EBAY INC - 10-Q Quarterly Report

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

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

As of October 31, 2003 there were 645,985,582 shares of the registrant’s common stock, $0.001 par value, outstanding, which is the only class of common or voting stock of the registrant issued.

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

eBay Inc. (“eBay”) was incorporated in California in May 1996, and reincorporated in Delaware in April 1998. As of September 30, 2003, through our wholly-owned and majority-owned subsidiaries and affiliates, we had websites directed towards the United States, Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, the Netherlands, New Zealand, the People’s Republic of China, Singapore, South Korea, Spain, Sweden, Switzerland, Taiwan and the United Kingdom. We pioneered online trading by developing a Web-based community in which buyers and sellers are brought together to buy and sell almost anything. The eBay online service permits sellers to list items for sale, buyers to bid on items of interest, and all eBay users to browse through listed items in a fully-automated, topically-arranged service that is available online seven days a week. Through our PayPal service, we enable any business or consumer with email in 33 countries to send and receive online payments.

On October 3, 2002, we completed our acquisition of PayPal, Inc. (“PayPal”) in a tax-free, stock-for-stock transaction. PayPal provides an online global payments platform and is headquartered in Mountain View, California. The PayPal financial statements are included in our consolidated financial statements from October 4, 2002.

On July 16, 2003, we completed the acquisition of all of the remaining outstanding capital stock and options of EachNet Inc. (“EachNet”), a Delaware corporation that, in cooperation with local subsidiaries, operates an e-commerce website in the People’s Republic of China. The EachNet financial statements are included in our consolidated financial statements from July 17, 2003.

When we refer to “we,” “our,” “us” or “eBay” in this document, we mean the current Delaware corporation (eBay Inc.) and its California predecessor, as well as all of our consolidated subsidiaries. When we refer to “eBay.com” we mean the online marketplace located at www.ebay.com. When we refer to “PayPal”, we mean the global payments platform located at www.paypal.com.

On July 24, 2003, our Board of Directors approved a two-for-one split of our shares of common stock effected in the form of a stock dividend. As a result of the stock split, our stockholders received one additional share of our common stock for each share of common stock held of record on August 4, 2003. The additional shares of our common stock were distributed on August 28, 2003. All share and per share amounts in these condensed consolidated financial statements and related notes have been retroactively adjusted to reflect the stock split for all periods presented.

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

The accompanying condensed consolidated financial statements include 100 percent of the assets and liabilities of eBay and our majority-owned subsidiaries. The interests of minority investors are recorded as minority interests. All significant intercompany balances and transactions have been eliminated in consolida-

tion. Investments in entities where we hold more than a 20 percent but less than a 50 percent ownership interest and have the ability to significantly influence the operations of the investee are accounted for using the equity method of accounting and the investment balance is included in long term investments. Our share of the investees’ income or loss is included in other income. As of September 30, 2003, we did not have any investments in this category. Investments in entities where we hold less than a 20 percent ownership interest or where we do not have the ability to significantly influence the operations of the investee are accounted for using the cost method of accounting.

These unaudited interim financial statements reflect our condensed consolidated financial position as of December 31, 2002 and September 30, 2003. These statements also show our condensed consolidated statements of income for the three and nine months ended September 30, 2002 and 2003 and cash flows for the nine months ended September 30, 2002 and 2003. These statements include all normal recurring adjustments that we believe are necessary to fairly present our financial position, operating results and cash flows. Because all of the disclosures required by generally accepted accounting principles in the United States of America for annual consolidated financial statements are not included, these interim financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2002, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2003. The condensed consolidated statements of income and cash flows for the periods presented are not necessarily indicative of results that we expect for any future period.

Certain prior period balances have been reclassified to conform to the current period presentation.

Consistent with predominant industry practice, we account for stock-based employee compensation issued under compensatory plans using the intrinsic value method, which calculates compensation expense based on the difference, if any, on the date of the grant, between the fair value of our stock and the option exercise price. Generally accepted accounting principles require companies who choose to account for stock option grants using the intrinsic value method to also determine the fair value of option grants using an option pricing model, such as the Black-Scholes model, and to disclose the impact of fair value accounting in a note to the financial statements. In December 2002, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure, an Amendment of FASB Statement No. 123.” We currently do not intend to voluntarily change to the fair value based method of accounting for stock based employee compensation and record such amounts as charges to operating expense. The impact of recognizing the fair value of option grants and stock grants under our employee stock purchase plan as an expense would have substantially reduced our net income, as follows (in thousands, except per share amounts):

We calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The following assumptions were used for each respective period:

For options granted prior to our initial public offering, the fair value of option grants was determined using the Black-Scholes option pricing model with a zero volatility assumption. For options granted subsequent to our initial public offering, the fair value of option grants was determined using the Black-Scholes option pricing model with volatility assumptions based on actual or expected fluctuations in the price of our common stock.

We account for stock-based arrangements issued to non-employees using the fair value based method, which calculates compensation expense based on the fair value of the stock option granted using the Black-Scholes option pricing model at the date of grant, or over the period of performance, as appropriate.

In January 2003, the FASB issued Financial Interpretation (“FIN”) 46, “Consolidation of Variable Interest Entities.” In accordance with the provisions of this standard, we have included our San Jose facilities lease arrangement in our consolidated financial statements effective July 1, 2003. Under this new accounting standard, our balance sheet at September 30, 2003 reflects additions for land and buildings totaling $126.4 million, lease obligations of $122.5 million and non-controlling minority interests of $3.9 million. Our income statement for the three months ended September 30, 2003 reflects the reclassification of lease payments on our San Jose facilities from operating expense to interest expense, a $5.4 million after-tax charge for cumulative depreciation for periods from lease inception through June 30, 2003, and incremental depreciation expense of approximately $400,000, net of tax. We have adopted the provisions of FIN 46 prospectively from July 1, 2003, and as a result, prior periods have not been restated. The cumulative effect of the change in accounting principle arising from the adoption of FIN 46 has been reflected in net income in the third quarter of 2003.

Basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common and potentially dilutive shares outstanding during the period. Potentially dilutive shares, composed of unvested, restricted shares of common stock and incremental shares of common stock issuable upon the exercise of outstanding stock options and warrants, are included in diluted net income per share to the extent such shares are dilutive.

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

Potentially dilutive shares are excluded from the calculation of diluted net income per share because they are anti-dilutive. For the three months ended September 30, 2002 and 2003, this number, as calculated based on the weighted average closing price of our common stock for the period, amounted to approximately 38.0 million and 2.5 million shares, respectively. For the nine months ended September 30, 2002 and 2003, this number amounted to approximately 36.8 million and 3.1 million shares, respectively.

During the three months ended September 30, 2003, we finalized our formal plan to exit certain activities and integrate certain facilities of PayPal. This plan includes provisions to terminate leases for redundant facilities, dispose of redundant fixed assets and leasehold improvements, resolve certain pre-acquisition legal contingencies, provide various employee-related benefits and exit certain contractual obligations. As of December 31, 2002, the aggregate purchase price for PayPal included $38.5 million of accruals for acquisition related liabilities and assumed lease liabilities totaling $4.7 million. As of September 30, 2003, the total remaining accrual was $43.5 million.

The components of the acquisition related liabilities are as follows (in thousands):

Excess facilities and fixed assets liabilities consist primarily of accruals for PayPal’s remaining lease obligations, net of estimated sublease income, and the write-off of certain leasehold improvements and other property and equipment at redundant facilities which we plan to exit by February 2004. A substantial portion of the excess facilities and fixed assets liabilities recorded as of September 30, 2003 are expected to settle in cash during future periods.

Other liabilities and contingencies consist primarily of accruals for legal contingencies, employee severance, relocation and other benefits, and contract termination costs. Accruals for legal contingencies are based on our assessment of probable losses arising from pre-acquisition litigation, claims and assessments. Accruals for employee severance, relocation and other benefits as well as for contract terminations are based on estimated costs associated with the acquisition-related terminations of certain PayPal employees and contracts. During the nine months ended September 30, 2003, cash payments were made to resolve various legal, employee severance and contract terminations. A substantial portion of the other liabilities recorded as of September 30, 2003 are expected to settle in cash during future periods.

Adjustments to our original estimates are based primarily upon the final resolution of various pre-acquisition legal contingencies and acquisition-related employee severance arrangements.

The following unaudited pro forma financial information presents the combined results of eBay and PayPal as if the acquisition had occurred as of the beginning of 2002, after applying certain adjustments, including amortization of acquired intangible assets and other acquisition related transactions (in thousands except per share amounts):

The pro forma financial information does not necessarily reflect the results of operations that would have occurred had eBay and PayPal constituted a consolidated entity during such periods.

During the third quarter of 2003, we completed the acquisition of all of the remaining outstanding capital stock and options of EachNet. The total purchase price was $144.9 million and comprised of approximately $143.3 million in cash and $1.6 million in acquisition related expenses. Under the terms of the transaction, $104.9 million of the cash amount was paid at closing and the remaining $38.4 million is to be paid on March 31, 2004. Prior to the third quarter of 2003, we owned approximately 34% of the outstanding common stock of EachNet and accounted for our investment using the equity method of accounting, with the total investment classified as a long-term investment. We have accounted for the acquisition of the remaining outstanding capital stock and options as a purchase and, accordingly, the purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. The valuation of the identifiable intangible assets acquired was based on management’s estimates using a valuation report prepared by an independent third-party.

The estimated useful economic lives of the identifiable intangible assets acquired in the EachNet acquisition are three years for the trade name, four years for the operating license, five years for the user base, two years for the developed technology and one year for the employment agreements.

As noted above, prior to the third quarter of 2003, we owned a minority interest in EachNet, which was accounted for using the equity method of accounting. The total value of our ownership interest, including identifiable intangible assets of approximately $1.4 million, net tangible assets of approximately $4.8 million and goodwill of approximately $19.3 million, was classified on our balance sheet as a long-term investment. As a result of the acquisition of the remaining outstanding capital stock, these balances have been reclassified from long-term investments to the relevant balance sheet categories.

The final purchase price will depend upon our final determination of the fair value of the net assets acquired, the liabilities assumed, and the total acquisition related expenses. The results of operations for EachNet during periods prior to our acquisition of the remaining ownership interest were not material to our consolidated results of operations and, accordingly, pro forma results of operations have not been presented.

The increase in goodwill acquired during the nine months ended September 30, 2003, resulted primarily from our acquisition of the remaining capital stock of EachNet as noted above and other insignificant acquisitions. Adjustments to goodwill during the nine months ended September 30, 2003, resulted primarily from foreign currency translation adjustments in addition to purchase price adjustments on prior period acquisitions. Foreign currency translation adjustments, reflecting movements in the underlying entities’ foreign currency exchange rate, totaled approximately $28.7 million for the nine months ended September 30, 2003.

The components of acquired identifiable intangible assets are as follows (in thousands):

Acquired identifiable intangible assets are subject to amortization and are comprised of developed technologies, customer lists, trademarks and trade names, and other acquired intangible assets including patents and contractual agreements. Developed technologies are being amortized over a weighted average period of approximately three years. Customer lists are being amortized over a weighted average period of approximately seven years. Trademarks are being amortized over a weighted average period of approximately seven years. All other intangible assets are being amortized over a weighted average period of approximately five years. No significant residual value is estimated for the intangible assets. The increase in intangible assets during the nine months ended September 30, 2003, resulted primarily from the acquisition of a license and contractual covenants related to certain patented technologies totaling approximately $11.4 million, certain intangible assets acquired as part of the EachNet acquisition, totaling approximately $11.2 million, and foreign currency translation adjustments totaling approximately $2.3 million.

As of September 30, 2003, expected future intangible asset amortization is as follows (in thousands):

Reporting segments are based upon our internal organization structure, the manner in which our operations are managed, the criteria used by our chief operating decision-maker to evaluate segment performance, the availability of separate financial information and overall materiality considerations.

We have identified three reporting segments: U.S., International and Payments. The U.S. segment comprises U.S. online trading platforms other than those of our PayPal and Billpoint subsidiaries. The International segment comprises our international online trading platforms other than those of our PayPal subsidiary. The Payments segment comprises our global payments platform consisting of PayPal and Billpoint. The Payments amounts reflect Billpoint’s historical operations and PayPal’s operations for the periods subsequent to October 3, 2002. We completed our planned wind-down of Billpoint’s operations in the second quarter of 2003.

Direct contribution consists of net revenues less direct costs. Direct costs include specific costs of net revenues, sales and marketing expenses, and general and administrative expenses over which segment managers have direct discretionary control or influence, such as advertising and marketing programs, customer support expenses, bank charges, provisions for doubtful accounts, authorized credits and transaction losses. Expenses over which segment managers do not have discretionary control or influence, such as site operations costs, product development expenses, and other general and administrative costs, are monitored by management through shared cost centers and are not evaluated in the measurement of segment performance.

The following tables illustrate the financial performance of our reporting segments (in thousands):

The following tables illustrate our net revenues and long-lived assets by geography (in thousands):

At December 31, 2002 and September 30, 2003, short and long-term investments were accounted for as available-for-sale securities, except for restricted cash and investments, and are reported at fair value as follows (in thousands):

The estimated fair value of short and long-term investments classified by date of contractual maturity at September 30, 2003, are as follows (in thousands):

During the nine months ended September 30, 2002 and 2003, we recorded impairment charges totaling $3.8 million and $230,000, respectively, as a result of the deterioration of the financial condition of certain of our public and private equity investees. These impairment losses were identified as part of our ongoing process of assessing the quality of our investment portfolio and reflect declines in fair value and other market conditions that we believe are other than temporary.

During the three and nine months ended September 30, 2003, we capitalized $11.4 million and $28.4 million, respectively, for major site and other product development efforts including our “V3” platform architecture, seller tools, global billing and payment gateway projects. At December 31, 2002 and September 30, 2003, unamortized capitalized software development costs totaled $21.4 million and $37.0 million, respectively. The increase in land and buildings during the first nine months of 2003 relates primarily to our purchase of our new facility in San Jose and the reclassification of our existing San Jose facility as described in Note 1 to these Condensed Consolidated Financial Statements. Total depreciation expense for property and equipment was $15.6 million and $27.8 million for the three months ended September 30, 2002 and 2003, respectively. Total depreciation expense for the nine months ended September 30, 2002 and 2003, was $46.4 million and $74.4 million, respectively.

In April 2001, our European subsidiaries, eBay GmbH and eBay International AG, were sued by Montres Rolex S.A. and certain Rolex affiliates, or Rolex, in the regional court of Cologne, Germany. The suit subsequently was transferred to the regional court in Dusseldorf, Germany. Rolex alleged that our subsidiaries were infringing Rolex’s trademarks as a result of users selling counterfeit Rolex watches through our German website. The suit also alleged unfair competition. Rolex sought an order forbidding the sale of Rolex watches on the website as well as damages. In December 2002, a trial was held in the matter and the court ruled in favor of eBay on all causes of action. Rolex has appealed the ruling and the appeal was heard on October 30, 2003. The court’s decision is expected to be received in late November 2003.

entered judgment for MercExchange in the amount of $29.5 million, plus pre-judgment interest and post-judgment interest in an amount to be determined. We have appealed the judgment and MercExchange has filed a cross-appeal. We continue to believe that the verdict against us in the trial was incorrect and intend to continue to defend ourselves vigorously. However, even if successful, our defense against this action will continue to be costly. In addition, as a precautionary measure, we have modified certain functionality of our websites and business practices in a manner which we believe makes them non-infringing. Nonetheless, we might be forced to pay significant additional damages and licensing fees. Any such results could materially harm our business. While it is not possible to predict the ultimate legal and financial implications of this lawsuit, in the light of the court’s judgment, we have reassessed the likelihood of a favorable outcome in accordance with SFAS No. 5, “Accounting for Contingencies.” Based on this reassessment, we have taken an operating charge in the amount of $30.0 million. The charge and the related estimated tax benefit of $12.1 million were reflected in our operating results in the second quarter of 2003.

In August 2002, Charles E. Hill & Associates, Inc., or Hill, filed a lawsuit in the U.S. District Court for the Eastern District of Texas (No. 2:02-CV-186) alleging that we and 17 other companies, primarily large retailers, infringed three patents owned by Hill generally relating to electronic catalog systems and methods for transmitting and updating data at a remote computer. The suit seeks an injunction against continuing infringement, unspecified damages, including treble damages for willful infringement, and interest, costs, expenses and fees. In January 2003, the court granted the collective defendants’ motion to transfer the case from the court where it was filed in Marshall, Texas to the Federal District Court for the Southern District of Indiana. We are currently awaiting the judge’s scheduling order in the case. We believe that we have meritorious defenses and intend to defend ourselves vigorously.

