit to
the restructuring expense of approximately $179,000 in the second quarter of
2007.





48


The
severance costs were recorded pursuant to SFAS No. 112, Employers' Accounting for
Postemployment Benefits—an amendment of FASB Statements No. 5
and 43, and the excess facility costs were recorded pursuant
to  SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities("SFAS No. 146").  SFAS No. 146
requires that the excess facilities liabilities be recorded at fair
value.  The difference between the fair value of the liability at the
time it was recorded and the total cash liability is accreted ratably
over the expected term.  This accretion is reported in the
restructuring expense line on the condensed consolidated statements of
operations.





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




Summary
      of Restructuring AccrualExcess
      Facility Costs
            
            
            Severance
      Costs
            
            
            Total
      Restructuring AccrualBalance
      as of December 31, 2006
            
            $
            3,045
            
            
            $
            403
            
            
            $
            3,448Restructuring
      charges
            
            
            1,093
            
            
            
            2,196
            
            
            
            3,289Adjustments
            
            
            —
            
            
            
            (179
            )
            
            
            (179
            )Net
      present value accretion
            
            
            57
            
            
            
            —
            
            
            
            57Payments
            
            
            (1,329
            )
            
            
            (1,653
            )
            
            
            (2,982
            )Write-off
      of capitalized assets
            
            
            (900
            )
            
            
            —
            
            
            
            (900
            )Balance
      as of December 31, 2007
            
            $
            1,966
            
            
            $
            767
            
            
            $
            2,733Restructuring
      charges
            
            
            8
            
            
            
            —
            
            
            
            8Adjustments
            
            
            183
            
            
            
            (25
            )
            
            
            158Net
      present value accretion
            
            
            112
            
            
            
            —
            
            
            
            112Payments
            
            
            (1,215
            )
            
            
            (742
            )
            
            
            (1,957
            )Balance
      as of December 31, 2008
            
            $
            1,054
            
            
            $
            —
            
            
            $
            1,054





In
addition, the Company recorded a charge of $580,000 for severance costs related
to the departure of our former Chief Executive Officer in the fourth quarter of
2008.  These costs are comprised of $310,000 for lump-sum cash
payment, $243,000 for the acceleration of stock options and stock awards and
$27,000 for continuation of health insurance benefits.  All cash
severance was fully paid by December 31, 2008 and the health insurance benefits
are expected to be paid over the next 17 months.





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
following is a summary of the acquisition-related restructuring activities
for the years ended December 31, 2007 and 2006 (in thousands):




Excess
      Facility CostsBalance
      as of December 31, 2006
            
            $
            817Payments
            
            
            (717
            )Balance
      as of December 31, 2007
            
            $
            100Payments
            
            
            (100
            )Balance
      as of December 31, 2008
            
            $
            —





As of December 31, 2008 and 2007, the
Company has classified $800,000 and $1.8 million, respectively, of the
restructuring liability in accrued liabilities and remaining $254,000 and $1.0
million, respectively, in long-term liabilities based on the Company’s
expectation that the remaining lease payments will be paid over the remaining
term of the related leases (net of expected sublease income).




49


Note
11. Income Taxes





Income
(loss) before income taxes includes net income (loss) from foreign operations of
approximately $1.9 million, $2.0 million and $750,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.





The
provision for (benefit from) income taxes consisted of the following for the
years ended December 31, 2008, 2007 and 2006 (in thousands):





2008
            
            
            2007
            
            
            2006Current:U.S.
      federal
            
            $
            (141)
            
            
            $
            —
            
            
            $
            (600
            )State
            
            
            (775)
            
            
            
            130
            
            
            
            (364
            )Foreign
            
            
            471
            
            
            
            629
            
            
            
            507$
            (445)
            
            
            $
            759
            
            
            $
            (457
            )Deferred:U.S.
      federal
            
            
            —
            
            
            
            19,640
            
            
            
            (5,966
            )State
            
            
            —
            
            
            
            2,716
            
            
            
            (772
            )Foreign
            
            
            (180
            )
            
            
            —
            
            
            
            —Other
            
            
            44
            
            
            
            36
            
            
            
            —(136)
            
            
            
            22,392
            
            
            
            (6,738
            )Total
      provision for (benefit from) income taxes
            
            $
            (581)
            
            
            $
            23,151
            
            
            $
            (7,195
            )




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, 2008 and December 31, 2007, the Company placed a full valuation
allowance on its net deferred tax assets from the United States and
Israel.   The components of deferred tax assets (liabilities)
consisted of the following as of December 31, 2008 and 2007 (in
thousands):





2008
            
            
            2007Deferred
      tax assets:Net
      operating loss carryforwards
            
            $
            45,713
            
            
            $
            43,278Reserves
      and accruals
            
            
            6,717
            
            
            
            8,834Research
      and other tax credits
            
            
            6,084
            
            
            
