UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

iPass Inc.

(Exact name of Registrant as specified in its charter)

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

3800 Bridge Parkway
Redwood Shores, California 94065
(Address of principal executive offices, including zip code)

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

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

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

     Large accelerated filer o      Accelerated filer þ       Non-accelerated filer o

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

The number of shares outstanding of the Registrant’s Common Stock, $0.001 par value, as of April 30, 2006 was 64,931,164.

 

 

iPASS INC.
QUARTERLY REPORT ON FORM 10-Q/A
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
EXPLANATORY NOTE TO FORM 10-Q/A AMENDMENT 1

This Amendment No. 1 on Form 10-Q/A (this “Amendment”) to the Quarterly Report on Form 10-Q is being filed to correct certain financial information included in “Part I, Item 1. Financial Statements” in “Note 2. Summary of Significant Accounting Policies – Stock-Based Compensation – Stock Options.” This Amendment amends only this one section of Note 2 of the Form 10-Q as originally filed on May 10, 2006. Also attached to this Amendment is an Exhibit Index disclosing the filing of the certifications required to be filed as exhibits to this Amendment, as well as such certifications.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

iPASS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)

		March 31,				December 31,
		2006				2005
ASSETS
Current assets:
Cash and cash equivalents		$	15,627			$	37,829
Short-term investments			97,474				146,727
Accounts receivable, net of allowance for doubtful accounts of $2,760 and $2,040, respectively			31,371				23,347
Prepaid expenses and other current assets			5,168				3,777
Short-term deferred income tax assets			6,536				4,555
Total current assets			156,176				216,235
Property and equipment, net			10,569				9,210
Other assets			3,131				1,561
Long-term deferred income tax assets			9,196				—
Acquired intangible assets, net			16,855				8,776
Goodwill			80,162				18,692
Total assets		$	276,089			$	254,474
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	14,528			$	12,669
Accrued liabilities			20,994				12,523
Deferred revenue – short-term			4,075				3,031
Total current liabilities			39,597				28,223
Deferred revenue — long-term			228				—
Other long-term accrued liabilities			688				—
Total liabilities			40,513				28,223
Stockholders’ equity:
Common stock			65				64
Additional paid-in capital			254,220				245,456
Deferred stock-based compensation			—				(593	)
Accumulated other comprehensive loss			(275	)			(307	)
Accumulated deficit			(18,434	)			(18,369	)
Total stockholders’ equity			235,576				226,251
Total liabilities and stockholders’ equity		$	276,089			$	254,474

See Accompanying Notes to the Condensed Consolidated Financial Statements

iPASS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share and per share amounts)

		Three Months Ended
		March 31,
		2006				2005
Revenues		$	44,270			$	44,072
Operating expenses (1)
Network access			12,532				10,492
Network operations			6,964				5,378
Research and development			5,531				4,537
Sales and marketing			14,815				12,758
General and administrative			5,862				4,354
Amortization of intangibles			821				592
Total operating expenses			46,525				38,111
Operating income (loss)			(2,255	)			5,961
Other income, net			1,127				773
Income (loss) before income taxes			(1,128	)			6,734
Provision for (benefit from) income taxes			(716	)			2,645
Net income (loss) before cumulative effect of change in accounting principle			(412	)			4,089
Cumulative effect of change in accounting principle, net of zero tax effect			347				—
Net income (loss)		$	(65	)		$	4,089
Net income (loss) per share before cumulative effect of change in accounting principle:
Basic		$	(0.00	)		$	0.07
Diluted		$	(0.00	)		$	0.06
Per share effect of cumulative change in accounting principle:
Basic		$	(0.00	)		$	0.00
Diluted		$	(0.00	)		$	0.00
Net income (loss) per share:
Basic		$	(0.00	)		$	0.07
Diluted		$	(0.00	)		$	0.06
Number of shares used in per share calculations:
Basic			64,494,634				62,316,794
Diluted			64,494,634				66,127,536

(1) Amortization of stock-based compensation included in the expense line items:

