iPass, Inc. Amendment No. 1 to Form S-1

Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement number for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. o

If delivery of the Prospectus is expected to be made pursuant to Rule 434, check the following box. o



(1)	Includes 1,050,000 shares that the underwriters have the option to purchase to cover over-allotments, if any.


(2)	Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) under the Securities Act of 1933.


(3)	$7,719 of this fee was previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

iPass Inc. is offering shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $11 and $13 per share.

Our common stock has been approved for quotation on the Nasdaq National Market under the symbol “IPAS.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 6.

We have granted the underwriters the right to purchase up to an additional 1,050,000 shares of common stock to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 2003.

Top of the page
iPass Logo at the top of the page
Text: “Enterprise Connectivity Services”

Text: “Enabling mobile workers to access their enterprise networks from approximately 150 countries”

iPass Logo at top of the page and graphic of woman using electronic device and graphic of man using computer

Text: “Empowering enterprises and their mobile workers to maintain productivity through multiple devices by enabling secure connectivity”

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the common stock.

Until , 2003 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

You should read the following summary together with the entire prospectus, including the more detailed information in our consolidated financial statements and related notes appearing in the back of this prospectus. You should carefully consider, among other things, the matters discussed in “Risk Factors.”

We are a global provider of software-enabled enterprise connectivity services for mobile workers. Our primary service offering, iPass Corporate Access, is designed to enable enterprises to provide their employees with secure access from approximately 150 countries to the enterprise’s internal networks through an easy-to-use interface. As opposed to telecommunications companies that own and operate physical networks, we provide our services through a virtual network. Our virtual network is enabled by our software, our scalable network architecture and our relationships with over 200 telecommunications carriers, Internet service providers and other network service providers around the globe. We pay network service providers for access, but do not incur the costs associated with building and maintaining physical networks. Our software is designed to provide enterprises with a high level of security, the ability to affect and control policy management, and centralized billing and detailed reporting. We provide our services predominantly over wired networks, and recently we have begun providing our services over wireless networks. We have generated 99% of our revenues to date from the sale of enterprise connectivity services using narrowband access technologies, such as modem dial-up, and seek to generate additional revenues from broadband access technologies, including wired broadband, or Ethernet, and wireless fidelity, or Wi-Fi. We market and sell our services directly, as well as indirectly through channel partners, which consist of network service providers, systems integrators and value-added resellers.

Enterprises have achieved significant advances in productivity over the last decade by connecting employees to internal networks, and by broadly deploying network-based applications such as e-mail. While these developments have increased productivity for employees in their offices, it is becoming increasingly important for enterprises to make these applications available to employees working outside of the office as well. According to estimates by International Data Corporation, or IDC, a market research firm, the number of U.S. mobile workers will increase from approximately 92 million in 2002 to approximately 105 million in 2006, growing at almost twice the rate of the U.S. worker population in general. As a result, many enterprises today are seeking secure and cost-effective ways to provide mobile workers with access to critical corporate resources, such as internal applications and databases, in order to further increase productivity and to enhance their competitive position.

Several factors in the telecommunications and technology industries make it challenging for enterprises to provide secure, high quality connectivity to mobile workers. These factors include the lack of a single network service provider with global coverage, the need to provide overlapping and redundant coverage to protect against service outages in geographic areas, the need to integrate and support complex access methods and devices, and increasing security concerns. iPass Corporate Access provides an enterprise’s mobile workers with the benefits of our software-enabled virtual network to address these challenges. Key benefits of our service include:


	•	Broad Global Coverage. Our virtual network provides mobile workers with the ability to access their enterprise networks through one of over 18,000 access points. As of June 30, 2003, over 16,000 of these access points were dial-up connections and over 2,000 were broadband connections.

	•	Redundant and Scalable Virtual Network. We create a scalable virtual network by using our software to access and link to the physical networks of over 200 service providers, which in most cases allows us to provide overlapping geographic coverage. Our geographically distributed software architecture is designed to reduce the risk of service interruptions.

	•	Secure Connectivity. Our software is designed to provide an enterprise with a high level of security by enabling integration of our connectivity services with a wide variety of enterprise security applications.

	•	Centralized Billing and Reporting. We offer centralized and detailed billing and reporting, which provide significant management and administrative benefits to our customers.


	•	Integration of New Technologies. We help our customers manage the increasing complexity of access methods, devices, applications and operating systems by continuing to assess, test and integrate current and emerging major technologies.

Our objective is to become the leading provider of secure enterprise connectivity services worldwide. To achieve this objective, we intend to:


	•	expand our customer base;

	•	increase penetration within our existing customer base;

	•	expand our wired and wireless broadband service offerings; and

	•	continue to enhance our virtual network and service offerings.

Our business is subject to numerous risks, which are highlighted in the section entitled “Risk Factors” immediately following this prospectus summary. In particular, we have incurred significant operating losses in the past and may incur significant operating losses in the future. Although we were profitable in 2002 and in the first six months of 2003, $24.3 million of our $29.8 million in net income in 2002 was due to a non-recurring tax benefit.

We were incorporated in California in July 1996 and reincorporated in Delaware in June 2000. Unless the context indicates otherwise, as used in this prospectus, the terms “we,” “us” and “our” refer to iPass Inc., a Delaware corporation, and its subsidiaries and, prior to June 9, 2000, iPass Inc., a California corporation. The address of our principal executive office is 3800 Bridge Parkway, Redwood Shores, California 94065 and our telephone number is (650) 232-4100. Our web site address is www.ipass.com. The information on, or that can be accessed through, our web site is not part of this prospectus.

The number of shares to be outstanding immediately after the offering is based on 51,710,175 shares of common stock outstanding as of June 30, 2003, and excludes:


	•	7,784,560 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2003, with exercise prices ranging from $.06 to $8.50 per share and a weighted average exercise price of $2.67 per share;

	•	618,188 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2003, with exercise prices ranging from $1.44 to $5.84 per share and a weighted average exercise price of $4.15 per share; and

	•	10,698,937 shares of common stock reserved for future grants under our employee stock option plans and employee stock purchase plan as of June 30, 2003. The 2003 Equity Incentive Plan, 2003 Non-Employee Directors Plan and 2003 Employee Purchase Plan contain provisions that automatically increase their share reserves each year, as more fully described in “Management — Employee Benefit Plans.”


	•	we granted options to purchase 131,500 shares of common stock with an exercise price of $7.50 per share; and


	•	options to purchase approximately 130,000 shares were exercised.

Except as otherwise indicated, all information contained in this prospectus assumes:


	•	the conversion of all of our shares of preferred stock into 35,273,169 shares of common stock immediately prior to the closing of this offering;

	•	no exercise by the underwriters of their right to purchase up to an additional 1,050,000 shares to cover over-allotments; and

	•	the filing of our Amended and Restated Certificate of Incorporation following conversion of our preferred stock, which increases the authorized number of shares of common stock to 250,000,000 and creates 25,000,000 shares of undesignated preferred stock.

The following summary consolidated financial data should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section included later in this prospectus, and our consolidated financial statements and related notes included in the back of this prospectus. The summary consolidated financial data for the years ended December 31, 2000, 2001 and 2002, and as of December 31, 2002, are derived from our audited consolidated financial statements included in the back of this prospectus. The summary consolidated financial data for the six months ended June 30, 2002 and 2003 and as of June 30, 2003, are derived from our unaudited consolidated financial statements included in the back of this prospectus. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, consisting only of normal, recurring adjustments, that management considers necessary for a fair statement of the results for those periods. The historical results are not necessarily indicative of results to be expected in any future period and the results for the six months ended June 30, 2003 should not be considered indicative of results expected for the full fiscal year.

The table above presents summary balance sheet data on an actual basis and on an as adjusted basis. The as adjusted column reflects our sale of 7,000,000 shares of our common stock in this offering at an assumed initial public offering price of $12.00 per share, the mid-point of our anticipated price range, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us (after giving effect to expenses already paid), and the application of the net proceeds from this offering, including a portion of the net proceeds to repay the entire outstanding balance under our line of credit and loans payable, as described in “Use of Proceeds.”

You should carefully consider the risks described below before deciding to invest in shares of our common stock. If any of the following risks occur, the value of our common stock could decline.

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

We experienced significant operating losses in each quarter from our inception in 1996 through the first quarter of 2002. Although we were profitable in 2002 and in the first six months of 2003, $24.3 million of our $29.8 million in net income in 2002 was due to a non-recurring tax benefit. As a result, our business does not have an established record of profitability and it may not continue to be profitable. If revenues do not meet the levels we anticipate, if our network service providers increase the rates we pay to access their networks, or if our expenses otherwise exceed our expectations, we may incur substantial operating losses in the future, in which case the price of our common stock may decline.

There are approximately 35 countries in which we provide access only through Equant. The loss of Equant as a network service provider would substantially diminish our ability to deliver global network access.

In approximately 35 countries, our sole network service provider is Equant. Network usage from access within these countries accounted for less than 2% of our revenues in 2002 and in the first six months of 2003. If we lose access to Equant’s network and are unable to replace this access in some or all of these countries, our revenues would decline. In addition, our ability to market our services as being global would be significantly impaired, which could cause us to lose customers. Although our agreement with Equant does not expire until February 2006, Equant may terminate the agreement earlier if we materially breach the contract and fail to cure the breach, or if we become insolvent. In addition, Equant has no obligation to continue to provide us with access to its network after February 2006. If Equant were to cease operations or terminate its arrangements with us, we would be required to enter into arrangements with other network service providers, which may not be available. This process could be costly and time consuming, and we may not be able to enter into these arrangements on terms acceptable to us.

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

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

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

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

Many of our competitors can compete on price. Because many of our facilities-based competitors own and operate physical networks, there is very little incremental cost for them to provide additional telephone or Internet connections. As a result, they can offer remote access services at little additional cost, and may be willing to discount or subsidize remote access services to capture other sources of revenue. In contrast, we

purchase network access from facilities-based network service providers. As a result, large carriers may sell their remote access services at a lower price. In addition, new non-facilities-based carriers may enter our market and compete on price. In either case, we may lose business or be forced to lower our prices to compete, which could reduce our revenues.