            5,722Fixed
      assets
            
            
            2,208
            
            
            
            1,968Total
      deferred tax assets
            
            
            60,722
            
            
            
            59,802Valuation
      allowance
            
            
            (59,672)
            )
            
            
            (56,040
            )Net
      deferred tax assets
            
            $
            1,050
            
            
            $
            3,762Deferred
      tax liabilities:Acquired
      intangibles
            
            $
            (870
            )
            
            $
            (3,762
            )Total
      net deferred tax assets
            
            $
            180
            
            
            $
            —




During
2008, the Company increased the valuation allowance by $3.6
million.  As of December 31, 2008, approximately $25.0 million of the
total valuation allowance for deferred tax assets relates to net operating loss
and credit carryforwards attributable to acquired
entities.  These net operating loss and credit carryforwards are
subject to an annual limitation under Internal Revenue Code Section
382.  Also included in the valuation allowance as of December 31, 2008
is approximately $1.9 million related to Israel.




For the
years ended December 31, 2008, 2007 and 2006, 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:





2008
            
            
            2007
            
            
            2006Federal
      statutory rate
            
            
            (35
            )%
            
            
            (35
            )%
            
            
            (35
            )%State
      taxes, net of federal benefit
            
            
            (5
            )
            
            
            (5
            )
            
            
            (4
            )Foreign
      taxes
            
            
            0
            
            
            
            (5
            )
            
            
            2Amortization
      of stock-based compensation
            
            
            0
            
            
            
            3
            
            
            
            2Research
      and development benefit
            
            
            (1
            )
            
            
            (5
            )
            
            
            (7
            )Tax
      exempt interest
            
            
            0
            
            
            
            (4
            )
            
            
            (6
            )Impairment
      of Intangible Assets
            
            
            34Other
            
            
            1
            
            
            
            4
            
            
            
            2Valuation
      Allowance
            
            
            5
            
            
            
            256Provision
      for (benefit from) income taxes
            
            
            (1
            )%
            
            
            209
            %
            
            
            (46)
            %





50


As of
December 31, 2008, the Company had gross cumulative net operating loss
carryforwards for federal and state tax reporting purposes of approximately
$113.7 million and $80.2 million, respectively, which expire in various periods
through 2028.  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 $5.9
million and state net operating losses of $6.1 million related to stock options
vested prior to the adoption of FAS 123(R).





The
Company also has research and development tax credit carryforwards of
approximately $5.2 million and $3.6 million for federal and state income tax
purposes, respectively. If not utilized, the federal carryforwards will expire
in various amounts through 2028. The state tax credits can be carried forward
indefinitely.





U.S.
income taxes were not provided for on a cumulative total of $6.8 million of
undistributed earnings for certain foreign subsidiaries.  The major foreign
jurisdictions where the Company has operations includes India and the U.K.
 The Company intends to reinvest these earnings indefinitely in its foreign
subsidiaries.  If these earnings were distributed to the U.S. in the form
of dividends or otherwise, or if the shares of the relevant foreign subsidiaries
were sold or otherwise transferred, the Company would be subject to additional
U.S. income taxes (subject to an adjustment for foreign tax
credits).





The
Company adopted the provisions of FIN 48 on January 1, 2007. The adoption of
FIN48 did not require a change in the Company’s liability for unrecognized tax
benefits. The total amount of unrecognized tax benefits at December 31, 2008 was
$2.5 million, and at January 1, 2008 was $3.8 million. If any of these tax
benefits that are unrecognized should become recognizable at a future time, $1.8
million would be recognized as deferred tax assets, and the remaining balance of
$700,000 would be released into net income.





The
decrease in unrecognized tax benefits primarily relates to the State of
California audit for the years 2002 to 2005, which the Company settled in 2008.
 Management had previously recorded reserves through net income for the
estimated liability related to the audit of $1.2 million.  Of these
reserves, $676,000 was reversed into net income during the quarter ended June
30, 2008 and the remainder was paid.  An increase to the reserves of
$501,000 was established for a transfer pricing audit being conducted in
India.




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





Balance
      at January 1, 2008
            
            $
            3,754Decreases
      for positions taken in prior years
            
            
            (53)Increases
      for positions related to the current year
            
            
            623Settlements
      with taxing authorities
            
            
            (1,853
            )Balance
      at December 31, 2008(1)
            
            $
            2,471




(1)
            $1.8
      million is included as a reserve against deferred tax assets and $700,000
      is included in accrued liabilities in the consolidated balance
      sheet.




It is
reasonably possible that the total amount of unrecognized tax benefits will
change in 2009.  Decreases in the unrecognized tax benefits will
result from the lapsing of statutes of limitations and the possible completion
of tax audits in various jurisdictions. Increases will result from tax
positions, primarily related to positions expected to be taken on tax
returns for 2009.