In February 2002, PayPal was sued in California state court (No. CV-805433) in a purported class action alleging that its restriction of customer accounts and failure to promptly unrestrict legitimate accounts violates state consumer protection law and is an unfair business practice and a breach of PayPal’s User Agreement. This action was refiled with a different named plaintiff in June 2002 (No. CV-808441), and a related action was also filed in the U.S. District Court for the Northern District of California in June 2002 (No. C-022777). In March 2002, PayPal was sued in the U.S. District Court for the Northern District of California (No. C-02-1227) in a purported class action alleging that its restrictions of customer accounts and failure to promptly unrestrict legitimate accounts violates federal and state consumer protection and unfair business practice law. The federal court has denied PayPal’s motion to compel individual arbitration as required by the PayPal User Agreement and has invalidated that provision of the User Agreement. PayPal has appealed that decision to the U.S. Court of Appeals for the Ninth Circuit. The two federal court actions have been consolidated into a single case. On September 8, 2003, the plaintiffs filed their motion for class certification. A class certification hearing is scheduled for November 17, 2003. The state court action has been stayed pending developments in the federal actions. PayPal is defending itself vigorously, but if it is unable to prevail in these lawsuits, it may have to change its anti-fraud operations in a manner that will harm its business and pay substantial damages. Even if its defense is successful, the litigation could damage PayPal’s reputation, could require significant management time, will be costly and could require changes to its customer service and operations that could increase its costs and decrease the effectiveness of its anti-fraud program.

Three purported class action complaints were filed following announcement of the PayPal merger in July 2002 in the court of Chancery in the State of Delaware in and for New Castle County by alleged stockholders of PayPal. Two additional purported class action complaints were filed in the Superior Court of the State of California, County of Santa Clara, by alleged PayPal stockholders. These complaints name as defendants PayPal and each member of its board of directors as well as eBay. The complaints are purported class actions that allege, among other things, that eBay controlled PayPal prior to the execution of their merger agreement, the defendants breached fiduciary duties they assertedly owed to PayPal’s stockholders in connection with PayPal entering into the merger agreement and the exchange ratio in the merger was unfair and inadequate.

The plaintiffs seek, among other things, an award of unspecified compensatory damages. We believe that each of the lawsuits is without merit and intend to defend ourselves vigorously.

In September 2002, Bank One Delaware (formerly known as First USA Bank, N.A.) filed a complaint against PayPal in the District of Delaware (No. 02-CV-1462) alleging infringement of two First USA patents relating to assigning an alias to a credit card so as to eliminate the need for the physical presence of the card in a financial transaction. In September 2003, PayPal filed a complaint against Bank One Corp., Bank One Delaware’s parent, in the same district court alleging infringement of a PayPal patent relating to a process that allows Internet users to make secure payments and authenticated transactions over a computer network. On October 20, 2003, the parties finalized the terms of an agreement to dismiss both lawsuits. The settlement is not expected to have a material impact on our financial position, results of operations or cash flows.

Other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We expect that we will increasingly be subject to patent infringement claims as our services expand in scope and complexity. In particular, we expect that patent infringement claims involving services we provide, including various aspects of our Payments business, will continue to be made. We have in the past been forced to litigate such claims. We have been notified of several potential disputes and are subject to a lawsuit by Tumbleweed Communications Corporation that is currently ongoing. Tumbleweed’s lawsuit claims infringement of two patents relating to techniques for the delivery of electronic documents to users over the Internet. We believe that Tumbleweed’s lawsuit is without merit and intend to defend ourselves vigorously. We may also become more vulnerable to intellectual property claims as laws such as the Digital Millennium Copyright Act are interpreted by the courts and as we expand into jurisdictions where the underlying laws with respect to the potential liability of online intermediaries like ourselves is less favorable. We expect that we will increasingly be subject to copyright and trademark infringement claims as the geographical reach of our services expands. These claims, whether meritorious or not, could be time consuming, result in costly litigation, cause service upgrade delays, require expensive changes in our methods of doing business or could require us to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm our business.

From time to time, we are involved in other disputes that arise in the ordinary course of business. The number and significance of these disputes is increasing as our business expands and our company grows larger. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. As a result, these disputes could harm our business.

While we currently believe that the ultimate resolution of these matters will not have a material adverse impact on our financial position or results of operations, the litigation and other claims noted above are subject to inherent uncertainties and our view of these matters may change in the future. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on our financial position and results of operations for the period in which the effect becomes reasonably estimable. We are unable to determine what potential losses we may incur if these matters were to have an unfavorable outcome.

During the ordinary course of business, in certain limited circumstances, we have included indemnification provisions within certain of our contracts. Pursuant to these agreements, we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally parties with which we have commercial relations, in connection with certain intellectual property infringement claims by any third party with respect to our services. To date, we have not incurred any costs in connection with such indemnification clauses.

We have an employee stock purchase plan for all eligible employees. Under the plan, shares of our common stock may be purchased over an offering period with a maximum duration of two years at 85% of the lower of the fair market value on the first day of the applicable offering period or on the last day of the six-month purchase period. Employees may purchase shares having a value not exceeding 10% of their gross compensation during an offering period. No shares were purchased during the three months ended September 30, 2002 or 2003. During the nine months ended September 30, 2002, employees purchased 160,040 shares at an average price of $22.53 per share. During the same period in 2003, employees purchased 262,338 shares at an average price of $23.99 per share. At September 30, 2003, approximately 3.3 million shares were reserved for future issuance. On each January 1, the aggregate number of shares reserved for issuance under the employee stock purchase plan is increased automatically by the number of shares purchased under this plan in the preceding calendar year.

We have stock option plans for directors, officers and employees, under which we have granted nonqualified and incentive stock options. These stock options generally vest 25% one year from the date of grant (or, in the case of existing employees, 12.5% six months from the date of grant) and vest at a rate of 1/48 per month thereafter and expire 10 years from the date of grant. At September 30, 2003, 51.9 million shares of common stock were available for future grant in the form of stock options and other stock-based compensation instruments.

The following table summarizes activity under our stock option plans for the three and nine months ended September 30, 2002 and 2003 (shares in thousands):

The weighted average grant date fair value of options granted during the period are calculated using the Black-Scholes option pricing model using the assumptions for each respective period as disclosed in Note 1 of these Condensed Consolidated Financial Statements.

The following tables summarize information about fixed stock options outstanding at September 30, 2003 (shares in thousands):

In-the-money options are options with an exercise price lower than the $53.64 closing price of our common stock on September 30, 2003. Out-of-the-money options are options with an exercise price greater than the $53.64 closing price of our common stock on September 30, 2003.


*	Named officers are the chief executive officer and the other four most highly-compensated executive officers during the twelve months ended December 31, 2002.

As of September 30, 2003, we had outstanding forward foreign exchange contracts with notional values equivalent to approximately $6.5 million with maturity dates within 92 days. The forward contracts are used to offset changes in the value of assets and liabilities denominated in foreign currencies as a result of currency fluctuations. Transaction gains and losses on the contracts and the assets and liabilities are recognized each period in our statement of income and generally are offsetting. As we purchased the forward contracts on September 30, 2003, the fair values of the forward contracts were immaterial as of this date.

We convert the financial statements of our foreign subsidiaries into U.S. dollars. When there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into the U.S. dollars will lead to a translation gain or loss. Translation exposure is the change in the book value of assets, liabilities, revenues, and expenses that results from changes in foreign currency exchange rates. From time to time we enter into transactions to hedge portions of our foreign currency denominated earnings translation exposure using both options and forward contracts. The notional amount of the options hedges in the third quarter of 2003 was 37 million Euro. The premium cost was approximately $500,000 and the net loss on the options was approximately $100,000, which was recorded in other income and expense in the third quarter of 2003. All contracts hedging translation exposure mature at the end of the quarter in which they are executed.

This quarterly report on Form 10-Q contains forward-looking statements based on our current expectations about our company and our industry. You can identify these forward-looking statements when you see us using words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You can also identify forward-looking statements by discussions of strategy, plans or intentions. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of the factors described in the “Risk Factors That May Affect Results of Operations and Financial Condition” section below and elsewhere in this report. All forward-looking statements are qualified by and should be read in conjunction with those risk factors. Except as may be required by applicable law, we undertake no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

We pioneered online trading by developing a Web-based marketplace in which a community of buyers and sellers are brought together in an entertaining, intuitive, easy-to-use environment to browse, buy and sell an enormous variety of items. Through our PayPal service, we enable any business or consumer with email to send and receive online payments securely, conveniently and cost-effectively.

Net revenues are allocated between U.S. and International geographies based upon the country in which the seller, payment recipient, advertiser or end-to-end service provider is located.

The U.S. segment comprises U.S. online trading platforms other than those of our PayPal subsidiary. The International segment comprises our international online trading platforms other than those of our PayPal subsidiary. The Payments segment comprises our global PayPal payments platform. The Payments amounts reflect Billpoint’s historical operations and PayPal’s operations for the periods subsequent to October 3, 2002. We completed our planned wind-down of Billpoint’s operations in the second quarter of 2003.

Our net revenues result from fees associated with our transaction, third-party advertising and end-to-end services in our U.S., International and Payments segments. Transaction net revenues are derived primarily from listing, feature and final value fees paid by sellers and fees from payment processing services. Net revenues from third-party advertising are derived principally from the sale of online banner and sponsorship advertisements for cash and through barter arrangements. End-to-end services net revenues are derived principally from contractual arrangements with third parties that provide transaction services to eBay users. Offline services net revenues were derived from wholly-owned subsidiaries that were divested in the third and fourth quarters of 2002, consisted of a variety of sources including seller commissions, buyer premiums, bidder registration fees and auction-related services including appraisal and authentication.

The growth in net revenues for our eBay transaction business during the third quarter and the first nine months of 2003, compared to the same periods in the prior year, was primarily the result of increased auction and fixed-price transaction activity, reflected in the growth in the number of our confirmed registered users, user activity and gross merchandise sales. Growth in our Payments segment net revenues during these same periods was primarily the result of increased total payment volumes processed by PayPal, which we acquired in October 2002.

The number of confirmed registered users from our U.S. and International segments increased 56% to 85.5 million at September 30, 2003, from 54.9 million at September 30, 2002. The number of registered users from our U.S. and International segments at September 30, 2003, reflects the first-time inclusion of approximately 3.2 million users from our acquisition of EachNet.

The number of active users on the eBay platform (which excludes the South Korean and Chinese websites) increased 55% to 37.4 million at September 30, 2003, from 24.2 million at September 30, 2002. Active users are the number of users on the eBay platform who bid, bought or listed over the trailing twelve months.

Gross merchandise sales from the U.S. and International segments increased 53% and 63% during the third quarter and first nine months of 2003, respectively, compared to the same periods of the prior year. eBay transaction net revenues as a percentage of gross merchandise sales was 7.1% during both the third quarter and first nine months of 2003, respectively, compared to 6.8% during the same periods of the prior year.

U.S. segment transaction net revenues increased 41% during the third quarter of 2003, compared to the same period in the prior year and 45% during the first nine months of 2003, compared to the same period in the prior year. International segment transaction net revenues increased 105% and 135% during the same periods, respectively. The growth in U.S. and International segment transaction net revenues during these periods was primarily the result of increased auction transaction activity, reflected in the growth in the number of our registered users, listings and gross merchandise sales.

We experienced growth in transaction net revenues across almost all categories in our U.S. segment during the third quarter and first nine months of 2003, compared to the same periods in the prior year, with computers and electronics, motors, clothing and accessories, and home categories making the most significant impact. In addition, active users increased 55% in the third quarter of 2003 compared to the same period in the prior year.

We also experienced transaction net revenues growth in our International segment during the third quarter and first nine months of 2003, compared to the same periods in the prior year. This growth is primarily the result of strong performances in Germany, the United Kingdom and South Korea. Additionally, the relative strength of foreign currencies, primarily the Euro, against the U.S. dollar resulted in increased net revenues of approximately $14.9 million and $55.3 million during the third quarter and first nine months of 2003, respectively, when compared to the weighted-average foreign currency exchange rates used in the preparation of our financial statements in the same periods of the prior year. Our European business experienced clear patterns of seasonality in July and August, with September showing improved activity in all markets. International segment transaction net revenue was 30% of total transaction net revenues during both the third quarter and first nine months of 2003. We expect that international segment transaction net revenues will continue to grow in significance to our business as we develop and deploy our global marketplace. On July 1, 2003, eBay began collecting value-added taxes, or VAT, on the fees we charge certain sellers in the European Union, or EU. We continue to work with the relevant tax authorities to clarify our obligations under these new regulations. There have been and will continue to be substantial ongoing costs associated with complying with the VAT rules throughout the EU, and the increased costs to our European users may reduce their activity on our websites and could adversely affect our international transaction net revenues.

Net revenues from the Payments segment were generated from eBay’s Billpoint operations in the third quarter and first nine months of 2002, and almost entirely from PayPal’s operations for the same periods in 2003. Payments segment net revenues increased from $6.1 million during the third quarter of 2002 to $106.4 during the third quarter of 2003, and increased from $15.6 million during the first nine months of 2002 to $298.9 million during the first nine months of 2003, reflecting the acquisition of PayPal in October 2002.

Total payment volumes processed by PayPal totaled $3.0 billion and $8.5 billion during the third quarter and first nine months of 2003, respectively. Payments transaction net revenues as a percentage of total payment volume was 3.5% during both the third quarter and first nine months of 2003. Also, the growth in Payments transaction net revenues was positively affected by PayPal’s continued penetration of eBay transactions in the U.S. and United Kingdom, growth in the off-eBay business and cross-border international payment transactions. Net transaction revenues from the Payments segment earned outside the United States totaled $23.3 million during the third quarter of 2003 and $63.1 million during the first nine months of 2003, representing 21% of total Payments segment net revenues for both periods.

Third-party advertising net revenues decreased in absolute dollars and as a percentage of total net revenues from $15.0 million during the third quarter of 2002, representing 5% of total net revenues, to $12.1 million during the third quarter of 2003, representing 2% of total net revenues. Third-party advertising net revenues decreased in absolute dollars and as a percentage of total net revenues from $50.8 million during the first nine months of 2002, representing 6% of total net revenues, to $31.4 million during the first nine months of 2003, representing 2% of total net revenues. Barter net revenues included in third-party advertising net revenues during the third quarter and first nine months of 2003, totaled $2.3 million and $7.9 million, respectively. Net revenues from third-party advertising decreased primarily as a result of the transition from the use of AOL as our agent in the online advertising market and our decreased emphasis on this source of revenue. We continue to view our business as primarily transaction driven and we expect third-party advertising net revenues to continue to decrease as a percentage of total net revenues and remain generally comparable in absolute dollars for the remainder of 2003.

End-to-end services net revenues decreased in absolute dollars and as a percentage of total net revenues from $6.1 million during the third quarter of 2002, representing 2% of total net revenues to $1.7 million in the same period of 2003, representing less than 1% of total net revenues. End-to-end services net revenues decreased in absolute dollars and as a percentage of total net revenues from $16.1 million in the first nine months of 2002, representing 2% of total net revenues to $5.7 million in the same period of 2003, representing less than 1% of total net revenues. As end-to-end services are largely dependent upon contractual terms and our users’ adoption of third-party products and services, we expect end-to-end services net revenues in future periods to fluctuate from period to period. In general, however, as we continue to view our business as primarily transaction driven, we expect these revenues to decrease as a percentage of total net revenues and possibly in absolute dollars for the remainder of 2003.

Offline net revenues totaled $4.0 million and $20.8 million during the third quarter and first nine months of 2002, respectively, representing 1% of total net revenues in the third quarter of 2002 and 3% in the first nine months of 2002. We divested our Butterfields and Kruse subsidiaries in the third and fourth quarters of 2002, respectively, and accordingly did not earn offline net revenues in 2003. We do not expect to earn offline net revenues in the foreseeable future.

Cost of net revenues consists primarily of costs associated with customer support, site operations and payment processing. Significant cost components include payment processing fees, employee compensation and facilities costs for customer support and site operations, Internet connectivity charges, depreciation of site equipment, amortization of required capitalization of major site and other product development costs, and corporate overhead allocations.

Cost of net revenues increased in absolute dollars and as a percentage of net revenues during the third quarter and first nine months of 2003, compared to the same periods in the prior year. The increase in absolute dollars was due to payment processing costs resulting from our acquisition of PayPal in October 2002, an increase in the volume of transactions on the eBay websites, and continued development and expansion of our customer support and site operations infrastructure. The increase as a percentage of net revenues was primarily due to our acquisition of PayPal, which is a lower margin business, and was partially offset by margin improvements in our U.S. and International segments. Payment processing costs increased $36.5 million and $110.5 million during the third quarter and first nine months of 2003, respectively. This increase was driven by the credit card interchange fees, and other bank and processing charges associated with the total payment volume processed by our Payments segment. Aggregate customer support and site operations costs increased $25.3 million and $58.0 million during the third quarter and first nine months of 2003, respectively, and resulted primarily from an increase in headcount and the related employee costs. Amortization of capitalized software development costs totaled $3.5 million in the third quarter of 2003 and $9.1 million in the first nine months of 2003. Costs of net revenues are expected to remain generally comparable in absolute dollars and as a percentage of net revenues for the remainder of 2003.

Sales and marketing expenses consist primarily of advertising, tradeshow and other promotional costs, employee compensation for our category development and marketing staff, certain trust and safety programs and certain corporate overhead allocations.