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

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

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

Any failure to provide reliable network access, uninterrupted operation of our network and software infrastructure, or a satisfactory experience for our customers and their mobile workers, whether or not caused by our own failure, could reduce demand for our services. In 2002, we experienced three outages affecting our clearinghouse system, which handles invoicing to our customers and network service providers, resulting in five days of outages and eight days of work to confirm data integrity in response to the outages. Although these problems did not affect the ability of mobile workers to access our services or impact our revenues, one of these outages caused a delay in our invoicing of approximately one week. If additional outages occur, or if we experience other hardware or software problems, our business could be harmed.

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

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


	•	the willingness of enterprises to make additional information technology expenditures;

	•	the availability of security products necessary to ensure data privacy over the public networks;

	•	the quality, cost and functionality of these services and competing services;

	•	the increased adoption of wired and wireless broadband access methods; and

	•	the proliferation of electronic devices and related applications.

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

The market for enterprise connectivity services is characterized by evolving industry standards and specifications and rapid technological change, including new access methods, devices, applications and operating systems. In developing and introducing our services, we have made, and will continue to make, assumptions with respect to which features, security standards, performance criteria, access methods, devices, applications and operating systems will be required or desired by enterprises and their mobile workers. If we implement technological changes or specifications that are different from those required or desired, or if we

are unable to successfully integrate required or desired technological changes or specifications into our wired or wireless services, market acceptance of our services may be significantly reduced or delayed and our business could be harmed.

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

We have generated 99% of our revenues to date from the sale of enterprise connectivity services using narrowband technologies such as modem dial-up. In some countries, including the United States, the use of narrowband as a primary means of enterprise connectivity is expected to decline over time as broadband access technologies, such as cable modem, DSL, and Wi-Fi, become more broadly used. Although we have not generated substantial revenues from broadband access, the growth of our business may depend upon our ability to expand the broadband elements of our virtual network. Such an expansion may not result in revenues to us. Key challenges in expanding the broadband elements of our virtual network include:

The broadband access market is at an early stage of development. Although we derive revenues from wired and wireless broadband “hotspots”, such as particular airports, hotels and convention centers, the broadband access market, particularly for wireless access, is at an early stage of development and demand may never develop. In particular, the market for enterprise connectivity services through broadband is characterized by evolving industry standards and specifications and there is currently no uniform standard for wireless access. We have developed and made available Wi-Fi specifications that are directed at enabling Wi-Fi access points to become ready for use by enterprise customers. If this specification is not widely adopted, market acceptance of our wireless broadband services may be significantly reduced or delayed and our business could be harmed. As of June 30, 2003, only approximately 2,000 of our over 18,000 access points were broadband access points. Furthermore, although the use of wireless frequencies generally does not require a license in the United States and abroad, if Wi-Fi frequencies become subject to licensing requirements, or are otherwise restricted, this would substantially impair the growth of wireless access. Many large telecommunications providers and other stakeholders that pay large sums of money to license other portions of the wireless spectrum may seek to have the Wi-Fi spectrum become subject to licensing restrictions. In addition, the United States Department of Defense has asserted that the increasing popularity of Wi-Fi could interfere with military radar, and is seeking new limits on the use of Wi-Fi. If the broadband wireless access market does not develop, we will not be able to generate revenues from broadband wireless access.

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

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

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

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

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

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

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

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

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

Our long sales cycle requires us to incur substantial sales costs and may not result in related revenues.

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

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

In the future we may acquire or invest in businesses, technologies or services, although we currently have no specific agreements or commitments with respect to any of these transactions. Integrating any newly acquired businesses, technologies or services may be expensive and time-consuming. To finance any

acquisitions, it may be necessary for us to raise additional funds through public or private financings. Additional funds may not be available on terms that are favorable to us and, in the case of equity financings, would result in dilution to our stockholders. If we do complete an acquisition, we may be unable to operate any acquired businesses profitably or otherwise implement our strategy successfully. If we are unable to integrate any newly acquired entities or technologies effectively, our operating results could suffer. Future acquisitions by us could also result in large and immediate write-offs or assumption of debt and contingent liabilities, either of which could harm our operating results.

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

We generate a substantial portion of our revenues from business conducted internationally. Revenues from customers domiciled outside of the United States were 38.6% of our revenues for 2002, of which approximately 18% and 15% 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.

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

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


	•	managing our research and development efforts for new and evolving technologies;

	•	expanding the capacity and performance of our network and software infrastructure;

	•	developing our administrative, accounting and management information systems and controls; and

	•	effectively maintaining coordination among our various departments, particularly as we expand internationally.

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

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

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

We license technologies from several software providers that are incorporated in our services. We anticipate that we will continue to license technology from third parties in the future. In particular, we license encryption technology from RSA Security. The license agreement with RSA Security expires in February

2006 and automatically renews for additional three-year periods unless terminated by us or by RSA Security. Licenses from third party technologies, including our license with RSA Security, may not continue to be available to us at a reasonable cost, or at all. The loss of these technologies or other technologies that we license could have an adverse effect on our services and increase our costs or cause interruptions or delays in our services until substitute technologies, if available, are developed or identified, licensed and successfully integrated into our services.

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

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

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

We currently are not required to record stock-based compensation charges if the employee’s stock option exercise price equals or exceeds the deemed fair value of our common stock at the date of grant. However, several companies have recently elected to change their accounting policies and begun to record the fair value of stock options as an expense. Although the standards have not been finalized and the timing of a final statement has not been established, the FASB has announced their support for recording expense for the fair value of stock options granted. If we were to change our accounting policy in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure and retroactively restate all prior periods as if we had adopted SFAS 123 for all periods presented, then our operating expenses would increase by approximately $2.0 million, $1.4 million, and $551,000 for the years ended December 31, 2000, 2001 and 2002, respectively, and by approximately $278,000 and $169,000 for the six months ended June 30, 2002 and June 30, 2003, respectively.

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

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

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

Internet-based communication services generally are not subject to federal fees or taxes imposed to support programs such as universal telephone service. Changes in the rules or regulations of the U.S. Federal Communications Commission or in applicable federal communications laws relating to the imposition of these fees or taxes could result in significant new operating expenses for us, and could negatively impact our business. Any new law or regulation, U.S. or foreign, pertaining to Internet-based communication 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.

Security concerns may delay the widespread adoption of the Internet for enterprise communications, 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. Any well-publicized compromises of confidential information may reduce demand for Internet-based communications, including our services.

The Severe Acute Respiratory Syndrome (SARS) outbreak could reduce the demand for our services and have a material adverse effect on our revenues.

The recent SARS outbreak may have an adverse impact on our revenue, particularly in the Asia Pacific region, where the outbreak has been most widespread. In response to the SARS outbreak, many companies have restricted travel by their employees to the affected regions. In addition, workers employed by our customers located in the Asia Pacific region may reduce travel within and outside of the affected areas. This reduction in travel may decrease the demand for our services and reduce our revenue in these areas. If the outbreak were to continue or worsen, these adverse effects could grow, as well as possibly impact the economies of the affected countries and have a significant adverse impact on our operating results.

Concentration of ownership of our common stock may prevent new investors from influencing significant corporate decisions.

Following this offering, our directors, entities affiliated with our directors, and our executive officers will beneficially own, in the aggregate, approximately 31% of our outstanding common stock. These stockholders as a group will be able to control our management and our affairs. Acting together, they could control most matters requiring the approval by our stockholders, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets, and any other significant corporate transaction. The concentration of ownership may also delay or prevent a change of control of iPass at a premium price if these stockholders oppose it. See the “Principal Stockholders” section for details regarding our stock ownership and how beneficial ownership is calculated.

Anti-takeover provisions in our corporate documents may discourage or prevent a takeover.

Provisions in our restated certificate of incorporation and bylaws may have the effect of delaying or preventing an acquisition or merger in which we are acquired or a transaction that changes our board of directors. These provisions:


	•	authorize the board to issue preferred stock without stockholder approval;

	•	prohibit cumulative voting in the election of directors;

	•	require that only one third of the members of the board of directors be elected each year;

	•	limit the persons who may call special meetings of stockholders; and


	•	establish advance notice requirements for nominations for the election of the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of the outstanding voting stock, from consummating a merger or combination to which we are a party. These provisions could limit the price that investors might be willing to pay in the future for our common stock. See “Description of Capital Stock” for a further discussion of these provisions.

A large number of shares may be sold in the market following this offering, which may depress the market price of our common stock.

Sales of a substantial number of shares of our common stock in the public market following this offering, or the perception that such sales could occur, could cause the market price of our common stock to decline. The number of shares of common stock available for sale in the public market is limited by restrictions under federal securities law and under lock-up agreements that our stockholders have entered into with the underwriters and with us. Those lock-up agreements restrict holders of 51,710,175 shares of our common stock from selling, pledging or otherwise disposing of their shares for a period of 180 days after the date of this prospectus without the prior written consent of Morgan Stanley & Co. Incorporated. However, Morgan Stanley & Co. Incorporated may, in its sole discretion, release all or any portion of the common stock from the restrictions of the lock-up agreements at any time. Upon the expiration of the lock-up agreements, the 51,710,175 shares of our common stock that are not being sold in the offering, but which were outstanding as of June 30, 2003, will be eligible for sale into the public market under Rules 144 and 701.

Of these shares, 3,687,300 shares were purchased by our employees issuing to us promissory notes, which become due one year from the date of this offering. When these notes become due, these employees will likely sell shares in order to obtain the funds to repay the notes. Additionally, of the 7,784,560 shares that may be issued upon the exercise of options outstanding as of June 30, 2003, approximately 4,455,207 shares will be vested and eligible for sale 180 days after the date of this prospectus. For a further description of the eligibility of shares for sale into the public market following the offering, see the “Shares Eligible for Future Sale” section.