The
continuing practice of the Company is to recognize interest and penalties
related to income tax matters in the provision for income taxes.  At
December 31, 2008, the Company had $28,000 accrued for interest related to U.S.
jurisdictions, of which $7,400 was accrued in the current year, and $297,000
accrued for interest and penalties related to India, all of which was accrued in
the current year.





The
Company is subject to taxation in the United States and various other foreign
jurisdictions.  The Company records accruals for the estimated outcomes of
these audits, and the accruals may change in the future due to new developments
in each matter.  The Company’s major taxing jurisdictions are U.S.
federal, California and India. Fiscal years 2005 to 2008 remain open to
examination by these major taxing jurisdictions, with the exception of
California which is open from 2004 to 2008.  The Company is currently
under audit for U.S. federal income tax matters, and recently settled an income
tax audit in the state of California. The years under examination by the
federal government are 2005 to 2006. The Company does not believe the
examination by the federal government will result in material payments, due to
the carryback of net operating losses and the availability of credits. The
Company also has income tax audits in progress in India.





The
Indian tax audits are considered routine audits relating to transfer pricing
calculations and the evaluation of gross margin percentage used to determine
arms length pricing. An assessment of $110,000 related to fiscal year 2005
Indian tax audit was issued in Q4 2008, and 40% of this amount will be paid by
March 15, 2009, with the other 60% deferred until December 31, 2009. Management
has accrued an estimated liability of $501,000 associated with all of the Indian
tax audits, and in the case of fiscal year 2005, the assessment is currently
being appealed.




51


Note 12.Stockholders' Equity





Stock
Option Plans





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




The
exercise price per share for nonstatutory stock options cannot be less than 85%
of the fair market value, as determined by the board of directors, on the date
of grant. The exercise price per share for incentive stock options cannot be
less than the fair market value, as determined by the board of directors on the
date of grant. Options generally vest 25% on the first anniversary of the
grant date with the remainder vesting ratably over the following 36 months;
options generally expire 10 years after the date of grant. As of December 31,
2008, 19,097,094 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.





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 from the
historical average expected term. 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, 2008
              
              For
      The Year Ended December 31, 2007
              
              For
      The Year Ended December 31, 2006Risk-free
      rate
              
              
              2.30
              %
              
              
              4.73
              %
              
              
              4.86
              %Expected
      dividend yield
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %Expected
      volatility
              
              
              52
              %
              
              
              49
              %
              
              
              50
              %Expected
      life
              5.0
      years
              
              6.1
      years
              
              6.1
      years




Stock option
activity under the Plans for the three years ended December 31, 2008 is
summarized below:




Shares
      Available for Grant
              
              
              Options
      Outstanding
              
              
              Weighted
      Average Exercise PriceBalance
      as of December 31, 2005
              
              
              10,742,291
              
              
              
              9,348,025
              
              
              $
              5.12Authorized
              
              
              3,248,060
              
              
              
              —
              
              
              
              —Options
      granted
              
              
              (2,071,823
              )
              
              
              2,071,823
              
              
              
              6.85Awards
      granted
              
              
              (446,303
              )
              
              
              —
              
              
              
              —Assumed
      in acquisition of GoRemote
              
              
              —
              
              
              
              1,710,353
              
              
              
              18.58Exercised
              
              
              —
              
              
              
              (1,831,995
              )
              
              
              3.03Cancelled
              
              
              1,897,781
              
              
              
              (1,897,781
              )
              
              
              7.09Balance
      as of December 31, 2006
              
              
              13,370,006
              
              
              
              9,400,425
              
              
              $
              7.96Options
      granted
              
              
              (1,445,525
              )
              
              
              1,445,525
              
              
              
              5.10Awards
      granted
              
              
              (560,094
              )
              
              
              —
              
              
              
              —Exercised
              
              
              —
              
              
              
              (473,280
              )
              
              
              1.86Cancelled
              
              
              1,324,876
              
              
              
              (2,164,711
              )
              
              
              15.14Balance
      as of December 31, 2007
              
              
              12,689,263
              
              
              
              8,207,959
              
              
              $
              5.92Options
      granted
              
              
              (856,650
              )
              
              
              856,650
              
              
              
              1.83Awards
      granted
              
              
              (1,544,870
              )
              
              
              —
              
              
              
              —Exercised
              
              
              —
              
              
              
              (122,914
              )
              
              
              0.73Cancelled
              
              
              1,687,950
              
              
              
              (1,820,294
              )
              
              
              6.34Balance
      at December 31, 2008
              
              
              11,975,693
              
              
              
              7,121,401
              
              
              $
              5.39Exercisable
      as of December 31, 2006
              
              
              
              
              
              
              5,703,614
              
              
              $
              8.85Exercisable
      as of December 31, 2007
              
              
              
              
              
              
              5,488,540
              
              
              $
              5.94Exercisable
      as of December 31, 2008
              
              
              
              
              
              
              5,325,459
              
              
              $
              5.97




52


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, 2008
            
            
            7,121,401
            
            
            $
            5.39
            
            
            
            5.25
            
            
            $
            184Options
      vested and expected to vest at December, 31, 2008
            
            
            6,426,553
            
            
            $
            5.54
            
            
            
            4.95
            
            
            $
            184Options
      exercisable at December 31, 2008
            
            
            5,325,459
            
            
            $
            5.97
            
            
            
            4.21
            
            
            $
            184





The
weighted average grant date fair value of options granted during the year ended
December 31, 2008 was $0.87.


