Forward-Looking Statements

This quarterly report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," variations of these words, and similar expressions are intended to identify these forward-looking statements. In addition, any statements which refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions based upon assumptions made that we believed to be reasonable at the time, and are subject to risks and uncertainties. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified below under "Factors Affecting Operating Results" and elsewhere in this quarterly report, for factors that may cause actual results to be different than those expressed in these forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements.

Company Overview

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

Overview of the three and nine months ended September 30, 2008

Our overall revenues increased slightly for the three and nine months ended September 30, 2008 as compared to the same periods in 2007. The increase was driven primarily by additional revenues from our 3G broadband service offering.
Revenues from broadband, software and services fees increased $7.6 million and $27.6 million for the three and nine months ended September 30, 2008, respectively, as compared to the same periods of the prior year. These increases were partially offset by $6.9 million and $24.7 million decline in dial-up revenue for the three and nine months ended September 30, 2008, respectively.

We increased the number of broadband access points during the quarter, increasing our global broadband footprint. We ended the quarter with approximately 107,000 Wi-Fi and wired hotspots worldwide, approximately 105,000 of which were Wi-Fi hotspots and approximately 2,000 of which were wired hotspots. This enabled our customers to access remotely their corporate networks from more locations, at higher speeds driving increases in broadband usage revenues in 2008 over 2007.

Going forward, we will continue to focus on delivering innovative services and solutions for our customers, increasing the number of end users of our services for both dial-up and broadband access, as well as to continue to increase fee revenues from device management and other fee based services. Through the remainder of 2008, we expect to see continued growth in our business. However, our success could be limited by several factors, including the timely release of new products, continued market acceptance of our products and the introduction of new products by existing or new competitors. For a further discussion of these and other risk factors, see the section below entitled "Factors Affecting Operating Results."

Sources of Revenues

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

We have incurred expenses to expand our broadband coverage and are seeking to generate additional revenues from our broadband wired and wireless coverage. Revenues from usage of our broadband services were 54% and 41% of our total revenues for the three months ended September 30, 2008 and 2007, respectively, and 53% and 37% for the nine months ended September 30, 2008 and 2007, respectively.

We provide customers with deployment services and technical support throughout the term of the contract. We typically charge fees for these services on a one-time or annual basis, depending on the service provided and the nature of the relationship. We also offer customers additional services for which we generally bill on a monthly basis. In addition, we generate license and maintenance revenue through software licensing agreements. Revenues generated from license and maintenance fees, together with revenues generated from deployment services and technical support, represented approximately 28% and 26% of our revenues for the three months ended September 30, 2008 and 2007, respectively, and 27% and 25% for the nine months ended September 30, 2008 and 2007, respectively.

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

Given the recent decline in our stock price, management reviewed the recoverability of our goodwill balance and concluded an impairment charge was not required as of September 30, 2008. If our common stock price continues to trade below book value per common share, we may have to recognize an impairment of all or some portion of our goodwill and other intangible assets in the near future.

There have been no significant changes in our critical accounting estimates during the nine months ended September 30, 2008 as compared to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2007.

RESULTS OF OPERATIONS

Revenue

                                          Three Months Ended           Nine Months Ended
                                             September 30,               September 30,
                                           2008          2007         2008          2007
                                                (In thousands, except percentages)
Total Revenue                           $   48,371     $ 47,736     $ 145,099     $ 142,221
Change, period over period              $      635                  $   2,878
Percentage change, period over period          1.3 %                      2.0 %

Total revenue increased in the three and nine months ended September 30, 2008, as compared to the same periods in 2007, due to an increase in enterprise flat rate fees, which is allocated to broadband and dial-up revenue based on actual usage, increase in broadband revenues from the addition of new customers signed over the last year and the increase in existing customers' mobile broadband usage. This was partially offset by a continued decline in dial-up revenue as customers migrated from dial-up to broadband as the preferred method of connecting to their corporate networks.