There has been no prior public market for our common stock, and the price of our common stock may be volatile and could decline significantly.

Prior to this offering, there has been no public market for our common stock and an active public market for these shares may not develop or be sustained after this offering. The initial public offering price for our common stock has been determined by negotiations between us and the underwriters and may not be representative of the price that will prevail in the open market. See the “Underwriters” section for a discussion of the factors considered in determining the initial public offering price.

In addition, the stock market in general, and the market for technology-related stocks in particular, has recently experienced dramatic declines and fluctuations that have often been unrelated to the operating performance of companies. If market-based or industry-based volatility continues, the trading price of our common stock could decline significantly independent of our actual operating performance, and you could lose all or a substantial part of your investment. The market price of our common stock could fluctuate significantly as a result of several factors, including:


	•	actual or anticipated variations in our results of operations;

	•	announcements of innovations, new services or significant price reductions by us or our competitors;

	•	announcements by us or our competitors of significant contracts or acquisitions;

	•	our failure to meet the performance estimates of investment research analysts;

	•	changes in financial estimates by investment research analysts; and

	•	general economic and market conditions.

New investors in this offering will experience immediate and substantial dilution.

The initial price to the public in this offering will be substantially higher than the net tangible book value per share of our common stock and the prices per share paid by all prior investors in our company. After we sell the shares in this offering at the assumed initial public offering price of $12.00 per share, our net tangible book value per share would be $2.28, which is below the per share initial price to the public. If we issue additional common stock in the future or outstanding options or warrants to purchase our common stock are exercised, there will be further dilution.

We have broad discretion to use the offering proceeds, and our investment of these proceeds may not yield a favorable return.

Our management will have considerable discretion in applying the net proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds of this offering may be used for corporate purposes that do not enhance our results of operations or do not yield a favorable return.

This prospectus, including particularly in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include those listed under “Risk Factors” and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus.

We estimate that our net proceeds from the sale of the shares in this offering will be approximately $76.1 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds will be approximately $87.8 million.

The principal purposes of this offering are to obtain additional capital, to create a public market for our common stock and to facilitate our future access to the public equity markets. In addition, we plan to repay out of the net proceeds of this offering the entire balance of our outstanding debt, which consists of the following as of June 30, 2003:


	•	approximately $6.8 million outstanding under a revolving line of credit with a bank, which carries an interest rate of 5.25% (the prime rate of 4.25% plus 1.0%) and matures in January 2004;

	•	approximately $3.3 million outstanding under an equipment term loan with the same bank, which carries an interest rate of 5.5% (the prime rate of 4.25% plus 1.25%), with each draw payable over 36 months from the date of the draw, with the last draw maturing in June 2006;

	•	approximately $580,000 outstanding under a secured loan agreement with a financing company, which carries an interest rate of 17.5% and matures in January 2004; and

	•	approximately $230,000 outstanding under a secured loan agreement with a financing company, which carries an interest rate of 16.9% and matures in January 2004.

We anticipate that we will use the remaining net proceeds for general corporate purposes, including working capital and capital expenditures, but we have not designated any specific uses. We may also use a portion of the net proceeds to fund possible investments in, or acquisitions of, complementary businesses, products or technologies or establishing joint ventures. We have no current agreements or commitments with respect to any investment, acquisition or joint venture, and we currently are not engaged in negotiations with respect to any investment, acquisition or joint venture. Accordingly, our management will have broad discretion in applying the net proceeds of this offering. Pending these uses, we intend to invest the net proceeds in short-term interest-bearing, investment grade securities, certificates of deposit or direct or guaranteed obligations of the U.S. government.

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 for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of the board. Under the terms of our indebtedness, we are restricted from paying dividends to our stockholders.

The following table sets forth, as of June 30, 2003, our cash and cash equivalents and capitalization. Our capitalization is presented on an actual basis and on an as adjusted basis. The as adjusted column reflects the conversion of convertible preferred stock into common stock and our sale of the shares in this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us (after giving effect to expenses already paid), and the application of the net proceeds, including a portion of the net proceeds to repay the entire outstanding balance under our line of credit and loans payable, as described in “Use of Proceeds.”

You should read this table in conjunction with “Selected Consolidated Financial Data,” “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Our outstanding common stock is based on 51,710,175 shares outstanding as of June 30, 2003 and excludes:


	•	7,784,560 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2003, with exercise prices ranging from $0.06 to $8.50 per share and a weighted average exercise price of $2.67 per share;

	•	618,188 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2003, with exercise prices ranging from $1.44 to $5.84 per share and a weighted average exercise price of $4.15 per share; and

	•	10,698,937 shares of common stock reserved for future issuance under our employee stock option plans and employee stock purchase plan as of June 30, 2003. The 2003 Equity Incentive Plan, 2003 Non-Employee Directors Plan and 2003 Employee Stock Purchase Plan contain provisions that automatically increase their share reserves each year, as more fully described in “Management — Employee Benefit Plans.”

If you invest in our common stock in this offering, your ownership interest in iPass will be diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per share after this offering. We calculate net tangible book value per share by taking the amount of our total tangible assets, reduced by the amount of our total liabilities, and then dividing that amount by the total number of shares of common stock outstanding after giving effect to the automatic conversion of all shares of our outstanding preferred stock.

After giving effect to our sale of the shares in this offering at an assumed initial public offering price of $12.00 per share and deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value on June 30, 2003 would have been $133.7 million, or $2.28. This represents an immediate increase in net tangible book value of $1.17 per share to existing stockholders and an immediate and substantial dilution in net tangible book value of $9.72 per share to new investors purchasing shares in this offering at the assumed initial public offering price. The following table illustrates this per share dilution:

The following table summarizes the differences between the number of shares purchased from us, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by existing stockholders and by new investors. As the table shows, new investors purchasing shares in this offering will pay an average price per share substantially higher than our existing stockholders paid. The table below assumes an initial public offering price of $12.00 per share for shares purchased in this offering, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

The number of shares to be outstanding immediately after the offering is based on 51,710,175 shares of common stock outstanding as of June 30, 2003, which assumes the conversion of all of our outstanding shares of preferred stock into 35,273,169 shares of common stock, and excludes:


	•	7,784,560 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2003, with exercise prices ranging from $.06 to $8.50 per share and a weighted average exercise price of $2.67 per share;

	•	618,188 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2003, with exercise prices ranging from $1.44 to $5.84 per share and a weighted average exercise price of $4.15 per share; and

	•	10,698,937 shares of common stock reserved for future issuance under our employee stock option plans and employee stock purchase plan as of June 30, 2003. The 2003 Equity Incentive Plan, 2003 Non-Employee Directors Plan and 2003 Employee Stock Purchase Plan contain provisions that automatically increase their share reserves each year, as more fully described in “Management — Employee Benefit Plans.”

To the extent the outstanding options or warrants are exercised, you will experience further dilution.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

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 in the back of this prospectus. The selected consolidated financial data for the years ended December 31, 2000, 2001 and 2002 and as of December 31, 2001 and 2002 are derived from our audited consolidated financial statements included in the back of this prospectus. The selected consolidated financial data for the years ended December 31, 1998 and 1999 and as of December 31, 1998, 1999 and 2000 are derived from our audited consolidated financial statements not included in this prospectus. The selected consolidated financial data for the six months ended June 30, 2002 and 2003 and as of June 30, 2003, are derived from our unaudited consolidated financial statements included in the back of this prospectus. The unaudited selected consolidated financial statements include, in the opinion of management, all adjustments, consisting only of normal, recurring adjustments, that management considers necessary for a fair statement of the results for those periods. The historical results are not necessarily indicative of results to be expected in any future period and the results for the six months ended June 30, 2003 should not be considered indicative of results expected for the full fiscal year.


	For a discussion of stock-based compensation, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies— Stock-Based Compensation.”


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

(3)	Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding for the period.

(4)	Diluted net income (loss) per share is computed using basic net income (loss) per share after giving effect to the conversion to common stock of all outstanding securities that would have a dilutive effect.

(5)	Pro forma, diluted net income per share is computed using diluted net income per share after giving effect to the repayment of outstanding debt and to the sale of shares in this offering solely related to the repayment of outstanding debt.

The following discussion should be read in conjunction with our consolidated financial statements and related notes that appear in the back of this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

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

We derive our revenues primarily from providing enterprise connectivity services through our virtual network. We sell these services directly, as well as indirectly through our channel partners. We bill substantially all customers on a per-minute basis for usage based on negotiated rates. We bill the remaining customers based on a fixed charge per active user per month with additional charges for excess time over allocated number of hours. Substantially all enterprise customers commit to a one to three year contract term. Most of our contracts with enterprise customers contain minimum usage levels. Since our inception, substantially all of our revenues have been usage-based.

To date, we have derived 99% of our revenues from our narrowband connectivity services. Although we have incurred expenses to expand our broadband coverage and are seeking to generate additional revenues from our broadband wired and wireless coverage, we have generated less than 1% of our revenues from broadband coverage in 2000, 2001 and 2002 and in the first six months of 2003, and we cannot determine when, if ever, we will generate any substantial revenues from broadband.

We also provide our customers with deployment services and technical support throughout the term of the contract. We typically charge fees for these services on a one-time or annual basis, depending on the service provided and the nature of the relationship. These fees represented less than 2% of our revenues in 2000, 2001 and 2002 and in the first six months of 2003.

We also offer customers additional services for which we generally bill on a monthly basis. Fees for these services represented less than 1% of our revenues in 2000, 2001 and 2002 and approximately 1% in the first six months of 2003.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, purchase commitments, income taxes, stock-based compensation expense, 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 for making judgments about the carrying values of assets and liabilities.

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

We have derived substantially all of our revenues from usage fees associated with providing enterprise connectivity services through our virtual network. We recognize revenues when persuasive evidence of an arrangement exists, service has been provided to the customer, the price to the customer is fixed or determinable and collectibility is probable.