The total
intrinsic value of options exercised during the year ended December 31, 2008 was
$254,000. At December 31, 2008, the Company had $1.9 million of total
unrecognized compensation expense, net of estimated forfeitures, related to
stock options, ESPP and options assumed in business combinations that will be
recognized over the weighted average period of 1.99 years. Cash received from
stock option exercises was $90,000 during the twelve months ended December 31,
2008. The Company issues new shares of common stock upon exercise of stock
options.





The
following table summarizes the options outstanding and exercisable as of
December 31, 2008:





Options
      Outstanding
            
            
            Options
      ExercisableRange
      of Exercise Prices
            
            
            Number
      Outstanding
            
            
            Weighted-
      Average
              Remaining
      Contractual Life (in Years)
            
            
            Weighted-Average
              Exercise
      Price per Share
            
            
            Number
      Exercisable
            
            
            Weighted-Average
              Exercise
      Price per Share$
            0.10
      — 1.70
            
            
            
            930,592
            
            
            
            6.50
            
            
            $
            1.28
            
            
            
            430,592
            
            
            $
            0.801.80
      — 2.22
            
            
            
            816,127
            
            
            
            6.32
            
            
            
            2.03
            
            
            
            486,682
            
            
            
            2.062.61
      — 5.05
            
            
            
            1,030,415
            
            
            
            1.91
            
            
            
            4.82
            
            
            
            992,325
            
            
            
            4.845.09
      — 5.09
            
            
            
            816,619
            
            
            
            6.78
            
            
            
            5.09
            
            
            
            76,916
            
            
            
            5.095.13
      — 5.30
            
            
            
            135,502
            
            
            
            6.34
            
            
            
            5.24
            
            
            
            96,804
            
            
            
            5.235.32
      — 5.35
            
            
            
            780,304
            
            
            
            5.27
            
            
            
            5.35
            
            
            
            775,551
            
            
            
            5.355.38
      — 6.24
            
            
            
            955.916
            
            
            
            5.61
            
            
            
            5.92
            
            
            
            858,869
            
            
            
            5.906.25
      — 6.51
            
            
            
            792,855
            
            
            
            5.38
            
            
            
            6.48
            
            
            
            789,699
            
            
            
            6.486.53
      — 20.02
            
            
            
            814,983
            
            
            
            4.92
            
            
            
            10.80
            
            
            
            769,933
            
            
            
            10.9920.80
      — 250.00
            
            
            
            48,088
            
            
            
            3.03
            
            
            
            40.31
            
            
            
            48,088
            
            
            
            40.31Total
            
            
            
            7,121,401
            
            
            
            5.25
            
            
            
            5.40
            
            
            
            5,325,459
            
            
            
            5.97





Employee
Stock Awards




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





A summary
of the changes in stock awards outstanding under the Company’s equity-based
compensation plan for the periods ended December 31, 2008, 2007 and 2006 is
presented below:





Shares
            
            
            Weighted
      Average Grant Date Fair ValueNonvested
      at December 31, 2005
            
            
            —
            
            
            $
            —Granted
            
            
            446,303
            
            
            
            6.32Vested
            
            
            —
            
            
            
            —Forfeited
            
            
            (33,950
            )
            
            
            6.39Nonvested
      at December 31, 2006
            
            
            412,353
            
            
            
            6.34Granted
            
            
            560,094
            
            
            
            5.09Vested
            
            
            (41,667
            )
            
            
            6.01Forfeited
            
            
            (131,535
            )
            
            
            5.65Nonvested
      at December 31, 2007
            
            
            799,245
            
            
            
            5.60Granted
            
            
            1,544,870
            
            
            
            2.42Vested
            
            
            (376,568
            )
            
            
            5.67Forfeited
            
            
            (576,393
            )
            
            
            4.07Nonvested
      at December 31, 2008
            
            
            1,391,154
            
            
            $
            2.68





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, 2008,
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 2.57 years.





53


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, 2008
            
            
            For
      The Year Ended December 31, 2007
            
            
            For
      The Year Ended December 31, 2006Risk-free
      rate
            0.74
            %
            
            
            3.89
            %
            
            
            4.95
            %Expected
      dividend yield
            0
            %
            
            
            0
            %
            
            
            0
            %Expected
      volatility
            67
            %
            
            
            46
            %
            
            
            55
            %Expected
      life
            0.5
      to 1 year
            
            
            0.5
      to 1 year
            
            
            0.5
      to 1 year





The
weighted-average fair value of the purchase rights granted under the ESPP during
the year ended December 31, 2008 and 2007 was $0.65 and $1.36,
respectively. During the twelve months ended December 31, 2008 and 2007, 254,417
and 424,832 shares, respectively, were issued pursuant to the plan.