A breakdown of revenue by type is as follows:

                                          Three Months Ended          Nine Months Ended
                                             September 30,              September 30,
                                           2008          2007         2008          2007
                                                (In thousands, except percentages)
Broadband                               $   26,289     $ 19,632     $  76,597     $ 52,944
Percentage of total revenue                   54.3 %       41.2 %        52.8 %       37.2 %
Change, period over period              $    6,657                  $  23,653
Percentage change, period over period         33.9 %                     44.7 %



Dial Up                                 $  8,788      $ 15,719     $  29,728      $ 54,419
Percentage of total revenue                 18.2 %        32.9 %        20.5 %        38.3 %
Change, period over period              $ (6,931 )                 $ (24,691 )
Percentage change, period over period      (44.1 %)                    (45.4 %)



Services Fees and Other                 $ 13,294     $ 12,385     $ 38,774     $ 34,858
Percentage of total revenue                 27.5 %       25.9 %       26.7 %       24.5 %
Change, period over period              $    909                  $  3,916
Percentage change, period over period        7.3 %                    11.2 %

International revenues accounted for approximately 40% and 36% of total revenues for the three months ended September 30, 2008 and 2007, respectively, and 38% and 37% of total revenues for the nine months ended September 30, 2008 and 2007, respectively. Substantially all of our international revenues are generated in the EMEA (Europe, Middle East and Africa) and Asia Pacific regions. Revenues in the EMEA region represented 27% and 26% of total revenues for the three months ended September 30, 2008 and 2007, respectively, and 27% of our revenues for both the nine months ended September 30, 2008 and 2007, respectively. Revenues in the Asia Pacific region represented 9% and 8% of total revenues for the three months ended September 30, 2008 and 2007, respectively, and 8% of total revenues for both the nine months ended September 30, 2008 and 2007. The only individual foreign country to account for 10% or more of total revenues for the periods presented was the United Kingdom, which for the three and nine months ended September 30, 2007 represented approximately 10% and 12% of total revenues, respectively. No individual foreign country represented 10% or more of total revenues for the three or nine months ended September 30, 2008. Substantially all of our revenues to date have been denominated in U.S. dollars. In the future, some portion of revenues may be denominated in foreign currencies. No individual customer accounted for 10% or more of total revenues for the three or nine months ended September 30, 2008 and 2007.

Operating Expenses

Network Access

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

                                          Three Months Ended          Nine Months Ended
                                             September 30,              September 30,
                                           2008          2007         2008          2007
                                                (In thousands, except percentages)
Network access expenses                 $   20,147     $ 17,396     $  61,588     $ 50,939
As a percentage of revenue                    41.7 %       36.4 %        42.4 %       35.8 %
Change, period over period              $    2,751                  $  10,649
Percentage change, period over period         15.8 %                     20.9 %

The growth in network access expenses in the three and nine months ended September 30, 2008 as compared to the same periods in 2007 was primarily due to increased usage of our virtual network with respect to our broadband services.
While network access costs for broadband access are higher than those for dial up, we expect that as broadband usage continues to increase, we will continue to be in a better position to negotiate lower rates for access to broadband networks.

We expect network access expenses to continue to increase in absolute dollars to the extent that revenue increases and remain relatively constant as a percentage of revenues in the fourth quarter of 2008.

Network Operations

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

                                          Three Months Ended          Nine Months Ended
                                             September 30,              September 30,
                                           2008          2007         2008          2007
                                                (In thousands, except percentages)
Network operations expenses             $    8,739      $ 8,686     $  26,138     $ 25,667
As a percentage of revenue                    18.1 %       18.2 %        18.0 %       18.0 %
Change, period over period              $       53                  $     471
Percentage change, period over period          0.6 %                      1.8 %

Network operations expenses increased only slightly for the three months ended September 30, 2008 as compared to the third quarter of 2007. There were no fluctuations, offsetting or otherwise, significant enough to note.

The growth in network operations expenses in the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 was related primarily to approximately $756,000 in additional compensation and benefits expense. This increase was offset by a reduction of $285,000 in expenses for outside contractors as those contractors were converted to full time employees.
The remainder of the increase was attributable to various expenses which, individually, are insignificant items.

We expect that our network operations expenses will remain relatively constant in absolute dollars and as a percentage of revenues in the fourth quarter of 2008.

Research and Development

Research and development expenses consist of compensation and benefits for our
research and development personnel, consulting, and certain allocated overhead
costs.