We recognize revenues during the period the services are rendered to end users on a usage basis based on negotiated rates. Most of our contracts with enterprise customers contain minimum usage levels. If actual usage in a given period is less than the minimum commitment, we recognize the additional charge between the minimum commitment and the actual usage as revenues when cash is collected because we cannot reasonably estimate the amount of the additional charges that will be collected. We cannot reasonably estimate the amount of the additional charge to be collected because we have from time to time renegotiated minimum commitments in cases where customers have exercised a right to seek renegotiation of their contract for reasons such as a significant downturn in their business or where we have determined that it would be in our best interest to do so.

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

We generally perform credit reviews to evaluate the customer’s ability to pay. If we determine that collectibility is not probable, revenue is recognized as cash is collected.

We have minimum purchase commitments with some network service providers for network access that we expect 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 we estimate that revenues derived from the purchase commitment will be less than the purchase commitment, we recognize a loss on that purchase commitment to the extent of the difference. As of June 30, 2003, we have not recognized any losses on purchase commitments.

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 or all of the net deferred tax assets will not be realized. Changes in the valuation allowance are included in our statement of operations as 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.

As of December 31, 2002, we determined that it was more likely than not that we would realize all of our available net deferred tax assets in the carryforward period of up to 19 years. As a result, we determined that it was no longer necessary or appropriate to maintain a valuation allowance related to deferred tax assets which had been established in each year from inception to 2002. Accordingly, we recorded a $24.3 million tax benefit in our statement of operations for the quarter ended December 31, 2002.

In determining that it was more likely than not that we would realize our deferred tax assets in the carryforward period, we evaluated the following factors:


	•	Our historical trends related to customer usage rates, deployment and attrition;

	•	Our historical and projected network access expenses;


	•	Our 2003 projected revenues from customers signed to contracts before December 31, 2002; and

	•	Our net operating loss carryforwards.

As of December 31, 2002, our analysis indicated that we would need to generate approximately $60 million of taxable income to fully realize our net deferred tax assets. Based on our projections and our assessment of other factors as noted above, we determined that it was more likely than not that we would be able to fully realize our net deferred tax assets in the carryforward period. Although we believe it is more likely than not that we will realize our net deferred tax assets, there is no guarantee this will be the case as our ability to use the net operating losses is contingent upon our ability to generate sufficient taxable income in the carryforward period. At each period end, we will be required to reassess our ability to realize the benefit of our net operating losses. If we were to conclude it is not more likely than not that we would realize the benefit of our net operating losses, we may have to re-establish the valuation allowance and therefore record a significant charge to our results of operations.

We record stock-based compensation charges in the amount by which the option exercise price or the restricted stock purchase price is less than the deemed fair value of our common stock at the date of grant. Our board of directors determines the fair value of our common stock based upon several factors, including our operating performance, issuances of our convertible preferred stock, liquidation preferences of our preferred stockholders, and valuations of other publicly-traded companies. We amortize this compensation expense on an accelerated basis over the vesting period of the applicable agreements, generally four years. We recorded deferred stock-based compensation of $8.1 million, $0 and $2.3 million for 2000, 2001 and 2002, respectively, and amortization of stock-based compensation of $10.5 million, $5.7 million, and $2.8 million for 2000, 2001 and 2002, respectively. For the six months ended June 30, 2002 and 2003, we recorded deferred stock-based compensation of $129,000 and $5.0 million, respectively, and amortization of stock-based compensation of $1.4 million and $2.0 million, respectively. The amount of compensation expense actually recognized in future periods could be lower than currently anticipated if unvested stock options for which deferred compensation has been recorded are forfeited. In addition, if we used different assumptions to determine the deemed fair value of our common stock, we could have reported materially different amounts of stock-based compensation.

We currently are not required to record stock-based compensation charges if the employee stock option exercise price or restricted stock purchase price equals or exceeds the deemed fair value of our common stock at the date of grant. Several companies have recently elected to change their accounting policies and begun to record the fair value of options as an expense. In addition, we understand that discussions of potential changes to applicable accounting standards are ongoing. If we had estimated the fair value of the options or restricted stock on the date of grant using a minimum value pricing model, and then amortized this estimated fair value over the vesting period of the options or restricted stock, our net income (loss) would have been adversely affected. See Note 2(l) to our consolidated financial statements in the back of this prospectus for a discussion of how our net income (loss) would have been adversely affected.

We establish allowances for doubtful accounts for specifically identified, as well as anticipated, uncollectible accounts receivable based on credit profiles of our customers, current economic trends, contractual terms and conditions, and historical payment experience. We have an allowance for doubtful accounts of $1.0 million, $1.1 million, $1.5 million and $1.6 million as of December 31, 2000, 2001, 2002, and June 30, 2003, 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.

The following table sets forth selected statements of operations data for each of the periods indicated as a percentage of revenues.

Revenues. Our revenues increased from $41.4 million for the six months ended June 30, 2002 to $63.6 million for the six months ended June 30, 2003, representing an increase of 54%. This growth was due to an increase in the usage of our services resulting from an increased number of end users of our services at new and existing customers. No individual customer accounted for 10% or more of total revenues for the six months ended June 30, 2002 or 2003. We expect that revenues derived from broadband coverage will increase as a percentage of revenues in future periods. However, due to the emerging nature of the broadband market and our limited experience in this market, we are unable to predict the overall effect of our participation in the broadband market on future revenues.

International revenues, which are revenues generated from customers domiciled outside the United States, accounted for approximately 39% and 38% of total revenues for the six months ended June 30, 2002 and 2003, respectively. No individual foreign country accounted for 10% or more of total revenues for the six months ended June 30, 2002 or 2003. Substantially all of our revenues to date have been denominated in U.S. dollars, although in the future some portion of revenues may be denominated in foreign currencies.

Network access. Our network access expenses consist of charges for access, principally by the minute, that we pay to our network service providers. Network access expenses increased from $11.0 million for the six months ended June 30, 2002 to $14.3 million for the six months ended June 30, 2003, representing an increase of 30%, due to the increase in the number of minutes used on our virtual network. As a percentage of revenues, network access expenses decreased from 27% for the six months ended June 30, 2002 to 23% for the six months ended June 30, 2003. The decrease from 2002 to 2003 as a percent of revenues was due to reduced access rates, which resulted from our ability to purchase network access from additional network service

providers at a lower cost and to renegotiate a number of our network service provider contracts. We expect network access expenses to increase in absolute dollars, but to decline as a percentage of revenues.

Network operations. Our 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 and the depreciation of our network equipment. Network operations expenses increased from $4.9 million for the six months ended June 30, 2002 to $6.6 million for the six months ended June 30, 2003, an increase of 36%. The increase was due primarily to $290,000 of additional depreciation expense on network operations equipment, $340,000 of additional transaction center fees and $550,000 of additional compensation and benefits expenses for an increase in the number of personnel. As a percentage of revenues, network operations expenses decreased from 12% for the six months ended June 30, 2002 to 10% for the six months ended June 30, 2003 due primarily to revenues increasing at a higher rate than network operations expenses and economies of scale in our network operations infrastructure. We expect that our network operations expenses will continue to increase in absolute dollars as we expand our operations, but to decline as a percentage of revenues.

Research and development. Our research and development expenses consist of compensation and benefits for our research and development personnel and consultants. Research and development expenses increased from $2.9 million for the six months ended June 30, 2002 to $4.6 million for the six months ended June 30, 2003, an increase of 60%. The increase was due primarily to an additional $1.0 million of compensation and benefits expenses and $500,000 of additional outside consulting costs for further development of our services. As a percentage of revenues, research and development expenses were 7% for the six months ended June 30, 2002 and 2003. We expect that our research and development expenses will continue to increase in absolute dollars as we increase the number of our personnel and consultants to enhance our service offerings, but to remain relatively constant as a percentage of revenues.

Sales and marketing. Our sales and marketing expenses consist of compensation, benefits, advertising and promotion expenses. Sales and marketing expenses increased from $15.6 million for the six months ended June 30, 2002 to $19.8 million for the six months ended June 30, 2003, an increase of 27%. The most significant component of the increase was $2.0 million of additional compensation and benefits expenses for the expansion of our sales organization. There was also an additional $570,000 of advertising expenses and an additional $380,000 of compensation and benefits expenses for an increase in the number of marketing personnel. As a percentage of revenues, sales and marketing expenses decreased from 38% for the six months ended June 30, 2002 to 31% for the six months ended June 30, 2003 because revenues increased at a higher rate than sales and marketing expenses. We expect that sales and marketing expenses will increase in absolute dollars to the extent revenues increase and as we expand our sales force and increase marketing activities, but to decline as a percentage of revenues.

General and administrative. Our general and administrative expenses consist of compensation and benefits of general and administrative personnel, legal and accounting expenses, and bad debt expense. General and administrative expenses increased from $4.8 million for the six months ended June 30, 2002 to $6.2 million for the six months ended June 30, 2003, an increase of 29%. The increase was due in significant part to $1.2 million of additional compensation and benefits expenses as a result of an increase in administrative personnel and consultants. As a percentage of revenues, general and administrative expenses decreased from 12% for the six months ended June 30, 2002 to 10% for the six months ended June 30, 2003 due primarily to revenues increasing at a higher rate than general and administrative expenses and economies of scale in our corporate infrastructure. We expect that our general and administrative expenses will increase in absolute dollars to the extent that we expand our operations and incur additional costs in connection with becoming a public company, but to remain relatively constant as a percentage of revenues.

Amortization of stock-based compensation. Amortization of stock-based compensation was $1.4 million for the six months ended June 30, 2002 and $2.0 million for the six months ended June 30, 2003. We expect to incur amortization of deferred stock compensation expense of at least $4.0 million in 2003 and $2.2 million in 2004. The amount of deferred stock-based compensation expense to be recorded in future periods could decrease if stock options for which accrued but unvested compensation expense has been recorded are forfeited.