Network operations		$	207			$	53
Research and development			301				57
Sales and marketing			532				85
General and administrative			390				165
Total amortization of stock-based compensation		$	1,430			$	360

See Accompanying Notes to the Condensed Consolidated Financial Statements

iPASS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

		Three Months Ended
		March 31,
		2006				2005
Cash flows from operating activities:
Net income (loss)		$	(65	)		$	4,089
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Stock-based compensation expense			1,430				360
Tax benefits from employee stock option plans			—				294
Amortization of acquired intangibles			821				592
Depreciation and amortization			1,248				1,256
Deferred income tax			(949	)			2,307
Provision for doubtful accounts			100				200
Realized loss on investments, net			—				31
Cumulative effect of change in accounting principle			(347	)			—
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Accounts receivable			(968	)			(2,804	)
Prepaid expenses and other current assets			(758	)			(98	)
Other assets			(1,225	)			(1	)
Accounts payable			(339	)			330
Accrued liabilities			285				137
Other liabilities			228				—
Net cash provided by (used in) operating activities			(539	)			6,693
Cash flows from investing activities:
Purchases of short-term investments			(56,667	)			(16,217	)
Maturities of short-term investments			111,739				9,997
Acquisition, net of cash acquired			(77,960	)			—
Purchases of property and equipment			(1,223	)			(1,295	)
Net cash used in investing activities			(24,111	)			(7,515	)
Cash flows from financing activities:
Proceeds from issuance of common stock			2,405				591
Tax benefit from employee stock option plans			43				—
Net cash provided by financing activities			2,448				591
Net decrease in cash and cash equivalents			(22,202	)			(231	)
Cash and cash equivalents at beginning of period			37,829				34,395
		$	15,627			$	34,164

See Accompanying Notes to the Condensed Consolidated Financial Statements

iPASS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Description of Business

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

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial data as of March 31, 2006, and for the three months ended March 31, 2006 and 2005 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The December 31, 2005 Condensed Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. However, the Company believes that the disclosures are adequate to make the information presented not misleading.

On February 15, 2006 the Company acquired GoRemote Internet Communications, Inc. (“GoRemote”). The effects of this transaction as well as the results of operations of GoRemote from February 15, 2006 through March 31, 2006 are included in our results of operations as of and for the three months ended March 31, 2006.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (which include normal recurring adjustments, except as disclosed herein) necessary to present fairly the Company’s financial position, results of operations, and cash flows for the interim periods presented. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Use of Estimates

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

Principles of Consolidation

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

Foreign Currency Translation

Substantially all revenues and network access expenses are denominated in U.S. dollars. Therefore, the Company considers the functional currency of its foreign subsidiaries to be the U.S. dollar. Foreign currency transaction gains and losses are included in the accompanying condensed consolidated statements of operation. Foreign currency transaction gains and losses were not significant for the three months ended March 31, 2006 and 2005.

Comprehensive Income (Loss)

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

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

		Three Months Ended
		March 31,
		2006				2005
Net income (loss)		$	(65	)		$	4,089
Net change in accumulated unrealized gain (loss) on available-for-sale securities, net of tax			32				(237	)
Total comprehensive income (loss)		$	(33	)		$	3,852

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

Concentrations of Risk

Substantially all of the Company’s cash and cash equivalents are held by two well established financial institutions.
The Company provides credit to its customers in the normal course of business, performs ongoing credit evaluations of its customers, and maintains an adequate allowance for doubtful accounts. As of March 31, 2006 and December 31, 2005, no individual customer represented 10% or more of revenue or accounts receivable.

Fair Value of Financial Instruments

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

Property and Equipment

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

Equipment (Three years)
Furniture and fixtures (Five years)
Computer software and equipment (Three years)
Leasehold improvements (Shorter of useful life or lease term)

Impairment of Long-Lived Assets

The Company periodically evaluates the carrying amount of its property and equipment when events or changes in business circumstances have occurred which indicate the carrying amount of such assets may not be fully realizable. Determination of impairment is based on an estimate of undiscounted future cash flows resulting from the use of the assets and their eventual disposition. If the Company determines these assets have been impaired, the impairment charge is recorded based on a comparison of the net book value of the fixed assets and their fair value determined by the discounted future cash flows resulting from the use of the assets over their remaining useful lives. There have been no such impairment charges during any of the periods presented.