Sales and marketing expenses increased in absolute dollars during the third quarter and first nine months of 2003, compared to the same periods in the prior year. However, sales and marketing expenses as a percentage of total net revenues declined in both periods due to the acquisition of PayPal, which has a significantly lower sales and marketing expense as a percentage of net revenues than either the U.S. or International segments. Growth in advertising and marketing costs as well as employee-related costs drove the increases in absolute dollars. Combined advertising and marketing costs increased $30.1 million and $113.9 million during the third quarter and first nine months of 2003, respectively, compared to the same periods in the prior year. The remainder of these increased costs were primarily the result of increased employee-related costs. The marketing programs were directed towards our national television advertising campaigns and several category-focused print and on-line advertising campaigns as well as our “eBay Live” events that were held in June 2003 in the United States and in August 2003 in Germany. Sales and marketing expenses are expected to increase in absolute dollars, and to remain generally comparable as a percentage of net revenues for the remainder of 2003.

Product development expenses consist primarily of employee compensation, payments to outside contractors, depreciation on equipment used for development and certain corporate overhead allocations. Product development expenses are net of required capitalization of major site and other product development efforts, including the development of our “V3” platform architecture, global billing, seller tools and payment gateway projects. These capitalized costs totaled $5.1 million and $11.4 million in the third quarter of 2002 and 2003, respectively, and will be reflected as a cost of net revenues when amortized in future periods. During the first nine months of 2002 and 2003, capitalized costs for major site and other product development efforts totaled $12.7 million and $28.4 million, respectively. We anticipate that we will continue to devote significant resources to product development in the future as we add new features and functionality to the eBay and PayPal platforms.

Product development expenses increased in absolute dollars during the third quarter and first nine months of 2003, compared to the same periods in the prior year. However, product development expenses as a percentage of net revenues declined during the first nine months of 2003, compared to the same period in the prior year. The increase in absolute dollars was primarily the result of headcount increases associated with our acquisition of PayPal in October 2002, as well as the hiring of new employees for various platform development initiatives at both eBay and PayPal. These increases were partially offset by the amounts capitalized in connection with major site and other product development efforts during the third quarter and first nine months of 2003. Product development expenses are expected to increase in absolute dollars for the remainder of 2003, as we develop new site features and functionality and continue to improve and expand operations across all our segments. Additionally, we expect product development expenses to remain generally comparable as a percentage of net revenues for the remainder of 2003. In addition, we estimate that the capitalization of major site and other product development costs for the remainder of 2003 will continue to approximate amounts capitalized during the third quarter of 2003.

General and administrative expenses consist primarily of employee compensation, provision for doubtful accounts, provisions for transaction losses associated with our Payments segment, insurance, fees for external professional advisors and corporate overhead allocations.

General and administrative expenses increased in absolute dollars during the third quarter and first nine months of 2003, compared to the same periods in the prior year. However, general and administrative expenses as a percentage of net revenues were constant during the third quarter and during the first nine months of 2003, compared to the same periods in the prior year. The increase in absolute dollars was due primarily to employee related costs and payment transaction loss expenses resulting from our acquisition of PayPal. The increases in employee-related costs resulted from the addition of PayPal employees in various trust and safety functions as well as continued headcount growth in the finance, human resource and legal departments to meet the demands of our expanding business, including growing international operations and the integration of acquired businesses. PayPal’s payment transaction loss expense contributed $6.8 million and $24.9 million during the third quarter and first nine months of 2003, respectively. PayPal’s payment

transaction loss rate, which is the transaction loss expense as a percentage of PayPal’s total payment volume, was 0.22% and 0.29% during the third quarter and the first nine months of 2003, respectively. As a result of seasonal holiday purchases and the buyer protection program implemented in September 2003, we expect our transaction loss rate will increase during the remainder of 2003. With the anticipated increase in the transaction loss expense together with our continued investment in the infrastructure needed to support our business, primarily in our International and Payments segments, we expect general and administrative expenses to increase in absolute dollars for the remainder of 2003. We also expect general and administrative expenses to remain generally comparable as a percentage of net revenues for the remainder of 2003.

Patent litigation expense during the first nine months of 2003 relates to the accrual of an August 6, 2003 court judgment resulting from the MercExchange patent infringement lawsuit. See “Note 7 — Contingencies” to our condensed consolidated financial statements.

We are subject to employer payroll taxes on employee gains resulting from exercises of non-qualified stock options. These employer payroll taxes are recorded as a charge to operations in the period in which such options are exercised based on actual gains realized by employees. Our quarterly results of operations and cash flows could vary significantly depending on the actual period that stock options are exercised by employees and, consequently, the amount of employer payroll taxes assessed. We expect exercises of employee stock option grants will result in increased payroll tax costs for the remainder of 2003, partially as a result of gains from the exercise of PayPal options assumed in the merger. In general, we expect payroll taxes on employee stock option gains to increase during periods in which our stock price is high relative to historical levels.

From time to time we have purchased, and we expect to continue purchasing, assets or businesses to accelerate category and geographic expansion, increase the features and functionality available to our users and maintain a leading role in online trading. These purchase transactions may result in the creation of acquired intangible assets and lead to a corresponding increase in the amortization expense in future periods.

Intangible assets consist of purchased customer lists, developed technologies, trade names, patents and other intangible assets. Intangible assets, excluding goodwill, are being amortized using the straight-line

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is no longer subject to amortization. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test.

During the third quarter of 2003, we completed the acquisition of the remaining outstanding capital stock and options of EachNet. The total purchase price was $144.9 million and comprised of approximately $143.3 million in cash and $1.6 million in acquisition related expenses. Under the terms of the transaction, $104.9 million was paid at closing and the remaining $38.4 million is to be paid on March 31, 2004. Prior to the third quarter of 2003, we owned approximately 34% of the outstanding capital stock of EachNet and accounted for our investment using the equity method of accounting, with the total investment classified as a long-term investment. We have accounted for the acquisition of the remaining outstanding common stock and options as a purchase and, accordingly, the purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date.

Amortization of acquired intangible assets increased in absolute dollars during the third quarter and first nine months of 2003, compared to the same periods in the prior year, primarily as a result of the amortization of acquired intangible assets related to our acquisition of PayPal. We expect amortization from acquired intangible assets to remain generally comparable in absolute dollars, and to decrease as a percentage of revenues for the remainder of 2003.

Interest and other income, net consists of interest earned on cash, cash equivalents, and investments as well as foreign exchange transaction gains and losses and other miscellaneous non-operating transactions.

Our interest and other income, net increased in absolute dollars during the third quarter and first nine months of 2003, compared to the same periods in the prior year. The increases were primarily a result of increased investment income on a larger aggregate balance of cash, cash equivalents, and investments partially offset by a decline in the weighted-average interest rate of our portfolio in addition to the increase in EachNet’s net losses during the period from July 1, 2003 through July 16, 2003, our acquisition date, which are primarily the result of acquisition advisory fees and other transaction-related costs. Our weighted average interest rate was approximately 2.6% and 2.9% in the third quarter and first nine months of 2002, respectively, compared to 1.64% and 1.77% in the same periods of 2003. We expect that interest and other income, net, will increase in absolute dollars for the remainder of 2003, as our cash, cash equivalents, and investments balances continue to grow.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” In accordance with the provisions of this standard we have included our San Jose facilities lease arrangement in our Consolidated Financial Statements effective July 1, 2003. Under this new accounting standard, our income statement during the third quarter of 2003, reflects the reclassification of lease payments on our San Jose facilities from operating expense to interest expense. We expect our interest expense will remain generally comparable in absolute dollars and to decrease as a percentage of net sales for the remainder of 2003.

During the third quarter of 2003, we recorded no investment impairment charges. During the third quarter of 2002 and the first nine months of 2002 and 2003, we recorded impairment charges totaling $2.6 million, $3.8 million and $230,000, respectively, as a result of the deterioration of the financial condition of certain of our private and public equity investees. These impairment losses were identified as part of our normal process of assessing the quality of our investment portfolio and reflect declines in fair value and other market conditions that we believe are other than temporary. We expect that the fair value of our equity investments will fluctuate from time to time and future impairment assessments may result in additional charges to our operating results.

The provision for income taxes differs from the amount computed by applying the statutory U.S. federal rate principally due to non-deductible expenses related to acquisitions, state taxes, subsidiary losses for which we have not provided a benefit and other permanent differences that increase the effective tax rate. These amounts are offset by decreases resulting from foreign income with lower effective tax rates and tax-exempt interest income.

The lower effective tax rate for the third quarter and first nine months of 2003, compared to the same periods in the prior year, reflects the increasing profit contribution from our international operations.

We receive tax deductions from the gains realized by employees on the exercise of certain non-qualified stock options for which the benefit is recognized as a component of stockholders’ equity. We have provided a full valuation allowance on the deferred tax assets relating to these stock option deductions due to the uncertainties associated with our future stock price and the timing of employee stock option exercises. To the extent that additional stock option deductions are not generated in future years, we will have the ability, subject to carryforward limitations, to utilize up to $194 million of additional deferred tax assets to reduce future income tax liabilities. When recognized, the tax benefit of tax deductions related to stock options are accounted for as a credit to additional paid-in capital rather than a reduction of the income tax provision.

Minority interests represents the minority investor’s percentage share of income or losses from subsidiaries in which we hold a majority ownership interest and consolidate the subsidiaries’ results in our financial statements.

Third parties hold minority interests in Internet Auction, our majority-owned South Korean subsidiary. The significant change in minority interests from the third quarter and first nine months of 2003, compared to the same periods in the prior year, primarily resulted from the increased profitability of Internet Auction in the third quarter and first nine months of 2003. We expect that minority interests will continue to fluctuate in future periods. If Internet Auction continues to be profitable, the minority interests adjustment on the statement of income will continue to decrease our net income by the minority investors’ share of Internet Auction’s net income.

In accordance with the provisions of FIN 46, “Consolidation of Variable Interest Entities,” we have included our San Jose facilities lease arrangement in our consolidated financial statements effective July 1, 2003. Under this new accounting standard, our balance sheet at September 30, 2003 reflects additions for land and buildings totaling $126.4 million, lease obligations of $122.5 million and non-controlling minority interests of $3.9 million. Our income statement for the three months ended September 30, 2003 reflects the reclassification of lease payments on our San Jose facilities from operating expense to interest expense, a $5.4 million after-tax charge for cumulative depreciation for periods from lease inception through June 30, 2003, and incremental depreciation expense of approximately $400,000, net of tax, each quarter. We have adopted the provisions of FIN 46 prospectively from July 1, 2003, and as a result, prior periods have not been restated. The cumulative effect of the change in accounting principle arising from the adoption of FIN 46 has been reflected in net income in the third quarter of 2003.

The growth in our international operations has increased our exposure to foreign currency fluctuations. We have foreign currency denominated net revenues, costs and expenses. These income statement amounts are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased net revenues, operating expenses and net income. Similarly, our net revenues, operating expenses and net income will decrease when the U.S. dollar strengthens against foreign currencies.

A significant portion of our international net revenues, operating expenses and net income are denominated in Euros. During the third quarter and first nine months of 2003, the U.S. dollar weakened against the Euro. Our weighted-average translation rate used to convert Euro denominated transactions into U.S. dollar equivalents, increased by approximately 16% and 20%, during the third quarter and first nine months of 2003, respectively, compared to the same periods in the prior year. These weighted-average translation rate changes for the Euro, combined with translation rate changes in other foreign currencies, resulted in increased net revenues of approximately $14.9 million and $55.3 million for the third quarter and first nine months of 2003, respectively, as well as increased operating expenses of approximately $7.7 million and $26.5 million, respectively, during the same periods.

We expect our international operations will continue to grow in significance as we develop and deploy our global marketplace. As a result, foreign currency fluctuations in future periods could become more significant and may have a negative impact on our net revenues and net income.

As of September 30, 2003, eBay Inc. and its consolidated subsidiaries employed approximately 5,300 persons (excluding approximately 400 temporary employees), of whom approximately 3,800 were in the United States (excluding approximately 300 temporary employees). Our future success is substantially dependent on the performance of our executive and senior management and key technical personnel, and our continuing ability to find and retain highly qualified technical and managerial personnel.

Since inception, we have financed operations primarily from net cash generated from operating activities. In addition, we have obtained additional financing from the sale of preferred stock and warrants, proceeds from the exercise of those warrants, proceeds from the exercise of stock options and proceeds from our initial and follow-on public offerings. During the first nine months of 2003, we were primarily financed by cash flows from operating activities and proceeds of stock option exercises.

Net cash provided by operating activities was $297.0 million during the first nine months of 2002 and $606.7 million in the same period of 2003. Net cash provided by operating activities resulted primarily from our net income, tax benefits from employee stock options and non-cash charges for depreciation and amortization. During the first nine months of 2002, such amounts were partially offset by net changes in assets and liabilities. During the first nine months of 2003, net changes in assets and liabilities contributed to increased cash flows from operating activities.

Net cash used in investing activities was $181.1 million in the first nine months of 2002 and $725.8 million in the same period of 2003. The primary use for invested cash in the periods presented was for net investments, purchases of property and equipment, and acquisitions. Capital expenditures increased in the first nine months of 2003, compared to the same period of the prior year, primarily as a result of our purchase in the second quarter of 2003 of new facilities in San Jose, California for $125.1 million.

Net cash provided by financing activities was $100.3 million in the first nine months of 2002 and $568.5 million in the same period of 2003. Net cash provided by financing activities was primarily due to the issuance of common stock associated with stock option exercises.

We expect capital expenditures to approximate $95 million for the remainder of 2003, without taking into account any acquisitions. We estimate that the capitalization of major site and other product development costs will approximate $11 million through the remainder of 2003. The remaining balance will be used primarily for the purchase of computer hardware and software of approximately $64 million, and furniture and fixtures, leasehold improvements and other corporate assets of approximately $20 million.

The risks and uncertainties described below are not the only ones facing eBay. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks or such other risks actually occur, our business could be harmed.

Our operating results have varied on a quarterly basis during our operating history. Our operating results may fluctuate significantly as a result of a variety of factors, many of which are outside our control. Factors that may affect our quarterly operating results include the following:


	•	our ability to retain an active user base, to attract new users and to encourage existing users to list items for sale, purchase items through our service or use our payment services, both in the U.S. and internationally;

	•	the amount and timing of operating costs and capital expenditures relating to the maintenance and expansion of our businesses, operations and infrastructure;

	•	foreign, federal, state or local government regulation, including investigations prompted by items listed, sold or paid for by our users;

	•	our ability to comply with the requirements of entities whose services are required for our operations, such as the credit card associations;

	•	the success of our geographical and product expansion;

	•	the introduction of new sites, services and products by us or our competitors;

	•	volume, size, timing and completion rate of transactions on our websites;

	•	consumer confidence in the safety and security of transactions on our websites;

	•	the costs and results of litigation that involves us;

	•	our ability to upgrade and develop our systems, infrastructure and customer service capabilities to accommodate growth at a reasonable cost;

	•	our ability to keep our websites operational at a reasonable cost;

	•	our ability to develop product enhancements at a reasonable cost and to develop programs and features in a timely manner;

	•	our ability to integrate successfully and cost effectively manage our acquisitions, including PayPal and, more recently, EachNet;

	•	our ability to manage transaction loss and credit card charge back rates and the payment funding mix at PayPal;

	•	our ability to expand PayPal’s product offerings internationally (including our ability to obtain any regulatory approvals) and to increase the acceptance of PayPal by online merchants outside of the eBay marketplace;

	•	our ability to attract new personnel in a timely and effective manner;

	•	our ability to retain key employees in our businesses;

	•	our ability to expand our product offerings involving fixed-price trading;

	•	the results of regulatory decisions that affect us;

	•	technical difficulties or service interruptions involving our websites or services provided to our users by third parties;


	•	the actions of our competitors;

	•	the timing, cost and availability of advertising in traditional media and on other websites and online services;

	•	the timing of payments to us and of marketing and other expenses under existing and future contracts;

	•	the success of our brand building and marketing campaigns;

	•	the continued financial strength of our technology suppliers and other parties with which we have commercial relations;

	•	the level of use of the Internet and online services;

	•	increasing consumer acceptance of the Internet and other online services for commerce and, in particular, for the trading of products such as those listed on our websites;

	•	general economic conditions and those economic conditions specific to the Internet and e-commerce industries; and

	•	geopolitical events such as war, threat of war or terrorist actions.

Our limited operating history and the increased variety of services offered on our websites make it difficult for us to forecast the level or source of our revenues or earnings accurately. We believe that period-to-period comparisons of our operating results may not be meaningful, and you should not rely upon them as an indication of future performance. We do not have backlog, and substantially all of our net revenues each quarter come from transactions involving sales or payments during that quarter. Due to the inherent difficulty in forecasting revenues it is also difficult to forecast income statement expenses as a percentage of net revenues. Quarterly and annual income statement expenses as a percentage of net revenues may be significantly different from historical or projected rates. Our operating results in one or more future quarters may fall below the expectations of securities analysts and investors. In that event, the trading price of our common stock would almost certainly decline.

We believe that our continued profitability at historical levels will depend in large part on our ability to do the following:


	•	attract new users and keep existing users active on our websites;

	•	manage the costs of our business, including the costs associated with maintaining and developing our websites, customer support, transaction and chargeback rates and international and product expansion;

	•	maintain sufficient transaction volume to attract buyers and sellers;

	•	increase the awareness of our brands; and

	•	provide our customers with superior community, customer support and trading experiences.