Interest income and other. Interest income and other includes interest income on cash balances. Interest income and other increased from $232,000 for the six months ended June 30, 2002 to $266,000 for the six months ended June 30, 2003 due to an increase in the average cash balance for the period, offset in part by a decrease in the average interest rates.

Interest expense. Interest expense consists of interest paid on our line of credit and loans, as well as amortization of a loan discount associated with the fair value of warrants issued in connection with our financing activities. Interest expense decreased from $521,000 for the six months ended June 30, 2002 to $434,000 for the six months ended June 30, 2003. The decrease was due to lower average interest rates on the outstanding loan balances.

Provision for (benefit from) income taxes. The provision for income taxes was $20,000 for the six months ended June 30, 2002 compared to a provision of $4.6 million for the six months ended June 30, 2003 due to the change in our taxable income.

Revenues. Our revenues increased from $53.2 million in 2001 to $92.8 million in 2002, representing an increase of 74%. This growth was due to an increase in usage of our service, resulting from an increased number of end users of our services at new and existing customers. This growth was the primary reason for the increase in accounts receivable from 2001 to 2002. No individual customer accounted for 10% or more of revenues in either 2001 or 2002.

International revenues accounted for approximately 44% and 39% of revenues for 2001 and 2002, respectively. No single foreign country accounted for 10% or more of revenues in either 2001 or 2002.

Network access. Network access expenses increased from $19.5 million in 2001 to $23.3 million in 2002, an increase of 19%, due to the increase in the number of minutes used on our virtual network, offset in part by reduced access rates that we paid to our network service providers. As a percentage of revenues, network access expenses decreased from 37% for the year ended December 31, 2001 to 25% for the year ended December 31, 2002. The decrease from 2001 to 2002 as a percent of revenues was due to reduced access rates, which resulted from our ability to purchase network access from additional network service providers at lower rates and to renegotiate a number of our current network service provider contracts.

Network operations. Network operations expenses increased from $9.7 million in 2001 to $10.5 million 2002, an increase of 8%. The most significant components of the increase were approximately $200,000 of additional transaction center fees in 2002 and $270,000 of additional depreciation expense for network operations equipment. As a percentage of revenues, network operations expenses decreased from 18% for the year ended December 31, 2001 to 11% for the year ended December 31, 2002 due primarily to revenues increasing at a higher rate than network operations expenses and economies of scale in our network operations infrastructure.

Research and development. Research and development expenses increased from $5.4 million in 2001 to $7.1 million in 2002, an increase of 31%. The increase was due primarily to an additional $1.0 million in fees paid to consultants to further develop our services, and an additional $670,000 of compensation and benefits expenses relating to the increase in number of research and development personnel. As a percentage of revenues, research and development expenses decreased from 10% for the year ended December 31, 2001 to 8% for the year ended December 31, 2002 because revenues increased at a higher rate than research and development expenses.

Sales and marketing. Sales and marketing expenses increased from $30.0 million in 2001 to $32.9 million in 2002, an increase of 10%. The increase was due primarily to $2.8 million of additional compensation and benefits expenses for the expansion of our sales organization. As a percentage of revenues, sales and marketing expenses decreased from 56% for the year ended December 31, 2001 to 36% for the year ended December 31, 2002 because revenues increased at a higher rate than sales and marketing expenses.

General and administrative. General and administrative expenses were $9.6 million in 2001 and 2002. In 2002, there was $520,000 of additional bad debt expense offset in part by a $380,000 decrease in compensation and benefits expenses. Included in 2001 compensation expenses was $450,000 of severance payments to our former Chief Executive Officer. As a percentage of revenues, general and administrative expenses decreased from 18% for the year ended December 31, 2001 to 10% for the year ended December 31, 2002 due primarily to revenues increasing at a higher rate than general and administrative expenses and economies of scale in our corporate infrastructure.

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


	•	lease termination fees, net, totaling approximately $190,000; and

	•	future rental obligations through February 2003 of $678,000, offset by estimated future sublease income of $198,000, totaling approximately $480,000.

Amortization of stock-based compensation. Amortization of stock-based compensation was $5.7 million in 2001 and $2.8 million in 2002.

Interest income and other. Interest income and other decreased from $895,000 in 2001 to $440,000 in 2002 due to a lower average cash balance and a reduction in the average interest rates.

Interest expense. Interest expense increased from $852,000 in 2001 to $1.0 million in 2002. The increase was due to higher average borrowings in 2002 as well as $64,000 of amortization of a loan discount associated with the fair value of warrants issued in connection with our financing activities.

Provision for (benefit from) income taxes. We incurred net operating losses in 2001 and consequently paid insignificant amounts of federal, state and foreign income taxes. As of December 31, 2001, we recorded a valuation allowance of $27.2 million, which is equal to the amount of our deferred tax assets. These assets relate to net operating loss carryforwards and other tax credit carryforwards and temporary differences between items recorded for financial reporting and tax return purposes. We established this valuation allowance because we determined that it was more likely than not that some portion or all of the deferred tax assets would not be realized. We reversed $2.9 million of this valuation allowance due to taxable earnings generated in the year ended December 31, 2002. We also reversed the remaining valuation allowance of $24.3 million as of December 31, 2002, because we have determined that it is more likely than not that we will generate enough taxable income to use our net operating losses in the carryforward period through December 31, 2021. The reversal of our valuation allowance is a non-recurring event. In future periods, we will provide a provision for income tax expenses at the statutory rates net of non-taxable income and expense.

Revenues. Our revenues increased from $35.3 million in 2000 to $53.2 million in 2001, representing an increase of 51%. This growth was due to an increase in usage of our service, resulting from an increased number of end users of our services at new and existing customers. One customer accounted for 27% of revenues in 2000. No individual customer accounted for 10% or more of revenues in 2001.

International revenues accounted for approximately 43% and 44% of revenues for 2000 and 2001, respectively. No individual foreign country represented 10% or more of revenues in either 2000 or 2001.

Network access. Network access expenses increased from $17.1 million in 2000 to $19.5 million in 2001, an increase of 14%, as a result of the increase in the number of minutes used on our virtual network, offset in

part by reduced access rates paid to our network service providers. As a percentage of revenues, network access expenses decreased from 49% for the year ended December 31, 2000 to 37% for the year ended December 31, 2001. The decrease from 2000 to 2001 as a percentage of revenues was due to reduced access rates, which resulted from the addition of new lower-cost network service providers to our virtual network and renegotiation of a number of our network service provider contracts.

Network operations. Network operations expenses increased from $8.1 million in 2000 to $9.7 million in 2001, an increase of 20%. This increase was due primarily to $820,000 of additional depreciation expense for network operations equipment and $370,000 additional transaction center fees. As a percentage of revenues, network operations expenses decreased from 23% for the year ended December 31, 2000 to 18% for the year ended December 31, 2001 due primarily to revenues increasing at a higher rate than network operations expenses and economies of scale in our support infrastructure.

Research and development. Research and development expenses increased from $4.5 million in 2000 to $5.4 million in 2001, an increase of 20%. The increase was due primarily to an additional $410,000 of compensation and benefits expenses relating to the increase in number of research and development personnel, and an additional $300,000 of fees paid to consultants to further develop our services. As a percentage of revenues, research and development expenses decreased from 13% for the year ended December 31, 2000 to 10% for the year ended December 31, 2001 because revenues increased at a higher rate than research and development expenses.

Sales and marketing. Sales and marketing expenses increased from $20.8 million in 2000 to $30.0 million in 2001, an increase of 44%. The primary source of the increase was $8.0 million of additional compensation and benefits expenses related to the expansion of our sales organization. As a percentage of revenues, sales and marketing expenses decreased from 59% for the year ended December 31, 2000 to 56% for the year ended December 31, 2001 because revenues increased at a higher rate than sales and marketing expenses.

General and administrative. General and administrative expenses increased from $8.3 million in 2000 to $9.6 million in 2001, an increase of 16%. The increase related to expansion of our operations, $540,000 of additional bad debt expense in 2001 and $450,000 related to severance payments to our former Chief Executive Officer in October 2001. As a percentage of revenues, general and administrative expenses decreased from 24% for the year ended December 31, 2000 to 18% for the year ended December 31, 2001 due primarily to revenues increasing at a higher rate than general and administrative expenses and economies of scale in our corporate infrastructure.

Restructuring charges. In April 2001, we conducted a restructuring as described above in the comparison of 2002 to 2001 results of operations. We had no restructuring charges in 2000.

Amortization of stock-based compensation. Amortization of stock-based compensation was $10.5 million and $5.7 million in 2000 and 2001, respectively.

Interest income and other. Interest income and other decreased from $990,000 in 2000 to $895,000 in 2001, due to a decrease in our average cash balance.

Interest expense. Interest expense decreased from $1.9 million in 2000 to $852,000 in 2001. The primary reason for this was that included in interest expense in 2000 was $1.1 million related to the amortization of the fair value of warrants issued in connection with financing activities.

Provision for (benefit from) income taxes. We incurred net operating losses in 2000 and 2001, and consequently recorded insignificant amounts of federal, state and foreign income taxes in 2000 and 2001.

The following tables set forth selected unaudited quarterly consolidated statement of operations data for the ten most recent quarters, as well as the percentage of revenues for each line item shown. The information for each of these quarters has been prepared on substantially the same basis as the audited consolidated financial statements included in the back of this prospectus and, in the opinion of management, includes all normal recurring adjustments necessary for the fair presentation of the results of operations for such periods. This data should be read in conjunction with the audited consolidated financial statements and the related notes included in the back of this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future period.

Since our inception in July 1996, we have funded our operations primarily through six issuances of convertible preferred stock that provided us with aggregate net proceeds of approximately $86.5 million. In addition, in September 2001 we established a $7.5 million line of credit, of which $6.8 million was drawn on the same month. As of December 31, 2002 and June 30, 2003, we had cash and cash equivalents of $27.9 million and $35.5 million, respectively.