Income Taxes

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

Stock- Based Compensation

Description of the Company’s Plans

In February 1997, the Company adopted the 1997 Stock Option Plan (1997 Plan). In June 1999, the Company adopted two option plans, the 1999 Stock Option Plan (1999 Plan) and the 1999 Interim Stock Option Plan (1999 Interim Plan). The 1997 Plan, the 1999 Plan, and the 1999 Interim Plan are collectively referred to as the Plans. Under the Plans, as amended, the Company is authorized to issue shares to employees, directors and consultants. As of March 31, 2006, 19,139,734 shares were authorized for grant. The Company’s board of directors adopted the 2003 Equity Incentive Plan and the 2003 Non-employee Directors Plan on January 15, 2003. The board of directors may grant incentive and nonqualified stock options to employees, directors, and consultants of the Company. The exercise price per share for nonstatutory stock options cannot be less than 85% of the fair market value, as determined by the board of directors, on the date of grant. The exercise price per share for incentive stock options cannot be less than the fair market value, as determined by the board of directors on the date of grant. Options generally vest over a four-year period and generally expire 10 years after the date of grant. Certain options can be exercised prior to vesting in exchange for restricted stock. Should the option holder subsequently terminate employment prior to vesting, the Company has the right to repurchase unvested shares at the lower of original exercise price or fair value. At March 31, 2006, there were no shares of common stock subject to repurchase.

In January 2003, the Company’s Board of Directors 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.

Change in Accounting Principle

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the ESPP based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued

to Employees” (“APB 25”). In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). Using the modified prospective transition method of adopting SFAS 123(R), the Company began recognizing compensation expense for stock-based awards granted or modified after December 31, 2005 and awards that were granted prior to the adoption of SFAS 123(R) but were still unvested at December 31, 2005. Under this method of implementation, no restatement of prior periods has been made.

Stock-based compensation expense and the related income tax benefit recognized under SFAS 123(R) in the condensed consolidated statements of operations for the three months ended March 31, 2006 related to stock options and ESPP were $1,430,000 and $43,000, respectively. The estimated fair value of the Company’s stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis. In addition, the Company has recorded a $(347,000) cumulative effect of a change in accounting principle in the condensed consolidated statement of operations for the three months ended March 31, 2006. The cumulative effect adjustment reversed the impact of estimated forfeitures on prior period stock compensation to the extent the related unvested options were outstanding as of January 1, 2006.

As a result of adopting SFAS 123(R), the Company’s loss before income taxes and net loss for the three months ended March 31, 2006 were increased by $1,430,000 and $1,040,000, respectively. The implementation of SFAS 123(R) reduced basic and fully diluted earnings per share by $0.02 for the three months ended March 31, 2006. The implementation of SFAS 123(R) did not have a significant impact on cash flows from operations during the three months ended March 31, 2006.

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s income statements. Prior to January 1, 2006, the Company measured compensation expense for its employee stock-based compensation plans using the intrinsic value method under APB 25 and related interpretations. In accordance with APB 25, no stock-based compensation expense was recognized in the Company’s income statements for stock options granted to employees and directors that had an exercise price equal to the deemed fair value of the underlying common stock on the date of grant.
Stock-based compensation expense recognized in the Company’s statement of operations for the three months ended March 31, 2006 included compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the pro forma provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), as amended, and compensation expense for the share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). As stock-based compensation expense recognized in the consolidated income statements for the three months ended March 31, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS 123 for the periods prior to 2006, the Company accounted for forfeitures as they occurred.