We are investing heavily in marketing and promotion, customer support, further development of our websites, technology and operating infrastructure development. The costs of these investments are expected to remain significant into the future. In addition, many of our acquisitions require continuing investments in these areas and we have significant ongoing contractual commitments in some of these areas. As a result, we may be unable to adjust our spending rapidly enough to compensate for any unexpected revenue shortfall, which may harm our profitability. In addition, we are spending in advance of anticipated growth, which may also harm our profitability. In view of the rapidly evolving nature of our business and our limited operating history, we believe that period-to-period comparisons of our operating results are not necessarily meaningful. You should not rely upon our historical results as indications of our future performance.

Our international expansion has been rapid and we have only limited experience in many of the countries in which we now do business. Our international business, especially in Germany, the U.K., Canada and South Korea, has also become critical to our revenues and profits. Expansion into international markets, such as our recent entry into the People’s Republic of China, requires management attention and resources. We have limited experience in localizing our service to conform to local cultures, standards and policies. In many countries, we compete with local companies who understand the local market better than we do. We may not be successful in expanding into particular international markets or in generating revenues from foreign operations. For example, in 2002 we withdrew from the Japanese market. Even if we are successful, the costs of operating new sites are expected to exceed our net revenues for at least 12 months in most countries. As we continue to expand internationally, we are subject to risks of doing business internationally, including the following:


	•	regulatory requirements, including regulation of auctioneering, professional selling, distance selling, banking, and money transmitting, that may limit or prevent the offering of our services in some jurisdictions, may prevent enforceable agreements between sellers and buyers, may prohibit the listing of certain categories of goods, may require special licensure, or may limit the transfer of information between our foreign subsidiaries and ourselves;

	•	legal uncertainty regarding liability for the listings and other content provided by our users, including uncertainty as a result of less Internet-friendly legal systems, unique local laws and lack of clear precedent or applicable law;

	•	different employee/employer relationships and the existence of workers’ councils and labor unions;

	•	difficulties in staffing and managing foreign operations;

	•	longer payment cycles, different accounting practices and greater problems in collecting accounts receivable;

	•	potentially adverse tax consequences, including local taxation of our fees or of transactions on our websites;

	•	higher telecommunications and Internet service provider costs;

	•	strong local competitors;

	•	more stringent consumer and data protection laws;

	•	cultural ambivalence to, or non-acceptance of, online trading;

	•	seasonal reductions in business activity;

	•	expenses associated with localizing our products, including offering customers the ability to transact business in the local currency;

	•	laws and business practices that favor local competitors;

	•	profit repatriation restrictions, foreign currency exchange restrictions and exchange rate fluctuations;

	•	changes in a specific country’s or region’s political or economic conditions; and

	•	differing intellectual property laws.

Some of these factors may cause our international costs to exceed our domestic costs of doing business. To the extent we expand our international operations and have additional portions of our international revenues denominated in foreign currencies, we also could become subject to increased difficulties in collecting accounts receivable and risks relating to foreign currency exchange rate fluctuations. The impact of currency exchange rate fluctuations is discussed in more detail under “We are exposed to fluctuations in currency exchange rates,” below.

We intend to expand PayPal’s services internationally. Both eBay and PayPal have limited experience with the payments business outside of the U.S. In addition to all of the factors listed above, we expect that successful international expansion of PayPal’s business will require international licensure, compliance with local consumer protection, data protection and other laws, and successful integration with local payment providers (including banks, credit and debit card associations, electronic fund transfer systems and others). In some countries, expansion of PayPal’s business may require a close commercial relationship with a local bank. We do not know if these or other factors may prevent, delay or limit PayPal’s expansion or reduce its profitability. Any limitation on our ability to expand PayPal internationally could harm our business.

In July 2003, we completed the acquisition of the remaining outstanding capital stock and options of EachNet. EachNet is a Delaware corporation and a foreign person under the law of the People’s Republic of China, or PRC, and is subject to many of the risks of doing business internationally described above under “There are many risks associated with our international operations.” The PRC currently regulates its Internet sector through regulations restricting the scope of foreign investment and through the enforcement of content restrictions on the Internet. While many aspects of these regulations remain unclear, they purport to limit and require licensing of various aspects of the provision of Internet information services, and have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, PRC Internet companies, including EachNet. In order to meet local ownership and regulatory licensing requirements, the EachNet website is operated through a foreign-owned enterprise indirectly owned by EachNet Inc., which acts in cooperation with a local PRC company owned by certain EachNet employees. We believe EachNet’s current ownership structure complies with all existing PRC laws, rules and regulations. There are, however, substantial uncertainties regarding the interpretation of current PRC laws and regulations, and it is possible that the PRC government will ultimately take a view contrary to ours. There are also uncertainties regarding EachNet’s ability to enforce contractual relationships it has entered into with respect to management and control of the company’s business. If EachNet were found to be in violation of any existing or future PRC laws or regulations, it could be subject to fines and other financial penalties, revocation of its business and Internet content provider licenses, or it could be forced to discontinue its business entirely.

Net revenues outside the United States accounted for approximately 26% of our net revenues in 2002 and 34% of our net revenues in the nine months ended September 30, 2003. Because a significant and growing portion of our business is conducted outside the United States, we face exposure to adverse movements in non-U.S. currency exchange rates. In connection with its multi-currency service, PayPal fixes exchange rates twice per day, and thus may face financial exposure if it incorrectly fixes the exchange rate. PayPal also holds some corporate funds in non-US currencies to facilitate customer withdrawals, and thus faces foreign exchange risk as these currencies fluctuate against the U.S. dollar. In addition, the results of operations of our internationally focused websites are exposed to foreign exchange rate fluctuations as the financial results of the applicable subsidiaries are translated from the local currency into U.S. dollars upon consolidation. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased net revenues, operating expenses and net income. Similarly, our net revenues, operating expenses and net income will decrease when the U.S. dollar strengthens against foreign currencies. As exchange rates vary, net sales and other operating results, when translated, may differ materially from expectations. In particular, to the extent the U.S. dollar strengthens against the Euro, our European revenues and profits will be reduced as the result of these translation adjustments.

We do not collect sales or other similar taxes on goods or services sold by users through our services. One or more states or any foreign country may seek to impose value-added taxes, or VAT, or sales or use tax

collection or record-keeping obligations on companies such as ours that engage in or facilitate online commerce. Such taxes could be imposed if, for example, we were ever deemed to be an auctioneer or the agent of our sellers. Several proposals have been made at the state and local level that would impose additional taxes on the sale of goods and services through the Internet. These proposals, if adopted, could substantially impair the growth of e-commerce, and could diminish our opportunity to derive financial benefit from our activities. In 1998, the U.S. federal government enacted legislation prohibiting states or other local authorities from imposing new taxes on Internet commerce for a period of three years, through November 1, 2003. The expiration of this moratorium may permit new Internet taxes that could adversely affect our business. Legislation has also been introduced in the U.S. Congress to override the Supreme Court’s Quill decision, which limits the ability of state governments to require sellers outside of their own state to collect and remit sales taxes on goods purchased by in-state residents. Passage of such legislation and the imposition of such sales tax requirements would adversely affect our sellers and our business. On July 1, 2003 eBay began collecting VAT on the fees we charge sellers in the European Union, or EU. We continue to work with the relevant tax authorities to clarify our obligations under these new regulations. There have been and will continue to be substantial ongoing costs associated with complying with the VAT rules throughout the EU, and the increased costs to our European users may reduce their activity on our websites and could adversely affect our international transaction net revenues. A successful assertion by one or more states or any foreign country that we should collect sales or other taxes on the exchange of merchandise on our system would harm our business.

PayPal faces significant risks of loss due to fraud and disputes between senders and recipients, including:


	•	merchant fraud and other disputes over the quality of goods and services;

	•	unauthorized use of credit card and bank account information and identity theft;

	•	the need to provide effective customer support to process disputes between senders and recipients;

	•	potential breaches of system security;

	•	potential employee fraud; and

	•	use of PayPal’s system by customers to make or accept payment for illegal or improper purposes.

For 2002 and the nine months ended September 30, 2003, PayPal’s provision for transaction losses totaled $28.8 million and $24.9 million, respectively, representing 0.41% and 0.29% of PayPal’s total payment volume. If PayPal is unable to deal effectively with fraudulent transaction and customer disputes, its loss rate would increase and its business would be harmed.

The highly automated nature of, and liquidity offered by, PayPal’s payment product makes PayPal an attractive target for fraud. In configuring its product, PayPal faces an inherent trade-off between customer convenience and security. Identity thieves and those committing fraud using stolen credit card or bank account numbers, often in bulk and in conjunction with automated mechanisms of online communication, potentially can steal large amounts of money from businesses such as PayPal’s. PayPal believes that several of PayPal’s current and former competitors in the electronic payments business have gone out of business or significantly restricted their businesses largely due to losses from this type of fraud. PayPal expects that technically knowledgeable criminals will continue to attempt to circumvent PayPal’s anti-fraud systems. If they are successful, our business will be harmed.

PayPal incurs substantial losses from merchant fraud, including claims from customers that merchants have not performed or that their goods or services do not match the merchant’s description. PayPal also incurs losses from claims that the customer did not authorize the purchase, from erroneous transmissions and from customers who have closed bank accounts or have insufficient funds in them to satisfy payments. In addition to the direct costs of such losses, if they are related to credit card transactions and become excessive they could

result in PayPal losing the right to accept credit cards for payment. If PayPal were unable to accept credit cards, the velocity of trade on eBay could decrease, in which case our business would further suffer. PayPal has been assessed substantial fines for excess chargebacks in the past, and excessive chargebacks may arise in the future. PayPal has taken measures to detect and reduce the risk of fraud, but these measures may not be effective. If these measures do not succeed, our business will suffer.

In addition, prior to September 2003, some card issuers have treated purchases made through PayPal as the purchase of a money transfer service rather than the purchase of goods and services, which resulted in reduced chargeback rights for the consumer if the consumer did not receive the goods or received unsatisfactory goods. PayPal could be required to provide consumers full chargeback rights in such cases, which may result in increased losses from merchant fraud and from disputes over the quality of goods and services.

In October 2003, PayPal launched a new buyer protection program that will refund buyers up to $500 in certain eBay transactions if they do not receive the goods they purchased or if the goods are significantly not as described. In the event that PayPal makes such a refund, it will seek to collect reimbursement from the seller, but may not be able to receive any funds from the seller. The PayPal Buyer Protection program is likely to increase PayPal’s loss rate.

As part of PayPal’s program to reduce fraud losses, it may temporarily restrict the ability of customers to withdraw their funds if those funds or their account activity are identified by PayPal’s anti-fraud models as suspicious. PayPal is subject to purported class action lawsuits challenging its procedures and disclosures with respect to suspicious accounts, and alleging that those procedures and disclosures violate federal and state law on consumer protection and unfair business practice and are inconsistent with PayPal’s user agreement. In addition, many customers who are subject to such restrictions complain to regulatory agencies. As a result of customer complaints, PayPal has also received inquiries regarding its restriction practices from the Federal Trade Commission and the attorneys general of a number of states. If PayPal’s processes are found to violate federal or state law on consumer protection and unfair business practices, it could be subject to an enforcement action or fines. If PayPal loses the litigation described above or becomes subject to an enforcement action, it could be required to restructure its anti-fraud processes in ways that would harm its business, and to pay substantial damages or fines. Even if PayPal is able to defend itself successfully, the litigation or enforcement action could cause damage to its reputation, could consume substantial amounts of its management’s time and attention, and could require PayPal to change its customer service and operations in ways that could increase its costs and decrease the effectiveness of its anti-fraud program.

The large volume of payments that PayPal handles for its customers makes it vulnerable to employee fraud or other internal security breaches. PayPal is required to reimburse customers for any funds stolen as a result of such breaches. Any such fraud or security breaches could adversely affect our business.

Because PayPal is not a bank, it cannot belong to and directly access the Visa and MasterCard credit card associations. As a result, PayPal must rely on banks or payment processors to process transactions. PayPal is required by its processors to comply with credit card association operating rules, and PayPal has agreed to

reimburse its processors for any fines they are assessed by credit card associations as a result of processing payments for PayPal. The credit card associations and their member banks set and interpret the credit card rules. Some of those member banks compete with PayPal. Visa, MasterCard, American Express or Discover could adopt new operating rules or re-interpret existing rules that PayPal and/or its processors might find difficult or even impossible to implement. As a result, PayPal could lose its ability to give customers the option of using credit cards to fund their payments. If PayPal were unable to accept credit cards, its business would be seriously damaged. In addition, the velocity of trade on eBay could decrease and our business would further suffer.

In 2002, both Visa and MasterCard adopted new operating rules for third party Internet payment services like PayPal. In order to comply with the associations’ new rules, PayPal and its credit card processors have implemented changes to existing business processes for U.S. customers, and throughout the first nine months of 2003, have been working aggressively on changes with respect to processes for transactions involving international customers. The complexity of the implementation changes required by both PayPal and its payment processor necessitated a formal request by PayPal’s payment processor to MasterCard for an extension to the compliance deadlines. PayPal and its payment processor anticipate that an extension will be granted by MasterCard. If the extension is not granted, PayPal could be subject to fines, the amount of which is within MasterCard’s discretion. Even if the extension is granted, PayPal and its processor could be unable to implement the necessary changes, which could result in fines or the inability of PayPal to process MasterCard payments for international merchants in certain countries. PayPal also could be subject to fines from MasterCard and Visa if it fails to register and conduct additional monitoring with respect to the activities of merchants that are considered “high risk,” primarily merchants that sell digital content or digital information services.

From time to time, Visa, MasterCard, American Express and Discover may increase the interchange fees that they charge for each transaction using their cards. MasterCard implemented an increase to its interchange fees effective April 2003. Visa implemented an increase in credit card interchange fees effective August 2003. Visa and MasterCard both implemented a decrease in their debit card interchange fees in August 2003 as a result of the settlement of litigation, but the settlement agreement only requires them to maintain these lower interchange fees until January 2004, after which they could again increase debit card interchange fees. PayPal’s credit card processors have the right to pass any increases in interchange fees on to PayPal. Any such increased fees could increase PayPal’s operating costs and reduce its profit margins. Furthermore, PayPal’s credit card processors require it to pledge cash as collateral with respect to PayPal’s acceptance of Visa, MasterCard, American Express and Discover and the amount of cash that PayPal is required to pledge could be increased at any time.

PayPal believes that the licensing or approval requirements of the U.S. Office of the Comptroller of the Currency, the Federal Reserve Board and other federal or state agencies that regulate banks, bank holding companies or other types of providers of electronic commerce services do not apply to PayPal, except for certain money transmitter licenses mentioned below. However, one or more states may conclude that, under its or their statutes, PayPal is engaged in an unauthorized banking business. PayPal received written communications from regulatory authorities in New York and Louisiana in early 2002 expressing the view that its service as it formerly operated constituted an unauthorized banking business, and from authorities in California and Idaho in 2001 that its service might constitute an unauthorized banking business. PayPal has taken steps to address these states’ concerns and received a conclusion in 2002 from the New York Banking Department that its current business model does not constitute illegal banking. PayPal also has obtained licenses to operate as a money transmitter in California, Louisiana, Idaho and other states. However, we

cannot assure you that the steps PayPal has taken to address state regulatory concerns will be effective in all states. If PayPal is found to be engaged in an unauthorized banking business in one or more states, it might be subject to monetary penalties and adverse publicity and might be required to cease doing business with residents of those states. Even if the steps it has taken to resolve these states’ concerns are deemed sufficient by the state regulatory authorities, PayPal could be subject to fines and penalties for its prior activities. The need to comply with state laws prohibiting unauthorized banking activities could also limit PayPal’s ability to enhance its services in the future. Any change to PayPal’s business practices that makes the service less attractive to customers or prohibits its use by residents of a particular jurisdiction could decrease the velocity of trade on eBay, in which case our business would further suffer.

A number of states have enacted legislation regulating money transmitters and PayPal has applied for licenses under this legislation in 31 jurisdictions. To date, PayPal has obtained licenses in 23 of these jurisdictions. As a licensed money transmitter, PayPal is subject to bonding requirements, restrictions on its investment of customer funds, reporting requirements and inspection by state regulatory agencies. If PayPal’s pending applications were denied, or if it were found to be subject to and in violation of any money services laws or regulations, PayPal also could be subject to liability or forced to cease doing business with residents of certain states or to change its business practices. Any change to PayPal’s business practices that makes the service less attractive to customers or prohibits its use by residents of a particular jurisdiction could decrease the velocity of trade on eBay, in which case our business would further suffer. Even if PayPal is not forced to change its business practices, it could be required to obtain licenses or regulatory approvals that could impose a substantial cost on PayPal.