Net cash used in operating activities was $20.6 million for 2000 and $20.7 million for 2001. Net cash provided by operating activities was $10.6 million for 2002 and $746,000 and $8.6 million for the six months ended June 30, 2002 and 2003, respectively. Net cash used in operating activities for 2000 and 2001 primarily resulted from net losses and increases in accounts receivable offset in part by amortization of stock-based compensation and depreciation and amortization. Net cash provided by operating activities for 2002 primarily resulted from net income of $29.8 million, enhanced by $6.3 million of depreciation and amortization and amortization of stock-based compensation, offset in part by a $24.3 million benefit from income taxes relating to the reversal of the valuation allowance related to our deferred tax assets and a $6.0 million increase in accounts receivable. Net cash provided by operating activities for the six months ended June 30, 2003 primarily resulted from net income of $5.3 million, enhanced by $3.8 million of depreciation and amortization and amortization of stock-based compensation and a $3.6 million decrease in deferred tax assets, offset in part by a $3.6 million increase in accounts receivable.

Net cash used in investing activities was $8.2 million for 2000, $1.3 million for 2001, $3.5 million for 2002, and $694,000 and $2.0 million for the six months ended June 30, 2002 and 2003, respectively. These amounts were related primarily to purchases of computer equipment to support our growth in revenues and employee base and, for 2000, office equipment, furniture and fixtures relating to our office relocation in that year.

Net cash provided by financing activities was $48.1 million for 2000, $6.2 million for 2001, $2.1 million for 2002, and $463,000 and $1.0 million for the six months ended June 30, 2002 and 2003, respectively. Cash provided by financing activities for 2000 was primarily from net proceeds of the sale of our preferred stock. For 2001, cash provided by financing activities was primarily from net proceeds of $6.7 million from the line of credit and $2.9 million from loans, offset by $3.6 million of payments on loans. For 2002, cash provided by financing activities was primarily from proceeds of $2.4 million from loans and $625,000 of proceeds from repayment of notes receivable from stockholders, offset by $1.1 million of payments on loans. For the six months ended June 30, 2003, cash provided by financing activities was primarily from $1.5 million of net

proceeds from loans payable and $505,000 of net proceeds from the issuance of common stock, offset in part by payments on loans payable of $988,000.

We have signed contracts with some network service providers under which we have minimum purchase commitments that expire on various dates through February 2006. Other than in the approximately 40 countries in which our sole network service provider is Equant, we have contracted with multiple network service providers to provide alternative access points in a given geographic area. In those geographic areas where we have access through multiple providers, we are able to direct users to the network of particular service providers. Consequently, we believe we have the ability to fulfill our minimum purchase commitments in such geographic areas. Future minimum purchase commitments under all agreements as of December 31, 2002 are as follows:

We lease our facilities under operating leases that are non-cancelable and that expire at various dates through February 2010. Future minimum lease payments under these operating leases as of December 31, 2002 are as follows:

As of June 30, 2003, we had an aggregate of $10.9 million of debt outstanding. We have a $10 million revolving bank line of credit that matures in January 2004 and a $2.5 million equipment term loan with the same lender, the last draw of which matures in June 2006. In connection with these agreements, we issued warrants to purchase an aggregate of 38,527 shares of our common stock. The term loan was to be used only to refinance purchases of equipment. To secure any outstanding loans, we have granted a security interest in our assets, including our accounts receivable. Interest on the bank line of credit and the loans is payable monthly and accrues at between one percentage point and one and one quarter percentage point above the bank’s prime rate. As of June 30, 2003, $6.8 million was outstanding under the revolving line of credit and $1.9 million was outstanding on the equipment term loan. We also have another equipment term loan with this bank, which we entered into in January 2003, in the amount of $5 million, of which $1.4 million was outstanding as of June 30, 2003. Under these debt agreements, we have agreed to maintain a balance of unrestricted cash and cash equivalents of at least $50 million, should we decide not to pay off the debt facilities upon our initial public offering. Additionally, we have a covenant requiring a net profit in each quarter. If we do not meet these requirements, then we may not be allowed to draw down any additional funds through these lines of credit. We also have two secured loan agreements with financing companies which mature in January 2004. As of June 30, 2003, the remaining outstanding balance under these loan agreements was $809,000.

We intend to use a portion of the net proceeds from this offering to repay all of our outstanding indebtedness.

We believe that cash flows from operations and our current cash and cash equivalents will be sufficient to fund our operations for at least the next 12 months.

In February 2002, Mr. Denman, our Chairman, President and Chief Executive Officer, purchased 2,675,300 shares of our common stock from us at $.50 per share in connection with an early exercise of stock options granted to him in December 2001 as part of his compensation package when he joined us. In February 2002, Mr. Thuma, our Vice President of Worldwide Sales, purchased 300,000 shares of our common stock from us at $.50 per share in connection with an early exercise of stock options granted to him in December 2001. All of iPass’ executives are contractually entitled to early exercise their options.

In August, November and December 2000, we conducted our most recent round of preferred stock financing in which we sold 8,544,522 shares of our preferred stock at $5.84 per share. Two of our then 5% or greater stockholders, Accel Partners and Crosspoint Venture Partners, purchased an aggregate of 3,364,727 of these shares in this financing. Accel Venture Partners is affiliated with Mr. Patterson, one of our directors. Crosspoint Venture Partners was affiliated with one of our then directors.

In November and December 2000, Cisco Systems, Inc. purchased an aggregate of 3,424,658 shares of preferred stock from us at $5.84 per share. In connection with these purchases, Cisco became a holder of in excess of 5% of our outstanding stock.

In April 2001, we entered into a Cisco AVVID Partner Program Agreement with Cisco pursuant to which we became a participant in Cisco’s AVVID Partner Program. AVVID is intended to establish a network of vendors of complementary, interoperable goods and services related to network solutions. Under the terms of this agreement, we have agreed to cooperate with Cisco in marketing products and services we wish to market under the program.

In addition to the above agreements, Cisco is one of our indirect customers through our channel partner, Equant. In 2002, we billed approximately $963,000 to Equant relating to our services purchased by Cisco from Equant.

We have received full recourse promissory notes in an aggregate amount of approximately $2.5 million from some of our officers in connection with the exercise of stock options held by them. Each of the notes has a market interest rate of 7%, with the outstanding principal and interest that will be due upon the first anniversary of the closing date of this offering. We cannot modify or extend the term of these notes.

Please see “Certain Relationships and Related Party Transactions” later in this prospectus for a more detailed discussion of these transactions.

As of December 31, 2002 and June 30, 2003, we had cash and cash equivalents of $27.9 million and $35.5 million, respectively, which consisted of cash and highly liquid short-term investments with original maturities of three months or less at the date of purchase, which we hold solely for non-trading purposes. These investments may be subject to interest rate risk and will decrease in value if market interest rates increase. A hypothetical increase or decrease in market interest rates by 10% from the market interest rates at June 30, 2003 would cause the interest generated by, and the fair value of, these short-term investments to change by an immaterial amount. Declines in interest rates over time will, however, reduce our interest income.

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

We are a global provider of software-enabled enterprise connectivity services for mobile workers. Our primary service offering, iPass Corporate Access, is designed to enable enterprises to provide their employees with secure access from approximately 150 countries to the enterprise’s internal networks through an easy-to-use interface. As opposed to telecommunications companies that own and operate physical networks, we provide our services through a virtual network. Our virtual network is enabled by our software, our scalable network architecture and our relationships with over 200 telecommunications carriers, Internet service providers and other network service providers around the globe. Our software is designed to provide enterprises with a high level of security, the ability to affect and control policy management, and to receive centralized billing and detailed reporting. We provide our services predominantly over wired networks, and recently we have begun providing our services over wireless networks. We have generated 99% of our revenues to date from the sale of enterprise connectivity services using narrowband access technologies, such as modem dial-up, and seek to generate additional revenues from broadband access technologies, including Ethernet and Wi-Fi. We market and sell our services directly, as well as indirectly through channel partners, which consist of network service providers, systems integrators and value-added resellers. We were incorporated in California in July 1996 and reincorporated in Delaware in June 2000.

Enterprises have achieved significant advances in productivity over the last decade by connecting employees to internal networks, and deploying network-based applications such as e-mail. While these developments have greatly increased productivity for employees in their offices, it is becoming increasingly important for enterprises to make these applications available to employees working outside of the office. According to estimates by International Data Corporation, a market research firm, the number of U.S. mobile workers will increase from approximately 92 million in 2002 to approximately 105 million in 2006, growing at almost twice the rate of the U.S. worker population in general. These workers access their enterprise networks while traveling or working from home or from other locations outside of their office, which enables them to be better informed and more collaborative, resulting in improved decision-making and more streamlined business processes. These productivity and efficiency gains are being facilitated by the widespread proliferation of electronic devices such as laptop computers, personal digital assistants, or PDAs, and mobile phones, and the growth of wired and wireless broadband networks. As a result, many enterprises today are seeking secure and cost-effective ways to provide the benefits of advanced connectivity services to their employees in order to enhance their competitive position.

In order to provide mobile workers with access to critical applications, databases and other resources located on internal networks, enterprises primarily rely on the public switched telephone network or the Internet. Some enterprises deploy and manage their own modem banks, toll-free access numbers and remote access servers, which can require substantial information technology resources. Mobile workers access the network by placing a long distance or toll-free call to their enterprise networks, which can be very expensive. In addition, reliable data transport may be a problem in areas where quality long-distance connections are unavailable.

Enterprises that lack the resources or the desire to procure and manage systems internally will frequently turn to network service providers for remote access services. These service providers may provide remote access by utilizing outsourced modem banks, telephone lines, and private data network services. Alternatively, service providers may employ virtual private network, or VPN, technology combined with other security applications to provide enterprise connectivity services through the Internet.