                                          Three Months Ended          Nine Months Ended
                                             September 30,              September 30,
                                           2008          2007         2008          2007
                                                (In thousands, except percentages)
Research and development expenses       $    3,845      $ 5,589     $ 12,288      $ 16,484
As a percentage of revenue                     7.9 %       11.7 %        8.5 %        11.6 %
Change, period over period              $   (1,744 )                $ (4,196 )
Percentage change, period over period        (31.2 %)                  (25.5 %)

The decrease in research and development expenses, in both absolute dollars and percent of revenue, for the three months ended September 30, 2008 as compared to the three months ended September 30, 2007 is primarily due to the restructuring plan completed in 2007. The headcount reductions included as part of the restructuring resulted in a $438,000 reduction in contractor expense and a $956,000 reduction in compensation and benefits expenses. The remaining portion of the decrease was due to individually insignificant items.

The decrease in research and development expenses, in both absolute dollars and percent of revenue, for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 resulted primarily from $3.6 million lower compensation, benefits and outside contractor expenses and $410,000 lower stock-based compensation expense due to the headcount reductions in the restructuring plan completed in 2007. The remaining portion of the decrease was due to individually insignificant items.

We expect that our research and development expenses will remain relatively constant in absolute dollars and as a percentage of revenue in the fourth quarter of 2008.

Sales and Marketing

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

                                          Three Months Ended          Nine Months Ended
                                             September 30,              September 30,
                                          2008           2007         2008          2007
                                                (In thousands, except percentages)
Sales and marketing expenses            $  10,724      $ 12,316     $ 31,403      $ 39,610
As a percentage of revenue                   22.2 %        25.8 %       21.6 %        27.9 %
Change, period over period              $  (1,592 )                 $ (8,207 )
Percentage change, period over period       (12.9 %)                   (20.7 %)

The decrease in sales and marketing expenses in absolute dollars and percent of revenue for the three months ended September 30, 2008 as compared to the three months ended September 30, 2007 was due primarily to an approximately $1.1 million decrease in compensation and benefits expenses due to decreased sales personnel resulting from our restructuring plan in 2007. The remaining portion of the decrease was due to individually insignificant items.

The decrease in sales and marketing expenses in absolute dollars and percent of revenue for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 was due primarily to approximately $5.7 million in decreased compensation and benefits expenses due to decreased sales personnel resulting from the restructuring plan in 2007. The decreased sales personnel resulted in an additional $581,000 reduction in travel costs and $609,000 reduction in stock-based compensation expense. Targeted reductions in specific marketing programs further reduced sales and marketing expenses by $636,000. The remaining portion of the decrease was due to individually insignificant items.

We expect that sales and marketing expenses will remain relatively constant in absolute dollars and as a percentage of revenues in the fourth quarter of 2008.

General and Administrative

General and administrative expenses consist of compensation and benefits of
general and administrative personnel, legal and accounting expenses, bad debt
expense, and certain allocated overhead costs.

                                          Three Months Ended          Nine Months Ended
                                             September 30,              September 30,
                                           2008          2007         2008          2007
                                                (In thousands, except percentages)
General and administrative expenses     $    5,579      $ 5,395     $  16,703     $ 16,213
As a percentage of revenue                    11.5 %       11.3 %        11.5 %       11.4 %
Change, period over period              $      184                  $     490
Percentage change, period over period          3.4 %                      3.0 %

General and administrative expenses for the three months ended September 30, 2008 increased slightly as compared to the three months ended September 30, 2007. There were no fluctuations, offsetting or otherwise, significant enough to note.

The increase in general and administrative expenses for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 was primarily driven by a $438,000 increase in stock-based compensation expense. The remainder of the increase is due to various individually insignificant items.

We expect that general and administrative expenses will remain relatively constant in absolute dollars and as a percentage of revenues in the fourth quarter of 2008.

Restructuring Charges

In November 2007, we recorded a restructuring charge of approximately $3.2 million related to (i) a workforce reduction of 72 employees spread across all functions though focused on sales and marketing, (ii) the abandonment of certain facilities and (iii) abandonment of certain capitalized assets totaling $900,000. As of December 31, 2007, we finalized approximately 56 of the employment terminations and had fully vacated the abandoned facilities.