Note
13. Stock Repurchase Program





In
February 2008, the Company’s Board of Directors approved a 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, 2008, the Company repurchased and retired a total of approximately
1.3 million shares of common stock for an aggregate purchase price of $3.7
million.  A total of $3.2 million of stock was repurchased in the first
quarter of 2008 and a total of $500,000 of stock was repurchased in the second
quarter of 2008, leaving approximately $26.3 million that may be used for future
repurchases.  There was no stock repurchase activity during the third
and fourth quarter of 2008.





In May
2006, the Company’s Board of Directors approved a two-year stock repurchase
program which authorized the Company to repurchase up to $30.0 million of
outstanding common stock from time to time on the open market or through
privately negotiated transactions.   In 2006, the Company
repurchased approximately 3.0 million shares of common stock for an aggregate
purchase price of $16.2 million. In 2007, the Company repurchased
approximately 2.6 million additional shares for an aggregate purchase price of
$13.8 million. In July 2007, the Company completed the $30.0 million repurchase
program and retired a total of approximately 5.6 million shares of common
stock.





Note
14. Commitments and Contingencies





The
Company leases facilities under non-cancelable operating leases that expire at
various dates through October 2016. Future minimum lease payments under these
operating leases, including payments on leases accounted for under our
restructuring plan, as of December 31, 2008 are as follows (in
thousands):





Year
      ending December 31:
            
            Operating
      Leases
            
            
            Sublease
      Income
            
            
            Net
      Operating Leases2009
            
            $
            6,986
            
            
            $
            (653
            )
            
            $
            6,3332010
            
            
            4,472
            
            
            
            (222
            )
            
            
            4,2502011
            
            
            3,309
            
            
            
            —
            
            
            
            3,3092012
            
            
            2,552
            
            
            
            —
            
            
            
            2,5522013
      and thereafter
            
            
            6,091
            
            
            
            —
            
            
            
            6,091$
            23,410
            
            
            $
            (875
            )
            
            $
            22,535





Rent expense under operating leases for
the years ended December 31, 2008, 2007 and 2006 was $5.0 million, $5.7 million
and $6.8 million respectively.





The Company has contracts with certain
network service and mobile data providers which have minimum purchase
commitments that expire on various dates through June 2011.  Future
minimum purchase commitments under all agreements are as follows (in
thousands):





Year
      ending December 31:2009
            
            $
            11,2972010
            
            
            10,1282011
            
            
            2,550$
            23,975




54


Letter of Credit




In
connection with an agreement with a network service provider, the Company
entered into an irrevocable letter of credit with Silicon Valley Bank in 2006.
The amount of the letter of credit is amended as needed per the terms of the
agreement based on current usage levels and totaled $1.9 million and $1.5
million as of December 31, 2008 and 2007, respectively. The letter of credit is
collateralized by an equal amount of restricted cash and automatically renews
for successive one-year periods.  The restricted cash is classified as
other assets on the consolidated balance sheet at December 31,
2008.





Foreign Currency Forward
Contracts





Because
the Company conducts business around the world, changes in foreign currency
exchange rates can have an effect on the results of operations.
 Periodically, the Company enters into forward contracts with financial
institutions to manage currency exposure related to supplier payments and
funding the operations of certain foreign subsidiaries. These forward contracts
purchase British Pounds and Euros and are generally settled
monthly.  The derivative financial instruments are not used for
trading purposes. The forward contracts do not eliminate but mitigate the impact
of currency exchange rate movements. Gains and losses on forward contracts are
included in Foreign exchange losses and other income (expense) in our
Consolidated Statements of Operations. As of December 31, 2008, the Company had
no outstanding forward contracts.




Legal Actions





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





In October 2002, GoRemote's officers
and directors were dismissed without prejudice pursuant to a stipulated
dismissal and tolling agreement with the plaintiffs.  In February 2003, the
court dismissed the section 10(b) claim against GoRemote without leave to amend,
but declined to dismiss the section 11 claim.  In June 2004, GoRemote and
almost all of the other Issuers executed a settlement agreement with the
plaintiffs.  In February 2005, the court certified the litigation as a
class action for settlement purposes and granted preliminary approval of the
settlement, subject to modification of certain bar orders contemplated by the
settlement.  In August 2005, the court reaffirmed class certification and
preliminary approval of the modified settlement.  On February 24, 2006, the
Court dismissed litigation filed against certain underwriters in connection with
the claims to be assigned to the plaintiffs under the settlement.  On April
24, 2006, the Court held a Final Fairness Hearing to determine whether to grant
final approval of the settlement.  On December 5, 2006, the Second Circuit
Court of Appeals vacated the lower Court's earlier decision certifying as class
actions the six IPO Lawsuits designated as "focus cases."  Thereafter, the
district court ordered a stay of all proceedings in all of the IPO Cases pending
the outcome of plaintiffs’ petition to the Second Circuit for rehearing en
banc.  On April 6, 2007, the Second Circuit denied plaintiffs’ rehearing
petition, but clarified that the plaintiffs may seek to certify a more limited
class in the district court. Accordingly, the settlement was terminated and will
not receive final approval.