Although there have been no definitive interpretations to date, PayPal has assumed that its service is subject to the Electronic Fund Transfer Act and Regulation E of the Federal Reserve Board. As a result, among other things, PayPal must provide advance disclosure of changes to its service, follow specified error resolution procedures and absorb losses from transactions not authorized by the consumer. In addition, PayPal is subject to the financial privacy provisions of the Gramm-Leach-Bliley Act and related regulations. As a result, some customer financial information that PayPal receives is subject to limitations on reuse and disclosure. Additionally, pending legislation at the state and federal levels may restrict further PayPal’s information gathering and disclosure practices. Existing and potential future privacy laws may limit PayPal’s ability to develop new products and services that make use of data gathered through its service. The provisions of these laws and related regulations are complicated, and PayPal does not have extensive experience in complying with these laws and related regulations. Even technical violations of these laws can result in penalties of up to $1,000 assessed for each non-compliant transaction. During 2002 and the nine months ended September 30, 2003, PayPal processed approximately 348,000 and 598,000 transactions per day, respectively, and any violations could expose PayPal to significant liability.

PayPal is subject to money laundering laws and regulations that prohibit, among other things, its involvement in transferring the proceeds of criminal activities. These laws and regulations require PayPal to operate an anti-money laundering program that contains at least the following elements: written policies and procedures (including those relating to customer identification), training for employees, designation of a compliance officer, and regular independent review of the program. PayPal has adopted a program to comply with these regulations, but any errors or failure to implement the program properly could lead to lawsuits, administrative action, fines and/or prosecution by the government. PayPal is also subject to regulations that require it to report suspicious activities involving transactions of $2,000 or more and may be required to obtain and keep more detailed records on the senders and recipients in certain transfers of $3,000 or more. The interpretation of suspicious activities in this context is uncertain. Future regulations under the USA PATRIOT Act may require PayPal to revise the procedures it uses to verify the identity of its customers and to monitor more closely international transactions. These regulations could impose significant costs on PayPal and make it more difficult for new customers to join its network. PayPal could be required to learn more about its customers before opening an account, to obtain additional verification of international customers and to

PayPal currently offers its product to customers with credit cards to send payments in 37 countries outside the U.S., and to receive payments in 32 of those countries. In 20 of these countries, customers can withdraw funds to local bank accounts. In the fourth quarter of 2002, PayPal began offering customers the ability to send or receive payments denominated in Pounds, Euros, Canadian Dollars or Yen, in addition to U.S. Dollars. In these 37 countries, it is not clear whether, in order to provide its product in compliance with local law, PayPal needs to be regulated as a bank or financial institution or otherwise. If PayPal were found to be subject to and in violation of any foreign laws or regulations, it could be subject to liability, forced to change its business practices or forced to suspend providing services to customers in one or more countries. Alternatively, PayPal could be required to obtain licenses or regulatory approvals that could impose a substantial cost on it and involve considerable delay to the provision or development of its product. A PayPal subsidiary has applied for a license as an Electronic Money Institution in the United Kingdom as a vehicle for providing localized versions of PayPal’s service to customers in the European Union. Delay or failure to receive such a license would require PayPal to change its business practices or features in ways that would adversely affect PayPal’s international expansion plans and could require PayPal to suspend providing services to customers in one or more countries.

PayPal pays significant transaction fees when senders fund payment transactions using credit cards, nominal fees when customers fund payment transactions by electronic transfer of funds from bank accounts and no fees when customers fund payment transactions from an existing PayPal account balance. During 2002 and the nine months ended September 30, 2003, senders funded 50% and 55%, respectively, of PayPal’s payment volume using credit cards. Senders may resist funding payments by electronic transfer from bank accounts because of the greater protection offered by credit cards, including the ability to dispute and reverse charges if merchandise is not delivered or is not as described, because of frequent flier miles or other incentives offered by credit cards or because of generalized fears regarding privacy or loss of control in surrendering bank account information to a third party.

PayPal’s ability to manage and account accurately for customer funds requires a high level of internal controls. PayPal has neither an established operating history nor proven management experience in maintaining, over a long term, these internal controls. As PayPal’s business continues to grow, it must strengthen its internal controls accordingly. PayPal’s success requires significant public confidence in its ability to handle large and growing transaction volumes and amounts of customer funds. Any failure to maintain necessary controls or to manage accurately customer funds could diminish customer use of PayPal’s product severely.

We currently are experiencing a period of expansion in our headcount, facilities and infrastructure, in the U.S., internationally, and with PayPal. We anticipate that further expansion will be required to address potential growth in our customer base and number of listings and payment transactions, as well as our expansion into new geographic areas, types of goods and alternative methods of sale. This expansion has


	•	The Websites. We must constantly add new hardware, update software and add new engineering personnel to accommodate the increased use of our and our subsidiaries’ websites and the new products and features we are regularly introducing. This upgrade process is expensive, and the increased complexity of our websites increases the cost of additional enhancements. If we are unable to increase the capacity of our systems at least as fast as the growth in demand for this capacity, our websites may become unstable and may cease to operate for periods of time. We are in the midst of significant multiyear projects to enhance our current technical architecture. If these projects are not successful, our business could be harmed. We have experienced periodic unscheduled downtime. Continued unscheduled downtime would harm our business and also could anger users of our websites and reduce future revenues.

	•	Customer Support. We are expanding our customer support operations to accommodate the increased number of users and transactions on our websites and the increased level of trust and safety activity we provide worldwide. If we are unable to provide these operations in a cost-effective manner, users of our websites may have negative experiences, and current and future revenues could suffer, or our operating margins may decrease.

	•	Customer Accounts. Our revenues are dependent on prompt and accurate billing processes. We are in the midst of a significant project to enhance our billing software. If this project is unsuccessful and we are unable to grow our transaction processing abilities to accommodate the increasing number of transactions that must be billed, our ability to collect revenue will be harmed.

We must continue to hire, train and manage new employees at a rapid rate. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the expected growth of our operations and personnel, we will need to improve our transaction processing, operational and financial systems, procedures and controls. This is a special challenge as we acquire new operations with different systems. Our current and planned personnel, systems, procedures and controls may not be adequate to support our future operations. We may be unable to hire, train, retain and manage required personnel or to identify and take advantage of existing and potential strategic relationships and market opportunities. The additional headcount and capital investments we are adding increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term.

Anything that diverts our users from their customary level of usage of our websites could adversely affect our business. We would therefore be adversely affected by geopolitical events such as war, the threat of war or terrorist activity. Similarly, our results of operations historically have been seasonal in nature because many of our users reduce their activities on our websites with the onset of good weather during the summer months, as well as during the holidays, such as the dates surrounding Thanksgiving (in the U.S.) and Christmas. We have historically experienced our strongest quarters of online growth in our first and fourth fiscal quarters. PayPal has shown similar seasonality, except that its strongest quarter of online growth has historically been the fourth fiscal quarter. As our websites gain more acceptance by a broader base of mainstream users, and as the size of our European operations grows relative to our other operations, we expect these patterns of seasonality to become more pronounced.

The law relating to the liability of providers of online services for the activities of their users on their service is currently unsettled. We are aware that certain goods, such as firearms, other weapons, adult material, tobacco products, alcohol and other goods that may be subject to regulation by local, state or federal

authorities, have been listed and traded on our service. We may be unable to prevent the sale of unlawful goods, or the sale of goods in an unlawful manner, by users of our service, and we may be subject to allegations of civil or criminal liability for unlawful activities carried out by users through our service. We have been subject to several lawsuits based upon such allegations. In order to reduce our exposure to this liability, we have prohibited the listing of certain items and increased the number of personnel reviewing questionable items. In the future, we may implement other protective measures that could require us to spend substantial resources and/or to reduce revenues by discontinuing certain service offerings. Any costs incurred as a result of liability or asserted liability relating to the sale of unlawful goods or the unlawful sale of goods, could harm our business. In addition, we have received significant and continuing media attention relating to the listing or sale of unlawful goods on our websites. This negative publicity could damage our reputation and diminish the value of our brand name. It also could make users reluctant to continue to use our services.

PayPal’s payment system is also susceptible to potentially illegal or improper uses. These may include illegal online gambling, fraudulent sales of goods or services, illicit sales of prescription medications or controlled substances, software and other intellectual property piracy, money laundering, bank fraud, child pornography trafficking, prohibited sales of alcoholic beverages and tobacco products and online securities fraud. Despite measures PayPal has taken to detect and lessen the risk of this kind of conduct, illegal activities may be funded using PayPal. In July 2003, PayPal reached agreement with the U.S. Attorney for the Eastern District of Missouri that it would pay $10 million as a civil forfeiture to settle allegations that its provision of services to online gambling merchants violated provisions of the USA PATRIOT Act and further agreed to have its compliance program reviewed by an independent audit firm. As illustrated by this recent settlement, the processing of payments for illegal transactions could expose PayPal to liability and result in additional restrictions on PayPal’s future operations including restrictions by Visa, MasterCard, American Express and Discover on PayPal’s ability to accept credit card transactions. In addition, future regulations under the USA PATRIOT Act may require PayPal to revise the procedures it takes to verify the identity of customers and to monitor more closely international transactions. PayPal’s business could suffer if customers use its system for illegal or improper purposes, or if usage of its system is reduced because of increased verification requirements.

In September 2001, a complaint was filed by MercExchange LLC against us, our Half.com subsidiary and ReturnBuy, Inc. in the Eastern District of Virginia (No. 2:01-CV-736) alleging infringement of three patents (relating to online auction technology, multiple database searching and electronic consignment systems) and seeking a permanent injunction and damages (including treble damages for willful infringement). In October 2002, the court granted in part our summary judgment motion, effectively invalidating the patent related to online auction technology and rendering it unenforceable. This ruling left only two patents in the case. Trial of the matter began on April 23, 2003. On May 27, 2003, the jury returned a verdict finding that eBay had willfully infringed one and Half.com had willfully infringed both of the patents in the suit, awarding $35.0 million in compensatory damages. Both parties filed post-trial motions. On August 6, 2003, the court entered judgment for MercExchange in the amount of $29.5 million, plus prejudgment interest and postjudgment interest in an amount to be determined. We have appealed the judgment and MercExchange has filed a cross-appeal. We continue to believe that the verdict against us in the trial was incorrect and intend to continue to defend ourselves vigorously. However, even if successful, our defense against this action will continue to be costly. In addition, as a precautionary measure, we have modified certain functionality of our websites and business practices in a manner which we believe makes them non-infringing. Nonetheless, if we

In September 2002, Bank One Delaware (formerly known as First USA Bank, N.A.) filed a complaint against PayPal in the District of Delaware (No. 02-CV-1462) alleging infringement of two First USA patents relating to assigning an alias to a credit card so as to eliminate the need for the physical presence of the card in a financial transaction. In September 2003, PayPal filed a complaint against Bank One Corp., Bank One Delaware’s parent, in the same district court alleging infringement of a PayPal patent relating to a process that allows Internet users to make secure payments and authenticated transactions over a computer network. On October 20, 2003, the parties finalized the terms of an agreement to dismiss both lawsuits. The terms of the settlement agreement are confidential.

infringement claims involving services we provide, including various aspects of our Payments business, will continue to be made. We have in the past been forced to litigate such claims. We have been notified of several potential disputes and are subject to a lawsuit by Tumbleweed Communications Corporation that is currently ongoing. Tumbleweed’s lawsuit claims infringement of two patents relating to techniques for the delivery of electronic documents to users over the Internet. We believe that Tumbleweed’s lawsuit is without merit and intend to defend ourselves vigorously. We may also become more vulnerable to intellectual property claims as laws such as the Digital Millennium Copyright Act are interpreted by the courts and as we expand into jurisdictions where the underlying laws with respect to the potential liability of online intermediaries like ourselves is less favorable. We expect that we will increasingly be subject to copyright and trademark infringement claims as the geographical reach of our services expands. These claims, whether meritorious or not, could be time consuming, result in costly litigation, cause service upgrade delays, require expensive changes in our methods of doing business or could require us to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm our business.

Our users may be targeted by criminals using fraudulent emails to steal personal information.

Our users, as well as those of other prominent Internet companies, have been and will continue to be targeted by parties attempting to misappropriate passwords, credit card numbers or other personal information by using fraudulent emails. These emails appear to be legitimate emails sent by eBay or PayPal, but request that recipients provide password, credit card or other personal information, and direct recipients to bogus websites operated by the sender of the email. We actively pursue the parties responsible for these attempts at misappropriation and encourage our users to divulge sensitive information only after they have verified that they are on our legitimate websites, but we cannot entirely eliminate these types of activities. In addition to harming our users, these fraudulent emails may damage our reputation, reduce our ability to attract new users to our websites, and diminish the value of our brand names.

We have received in the past, and we anticipate we will receive in the future, communications alleging that certain items listed or sold through our service by our users infringe third-party copyrights, trademarks and tradenames or other intellectual property rights. Although we have sought to work actively with the content community to eliminate infringing listings on our websites, some content owners have expressed the view that our efforts are insufficient. Content owners have been active in defending their rights against online companies, including eBay. Allegations of infringement of third-party intellectual property rights have in the past and may in the future result in litigation against us. Such litigation is costly for us, could result in increased costs of doing business through adverse judgment or settlement, could require us to change our business practices in expensive ways, or could otherwise harm our business. Litigation against other online companies could result in interpretations of the law that could also require us to change our business practices or otherwise increase our costs.

Our future success will depend largely upon sellers reliably delivering and accurately representing their listed goods and buyers paying the agreed purchase price. We have received in the past, and anticipate that we will receive in the future, communications from users who did not receive the purchase price or the goods that were to have been exchanged. In some cases individuals have been arrested and convicted for fraudulent activities using our websites. While we can suspend the accounts of users who fail to fulfill their delivery obligations to other users, we do not have the ability to require users to make payments or deliver goods or otherwise make users whole other than through our limited buyer protection programs. Other than through

these programs, we do not compensate users who believe they have been defrauded by other users. We also periodically receive complaints from buyers as to the quality of the goods purchased. Negative publicity generated as a result of fraudulent or deceptive conduct by users of our service is increasing, and such publicity could damage our reputation, reduce our ability to attract new users and diminish the value of our brand name. We expect to continue to receive communications from users requesting reimbursement or threatening or commencing legal action against us if no reimbursement is made. Our liability for these sort of claims is only beginning to be clarified and may be higher in some non-U.S. jurisdictions than it is in the U.S. This sort of litigation could be costly for us, divert management attention, result in increased costs of doing business, lead to adverse judgments or could otherwise harm our business. In addition, affected users will likely complain to regulatory agencies who could take action against us, including imposing fines or seeking injunctions.

In January 1999, we received initial requests to produce certain records and information to the federal government relating to an investigation of possible illegal transactions in connection with our websites. We were informed that the inquiry includes an examination of our practices with respect to these transactions. We have continued to provide further information in connection with this ongoing inquiry. In order to protect the investigation, the court has ordered that no further public disclosures be made with respect to the matter. Should this or any other investigation lead to civil or criminal charges against us, we would likely be harmed by negative publicity, the cost of litigation, the diversion of management time and other negative effects, even if we ultimately prevail. Our business would suffer if we were not to prevail in any action like this. Even the process of providing records and information can be expensive, time consuming and result in the diversion of management attention.

A large number of transactions occur on our websites. We believe that government regulators have received a substantial number of consumer complaints about both eBay and PayPal, which, while small as a percentage of our total transactions, are large in aggregate numbers. As a result, we have from time to time been contacted by various foreign, federal, state and local regulatory agencies and been told that they have questions with respect to the steps we take to protect our users from fraud and about our operations. In particular, PayPal has received inquiries regarding its account restriction practices from the Federal Trade Commission and the attorneys general of a number of states. Both eBay and PayPal are likely to receive additional inquiries from regulatory agencies in the future, which may lead to action against either company. We have responded to all inquiries from regulatory agencies by describing our current and planned antifraud efforts, customer support procedures and operating procedures. If one or more of these agencies is not satisfied with our response to current or future inquiries, we could be subject to fines or other penalties or forced to change our operating practices in ways that could harm our business.

We are subject to laws relating to the use and transfer of personally identifiable information about our users and their transfers, especially outside of the U.S. Violation of these laws, which in many cases apply not only to third-party transfers but also to transfers of information between ourselves and our subsidiaries, and between ourselves, our subsidiaries and other parties with which we have commercial relations could subject us to significant penalties and negative publicity and could adversely affect us.

Customer complaints or negative publicity about our customer service could severely diminish consumer confidence in and use of our services. Breaches of our customers’ privacy and our security measures could have the same effect. Measures we sometimes take to combat risks of fraud and breaches of privacy and security can damage relations with our customers. These measures heighten the need for prompt and accurate customer service to resolve irregularities and disputes. Effective customer service requires significant personnel expense, and this expense, if not managed properly, could impact our profitability significantly. Any inability by us to manage or train our customer service representatives properly could compromise our ability to handle customer complaints effectively. If we do not handle customer complaints effectively, our reputation may suffer and we may lose our customers’ confidence.

Because it is providing a financial service and operating in a more regulated environment, PayPal, unlike eBay, must provide telephone as well as email customer service and must resolve certain customer contacts within shorter time frames. PayPal has received negative publicity with respect to its customer service and is the subject of purported class action lawsuits and state attorney general inquiries alleging, among other things, failure to resolve promptly certain account restrictions. If PayPal is unable to provide quality customer support operations in a cost-effective manner, its users may have negative experiences, PayPal may receive additional negative publicity and its ability to attract new customers may be damaged. Current and future revenues could suffer, or its operating margins may decrease. In addition, negative publicity about or experiences with PayPal’s customer support could cause eBay’s reputation to suffer or affect consumer confidence in eBay as a whole.