Regardless of approach, because of the ubiquity of telephone lines, narrowband access is currently more available than broadband access as a means for enterprises to connect their mobile workers to enterprise networks. In addition, security concerns, the early stage nature of broadband technology and reduced information technology budgets have prevented a significant number of enterprises from providing their

mobile workers with broadband remote access. However, continuing advances in broadband technology are expected to enable increased adoption of remote broadband access.

Several factors in the telecommunications and technology industries make it difficult for enterprises to provide secure, high quality remote access to mobile workers at a reasonable cost. These factors include:

No Single Provider for Global Coverage. Although many network service providers offer coverage in a broad range of geographic locations, the capital and lead time required for any one service provider to establish network coverage in all locations that an enterprise may require can be significant. To date, no single network service provider has established a global physical network. Therefore, enterprises may enter into relationships with multiple service providers in order to obtain remote access in all areas in which access is required.

Lack of Network Redundancy. Many network service providers do not have multiple access points in many geographic locations. Even if they do, a network system failure may affect all access points of that network in that geographic region. As a result, enterprises that rely on only one network service provider for remote access in a given geographic area may face service interruptions or delays if the service provider’s physical network goes down. In addition, the recent downturn in economic conditions and reduction in overall information technology spending has had a significant negative impact on network service providers, raising concerns as to whether the services offered by some of these network service providers will remain available. To minimize the risk of service interruptions, enterprises may need to secure multiple service providers.

Need for Integration and Management of Security. Recently, the number and severity of attacks on corporate networks by hackers have become a significant issue. New access methods, devices, applications and operating systems have also introduced additional vulnerabilities that have been actively exploited by hackers. Because remote access provides workers with an extension to the corporate network, it is critical that this “extended” network be secure. As a result, security has become one of the most important barriers that enterprises must overcome in order to fully realize the benefits of remote access. To combat these risks, enterprises have managed the security of their remotely accessed internal networks with a wide variety of security products, such as VPNs, firewalls and authentication tokens. Therefore, enterprises frequently seek a connectivity solution that can fully integrate with their existing and future security infrastructure.

Need to Manage and Monitor Multiple Provider Relationships. In order to provide remote access with global coverage and redundancy, enterprises may enter into relationships with multiple service providers. Entering into multiple contracts and establishing multiple billing, reporting and payment standards may be costly and time consuming for an enterprise and increases the complexity of monitoring, managing and troubleshooting the usage of remote access by employees.

Need for Integration of Rapidly Changing Technologies. The market for enterprise connectivity and related technology is rapidly changing. Several access methods through which a mobile worker can connect to the Internet have emerged, including wired broadband access technologies such as Ethernet, and wireless broadband access technologies such as Wi-Fi, and third generation mobile data network, or 3G. In addition, new electronic devices such as wireless PDAs and other Internet protocol-enabled mobile devices have provided new connectivity options. New security applications and operating systems have also emerged and are expected to continue to develop. As a result, enterprises may seek a service provider that can continue to support and integrate these rapidly emerging technologies while conforming to changing corporate access and security policies.

We believe that enterprises are increasingly requiring a comprehensive solution that can successfully address all these challenges in a cost-effective manner while providing their employees and administrators with an easy-to-use, unified and secure remote access experience.

Our services are designed to enable enterprises to provide their employees with secure access from approximately 150 countries to the enterprise’s internal networks through an easy-to-use interface. We provide our services through a virtual network that is enabled by our software, our scalable network architecture, and our relationships with over 200 network service providers around the globe.

Broad Global Coverage. Our virtual network aggregates over 18,000 network access points in approximately 150 countries. As of June 30, 2003, over 16,000 of these access points were dial-up connections and over 2,000 were broadband connections, including over 1,500 Wi-Fi hotspots and over 500 wired hotspots. As a result, enterprises that use our services can provide their mobile workers with access from these countries, in most instances with a local telephone connection.

Redundant and Scalable Virtual Network. Our relationships with over 200 network service providers enable us to provide connectivity through multiple networks in approximately 100 out of the approximately 150 countries on our virtual network. As a result, our virtual network reduces the risk of service interruptions associated with depending on only one service provider. Furthermore, our geographically distributed transaction centers, which operate as collection points for transactional and other user information, provide efficient, redundant transaction processing. Our technology enables us to monitor and manage our virtual network by producing near real-time updates, generally within 15 minutes, of connection success rates, client configurations, authentication times and other information critical to diagnosing network health and troubleshooting user connection problems. In addition, our virtual network is scalable, which allows us to handle many connections and users and reduces the need for enterprises to employ additional information technology resources.

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

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

Integration of New Technologies. We actively evaluate and integrate new access methods, devices, applications and operating systems into our service offering. For example, we have added wired broadband as well as wireless broadband based on the current and emerging Wi-Fi standards to the list of access methods we support. End users can access our virtual network using desktop and laptop computers, wireless PDAs and other Internet protocol-enabled electronic devices. Our network integrates with our enterprise customers’ existing VPN and security applications, and our software supports a wide range of computer operating systems, including various Windows, Mac OS, Pocket PC and Palm OS versions. As new access methods, devices, applications and operating systems emerge, we intend to integrate these new technologies into our service offerings.

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

Expand our Customer Base. We seek to increase the number of enterprises that use our services by increasing the number of our direct sales professionals who focus on generating new accounts. We also seek to

expand our indirect sales capabilities by building additional relationships with channel partners, such as systems integrators, and providers of VPN and broadband access service and equipment. We also intend to build and maintain iPass brand awareness through the promotion of our logo and marketing campaigns, and by increasing our market credibility through integrating our software with the offerings of our channel partners and co-branding our client software.

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

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

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

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


	1.	The iPassConnect client software installed on a mobile worker’s laptop computer or other electronic device enables the mobile worker to connect to our virtual network. The mobile worker indicates the city in which he or she is located, and then selects a local network access point or has the client software select one automatically.

	2.	The iPass NetServer software, installed in a network service provider’s network, provides the interface between the network service provider and the iPass network. The NetServer recognizes that the end user belongs to the iPass network and securely transmits the username and password to the nearest iPass transaction center.

	3.	The transaction center to which the authentication request is routed securely transmits the user name and password to the iPass RoamServer software residing on the enterprise’s servers. Our eight transaction centers are located in California, New York, Georgia, Hong Kong, Australia, the United Kingdom, Germany and Japan.

	4.	The RoamServer receives the request from the transaction center and passes it to the enterprise authentication database. Enterprises can manage their own user lists and authentication databases and control users’ access to their internal network through the authentication system of their choice.

	5.	The enterprise authentication database then grants or denies authorization. The RoamServer securely sends a yes/no response back to the network service provider via a transaction center.

	6.	Once we authorize the network service provider to allow access to the Internet, the iPassConnect client software can automatically launch the user’s VPN to securely connect to the enterprise network.


	7.	When the mobile worker terminates the Internet session, the VPN connection is also terminated and a record of the transaction is forwarded to the iPass clearinghouse. The enterprise receives one or more detailed monthly invoices, as requested.

We provide our customers with deployment services and technical support throughout the term of the contract. Fees for these services represented less than 2% of our revenues in 2000, 2001 and 2002 and in the first six months of 2003.

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

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

ExpressConnect. Our ExpressConnect service is designed to enable enterprises to realize the benefits of our enterprise connectivity services while avoiding the cost of installing and managing additional authentication infrastructure. We manage an enterprise’s authentication server at an off-site secure data center, but the enterprise’s information technology manager retains full control. We generally charge a monthly fee for our ExpressConnect service.

iPassNet. Our iPassNet service is used primarily by network service providers to expand their geographic coverage, particularly where a network service provider’s subscriber requires remote access outside of the provider’s primary coverage. We generally bill the network service provider on a per-minute basis for usage of our network.

Fees for these additional services represented less than 1% of our revenue in 2000, 2001 and 2002 and approximately 1% in the first six months of 2003.

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

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


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

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


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

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

	•	Third Party Application Integration. iPassConnect client can be configured to automatically launch a variety of third party VPNs upon successful connection to the Internet.

	•	Support for multiple operating systems and languages. iPassConnect client supports a wide range of computer operating systems, including Windows 95, 98, NT, 2000, Me, XP, Mac OS 8.x, 9.x, 10.x, Windows CE, Pocket PC2000, Pocket PC2002 and Palm OS. Additionally, iPassConnect is localized in Chinese, French, German, Japanese, Portuguese and Spanish.

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

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

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

We have recently developed and are presently deploying an additional security enhancement to our authentication system designed to further ensure the confidentiality of sensitive user credentials.

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

Service Quality Management. Our iPass service quality management, or SQM, software consists of several quality of service monitoring and management elements that we have 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. Based on input from the SQM infrastructure, the phonebook tool within the iPassConnect client places the highest quality access point at the top of the directory in order to enhance the experience for our customers’ end users.

Our eight transaction centers are located in third-party co-location facilities in California, New York, Georgia, Hong Kong, Australia, the United Kingdom, Germany and Japan. In addition, two out of our eight transactions centers also run the Clearinghouse, our ExpressConnect service and the phonebook distribution servers. We maintain standard contractual agreements with the third parties that host our co-location facilities which generally provide for a term of between one and three years. If our relationship with these providers terminate, we believe that we will be able to secure relationships with alternative providers without any significant disruption to our operations.

We have developed collaborative relationships with several companies focused on the development and marketing of current and emerging complementary technologies. We work with these companies to integrate our client technology with VPN, personal firewall, intrusion detection and anti-virus solutions; test interoperability and demonstrate joint solutions; and co-market and co-sell joint solutions. For example, we are engaged in a collaboration with Intel Corporation to improve ease-of-use and secure connectivity to the Internet with Intel® Centrino^TM mobile technology products. As part of our relationship with Cisco, we participate in the AVVID (Architecture for Voice, Video and Integrated Data) Program and the Cisco Mobile Office On The Road program (solutions for mobile users). There is no compensation involved in these contracts.