Plaintiffs
filed amended complaints in the six cases designated as “focus cases” on or
about August 14, 2007.  GoRemote is not a focus case.  In September
2007, GoRemote's named officers and directors again extended the tolling
agreement with plaintiffs.  On or about September 27, 2007, plaintiffs
moved to certify the classes alleged in the “focus cases” and to appoint class
representatives and class counsel in those cases. The “focus case” issuers filed
motions to dismiss the claims against them in November 2007 and an opposition to
plaintiffs' motion for class certification in December 2007.  The Court
denied the motions to dismiss on March 16, 2008.  On October 2, 2008,
the plaintiffs withdrew their class certification motion.  On
February 25, 2009, liaison counsel for plaintiffs informed the district court
that a settlement of the IPO cases had been agreed to in principle, subject to
formal approval by the parties and preliminary and final approval by the
court.  No loss has been accrued as a loss is not probable or
estimable as of December 31, 2008.





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





Note
15. Employee 401(k) Plan





Substantially
all of the Company’s employees are eligible to participate in the Company’s
401(k) plan, which provides for discretionary Company matching contributions.
Beginning January 1, 2006, the Company provided a 50% match to employee
contributions up to 6% of an employee’s total compensation.  The Company
has suspended the 50% match to employees for 2009.  The Company’s
matching contributions to the plan totaled $557,000, $716,000 and $792,000 for
the years ended December 31, 2008, 2007 and 2006, respectively.





Note
16. Net Income (Loss) Per Common Share




In
accordance with SFAS 128, “Earnings Per Share,” basic net income (loss) per
share is computed by dividing net income (loss) by the weighted daily average
number of shares of common stock outstanding during the period. The weighted
daily average number of shares of common stock excludes shares that have been
exercised prior to vesting and are subject to repurchase by the company as well
as unvested restricted stock awards.  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.





55


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 31,2008
            
            
            2007
            
            
            2006Numerator:Net
      income (loss)
            
            $
            (91,968
            )
            
            $
            (34,214
            )
            
            $
            (8,089
            )Denominator:Denominator
      for basic net income per common shareWeighted
      average shares outstanding
            
            
            61,179,969
            
            
            
            62,828,202
            
            
            
            64,572,603Effect
      of dilutive securities:Stock
      options
            
            
            --
            
            
            
            --
            
            
            
            --Denominator
      for diluted net income (loss) per common share —
      adjusted
            
            
            61,179,969
            
            
            
            62,828,202
            
            
            
            64,572,603Basic
      net income (loss) per common share
            
            $
            (1.50
            )
            
            $
            (0.54
            )
            
            $
            (0.13
            )Diluted
      net income (loss) per common share
            
            $
            (1.50
            )
            
            $
            (0.54
            )
            
            $
            (0.13
            )





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 31,2008
            
            
            2007
            
            
            2006Options
      to purchase common stock
            
            
            7,121,401
            
            
            
            8,207,959
            
            
            
            9,400,425Unvested
      restricted stock awards
            
            
            1,391,154
            
            
            
            799,245
            
            
            
            323,303





The
weighted-average exercise price of options to purchase common stock excluded
from the computation was $5.39, $5.92 and $7.70 for the years ended December 31,
2008, 2007 and 2006, respectively.





Note
17. 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.





Revenues
generated in the United States accounted for approximately 61%, 62% and 60% of
total revenues for the year ended December 31, 2008, 2007 and 2006,
respectively.  International revenue is determined by the location of
the customer’s headquarters. International revenue accounted for approximately
39%, 38% and 40% of total revenues for the years ended December 31, 2008, 2007
and 2006, 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 28%, 27% and
26% of total revenues in 2008, 2007 and 2006, respectively.  Revenues
in the Asia Pacific region represented 8%, 7% and 10% of total revenues in 2008,
2007 and 2006, respectively.  Revenues in the United Kingdom accounted
for 9%, 11% and 11% of total revenues for the years ended December 31,
2008, 2007 and 2006, respectively.