By February 2008, we finalized all of the employment terminations, settled all negotiations and paid out the remaining severance. As a result of finalizing all such terminations as well as some additional charges related to abandoned facilities, we adjusted the accrual for the difference between initial estimates of severance and facility liability and the final payments ultimately made. This adjustment of approximately $17,000 was credited to the restructuring expense in the first quarter of 2008.

SFAS No. 146 requires that liabilities recorded related to abandoned facilities be recorded at fair value. The difference between the fair value of the liability at the time it was recorded and the total cash liability is accreted ratably over the expected term and is reported in the restructuring expense line on the condensed consolidated statements of operations.

Amortization of Acquired Intangibles

Amortization of acquired intangibles was approximately $1.1 million for each of the three months ended September 30, 2008 and September 30, 2007, and $3.2 million for each of the nine months ended September 30, 2008 and September 30, 2007.

Some of our acquired intangibles will begin reaching the end of their estimated useful lives starting in the fourth quarter of 2008. The following table presents the estimated future amortization of intangible assets (in thousands):

Fiscal Year
Remaining 2008        $   750
2009                    2,401
2010                    1,241
2011                    1,021
2012                      876
2013 and thereafter        65
                      $ 6,354

Interest and Other Income (Expense)

Interest and other income (expense) includes interest income on cash, cash equivalents, and short-term investment balances as well as gains and losses on foreign currency transactions and foreign currency forward contracts. Interest income was $433,000 and $812,000 for the three months ended September 30, 2008 and 2007, respectively and $1.6 million and $2.5 million for the nine months ended September 30, 2008 and 2007, respectively. Interest declined primarily due to a decreased investment balance resulting from funds used for stock repurchases over the past year and a decrease in the rate of return on our investments. Conversion of foreign currencies resulted in losses of $729,000 and $40,000 for the three months ended September 30, 2008 and 2007, respectively and losses of $906,000 and $123,000 for the nine months ended September 30, 2008 and 2007, respectively. The increased loss on foreign currency exchange is primarily due to the strengthening of the US dollar against Euros and British Pounds during the third quarter of 2008.

Provision for (Benefit from) Income Taxes

Provision for (benefit from) income taxes was $59,000 expense and $656,000 benefit for the three and nine months ended September 30, 2008, respectively, compared to a benefit of $856,000 and $3.5 million for the three and nine months ended September 30, 2007, respectively. The decrease in benefit from income taxes is primarily due to the establishment of a valuation allowance against net deferred tax assets at December 31, 2007 due to continued losses in the US jurisdictions, as compared to the same periods in 2007. The $59,000 expense recorded in the three months ended September 30, 2008 primarily relates to foreign tax expense of $162,000 in the current period less a federal tax benefit of $103,000 recorded for acceleration of R&D credits under the Housing Assistance Tax Act of 2008. The effective tax rate was 3% and (44)% for the three months ended September 30, 2008 and 2007, respectively, and (12)% and
(47)% for the nine months ended September 30, 2008 and 2007, respectively.

Liquidity and Capital Resources

Current Cash Flows

Since our initial public offering of common stock in July 2003, our principal source of funding has been cash from operations. As of September 30, 2008, our principal source of liquidity was $68.0 million of cash, cash equivalents and short-term investments, compared to $75.2 million at December 31, 2007.

Net cash provided by operating activities for the nine months ended September 30, 2008 was $326,000, resulting from net loss of $4.9 million, adjusted for $11.4 million in non-cash charges and $6.2 million net change in assets and liabilities. The non-cash charges included depreciation and amortization and stock-based compensation. Net change in assets and liabilities was driven principally by a decrease in accrued liabilities due to cash payments for commissions and excess facilities and a decrease in deferred revenue.

Net cash used in investing activities was $20.6 million for the nine months ended September 30, 2008, resulting primarily from $16.3 million in purchase, net of sales, and maturities of short-term investments and $3.8 million used in capital expenditures.

Net cash used in financing activities for the nine months ended September 30, 2008 was $3.2 million, resulting primarily from $3.7 million used to repurchase shares of common stock in the open market, which was offset by $505,000 in proceeds from issuance of common stock upon exercise of options.

Commitments

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