On November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 123(R)-3 “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” This FSP provides a practical transition election related to the accounting for the tax effects of share-based payments awards to employees, as an alternative to the transition guidance for the additional paid-in capital pool (“APIC pool”) in paragraph 81 of SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the APIC pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R). The guidance in this FSP is effective after November 10, 2005. The Company may take up to one year from the later of adoption of SFAS 123(R) or the effective date of this FSP to evaluate its available transition alternatives and make its one-time election. The Company is currently evaluating the transition alternatives.

Stock Options

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

			Three Months Ended
			March 31, 2006
Risk-free rate			4.5	%
Expected dividend yield			0	%
Expected volatility			50	%
Expected life			6.1 years

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

		Number of				Weighted Average
		Shares				Exercise Price
Balance as of December 31, 2005			9,348,025			$	5.12
Granted			787,748			$	7.53
Assumed			1,915,009			$	23.63
Exercised			(811,318	)		$	3.87
Cancelled			(367,562	)		$	8.08
Balance as of March 31, 2006			10,871,902			$	7.42

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Shares				Price				Term (Years)				Value
		(In thousands, except per share amounts)
Options outstanding at March 31, 2006			10,871,902				7.42				7.43			$	31,079
Options vested and expected to vest at March 31, 2006			10,218,178				7.46				7.33			$	29,939
Options exercisable at March 31, 2006			5,915,077				8.26				6.39			$	20,605

The weighted average grant date fair value of options granted during the three months ended March 31, 2006 was $4.05. The total intrinsic value of options exercised during the three months ended March 31, 2006 was $2.9 million. At March 31, 2006, the Company had $7.5 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock option plans that will be recognized over the weighted average period of 1.3 years. Cash received from stock option exercises was $2.4 million during the three months ended March 31, 2006.

The following table summarizes significant ranges of outstanding and exercisable options as of March 31, 2006 (in thousands, except years and per-share amounts):

Range of
Exercise Prices										Options Outstanding								Options Exercisable
														Weighted-				Weighted-								Weighted-
														Average				Average								Average
														Remaining				Exercise								Exercise
										Number				Contractual				Price per				Number				Price per
										Outstanding				Life (in Years)				Share				Exercisable				Share
$    0.10			—				0.85				1,215,313				5.87			$	0.63				1,153,064			$	0.62
0.95			—				4.00				1,168,559				6.55				2.46				879,730				2.42
4.17			—				5.05				1,887,035				6.29				4.89				1,174,944				4.79
5.26			—				5.35				1,765,124				8.33				5.35				688,343				5.35
5.38			—				5.87				1,310,809				9.02				5.70				415,241				5.61
5.91			—				7.38				1,191,163				8.79				6.59				307,159				6.40
7.40			—				8.50				1,134,198				7.55				7.89				538,449				8.23
8.80			—				47.78				1,089,741				7.45				15.43				648,187				16.56
53.33			—				160.00				101,910				3.97				149.35				101,910				149.35
250.00			—				250.00				8,050				3.82				250.00				8,050				250.00
Total											10,871,902				7.43			$	7.42				5,915,077			$	12.13

Employee Stock Purchase Plan

Compensation expense is calculated related to the ESPP 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:

		2006					2005
Risk-free rate			4.5	%			3.2	%
Expected dividend yield			0	%			0	%
Expected volatility			50	%			41	%
Expected life			0.5 to 1 year				0.5 years

The weighted-average fair value of the purchase rights granted under the ESPP during the three months ended March 31, 2006 was $1.80.

Pro Forma Information under SFAS 123 for Periods Prior to 2006

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

		Three Months Ended
		March 31,
		2005
Net income — as reported		$	4,089
Add: Stock-based employee compensation expense included in the reported net income, net of related tax effects			220
Deduct: Stock-based employee compensation expense using the fair value method, net of related tax effects			(1,083	)
Pro forma net income		$	3,226
Basic net income per share:
As reported		$	0.07
Pro forma		$	0.05
Diluted net income per share:
As reported		$	0.06
Pro forma		$	0.05

Compensation expense for pro forma purposes is reflected over the vesting period, in accordance with the method described in FASB Interpretation (FIN) 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.”