The
following table sets forth disaggregated revenue by type (in
thousands):




For
      the Year Ended December 31,2008
            
            
            2007
            
            
            2006Broadband
            
            $
            103,712
            
            
            $
            75,073
            
            
            $
            39,936Dial-up
            
            
            37,115
            
            
            
            67,826
            
            
            
            105,682Service
      fees and other
            
            
            50,541
            
            
            
            48,833
            
            
            
            37,093$
            191,368
            
            
            $
            191,732
            
            
            $
            182,711





Substantially
all of the Company’s long-lived assets are located in the United
States.  Revenues in the United States were $117.8 million for the
year ended December 31, 2008.





Note
18. Subsequent Event





On
February 23, 2009, management of iPass committed to the restructuring of its
sales, marketing, research and development, operations and general and
administrative departments to improve operational efficiencies and align the
company’s cost structure with the changing business
conditions.   The restructuring plan includes the termination of
approximately 15 sales and marketing employees, 46 operations and research and
development employees and 9 general and administrative employees.  The
charges associated with the plan of termination will range between $2.8 million
and $3.3 million.  Of the total charges, approximately $1.3 million to
$1.8 million relates to facilities costs and approximately $1.5 million relates
to severance charges.  All of these charges will result in cash
expenditures, of which iPass expects to pay approximately $1.5 million in the
first quarter of 2009.




56




SIGNATURES





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




iPass
      Inc.By:  /s/ Evan
      L. Kaplan
            
            
            By:  /s/ Frank
      E. VerdecannaEvan
      L. Kaplan, President and Chief Executive Officer
              (Principal
      Executive Officer)
            
            
            Frank
      E. Verdecanna, Vice President and Chief Financial Officer
              (Principal
      Financial Officer)





Date:  March
16, 2009


57








POWER
OF ATTORNEY





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




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





Signature
            Title
            Date/s/
      Evan L. Kaplan
            Chief
      Executive Officer and Director (Principal Executive
    Officer)
            March
      16, 2009Evan
      L. Kaplan/s/
      Frank E. Verdecanna
            Vice
      President and Chief Financial Officer (Principal Financial
      Officer)
            March
      16, 2009Frank
      E. Verdecanna/s/
      A. Gary Ames
            Director
            March
      16, 2009A.
      Gary Ames/s/
      John D. Beletic
            Chairman
      and Director
            March
      16, 2009John
      D. Beletic/s/
      Peter G. Bodine
            Director
            March
      16, 2009Peter
      G. Bodine/s/
      Peter C. Clapman
            Director
            March
      16, 2009Peter
      C. Clapman/s/
      Stanley P. Gold
            Director
            March
      16, 2009Stanley
      P. Gold/s/
      Arthur C. Patterson
            Director
            March
      16, 2009Arthur
      C. Patterson/s/
      Olof Pripp
            Director
            March
      16, 2009Olof
      Pripp/s/
      Allan R. Spies
            Director
            March
      16, 2009Allan
      R. Spies




58







INDEX TO EXHIBITS




Exhibit
              Number
            
            Description
      of Document2.1
            
            Agreement
      and Plan of Merger dated October 26, 2004 by and among iPass Inc., Montage
      Acquisition Corp., Mobile Automation, Inc. and David Strohm, as
      Stockholders’ Agent.(1)2.2
            
            Agreement
      of Merger among iPass Inc., Keystone Acquisition Sub, Inc. and GoRemote
      Internet Communications, Inc. dated December 9,
2005.(2)3.1
            
            Amended
      and Restated Certificate of Incorporation.(3)3.2
            
            Amended
      and Restated Bylaws (11)4.1
            
            Reference
      is made to Exhibits 3.1 and 3.2.4.2
            
            Specimen
      stock certificate.(3)10.1
            *
            2003
      Equity Incentive Plan and form of related agreements, as
      amended.(3)10.1.1
            *
            Form
      of Stock Option Grant Notice under the 2003 Equity Incentive Plan
      (containing additional vesting terms).(4)10.2
            *
            2003
      Non-Employee Directors Plan, as amended.(5)10.2.1
            *
            Forms
      of Restricted Stock Award Grant Notice and Restricted Stock Award
      Agreement under the 2003 Non-Employee Directors Plan
  (10)10.2.2
            *
            Forms
      of Stock Option Grant Notice and Stock Option Agreement under the 2003
      Non-Employee Directors Plan (10)10.3
            *
            1999
      Stock Option Plan and form of related agreements.(3)10.4
            *
            1997
      Stock Option Plan and form of related agreements.(3)10.5
            *
            Interim
      1999 Stock Option Plan.(3)10.6
            *
            Restricted
      Stock Purchase Agreement by and between the Registrant and Anurag Lal
      dated November 8, 1999.(3)10.7
            *
            2003
      Employee Stock Purchase Plan and form of related agreements, as
      amended.(3)10.8
            
            Lease
      Agreement, dated October 26, 1999, between Registrant and Westport Joint
      Venture (as amended).(3)10.9
            
            Amended
      and Restated Investor Rights Agreement, dated August 8, 2000, between
      Registrant, founders and holders of the Registrant’s Preferred
      Stock.(3)10.10
            