We have acquired a number of businesses, including our acquisitions of Half.com, Internet Auction, iBazar, NeoCom, PayPal, CARad Inc. and EachNet. We also recently completed the acquisition of substantially all the assets of FairMarket, Inc., a provider of online auction and promotions platforms. We expect to continue to evaluate and consider a wide array of potential strategic transactions, including business combinations, acquisitions and dispositions of businesses, technologies, services, products and other assets, including interests in our existing subsidiaries and joint ventures. At any given time we may be engaged in discussions or negotiations with respect to one or more of such transactions. Any of such transactions could be material to our financial condition and results of operations. There is no assurance that any such discussions or negotiations will result in the consummation of any transaction. The process of integrating any acquisition, including the acquisition of PayPal, may create unforeseen operating difficulties and expenditures and is itself risky. The areas where we may face difficulties include:


	•	diversion of management time at both companies during the period of negotiation through closing and further diversion of such time after closing, as well as a shift of focus from operating the businesses to issues of integration and future products;

	•	declining employee morale and retention issues resulting from changes in compensation, reporting relationships, future prospects or the direction of the business;

	•	the need to integrate each company’s accounting, management information, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented;

	•	the need to implement controls, procedures and policies appropriate for a larger public company at companies that prior to acquisition had lacked such controls, procedures and policies; and

	•	in some cases, the need to transition operations onto the existing eBay platform.

Foreign acquisitions involve special risks, including those related to integration of operations across different cultures, languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. Moreover, the anticipated benefits of any or all of our acquisitions may not be realized. Future acquisitions or mergers could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could harm our business. Future acquisitions or mergers may require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all. Even if available, this financing may be dilutive.

The law relating to the liability of online services companies for information carried on or disseminated through their services is currently unsettled. Claims could be made against online services companies under both U.S. and foreign law for defamation, libel, invasion of privacy, negligence, copyright or trademark infringement, or other theories based on the nature and content of the materials disseminated through their services. Several private lawsuits seeking to impose liability upon us under a number of these theories have

been brought against us. In addition, federal, state and foreign legislation has been proposed that imposes liability for or prohibits the transmission over the Internet of certain types of information. Our service features a Feedback Forum, which includes information from users regarding other users. Although all such feedback is generated by users and not by us, claims of defamation or other injury have been made in the past and could be made in the future against us for content posted in the Feedback Forum. Claims like these are more likely and may have a higher probability of success in jurisdictions outside the U.S. If we become liable for information provided by our users and carried on our service in any jurisdiction in which we operate, we could be directly harmed and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources and/or to discontinue certain service offerings, which would negatively affect our financial results. In addition, the increased attention focused upon liability issues as a result of these lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result of this liability or asserted liability could harm our business.

We seek to generate a high volume of traffic and transactions on our websites. The satisfactory performance, reliability and availability of our websites, processing systems and network infrastructure are critical to our reputation and our ability to attract and retain large numbers of users. Our revenues depend primarily on the number of items listed by users, the volume of user transactions that are successfully completed, the final prices paid for the items listed and the volume of payment transactions by our payment customers. We need to expand and upgrade our technology, transaction processing systems and network infrastructure both to meet increased traffic on our site and to implement new features and functions, including those required under our contracts with third parties. We may be unable to project accurately the rate or timing of increases, if any, in the use of our service or to expand and upgrade our systems and infrastructure to accommodate any increases in a timely fashion.

We use internally developed systems to operate our service for transaction processing, including billing and collections processing. We must continually improve these systems in order to accommodate the level of use of our websites. In addition, we may add new features and functionality to our services that would result in the need to develop or license additional technologies. We capitalize hardware and software costs associated with this development in accordance with generally accepted accounting principles and include such amounts in property and equipment. Our inability to add additional software and hardware or to upgrade our technology, transaction processing systems or network infrastructure to accommodate increased traffic or transaction volume could have adverse consequences. These consequences include unanticipated system disruptions, slower response times, degradation in levels of customer support, impaired quality of the users’ experiences of our service and delays in reporting accurate financial information. Our failure to provide new features or functionality also could result in these consequences. We may be unable to effectively upgrade and expand our systems in a timely manner or to integrate smoothly with our existing systems any newly developed or purchased technologies or businesses such as PayPal. These difficulties could harm or limit our ability to expand our business.

Our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, loss of data, public release of confidential data or the inability to complete customer transactions. In addition, unauthorized persons may improperly access our data. In 1999, eBay experienced an unauthorized break-in by a “hacker” who stated that he could, in the future, damage or change our system or take confidential information. We have also experienced “denial of service” type attacks on our system that have made all or portions of our websites unavailable for periods of time. These and other types of attacks could harm us. Actions of this sort may be very expensive to remedy and could damage our reputation and discourage new and existing users from using our services.

Furthermore, any inability on PayPal’s part to protect the security and privacy of its electronic transactions could have a material adverse effect on its profitability. A security or privacy breach could:


	•	expose PayPal to additional liability;

	•	increase PayPal’s expenses relating to resolution of these breaches; and

	•	deter customers from using PayPal’s product.

PayPal’s data security measures may not effectively counter evolving security risks or address the security and privacy concerns of existing and potential customers. Any failures in PayPal’s security and privacy measures could have a material adverse effect on our business.

Any interruption in the availability of our websites will reduce our revenues and profits, and our future revenues and profits could be harmed if our users believe that our system is unreliable. Although our systems have been designed around industry standard architectures to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial of service attacks and similar events. Some of our systems, including the PayPal site and PayPal’s customer support operations, are not fully redundant, and our disaster recovery planning is not sufficient for all eventualities. PayPal, in particular, could be offline for a number of days in the event of a disaster in Northern California. Our systems are also subject to break-ins, sabotage, intentional acts of vandalism and to potential disruption if the operators of these facilities have financial difficulties. Despite any precautions we may take, the occurrence of a natural disaster, a decision to close a facility we are using without adequate notice for financial reasons or other unanticipated problems at our hosting facilities could result in lengthy interruptions in our services. In addition, the failure by our hosting facilities to provide our required data communications capacity could result in interruptions in our service. We do not carry business interruption insurance sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures.

We have experienced system failures from time to time. eBay’s primary website has been interrupted for periods of up to 22 hours. In addition to placing increased burdens on our engineering staff, these outages create a flood of user questions and complaints that need to be addressed by our customer support personnel. Any unscheduled interruption in our services results in an immediate loss of revenues that can be substantial and may cause some users to switch to our competitors. If we experience frequent or persistent system failures on our websites, our reputation and brand could be permanently harmed. We have been taking steps to increase the reliability and redundancy of our systems. These steps are expensive, reduce our margins and may not be successful in reducing the frequency or duration of unscheduled downtime.

Our infrastructure could prove unable to handle a larger volume of customer transactions. Any failure to accommodate transaction growth could impair customer satisfaction, lead to a loss of customers, impair our ability to add customers or increase its costs, all of which would harm our business.

Because our customers may use our products for critical transactions, any errors, defects or other infrastructure problems could result in damage to our customers’ businesses. These customers could seek significant compensation from us for their losses. Even if unsuccessful, this type of claim likely would be time consuming and costly for us to address.

The trading price of our common stock has been and is likely to be extremely volatile. Our stock price could be subject to wide fluctuations in response to a variety of factors, including the following:


	•	actual or anticipated variations in our quarterly operating results;

	•	unscheduled system downtime;

	•	additions or departures of key personnel;


	•	announcements of technological innovations or new services by us or our competitors;

	•	changes in financial estimates by securities analysts;

	•	conditions or trends in the Internet and online commerce industries;

	•	changes in the market valuations of other Internet companies;

	•	developments in regulation;

	•	events affecting PayPal’s business;

	•	announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, new products or capital commitments;

	•	unanticipated economic or political events;

	•	sales of our common stock or other securities in the open market; and

	•	other events or factors, including these described in this “Risk Factors That May Affect Results of Operations and Financial Condition” section and others that may be beyond our control.

In addition, the trading prices of Internet stocks in general, and ours in particular, have experienced extreme price and volume fluctuations in recent periods. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. The valuation of our stock remains extraordinarily high based on conventional valuation standards such as price-to-earnings and price-to-sales ratios. The trading price of our common stock has increased enormously from our initial public offering price and from our stock price during 2002. This trading price and valuation may not be sustained. Negative changes in the public’s perception of the prospects of Internet or e-commerce or technology companies have in the past and may in the future depress our stock price regardless of our results. Other broad market and industry factors may decrease the market price of our common stock, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions, such as recession or interest rate or currency rate fluctuations, also may decrease the market price of our common stock. In the past, following declines in the market price of a company’s securities, securities class-action litigation often has been instituted. Litigation of this type, if instituted, could result in substantial costs and a diversion of management’s attention and resources.

We are subject to the same foreign, federal, state and local laws as other companies conducting business on and off the Internet. Today, there are still relatively few laws specifically directed towards online services. However, due to the increasing popularity and use of the Internet and online services, many laws relating to the Internet are being debated at all levels of government around the world and it is possible that such laws and regulations will be adopted. These laws and regulations could cover issues such as user privacy, freedom of expression, pricing, fraud, content and quality of products and services, taxation, advertising, intellectual property rights and information security. Applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel and defamation, obscenity and personal privacy is uncertain. The vast majority of these laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Those laws that do reference the Internet, such as the U.S. Digital Millennium Copyright Act and the European Union’s (E.U.) Directive on Distance Selling and Electronic Commerce are only now beginning to be interpreted by the courts and implemented by the E.U. Member States, so their applicability and scope remain somewhat uncertain. In addition, numerous states and foreign jurisdictions, including the State of California, where our headquarters is located, have regulations regarding how “auctions” may be conducted and the liability of “auctioneers” in conducting such auctions. No final legal determination has been made with respect to the applicability of the California regulations to our business to date and little precedent exists in this area. Several states and some foreign jurisdictions have attempted, and may attempt in the future to impose such regulations upon us or our users, which could harm

our business. We are currently subject to potential regulation under the Office of Banks and Real Estate, or OBRE, in Illinois concerning the applicability of the Illinois auction law to our services. In August 2002, Illinois amended the Illinois auction law to provide for a special regulatory regime for “Internet auction listing services.” We expect to register as an Internet auction listing service in Illinois following the adoption of regulations under the amended statute. Although we do not expect this registration to have a negative impact on our business, other regulatory and licensure claims could result in costly litigation or could require us to change our manner of doing business in ways that increase our costs or reduce our revenues or force us to prohibit listings of certain items for some locations. We could also be subject to fines or other penalties. Any of these outcomes could harm our business. As our activities and the types of goods listed on our site expand, regulatory agencies may claim that we or our users are subject to licensure in their jurisdiction, either with respect to our services in general, or in order to allow the sale of certain items (e.g., real estate, boats, automobiles). As discussed above, PayPal is also subject to regulation, both in the U.S. and internationally.

Several domestic jurisdictions have proposed, and California, Minnesota, Utah and Vermont have recently passed, legislation that would limit the uses of personal user information gathered online or offline. Many jurisdictions already have such laws and continuously consider strengthening them, especially against online services. eBay and PayPal in certain instances are subject to some of these current laws. PayPal may be subject to recently enacted legislation in several states and countries imposing greater restrictions on the ability of financial services companies to share user information with third parties without affirmative user consent. In addition, the Fair Credit Reporting Act, or FCRA, a federal statute enacted in 1970 to protect consumer privacy, includes a provision preempting conflicting state laws on the sharing of information between corporate affiliates. The preemptive provisions of the FCRA will expire on January 1, 2004 unless Congress takes action to extend them or make them permanent. If the preemptive provisions of the FCRA expire, PayPal and eBay will be subject to the laws of each individual state, some of which are more restrictive than the FCRA and may require us to change our business practices.

The U.S. Federal Trade Commission also has settled several proceedings against companies regarding the manner in which personal information is collected from users and provided to third parties. Specific statutes intended to protect user privacy have been passed in many non-U.S. jurisdictions, including virtually every non-U.S. jurisdiction where we currently have a website. Compliance with these laws, given the tight integration of our systems across different countries and the need to move data to facilitate transactions amongst our users (e.g., to payment companies, shipping companies, etc.), is both necessary and difficult. Failure to comply could subject us to lawsuits, fines, criminal penalties, statutory damages, adverse publicity and other losses that could harm our business. Changes to existing laws or the passage of new laws intended to address these issues could directly affect the way we do business or could create uncertainty on the Internet. This could reduce demand for our services, increase the cost of doing business as a result of litigation costs or increased service or delivery costs, or otherwise harm our business. In addition, because our services are accessible worldwide, and we facilitate sales of goods to users worldwide, foreign jurisdictions may claim that we are required to comply with their laws. For example, the Australian high court has ruled that a U.S. website in certain circumstances must comply with Australian laws regarding libel. As we have expanded our international activities, we have become obligated to comply with the laws of the countries in which we operate. Laws regulating Internet companies outside of the U.S. may be less favorable than those in the U.S., giving greater rights to consumers, content owners and users. Compliance may be more costly or may require us to change our business practices or restrict our service offerings relative to those in the U.S. Our failure to comply with foreign laws could subject us to penalties ranging from criminal fines to bans on our ability to offer our services.

A number of third parties provide services to our users that indirectly benefit us. Such services include seller tools that automate and manage listings, merchant tools that manage listings and interface with inventory management software, and other services. In many cases we have contractual agreements with these companies which may give us a direct financial interest in their success, while in other cases we have none. In either circumstance, financial, regulatory or other problems that prevent these companies from providing

services to our users could reduce the number of listings on our websites or make completing transactions on our websites more difficult, and thereby harm our business. Although we generally have been able to renew or extend the terms of contractual arrangements with these third party service providers on acceptable terms, there can be no assurance that we will continue to be able to do so in the future.

Third parties, including PayPal before its acquisition by us, have in the past and may in the future allege that actions taken by us violate the antitrust or competition laws of the U.S. or other countries, or otherwise constitute unfair competition. Such claims typically are very expensive to defend, involve negative publicity and diversion of management time and effort and could result in significant judgments against us, all of which would adversely affect us.

We have provided information to the Antitrust Division of the Department of Justice in connection with an inquiry into our conduct with respect to “auction aggregators” including our licensing program and a previously settled lawsuit against Bidder’s Edge. Although the Antitrust Division has closed this inquiry, if the Department of Justice or any other antitrust agency were to open other investigations of our activities, we would likely be harmed by negative publicity, the costs of the action, possible private antitrust lawsuits, the diversion of management time and effort and penalties we might suffer if we ultimately were not to prevail.

We recognize revenues from end-to-end service providers and direct advertising promotions. These revenues may be affected by the financial condition of the parties with whom we have these relationships and by the success of online promotions generally. Our direct advertising revenues historically have been dependent in significant part on the performance of AOL’s sales force. Our advertising sales relationship with AOL terminated on March 31, 2003, and we are now dependent on the efforts of our existing internal sales staff. At this time, we expect third-party advertising and end-to-end services revenues to decrease substantially on an absolute basis in 2003 relative to 2002.

The business of selling goods over the Internet, particularly through online trading, is new and dynamic. Our future net revenues and profits will be substantially dependent upon the widespread acceptance of the Internet and online services as a medium for commerce by consumers. Rapid growth in the use of and interest in the Internet and online services is a recent phenomenon. This acceptance and use may not continue. Even if the Internet is accepted, concerns about fraud, privacy and other problems may mean that a sufficiently broad base of consumers will not adopt the Internet as a medium of commerce. In particular, our websites require users to make publicly available personal information that some potential users may be unwilling to provide. These concerns may increase as additional publicity over privacy issues on eBay or generally over the Internet increase. Market acceptance for recently introduced services and products over the Internet is highly uncertain, and there are few proven services and products. In order to expand our user base, we must appeal to and acquire consumers who historically have used traditional means of commerce to purchase goods. If these consumers prove to be less active than our earlier users, and we are unable to gain efficiencies in our operating costs, including our cost of acquiring new customers, our business could be adversely impacted.

Our future performance will be substantially dependent on the continued services of our senior management and other key personnel. Our future performance also will depend on our ability to retain and motivate our other officers and key personnel. The loss of the services of any of our executive officers or other key employees could harm our business. We do not have long-term employment agreements with any of our key personnel, we do not maintain any “key person” life insurance policies, and our Chief Executive Officer has fully vested the vast majority of her equity incentives. Our new businesses are all dependent on attracting

and retaining key personnel. In addition, employee turnover and other labor problems frequently increase during the period following an acquisition as employees evaluate possible changes in compensation, culture, reporting relationships and the direction of the business. Such increased turnover could increase our costs and reduce our future revenues. Our future success also will depend on our ability to attract, train, retain and motivate highly skilled technical, managerial, marketing and customer support personnel. Competition for these personnel is intense, and we may be unable to successfully attract, integrate or retain sufficiently qualified personnel. In making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the stock options they are to receive in connection with their employment. Fluctuations in our stock price may make it more difficult to retain and motivate employees whose stock option strike prices are substantially above current market prices.