For pro forma purposes, the fair value of the Company’s stock option awards was estimated using the Black-Scholes option-pricing model, assuming no expected dividends and the following weighted-average assumptions for the three months ended March 31, 2005:

			2005
Risk-free rate			3.5	%
Expected dividend yield			0	%
Expected volatility			41	%
Expected life			3 years

Prior to January 1, 2006, the expected life and expected volatility of the stock options were based upon historical data and other relevant factors. Forfeitures of employee stock options were accounted for on an as-incurred basis.

Based on the Black-Scholes option pricing model, the weighted average estimated fair value of employee stock option grants was $2.05 for the three months ended March 31, 2005. The total intrinsic value of options exercised during the three months ended March 31, 2005 was $1.0 million. No shares were issued under the ESPP during the three months ended March 31, 2006 and 2005.

Revenue Recognition

Services and Fees

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

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

We typically provide our customers with deployment services, technical support and additional optional services. Depending on the service provided and the nature of the arrangement, we may charge a one-time, annual or monthly fee. We recognize revenues relating to one-time fees on a straight-line basis over the term of the initial contract, generally one to three years, as we can not reasonably estimate the period of performance. We recognize revenues relating to annual fees on a straight-line basis. We recognize revenues for monthly services during the month that these services are provided.

License and Maintenance

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

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

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

Fixed Broadband

Through the acquisition of GoRemote Internet Communications, Inc., the Company provides services over a heterogeneous virtual network, which was created by forming contractual relationships with approximately 500 access providers, including Internet service providers, cable companies, DSL companies and telecommunications companies. These companies may provide us their services under either a reseller or an agency arrangement. In applying our revenue recognition policy we must make judgments with regard to the specific facts and circumstances surrounding each provider relationship to determine which portion of our revenues we provide under a reseller arrangement, where we would record gross revenues and cost of revenues, and which portion of our revenues we provide as an agent, where we would record revenues and cost of revenues combined on a net basis. In exercising our judgment, we evaluate the contractual arrangements and de facto relationships with each provider, together with various other assumptions believed to be applicable and reasonable under the circumstances, to determine whether revenues are gross versus net. We have one significant provider arrangement under which we account for revenues on a net basis. All other provider arrangements are accounted for on a gross basis, with the related costs associated with provisioning each endpoint being deferred initially and amortized over the estimated life of an endpoint, typically 30 months. Our judgments may change as new events occur, as additional information is obtained and as our operating environment changes, any of which could cause a material impact on the revenues that we have reported. We record estimated allowances against revenues for returns and cancellations in the same period the revenues are recorded. These estimates are based upon historical analysis of our service level agreements, credit memo data and other known factors for pricing and transaction volume disputes that arise in the normal course of business. To date, allowances pertaining to our current business have not been significant.

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.

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. We recognize costs of minimum purchase contracts as network access expenses at the greater of the minimum commitment or actual usage.

If the Company estimates that the revenues derived from the purchase commitment will be less than the purchase commitment, the Company recognizes a loss on that purchase commitment to the extent of that difference. No such loss has been recognized for the three months ended March 31, 2006.

Note 3. Net Income (Loss) Per 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. There were no shares subject to repurchase for the three months ended March 31, 2006. Basic net income per share excludes 558,769 shares subject to repurchase for the three months ended March 31, 2005. These shares have been included in diluted net income per share to the extent that the inclusion of such shares is dilutive. Diluted net income (loss) per share is based upon the weighted daily average number of shares of common stock outstanding for the period plus dilutive potential common shares from the issuance of stock options using the treasury-stock method.