            Form
      of Indemnity Agreement.(3)10.11
            *
            Employment
      Agreement, dated November 13, 2001, between Registrant and Kenneth D.
      Denman.(3)10.12
            *
            Form
      of Offer Letter to Executive Officers.(3)10.13
            
            OEM
      Service Provider License Agreement, dated February 29, 2000, between RSA
      Security, Inc. and the Registrant, and amendments
    thereto.(4)10.14
            
            Support
      Agreement, dated February 29, 2000, by and between RSA Security,
      Inc.(4)10.15
            
            Loan
      and Security Agreement dated September 4, 2001 between Silicon Valley Bank
      and the Registrant, and modifications thereto.(3)10.16
            *
            2007
      Annual Executive Management Bonus Plan.(6)10.17
            *
            Outside
      Director Compensation Arrangement.(7)10.18
            *
            Letter
      Agreement pursuant to which Michael J. McConnell and Peter C. Clapman were
      elected to Registrant’s Board of Directors.(9)10.19
            *
            Description
      of iPass 2007 Annual Executive Management Bonus Plan and Annual Target
      Bonuses for named executive officers. (12)10.20
            *
            iPass
      Inc. Executive Corporate Transaction and Severance Benefit Plan, as
      amended.10.21
            *
            Amendment
      to Employment Agreement, dated December 20, 2007, between iPass Inc. and
      Kenneth D. Denman. (13)10.22
            *
            Form
      of Restricted Stock Grant Notice and Agreement for Vice Presidents and
      above, under the Company’s 2003 Equity Incentive Plan.
  (8)10.23
            *
            Form
      of Restricted Stock Grant Notice and Agreement for below Vice Presidents,
      under the Company’s 2003 Equity Incentive Plan. (8)10.24
            *
            Form
      of Performance Shares Grant Notice and Agreement, under the Company’s 2003
      Equity Incentive Plan. (8)10.25
            
            iPass
      Inc. Severance Benefit Plan.10.26
            
            iPass
      Inc. Key Employee Corporate Transaction and Severance Benefit
      Plan.10.27
            
            Separation
      Agreement, dated October 31, 2008, between Registrant and Kenneth D.
      Denman.10.28
            
            Employment
      Agreement, dated November 1, 2008, between Registrant and Evan L.
      Kaplan.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
      (Commission No. 000-50327) filed with the Securities and Exchange
      Commission on March 15, 2005, and incorporated by reference
      herein.(2
              )
              Previously
      filed as exhibit 10.22 on our Current Report on Form 8-K (Commission No.
      000-50327) filed with the Securities and Exchange Commission on December
      12, 2005, and incorporated by reference herein.(3
              )
              Previously
      filed as the like-numbered exhibit to our Registration Statement on Form
      S-1 (Commission No. 333-102715), as amended, originally filed with the
      Securities and Exchange Commission on January 24, 2003, as amended, and
      incorporated by reference herein.(4
              )
              Previously
      filed as the like-numbered exhibit to our Annual Report on Form 10-K
      (Commission No. 000-50327) filed with the Securities and Exchange
      Commission on March 16, 2006, and incorporated by reference
      herein(5
              )
              Previously
      filed as exhibit 10.1 on our Current Report on Form 8-K (Commission No.
      000-50327) filed with the Securities and Exchange Commission on August 16,
      2006, and incorporated by reference herein.(6
              )
              Previously
      filed as Item 5.02 on our Current Report on Form 8-K (Commission No.
      000-50327) filed with the Securities and Exchange Commission on February
      15, 2008, 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 28, 2008, and incorporated by reference
      herein.(8
              )
              Filed
      as the like-described exhibit to iPass’ Quarterly Report on Form 10-Q
      (Commission No. 000-50327), filed with the SEC on May 10, 2007, and
      incorporated herein by reference.(9
              )
              Previously
      filed as exhibit 99.1 on our Current Report on Form 8-K (Commission No.
      000-50327) filed with the Securities and Exchange Commission on February
      21, 2007.(10
              )
              Previously
      filed as the like-numbered exhibit to our Annual Report on form 10-K
      (Commission No. 000-50327) filed with the Securities and Exchange
      Commission on March 29, 2007, and incorporated by reference
      herein(11
              )
              Previously
      filed as exhibit 3.1 on our Quarterly Report on Form 10-Q (Commission No.
      000-50327) filed with the Securities and Exchange Commission on August 11,
      2008, and incorporated by reference herein.(12
              )
              Previously
      filed as the description in Item 5.02 of the Current Report on Form
      8-K (Commission No. 000-50327), filed with the SEC on February 15,
      2008, and incorporated herein by reference.(13
              )
              Previously
      filed as the like-described exhibit to iPass’ Current Report on Form 8-K
      (Commission No. 000-50327), filed with the SEC on December 26, 2007, and
      incorporated herein by
reference.




*Indicates
a management contract or compensatory plan or
arrangement