Depending on the category of product, we currently or potentially compete with a number of companies serving particular categories of goods as well as those serving broader ranges of goods. The Internet provides new, rapidly evolving and intensely competitive channels for the sale of all types of goods. We expect competition to intensify in the future as the barriers to entry into these channels are relatively low, as current offline and new competitors can easily launch online sites at a nominal cost using commercially available software or partnering with any one of a number of successful electronic commerce companies. Our broad-based competitors include the vast majority of traditional department, warehouse, discount and general merchandise stores, emerging online retailers, online classified services, and other shopping channels such as offline and online home shopping networks. These include most prominently: Wal-Mart, Kmart, Target, Sears, Macy’s, JC Penney, Costco, Office Depot, Staples, OfficeMax, Sam’s Club, Amazon.com, Buy.com, AOL.com, Yahoo! Shopping, MSN, QVC and Home Shopping Network/HSN.com.

We face competition from local, regional and national specialty retailers and exchanges in each of our categories of products. For example:


	Antiques and Art: Bonhams & Butterfields, Christie’s, Sotheby’s, other regional auction houses, antique and art dealers and galleries, antique and collectible fairs, estate sales, Ruby Lane, Tias, Allposters.com, Artnet, Art.com, Barewalls.com, Guild.com,

	Automotive (used cars and parts): Advance Auto Parts, AutoByTel.com, Autonation.com, AutoPartsPlace, AutoTrader.com, Autozone, Barons Ltd., Barrett-Jackson, California Classics, Car Parts Wholesale, Car-Part.com, CarMax, Cars.com, CarsDirect.com, Collectorcartraderonline.com, CSK Auto, Dealix, Discount Auto Parts, Dupont Registry, eClassics.com, ExpressAutoparts.com, General Parts (Carquest), Genuine/NAPA, Hemmings, iMotors.com, JC Whitney, Kragen, Kruse International, OpenAuto.com, PartsAmerica.com, RM Auctions, Inc., TraderOnline, Trader Publishing, newspaper classifieds, used car dealers, swap meets, car clubs, vehicle recyclers

	Books, Movies, Music: Abebooks.com, Amazon.com, Barnes & Noble, Barnesandnoble.com, Alibris.com, Blockbuster, BMG, Columbia House, Best Buy, CDNow, Express.com, Emusic.com, Tower Records/ Tower Records.com

	Business-to-Business: Ariba, BidFreight.com, Bid4Assets, BizBuyer.com, bLiquid.com, Buyer Zone, CloseOutNow.com, Commerce One, Concur Technologies, DoveBid, FreeMarkets, Iron Planet, labx.com, Oracle, Overstock.com, PurchasePro.com, RicardoBiz.com, Sabre, SurplusBin.com, Ventro, VerticalNet

	Clothing and Accessories: Abercrombie.com, AE.com, Amazon.com, Bluefly.com, Coldwater-Creek.com, Delias.com, Dockers.com, Eddie Bauer, The Gap, Gap Online sites, J. Crew, JCrew.com, LandsEnd.com, The Limited, LLBean.com, Macy’s, The Men’s Wearhouse, Overstock.com, Payless.com, Ross, Urbanq.com, VictoriasSecret.com, Yoox.com

	Coins and Stamps: Collectors Universe, Heritage, US Mint, US Postal Service, Shop At Home, Bowers and Morena, auction houses, independent coin and stamp dealers


	Collectibles: Collectiblestoday.com, Franklin Mint, Go Collect, Heritage, Mastronet, Replacements.com, Ruby Lane, Tias, antique and collectible dealers, antique and collectible fairs, flea markets and swap meets, specialty retailers, regional auction houses

	Computers & Consumer Electronics: Amazon.com, Best Buy, Buy.com, Circuit City, CNET, CompUSA, Dell, Electronics Boutique, Fry’s Electronics, Gamestop, Gateway, The Good Guys, Hewlett Packard, IBM, MicroWarehouse, PC Connection, Radio Shack, Ritz Camera, Tech Depot, Tiger Direct, Tweeter Home Entertainment, uBid, Computer Discount Warehouse, computer, consumer electronics and photography retailers

	Home & Garden: IKEA, Crate & Barrel, Home Depot, Williams-Sonoma Inc. (Pottery Barn, Williams-Sonoma), Bed, Bath & Beyond, Lowes, Linens ’n Things, Pier One, Ethan Allen, Frontgate, Burpee.com

	Jewelry: Bluenile.com, Diamond.com, Ice.com, Macy’s, Mondera.com, HSN.com, QVC.com, Wal-Mart.com, Zales,

	Musical Instruments: Guitar Center/ Musicians Friend, Sam Ash, Gbase.com, Harmony-Central.com, musical instrument retailers and manufacturers

	Pottery & Glass: Just Glass, Pottery Auction, Go Collect, Pier 1 Imports, Williams-Sonoma, Replacements.com, Ruby Lane, Tias, antique and collectible dealers, antique and collectible fairs, flea markets and swap meets, specialty retailers, regional auction houses

	Sporting Goods/ Equipment: Amazon.com, BassPro, Big 5, Cabellas, Dick’s Sporting Goods, Footlocker, Gart Sports, Gear.com, Global Sports, golfclubexchange, MVP.com, Performance Bike, Play It Again Sports, REI, Sports Authority, Sportsline.com, TGW.com

	Sports Memorabilia: Beckett’s, Collectors Universe, Gray Flannel, MastroNet, Lelands, NAXCOM, ThePit.com, Steiner Sports, Superior, hobby shops and discount retailers

	Tickets and Experiences: Craig’s List, Liquid Seats, Music Today, Paciolan, RazorGator.com, SCI Ticketing, Ticketmaster, Tickets.com, TicketsNow.com, ticket brokers

	Tool/ Equipment/ Hardware: Home Depot, HomeBase, Amazon.com, Ace Hardware, OSH

	Toys and Hobbies: Toys R Us, Amazon.com/ Toysrus.com, KB Toys/ KBToys.com, FAO Inc. (FAO Schwarz, Zany Brainy, the Right Start), Lego, TY Inc.

Additionally, we face competition from various online commerce sites and e-commerce solution providers including: Amazon.com, BargainAndHaggle, GSI Commerce, Surplus Auction, uBid, Yahoo! Shopping, Overstock.com and a large number of other regional and national companies engaged in consumer-to-consumer or business-to-consumer sales. Different aspects of our fixed-priced business compete with the major Internet portals (AOL, MSN, Yahoo! and comparable companies outside the U.S.) as well as Amazon.com and others.

Our international websites compete with similar online and offline channels in each of their vertical categories in most countries. In addition, they compete with general online e-commerce sites, such as Quelle and Otto in Germany, Yahoo-Kimo in Taiwan, Daum in South Korea, El Corte Inglés in Spain, Kelkoo in Italy and Amazon in the U.K. and other countries. In some of these countries, there are online sites that have much larger customer bases and greater brand recognition than we do, and in each of these countries there are competitors that have a better understanding of local culture and commerce than we do.


	•	ability to attract buyers and sellers;

	•	volume of transactions and selection of goods;


	•	community cohesion and interaction;

	•	system reliability;

	•	reliability of delivery and payment;

	•	website convenience and accessibility;

	•	level of service fees; and

	•	quality of search tools.

Some current and potential competitors have longer company operating histories, larger customer bases and greater brand recognition in other business and Internet spaces than we do. Some of these competitors also have significantly greater financial, marketing, technical and other resources. Other online trading services may be acquired by, receive investments from, or enter into other commercial relationships with larger, well-established and well-financed companies. As a result, some of our competitors with other revenue sources may be able to devote more resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to website and systems development than we can. Some of our competitors have offered services for free and others may do this as well. We may be unable to compete successfully against current and future competitors. In addition, certain offline competitors may encourage manufacturers to limit or cease distribution of their products to dealers who sell through online channels such as eBay. The adoption by manufacturers of anti-Internet policies could force eBay users to stop selling certain products on our site. Increased competition or anti-Internet distribution policies may result in reduced operating margins, loss of market share and diminished value of our brand.

In order to respond to changes in the competitive environment, we may, from time to time, make pricing, service or marketing decisions or acquisitions that could harm our business. For example, we have implemented a buyer protection program that generally insures items up to a value of $200, with a $25 deductible, for users with a non-negative feedback rating at no cost to the user, and PayPal recently implemented a similar buyer protection program covering losses from selected sellers up to $500. In addition, certain competitors may offer or continue to offer free shipping or other transaction related services, which could be impractical or inefficient for eBay users to match. New technologies may increase the competitive pressures by enabling our competitors to offer a lower cost service.

Although we have established Internet traffic arrangements with several large online services and search engine companies, these arrangements may not be renewed on commercially reasonable terms or these companies may decide to promote competitive services. Even if these arrangements are renewed, they may not result in increased usage of our service. In addition, companies that control access to transactions through network access, Internet browsers, or search engines, could: promote our competitors; channel current or potential users to their vertically integrated electronic commerce sites or their pay-for-placement or paid search services that compete with us; attempt to restrict our access; or charge us substantial fees for inclusion.

The market for PayPal’s product is emerging, intensely competitive and characterized by rapid technological change. PayPal competes with existing on-line and off-line payment methods, including, among others:


	•	credit card merchant processors that offer their services to online merchants, including First Data, Concord EFS, iPayment, Paymentech, and Wells Fargo; and payment gateways, including CyberSource, VeriSign and Authorize.net;

	•	Western Union Auction Payment at BidPay.com and Western Union MoneyZap. Western Union is a subsidiary of First Data;


	•	Yahoo! PayDirect offered by Yahoo! and HSBC;

	•	current and announced payment services offered by Amazon.com;

	•	CheckFree;

	•	USPS SendMoney offered by the U.S. Postal Service; and

	•	processors that provide online merchants the ability to offer their customers the option of paying for purchases from their bank account, including Certegy and TeleCheck, a subsidiary of First Data.

	•	providers of traditional payment methods, particularly credit cards, checks, money orders and Automated Clearing House, or ACH, transactions.

Some of these competitors have longer operating histories, significantly greater financial, technical, marketing, customer service and other resources, greater name recognition or a larger base of customers in affiliated businesses than PayPal. PayPal’s competitors may respond to new or emerging technologies and changes in customer requirements faster and more effectively than PayPal. They may devote greater resources to the development, promotion and sale of products and services than PayPal, and they may offer lower prices. Some of these competitors have offered, and may continue to offer, their services for free in order to gain market share, and PayPal may be forced to lower its prices in response. Competing services tied to established banks and other financial institutions may offer greater liquidity and engender greater consumer confidence in the safety and efficacy of their services than PayPal. If these competitors acquired significant market share, this could result in PayPal losing market share.

PayPal’s service relies on the credit card networks, the Automated Clearing House network in the U.S., and similar bank clearing networks overseas. Associations of traditional financial institutions such as Visa, MasterCard and National Automated Clearing House Association, or NACHA, generally set the features of these payment methods. Changes in these associations’ rules could negatively affect PayPal’s competitive position.

Overseas, PayPal faces competition from similar channels and payment methods in most countries and from regional and national online and offline competitors in each country including Visa’s Visa Direct, MasterCard’s MoneySend, ING’s Way2Pay and Royal Bank of Scotland’s World Pay in the European Community; NOCHEX and FastPay by Royal Bank of Scotland in the U.K.; CertaPay and HyperWallet in Canada, Paymate in Australia and Inicis in South Korea. In addition, in certain countries, such as Germany, electronic funds transfer (EFT) is a leading method of payment for both online and offline transactions. As in the U.S., established banks and other financial institutions that do not currently offer online payments could quickly and easily develop such a service. Effective July 1, 2003, financial institutions in the European Union are restricted from charging customers higher fees than they charge for domestic Euro payments for many cross-border Euro payments. This development could increase the effectiveness of using traditional financial institutions instead of PayPal for European customers seeking to complete cross-border payments.

Half.com competes directly with online and offline retailers in its product categories such as Amazon.com, as well as with traditional offline and online sellers of new and used books, videos and CDs, consumer electronics and other products.

The success of our service will depend largely on the development and maintenance of the Internet infrastructure. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security, as well as timely development of complementary products, for providing reliable Internet access and services. The Internet has experienced, and is likely to continue to experience, significant growth in the numbers of users and amount of traffic. If the Internet continues to experience increased numbers of users, increased frequency of use or increased bandwidth requirements, the Internet infrastructure may be unable to support the demands placed on it. In addition, the performance of the Internet may be harmed by increased number of users or bandwidth requirements or by “viruses,” “worms” and similar programs. The backbone computers of the Internet have been the targets of such programs. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and it

To succeed, online commerce and communications must provide a secure transmission of confidential information over public networks. Our security measures may not prevent security breaches. Our failure to prevent security breaches could harm our business. Currently, a significant number of our users authorize us to bill their credit card accounts directly for all transaction fees charged by us. PayPal’s users routinely provide credit card and other financial information. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication technology to effect secure transmission of confidential information, including customer credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the technology used by us to protect customer transaction data. A number of websites have reported breaches of their security. Any compromise of our security could harm our reputation and, therefore, our business. In addition, a party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. These issues are likely to become more difficult as we expand the number of places where we operate. Security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches.

Our competitive space is characterized by rapidly changing technology, evolving industry standards, frequent new service and product introductions and enhancements and changing customer demands. These characteristics are caused in part by the emerging and changing nature of the Internet. Our future success therefore will depend on our ability to adapt to rapidly changing technologies, to adapt our services to evolving industry standards and to improve the performance, features and reliability of our service. Our failure to adapt to such changes would harm our business. New technologies, such as the development of a peer-to-peer personal trading technology, could adversely affect us. In addition, the widespread adoption of new Internet, networking or telecommunications technologies or other technological changes could require substantial expenditures to modify or adapt our services or infrastructure.

We plan to expand our operations by developing new or complementary services, products or transaction formats or expanding the breadth and depth of services. We may be unable to expand our operations in a cost-effective or timely manner. Even if we do expand, we may not maintain or increase our overall acceptance. If we launch a new business or service that is not favorably received by consumers, it could damage our reputation and diminish the value of our brand. We anticipate that future services will include pre-trade and post-trade services.

We are pursuing strategic relationships with third parties to provide many of these services. Because we use third parties to deliver these services, we may be unable to control the quality of these services, and our ability to address problems if any of these third parties fails to perform adequately will be reduced. Expanding our operations in this manner also will require significant additional expenses and development, operations and other resources and will strain our management, financial and operational resources. The lack of acceptance of any new services could harm our business.

We believe that our historical growth has been largely attributable to word of mouth. Both eBay and PayPal have benefited from frequent and high visibility media exposure both nationally and locally. We believe that continuing to strengthen our brand will be critical to achieving widespread acceptance of our

services. Promoting and positioning our brand will depend largely on the success of our marketing efforts and our ability to provide high quality services. In order to promote our brand, we will need to increase our marketing budget and otherwise increase our financial commitment to creating and maintaining brand loyalty among users. Brand promotion activities may not yield increased revenues, and even if they do, any increased revenues may not offset the expenses we incurred in building our brand. If we do attract new users to our services, they may not conduct transactions over our services on a regular basis. If we fail to promote and maintain our brand or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, our business would be harmed.

We regard the protection of our trademarks, copyrights, patents, domain names, trade dress and trade secrets as critical to our success. We aggressively protect our intellectual property rights by relying on a combination of trademark, copyright, patent, trade dress and trade secret laws and through the domain name dispute resolution system. We also rely on contractual restrictions to protect our proprietary rights in products and services. We have entered into confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure agreements with parties with whom we conduct business in order to limit access to and disclosure of our proprietary information. These contractual arrangements and the other steps taken by us to protect our intellectual property may not prevent misappropriation of our technology or deter independent third-party development of similar technologies. We pursue the registration of our domain names, trademarks and service marks in the U.S. and internationally. Effective trademark, copyright, patent, trade dress, trade secret and domain name protection is very expensive to maintain and may require litigation. Protection may not be available in every country in which our services are made available online. Furthermore, we must also protect our trademarks, patents and domain names in an increasing number of jurisdictions, a process that is expensive and may not be successful in every location. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. These licensees may take actions that diminish the value of our proprietary rights or harm our reputation.

We own real property including land, buildings and interests in a partnership holding land and buildings, primarily related to our operations. We have little experience in managing real property. Ownership of this property subjects us to risks, including:


	•	the possibility of environmental contamination and the costs associated with fixing any environmental problems;

	•	adverse changes in the value of these properties, due to interest rate changes, changes in the neighborhoods in which the properties are located, or other factors;

	•	the possible need for structural improvements in order to comply with zoning, seismic, disability act or other requirements; and

	•	possible disputes with tenants, partners or others.

The Board of Directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the preferences, rights and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of common stock may be harmed by the rights of the holders of any preferred stock that may be issued in the future. Some provisions of our certificate of incorporation and bylaws could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. These include provisions that provide for a classified board of directors, prohibit stockholders from taking action by written consent and restrict the ability of stockholders to call special meetings. We are also subject to provisions of Delaware law that prohibit us from engaging in any business combination with any

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents, short-term and long-term investments in a variety of securities, including government and corporate obligations and money market funds. These securities are generally classified as available for sale and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of estimated tax.