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

		Three Months Ended
		March 31,
		2006				2005
Numerator:
Net income (loss)		$	(65	)		$	4,089
Denominator:
Denominator for basic net income per share
Weighted average shares outstanding			64,494,634				62,316,794
Effect of dilutive securities:
Stock options			—				3,810,742
Denominator for diluted net income (loss) per share — adjusted
Weighted average shares			64,494,634				66,127,536
Basic net income (loss) per share		$	(0.00	)		$	0.07
Diluted net income per (loss)share		$	(0.00	)		$	0.06

For the three months ended March 31, 2006 and 2005, 10,871,902 and 1,655,439 options to purchase common stock have been excluded from the computation of diluted net income per share because the effect of including these shares would have been anti-dilutive.

The weighted-average exercise price of options to purchase common stock excluded from the computation was $7.42 and $10.94 for the three months ended March 31, 2006 and 2005, respectively.

Note 4. Legal Contingencies

Beginning on January 14, 2005, three purported class action complaints were filed against the Company and certain of its executive officers in the United States District Court for the Northern District of California. On March 2, 2005, these cases were consolidated as In re iPass Securities Litigation, Case No. 3:05-cv-00228-MHP. On April 22, 2005, David Lutzke and Rhonda Lutzke were named lead plaintiffs. On July 5, 2005, plaintiffs filed a Consolidated Amended Complaint. Named as defendants together with the Company are officers Kenneth D. Denman, Donald C. McCauley, Anurag Lal, and Jon M. Russo. The Consolidated Amended Complaint (“CAC”) alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 during an alleged “class period” from April 22, 2004 to June 30, 2004 by failing to inform investors of certain operational issues that allegedly led to declines in the Company’s revenue, earnings and growth prospects. Defendants moved to dismiss the CAC, and on February 28, 2006, the court granted the motion with leave to amend. On March 30, 2006, plaintiffs filed a Second Consolidated Amended Complaint, (“SCAC”) which set forth, the same claims against the same defendants relating to the same alleged class period. Defendants filed a motion to dismiss the SCAC on May 1, 2006, and pursuant to an agreed-upon schedule, the motion is set to be heard on July 31, 2006. The case is at an early stage and no trial date has been set. No discovery is expected to take place unless defendants’ motion to dismiss is denied. No loss has been accrued as a loss is not probable or estimable as of March 31, 2006

Beginning on March 25, 2005, two stockholders filed separate derivative actions in California Superior Court for the County of San Mateo, purporting to state claims on behalf of the Company against Kenneth D. Denman, Donald C. McCauley, Anurag Lal, Jon M. Russo, Peter G. Bodine, Arthur C. Patterson, John D. Beletic, A. Gary Ames, Cregg B. Baumbaugh and Allan R. Spies. The complaints purport to arise out of the same alleged nondisclosures set forth in the Consolidated Amended Complaint set forth in the shareholder class action, and purport to set forth claims for breach of fiduciary duty, abuse of process, gross mismanagement, waste, unjust enrichment, and violation of California Corporations Code 25402. On May 5, 2005, the actions were consolidated as In re iPass, Inc. Derivative Litigation, Case No. CIV445765. By agreement of the parties, the time to file plaintiffs’ consolidated complaint was extended several times, and a Consolidated Derivative Complaint (“CDC”) was filed on February 21, 2006. On March 28, 2006, defendants filed a demurrer to the CDC, in response to which plaintiffs stated that they intend to further amend the CDC. The further amended complaint has not yet been filed. On April 6, 2006, the court granted the joint motion of all parties to have the case designated as “complex litigation”. The case is at an early stage, no discovery has occurred, and no trial date has been set. No loss has been accrued as a loss is not probable or estimable as of March 31, 2006

On December 15, 2005, Peter Helfrich filed a complaint in the Superior Court for Orange County against GoRemote Internet Communications, Inc. (“GoRemote”) (a company acquired by the Company on February 15, 2006), alleging claims, including wrongful termination in violation of public policy, breach of contract, unpaid compensation, unfair

business practices, breach of the implied covenant of good faith and fair dealing, and intentional infliction of emotional distress (the “Complaint”). GoRemote responded to that Complaint on January 17, 2006, with a general denial of the allegations in the Complaint and raised certain affirmative defenses. The parties have agreed to schedule a private mediation, and most discovery has been stayed pending the outcome of the mediation.