The following is a representative list of our enterprise customers and channel partner customers:


Delaware	7389	93-1214598
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)






			Proposed Maximum
Title of Each Class of	Amount to be	Proposed Maximum	Aggregate Offering	Amount of
Securities to be Registered	Registered⁽¹⁾	Price Per Share	Price⁽²⁾	Registration Fee⁽³⁾


Common Stock, $.001 par value	8,050,000	$13.00	$104,650,000	$9,022


	PROSPECTUS SUMMARY
	SUMMARY CONSOLIDATED FINANCIAL DATA
	RISK FACTORS
	SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
	USE OF PROCEEDS
	DIVIDEND POLICY
	CAPITALIZATION
	DILUTION
	SELECTED CONSOLIDATED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	BUSINESS
	MANAGEMENT
	CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
	PRINCIPAL STOCKHOLDERS
	DESCRIPTION OF CAPITAL STOCK
	SHARES ELIGIBLE FOR FUTURE SALE
	UNDERWRITERS
	LEGAL MATTERS
	EXPERTS
	WHERE YOU CAN FIND ADDITIONAL INFORMATION
INDEX TO FINANCIAL STATEMENTS
EXHIBIT 23.1


Common stock offered		7,000,000 shares

Common stock to be outstanding after the offering		58,710,175 shares

Use of proceeds		We expect to use the net proceeds to repay outstanding debt, for general corporate purposes, including working capital and capital expenditures, and potential investments and acquisitions.

Nasdaq National Market symbol		IPAS



											Six Months Ended
		Year Ended December 31,									June 30,

		2000			2001			2002			2002		2003


											(unaudited)

		(in thousands, except share and per share data)
Statement of Operations Data:
Revenues		$	35,281		$	53,164		$	92,830		$	41,417	$	63,601
Operating income (loss)			(34,035	)		(27,734	)		6,652			798		10,028
Net income (loss)			(34,964	)		(27,801	)		29,759⁽¹	⁾		489		5,262
Net income (loss) per share:
	Basic⁽²⁾	$	(3.60	)	$	(2.43	)	$	2.34		$	.04	$	.38
	Diluted⁽³⁾	$	(3.60	)	$	(2.43	)	$	.57		$	.01	$	.09
	Pro forma, diluted (unaudited)⁽⁴⁾							$	.58				$	.10
Number of shares used in per share calculations:
	Basic⁽²⁾		9,715,768			11,443,250			12,742,068			12,483,611		14,015,081
	Diluted⁽³⁾		9,715,768			11,443,250			51,873,067			50,487,256		56,385,880
	Pro forma, diluted (unaudited)⁽⁴⁾								52,737,650					57,294,047


Timothy J. Moore, Esq. Brett D. White, Esq. Gordon K. Ho, Esq. Cooley Godward LLP Five Palo Alto Square 3000 El Camino Real Palo Alto, CA 94306-2155 (650) 843-5000		Bruce K. Posey, Esq. Vice President and General Counsel iPass Inc. 3800 Bridge Parkway Redwood Shores, CA 94065 (650) 232-4100		James S. Scott, Sr., Esq. Mark K. Hyland, Esq. Shearman & Sterling LLP 599 Lexington Avenue New York, NY 10022 (212) 848-4000


	Page

Prospectus Summary		1
Risk Factors		6
Special Note Regarding Forward-Looking Statements		14
Use of Proceeds		15
Dividend Policy		15
Capitalization		16
Dilution		17
Selected Consolidated Financial Data		18
Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Business		32
Management		43
Certain Relationships and Related Party Transactions		55
Principal Stockholders		57
Description of Capital Stock		59
Shares Eligible for Future Sale		62
Underwriters		64
Legal Matters		67
Experts		67
Where You Can Find Additional Information		67
Index to Financial Statements		F-1



	As of June 30, 2003

	Actual			As Adjusted


	(unaudited)
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	35,538		$	101,683
Working capital		41,377			115,510
Total assets		84,998			149,803
Line of credit and loans payable		10,898			—
Accumulated deficit		(58,972	)		(58,972	)
Total stockholders’ equity		57,543			133,663


Assumed initial public offering price per share				$	12.00
	Net tangible book value per share before offering	$	1.11
	Increase per share attributable to new investors		1.17

As adjusted net tangible book value per share after offering					2.28

Dilution per share to new investors				$	9.72



		Shares Purchased					Total Consideration?
												Average Price
		Number		Percent			Amount		Percent			Per Share

Existing stockholders			51,710,175		88	%	$	91,603,741		52	%	$	1.77
New investors			7,000,000		12			84,000,000		48			12.00

	Total		58,710,175		100	%	$	175,603,741		100	%



												Six Months
												Ended
				Year Ended December 31,								June 30,

				1999		2000		2001		2002		2002		2003


												(unaudited)

				(in thousands)
(1)	Amortization of stock-based compensation consists of:
		Network operations		$	419	$	981	$	576	$	302	$	140	$	246
		Research and development			202		722		398		219		87		192
		Sales and marketing			642		2,503		1,171		571		287		503
		General and administrative			2,318		6,294		3,505		1,673		918		1,023

			Total amortization of stock-based compensation	$	3,581	$	10,500	$	5,650	$	2,765	$	1,432	$	1,964


																As of
	As of December 31,															June 30,

	1998			1999			2000			2001			2002			2003

																(unaudited)

	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	5,166		$	15,178		$	34,548		$	18,789		$	27,916		$	35,538
Working capital		3,670			11,308			30,211			10,028			29,589			41,377
Total assets		6,945			24,216			52,232			37,421			75,442			84,998
Line of credit and loans payable		1,059			4,371			2,726			8,932			10,375			10,898
Accumulated deficit		(12,854	)		(31,228	)		(66,192	)		(93,993	)		(64,234	)		(58,972	)
Total stockholders’ equity		3,655			11,941			38,294			16,262			49,600			57,543



												Six Months
			Year Ended									Ended
			December 31,									June 30,

			2000			2001			2002			2002			2003

Revenues				100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses:
	Network access			48.5			36.6			25.1			26.6			22.5
	Network operations			22.9			18.3			11.3			11.8			10.4
	Research and development			12.7			10.2			7.6			7.0			7.3
	Sales and marketing			59.1			56.4			35.5			37.7			31.2
	General and administrative			23.5			18.0			10.4			11.5			9.7
	Restructuring charges			—			2.1			—			—			—
	Amortization of stock-based compensation			29.8			10.6			3.0			3.5			3.1

		Total operating expenses		196.5			152.2			92.9			98.1			84.2

		Operating income (loss)		(96.5	)		(52.2	)		7.1			1.9			15.8
Other income (expense):
	Interest income and other			2.8			1.7			.5			.6			.4
	Interest expense			(5.4	)		(1.6	)		(1.1	)		(1.3	)		(.7	)

		Total other income (expense)		(2.6	)		.1			(.6	)		(.7	)		(.3	)

Income (loss) before income taxes				(99.1	)		(52.1	)		6.5			1.2			15.5
Provision for (benefit from) income taxes				—			.2			(25.6	)		—			7.2

Net income (loss)				(99.1	)%		(52.3	)%		32.1	%		1.2	%		8.3	%


	*Comparison of the Six Months Ended June 30, 2002 and 2003*


	*Comparison of the Years Ended December 31, 2001 and 2002*


*MORGAN STANLEY*	*CREDIT SUISSE FIRST BOSTON*


*SG COWEN*	*THOMAS WEISEL PARTNERS LLC*


	*Revenue Recognition*


	*Purchase Commitments*



			Quarter Ended

			Mar. 31,			Jun. 30,			Sep. 30,			Dec. 31,			Mar. 31,			Jun. 30,			Sep. 30,			Dec. 31,			Mar. 31,			Jun. 30,
			2001			2001			2001			2001			2002			2002			2002			2002			2003			2003


			(unaudited)
			(in thousands)
Revenues			$	10,698		$	11,931		$	14,264		$	16,271		$	19,317		$	22,100		$	24,007		$	27,406		$	30,498		$	33,103
Operating expenses:
	Network access			4,430			4,859			4,994			5,193			5,431			5,592			5,784			6,516			7,081			7,264
	Network operations			2,740			2,431			2,256			2,273			2,529			2,361			2,653			2,916			3,233			3,395
	Research and development			1,436			1,499			1,258			1,236			1,500			1,395			1,955			2,220			2,246			2,377
	Sales and marketing			8,353			7,632			7,213			6,758			7,576			8,035			8,192			9,128			9,712			10,129
	General and administrative			2,565			2,293			1,942			2,777			2,083			2,685			2,279			2,583			2,861			3,311
	Restructuring charges			—			440			190			480			—			—			—			—			—			—
	Amortization of stock-based compensation			1,932			1,400			1,234			1,084			818			614			664			669			975			989

		Total operating expenses		21,456			20,554			19,087			19,801			19,937			20,682			21,527			24,032			26,108			27,465

		Operating income (loss)		(10,758	)		(8,623	)		(4,823	)		(3,530	)		(620	)		1,418			2,480			3,374			4,390			5,638
Other income (expense):
	Interest income and other			390			237			138			130			97			135			101			107			107			159
	Interest expense			(137	)		(197	)		(203	)		(315	)		(260	)		(261	)		(282	)		(223	)		(226	)		(208	)

		Total other income (expense)		253			40			(65	)		(185	)		(163	)		(126	)		(181	)		(116	)		(119	)		(49	)

Income (loss) before income taxes				(10,505	)		(8,583	)		(4,888	)		(3,715	)		(783	)		1,292			2,299			3,258			4,271			5,589
Provision for (benefit from) income taxes				6			1			32			71			8			12			125			(23,838	)		1,961			2,637

Net income (loss)			$	(10,511	)	$	(8,584	)	$	(4,920	)	$	(3,786	)	$	(791	)	$	1,280		$	2,174		$	27,096		$	2,310		$	2,952


Year Ending December 31,	Annual Commitment

	(in thousands)
2003	$	6,545
2004		2,817
2005		2,500
2006		208

	$	12,070


Enterprise Customers:		Channel Partner Customers:
American Standard BEA Syste