In July and August 2001, GoRemote and certain of its officers were named as defendants in five purported securities class action lawsuits filed in the United States District Court, Southern District of New York, captioned as In re GoRemote Internet Communications, Inc. Initial Public Offering Securities Litigation, No. 01 Civ 6771 (SAS), and consolidated with more than three hundred substantially identical proceedings as In re Initial Public Offering Securities Litigation, Master File No. 21 MC 92 (SAS). The Consolidated Amended Class Action Complaint for Violation of the Federal Securities Laws (“Consolidated Complaint”) was filed on or about April 19, 2002, and alleged claims against certain of GoRemote’s officers and against CIBC World Markets Corp., Prudential Securities Incorporated, DB Alex. Brown, as successor to Deutsche Bank, and U.S. Bancorp Piper Jaffray Inc., underwriters of GoRemote’s December 14, 1999 initial public offering (“underwriter defendants”), under Sections 11 and 15 of the Securities Act of 1933, as amended, and under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended.

Citing several press articles, the Consolidated Complaint alleged that the underwriter defendants used improper methods in allocating shares in initial public offerings, and claimed the underwriter defendants entered into improper commission agreements regarding aftermarket trading in GoRemote’s common stock purportedly issued pursuant to the registration statement for the initial public offering. The Consolidated Complaint also alleged market manipulation claims against the underwriter defendants based on the activities of their respective analysts, who were allegedly compromised by conflicts of interest. The plaintiffs in the Consolidated

Complaint sought damages as measured under Section 11 and Section 10(b) of the Securities Act of 1933, pre-judgment and post-judgment interest, and reasonable attorneys’ and expert witnesses’ fees and other costs; no specific amount was claimed in the plaintiffs’ prayer in the Consolidated Complaint.

In October 2002, certain of GoRemote’s officers and directors who had been named as defendants in the Consolidated Complaint were dismissed without prejudice upon order of the presiding judge. In February 2003, the presiding judge dismissed the Section 10(b) claims against GoRemote and its named officers and directors with prejudice.

From September 2002 through June 2003, GoRemote participated in settlement negotiations with a committee of issuers’ litigation counsel, plaintiffs’ executive committee and representatives of various insurance companies (the “Insurers”). GoRemote’s Insurers were actively involved in the settlement negotiations, and strongly supported a settlement proposal presented to GoRemote for consideration in early June 2003. The settlement proposed by the plaintiffs would be paid for by the Insurers and would dispose of all remaining claims against GoRemote.

After careful consideration, GoRemote decided to approve the settlement proposal in July 2003. Although GoRemote believed that plaintiffs’ claims were without merit, it decided to accept the settlement proposal (which does not admit wrongdoing) to avoid the cost and distraction of continued litigation. Because the settlement would be funded entirely by its Insurers, GoRemote did not believe that the settlement would have any effect on GoRemote’s financial condition, results of operations or cash flows.

On February 15, 2005, the court issued a decision certifying a class for settlement purposes and granting preliminary approval of the settlement subject to modification of certain orders contemplated by the settlement. On August 31, 2005, the court reaffirmed class certification and preliminary approval of the modified settlement in a comprehensive order, and directed that Notice of the settlement be published and mailed to class members beginning November 15, 2005. 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. A decision is expected this summer. GoRemote is covered by a claims-made liability insurance policy which the Company believes will satisfy any potential liability of the Company under this settlement. No loss has been accrued as of March 31, 2006.

Note 5. 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 executive officer (CEO) is considered to be the Company’s chief operating decision maker. 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 condensed consolidated financial statements. Therefore, the Company has determined that it operates in a single reportable segment.

Note 6. Business Combinations

On February 15, 2006, iPass completed its acquisition of GoRemote, a publicly-traded company headquartered in Milpitas, California that provides secure managed virtual business network services. GoRemote became a wholly owned subsidiary of iPass in a transaction accounted for using the purchase method. The Company acquired 100% of the outstanding shares of GoRemote in a cash transaction for $1.71 per share of GoRemote common stock and $3.37 per share of GoRemote Series A preferred stock for a total of approximately $75.8 million.

The Company plans to expand its product offering to its customers by offering GoRemote’s managed broadband services for branch offices and teleworkers. On February 13, 2006, the stockholders of GoRemote adopted the merger agreement and on February 15, 2006, a certificate of merger was filed and the merger was effective. The Company paid, in total, approximately $78.9 million in cash, which includes ancillary expenses associated with the purchase, to acquire the approximately 43.3 million outstanding shares of GoRemote common stock and the approximately 541,631 shares of GoRemote Series A preferred stock. 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 1.9 million shares of iPass common stock.

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

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

Under the purchase method of accounting, the total estimated 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 preliminary estimated purchase price based on various factors. The allocation of the purchase price is preliminary pending the completion of various analyses and the finalization of estimates. The allocation of the preliminary estimated purchase price is as follows (in thousands):

Net tangible assets		$	6,380
Deferred Revenues			(1,025	)
Restructuring liabilities			(1,249	)
Amortizable intangible assets:
Customer relationships			7,600
Supplier contracts			950
Internally developed software			350
Goodwill			61,471
Deferred tax assets, net			10,252
Total preliminary estimated purchase price		$	84,729

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

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

Fiscal Year
2006		$	1,605
2007			1,834
2008			1,834
2009			1,834
2010			685
2011			521
2012			521
2013			66
		$	8,900

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

		Three Months Ended
		March 31,
		2006				2005
Total revenue		$	49,293			$	56,274
Net income (loss)			(4,753	)			3,421
Net income (loss) per share:
Basic		$	(0.07	)		$	0.05
Diluted		$	(0.07	)		$	0.05
Number of shares used in per share calculations:
Basic			64,494,634				62,316,794
Diluted			64,494,634				66,127,536

Note 7. Goodwill and Intangibles

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

		December 31,												March 31,
		2005												2006
		Balance				Acquisition				Amortization				Balance
Goodwill		$	18,691			$	61,471			$	—			$	80,162
Intangibles:
Existing technology			5,973				—				(403	)			5,570
Patent/Core technology			2,127				—				(141	)			1,986
Maintenance agreements and certain relationships			322				—				(17	)			305
Customer relationships			354				7,600				(224	)			7,730
Supplier contracts			—				950				(30	)			920
Internally developed software			—				350				(6	)			344
		$	27,467			$	70,371			$	(821	)		$	97,017

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

		Three Months Ended
		March 31,
		2006				2005
Intangibles:
Existing technology		$	(403	)		$	(403	)
Patent/Core technology			(141	)			(141	)
Maintenance agreements and certain relationships			(17	)			(17	)
Customer relationships			(224	)			(31	)
Supplier contracts			(30	)			—
Internally developed software			(6	)			—
		$	(821	)		$	(592	)

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

		March 31, 2006
						Gross
		Amortization				Carrying				Accumulated				Net Carrying
		Life				Amount				Amortization				Amount
Intangibles:
Existing technology		7 yrs				$	7,900			$	(2,330	)		$	5,570
Patent/Core technology		7 yrs					2,800				(814	)			1,986
Maintenance agreements and certain relationships		5 yrs					400				(95	)			305
Customer relationships		3-7 yrs					8,100				(370	)			7,730
Supplier contracts		4 yrs					950				(30	)			920
Internally developed software		7 yrs					350				(6	)			344
						$	20,500			$	(3,645	)		$	16,855

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

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

Fiscal Year
2006		$	3,150
2007			4,201
2008			3,901
2009			2,401
2010			1,241
Thereafter			1,961
		$	16,855

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		iPass Inc.
Date: May 11, 2006		By:		/s/ Frank E. Verdecanna
				Frank E. Verdecanna
				Vice President and Chief Financial Officer
				(duly authorized officer and
				principal financial officer)

INDEX TO EXHIBITS

Exhibit
Number		Description
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