Investments in both fixed rate and floating rate interest earning instruments carry varying degrees of interest rate risk. The fair market value of our fixed rate securities may be adversely impacted due to a rise in interest rates. In general, securities with longer maturities are subject to greater interest rate risk than those with shorter maturities. While floating rate securities generally are subject to less interest rate risk than fixed rate securities, floating rate securities may produce less income than expected if interest rates decrease. Due in part to these factors, our investment income may fall short of expectations or we may suffer losses in principal if securities are sold that have declined in market value due to changes in interest rates. As of September 30, 2003, our fixed income investments earned a pretax yield of approximately 1.6% with a weighted average maturity of 5 months. If interest rates were to instantaneously increase (decrease) by 100 basis points, the fair market value of the total investment portfolio could decrease (increase) by approximately $10.4 million.

We entered into two interest rate swaps on June 19 and July 20, 2000, totaling $95 million to reduce the impact of changes in interest rates on a portion of the floating rate operating lease for our primary office facilities. The interest rate swaps allow us to receive floating rate receipts based on LIBOR in exchange for making fixed rate payments which effectively changes our interest rate exposure on our operating lease from a floating rate to a fixed rate on $95 million of the total $126.4 million notional amount of our corporate headquarters facility lease commitment. Of the $126.4 million commitment, the interest rate is fixed on $95 million with the balance of $31.4 million remaining at a floating rate of interest based on the spread over 3-month LIBOR. If the 3-month LIBOR rates were to increase (decrease) by 100 basis points, then our payments would increase (decrease) by $78,000 per quarter.

We are exposed to equity price risk on the marketable portion of equity investments we hold, typically as the result of strategic investments in third parties that are subject to considerable market risk due to their volatility. We typically do not attempt to reduce or eliminate our market exposure in these equity investments. As of September 30, 2003, we did not have any unrealized gains or losses associated with our equity investments. In accordance with our policy to assess whether an impairment loss on our investments has occurred due to declines in fair value and other market conditions, we determined that declines in fair value of certain of our marketable and non-marketable equity investments were other than temporary. Accordingly, we recorded impairment charges totaling $3.8 million and $230,000 during the nine months ended September 30, 2002 and 2003, respectively, relating to the other-than-temporary impairment in the fair value of equity investments. At September 30, 2003, the total fair value of our equity investments was $14.2 million, including $3.1 million in marketable investments.

International net revenues result from transactions by our foreign operations and are typically denominated in the local currency of each country. These operations also incur most of their expenses in the local currency. Accordingly, our foreign operations use the local currency as their functional currency. Our international operations are subject to risks typical of international operations, including, but not limited to

Foreign exchange rate fluctuations may adversely impact our financial position as well as our results of operations. Foreign exchange rate fluctuations may adversely impact our financial position as the assets and liabilities of our foreign operations are translated into U.S. dollars in preparing our consolidated balance sheet. The effect of foreign exchange rate fluctuations on eBay’s financial position for the nine months ended September 30, 2003, was a translation gain of approximately $59.4 million. This gain is recognized as an adjustment to stockholders’ equity through other comprehensive income. Additionally, foreign exchange rate fluctuations may adversely impact our results of operations as exchange rate fluctuations on transactions denominated in currencies other than our functional currencies create gains and losses that are reflected in our consolidated statement of income.

We convert the financial statements of our foreign subsidiaries into U.S. dollars. When there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into the U.S. dollars will lead to a translation gain or loss. Translation exposure is the change in the book value of assets, liabilities, revenues, and expenses that results from changes in foreign currency exchange rates. From time to time we enter into transactions to hedge portions of our foreign currency denominated earnings translation exposure using both options and forward contracts. The notional amount of the options hedges in the third quarter of 2003 was 37 million Euro. The premium cost was approximately $500,000 and the net loss on the options was approximately $100,000, both of which were recorded in other income and expense in the third quarter of 2003. No forward contracts were executed in the third quarter of 2003. All contracts hedging translation exposure mature at the end of the quarter in which they are executed.

(a) Evaluation of disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) required by Securities Exchange Act Rules 13a-15(b) or 15d-15(b), our Chief Executive Officer and our Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

(b) Changes in internal controls. There were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In September 2001, a complaint was filed by MercExchange LLC against us, our Half.com subsidiary and ReturnBuy, Inc. in the Eastern District of Virginia (No. 2:01-CV-736) alleging infringement of three patents (relating to online auction technology, multiple database searching and electronic consignment systems) and seeking a permanent injunction and damages (including treble damages for willful infringement). In October 2002, the court granted in part our summary judgment motion, effectively invalidating the patent related to online auction technology and rendering it unenforceable. This ruling left only two patents in the case. Trial of the matter began on April 23, 2003. On May 27, 2003, the jury returned a verdict finding that eBay had willfully infringed one and Half.com had willfully infringed both of the patents in the suit, awarding $35.0 million in compensatory damages. Both parties filed post-trial motions. On August 6, 2003, the court entered judgment for MercExchange in the amount of $29.5 million, plus prejudgment interest and postjudgment interest in an amount to be determined. We have appealed the judgment and MercExchange has filed a cross-appeal. We continue to believe that the verdict against us in the trial was incorrect and intend to continue to defend ourselves vigorously. However, even if successful, our defense against this action will continue to be costly. In addition, as a precautionary measure, we have modified certain functionality of our website and business practices in a manner which we believe makes them non-infringing. Nonetheless, if we are not successful in appealing the court’s ruling, we might be forced to pay significant additional damages and licensing fees.

that allege, among other things, that eBay controlled PayPal prior to the execution of their merger agreement, the defendants breached fiduciary duties they assertedly owed to PayPal’s stockholders in connection with PayPal entering into the merger agreement and the exchange ratio in the merger was unfair and inadequate. The plaintiffs seek, among other things, an award of unspecified compensatory damages. We believe that each of the lawsuits is without merit and intend to defend ourselves vigorously.

In September 2002, Bank One Delaware (formerly known as First USA Bank, N.A.) filed a complaint against PayPal in the District of Delaware (No. 02-CV-1462) alleging infringement of two First USA patents relating to assigning an alias to a credit card so as to eliminate the need for the physical presence of the card in a financial transaction. In September 2003, PayPal filed a complaint against Bank One Corp., Bank One Delaware’s parent, in the same district court alleging infringement of a PayPal patent relating to a process that allows Internet users to make secure payments and authenticated transactions over a computer network. On October 20, 2003, the parties finalized terms of an agreement to dismiss both lawsuits. The terms of the settlement agreement are confidential.

Other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We expect that we will increasingly be subject to patent infringement claims as our services expand in scope and complexity. In particular, we expect that patent infringement claims involving services we provide, including various aspects of our Payments business, will continue to be made. We have in the past been forced to litigate such claims. We have been notified of several potential disputes and are subject to a lawsuit by Tumbleweed Communications Corporation that is currently ongoing. Tumbleweed’s lawsuit claims infringement of two patents relating to techniques for the delivery of electronic documents to users over the Internet. We believe that Tumbleweed’s lawsuit is without merit and intend to defend ourselves vigorously. We may also become more vulnerable to intellectual property claims as laws such as the Digital Millennium Copyright Act are interpreted by the courts and as we expand into jurisdictions where the underlying laws with respect to the potential liability of online intermediaries like ourselves is less favorable. We expect that we will increasingly be subject to copyright and trademark infringement claims as the geographical reach of our services expands. These claims, whether meritorious or not, could be time-consuming, result in costly litigation, cause service upgrade delays, require expensive changes in our methods of doing business or could require us to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm our business.

From time to time, we are involved in other disputes that arise in the ordinary course of business. The number and significance of these disputes is increasing as our business expands and our company grows larger. Any claims against us, whether meritorious or not, could be time-consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. As a result, these disputes could harm our business.

Our Audit Committee has adopted a policy requiring the pre-approval of any non-audit engagement of PricewaterhouseCoopers LLP, or PwC, our independent auditor. In the event that we wish to engage PwC to perform accounting, technical, diligence or other permitted services not related to the services performed by

PwC as our independent auditor, our internal finance personnel will prepare a summary of the proposed engagement, detailing the nature of the engagement, the reasons why PwC is the preferred provider of such services and the estimated duration and cost of the engagement. The report will be provided to our Audit Committee or a designated committee member, who will evaluate whether the proposed engagement will interfere with the independence of PwC in the performance of its auditing services. We intend to disclose all approved non-audit engagements in the appropriate quarterly report on Form 10-Q or annual report on Form 10-K.

Our Audit Committee approved the following non-audit engagements during the quarter ended September 30, 2003:


	•	the engagement by PayPal of PwC to review the internal controls of PayPal Asset Management, Inc., a wholly-owned subsidiary of PayPal that acts as transfer agent and registrar for the PayPal Money Market Reserve Fund; and

	•	pursuant to the “de minimis” safe harbor exception for non-audit engagements, the engagement of PwC to perform certain tax-related services for Internet Auction Company Limited, a majority-owned subsidiary of eBay.

Exhibit 31.1. Certification of eBay’s Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2. Certification of eBay’s Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1. Certification of eBay’s Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2. Certification of eBay’s Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.

On July 24, 2003, eBay furnished a current report on Form 8-K to report under Item 9 that it was filing a copy of its press release announcing its financial results for the three months ended June 30, 2003 and that such press release contained non-GAAP financial measures under Regulation G.

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


	By:	/s/ MARGARET C. WHITMAN



	Margaret C. Whitman
	President and Chief Executive Officer

	Principal Financial Officer:


	By:	/s/ RAJIV DUTTA



	Rajiv Dutta
	Senior Vice President, Chief Financial Officer

	Principal Accounting Officer:


	By:	/s/ MARK J. RUBASH



	Mark J. Rubash
	Vice President, Finance and
	Chief Accounting Officer


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2003
		or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to .


Delaware		77-0430924
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

2145 Hamilton Avenue San Jose, California (Address of principal executive offices)		95125 (Zip Code)


PART I: FINANCIAL INFORMATION
	Item 1: Financial Statements
	Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3: Quantitative and Qualitative Disclosures About Market Risk
	Item 4: Controls and Procedures
PART II: OTHER INFORMATION
	Item 1: Legal Proceedings
	Item 2: Changes in Securities and Use of Proceeds
	Item 3: Defaults Upon Senior Securities
	Item 4: Submission of Matters to a Vote of Security Holders
	Item 5: Other Information
	Item 6: Exhibits and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


			December 31,			September 30,
			2002			2003


			(In thousands, except
			per share amounts)

			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	1,109,313		$	1,583,875
	Short-term investments			89,690			163,765
	Accounts receivable, net			131,453			169,050
	Funds receivable			41,014			84,659
	Other current assets			96,988			109,657

		Total current assets		1,468,458			2,111,006
Long-term investments				470,227			730,155
Restricted cash and investments				134,644			127,083
Property and equipment, net				218,028			534,624
Goodwill				1,456,024			1,643,120
Intangible assets, net				279,465			271,578
Deferred tax assets				84,218			63,547
Other assets				13,380			19,581

			$	4,124,444		$	5,500,694


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	47,424		$	54,584
	Funds payable and amounts due to customers			50,396			110,071
	Accrued expenses and other current liabilities			199,323			335,987
	Deferred revenue and customer advances			18,846			25,246
	Short-term obligations			2,970			3,586
	Income taxes payable			67,265			78,352

		Total current liabilities		386,224			607,826
Long-term obligations				13,798			133,954
Deferred tax liabilities				111,843			101,169
Other liabilities				22,874			15,862
Minority interests				33,232			49,526

		Total liabilities		567,971			908,337

Stockholders’ equity:
	Convertible preferred stock, $0.001 par value; 10,000 shares authorized; no shares issued or outstanding			—			—
	Common stock, $0.001 par value; 900,000 shares authorized: 622,554 and 644,598 shares issued and outstanding			623			645
	Additional paid-in capital			3,108,131			3,779,835
	Unearned stock-based compensation			(5,253	)		(1,054	)
	Retained earnings			414,474			713,783
	Accumulated other comprehensive income			38,498			99,148

		Total stockholders’ equity		3,556,473			4,592,357

			$	4,124,444		$	5,500,694



			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2002			2003			2002			2003


			(In thousands, except per share amounts)

			(Unaudited)
Net revenues			$	288,779		$	530,942		$	800,172		$	1,516,703
Cost of net revenues				45,374			109,353			131,212			300,601

		Gross profit		243,405			421,589			668,960			1,216,102

Operating expenses:
	Sales and marketing			88,008			136,408			240,916			394,784
	Product development			24,163			39,737			72,816			112,888
	General and administrative			39,352			74,238			108,441			206,714
	Patent litigation expense			—			—			—			29,965
	Payroll tax on employee stock options			526			1,510			2,636			7,984
	Amortization of acquired intangible assets			1,239			13,824			3,877			37,668

		Total operating expenses		153,288			265,717			428,686			790,003

Income from operations				90,117			155,872			240,274			426,099
Interest and other income, net				8,729			7,806			25,117			26,419
Interest expense				(50	)		(2,267	)		(1,433	)		(2,335	)
Impairment of certain equity investments				(2,600	)		—			(3,781	)		(230	)

Income before cumulative effect of accounting change, income taxes and minority interests				96,196			161,411			260,177			449,953
Provision for income taxes				(34,314	)		(51,137	)		(97,011	)		(139,698	)
Minority interests				(879	)		(1,611	)		(271	)		(5,533	)

Net income before cumulative effect of accounting change				61,003			108,663			162,895			304,722
Cumulative effect of accounting change, net of tax				—			(5,413	)		—			(5,413	)

Net income			$	61,003		$	103,250		$	162,895		$	299,309

Net income per basic share:
	Net income before cumulative effect of accounting change		$	0.11		$	0.17		$	0.29		$	0.48
	Cumulative effect of accounting change			—			(0.01	)		—			(0.01	)

	Net income per basic share		$	0.11		$	0.16		$	0.29		$	0.47

Net income per diluted share:
	Net income before cumulative effect of accounting change		$	0.11		$	0.17		$	0.29		$	0.47
	Cumulative effect of accounting change			—			(0.01	)		—			(0.01	)

	Net income per diluted share		$	0.11		$	0.16		$	0.29		$	0.46

Weighted average shares:
	Basic			564,534			642,729			560,896			635,484

	Diluted			573,182			662,231			571,274			653,325



	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,

	2002			2003			2002			2003

Risk-free interest rates		2.1	%		2.2	%		3.5	%		2.0	%
Expected lives (in years)		3.0			3.0			3.0			3.0
Dividend yield		0	%		0	%		0	%		0	%
Expected volatility		68	%		58	%		70	%		64	%


	Acquisition-Related Liabilities Capitalized as a Cost of Acquisition


		Balance at											Balance at
		December 31,		Cash			Non-Cash						September 30,
		2002		Payments			Amount Used			Adjustments			2003

Excess facilities and fixed assets		$	36,705	$	(1,757	)	$	(1,098	)	$	(589	)	$	33,261
Other liabilities and contingencies			6,447		(10,831	)		—			14,621			10,237

	Total liability	$	43,152	$	(12,588	)	$	(1,098	)	$	14,032		$	43,498


Net current assets		$	10,866
Property and equipment			1,479
Trade name			5,381
Operating license			4,190
User base			919
Developed technology			525
Employment agreements			197
Deferred tax liabilities			(3,599	)
Goodwill			124,932

	Total purchase price	$	144,890


		United States			International		Payments		Total

December 31, 2002		$	118,649		$	294,761	$	1,061,867	$	1,475,277
	Goodwill acquired		5,880			124,932		—		130,812
	Adjustments		(3,487	)		30,445		10,073		37,031

September 30, 2003		$	121,042		$	450,138	$	1,071,940	$	1,643,120



		December 31, 2002							September 30, 2003

		Gross					Net		Gross					Net
		Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
		Amount		Amortization			Amount		Amount		Amortization			Amount

Intangible assets:
	Developed technologies	$	27,825	$	(8,353	)	$	19,472	$	31,014	$	(14,873	)	$	16,141
	Customer lists		208,811		(10,723	)		198,088		211,865		(34,367	)		177,498
	Trademarks and trade names		65,140		(3,235	)		61,905		71,841		(11,322	)		60,519
	All other		733		(733	)		—		18,649		(1,229	)		17,420

		$	302,509	$	(23,044	)	$	279,465	$	333,369	$	(61,791	)	$	271,578


Fiscal Years:
	2003 (remaining three months)	$	13,578
	2004		55,078
	2005		51,630
	2006		43,502
	2007		40,674
	Thereafter		67,116

		$	271,578



		Three Months Ended September 30,


		2002										2003

		U.S.		International		Payments			Consolidated			U.S.		International		Payments		Consolidated

Net revenues from external customers		$	206,491	$	76,194	$	6,094		$	288,779		$	266,088	$	156,475	$	108,379	$	530,942
Direct costs			76,284		31,754		7,222			115,260			95,229		63,668		59,106		218,003

	Direct contribution	$	130,207	$	44,440	$	(1,128	)		173,519		$	170,859	$	92,807	$	49,273		312,939

Operating expenses and indirect costs of net revenues										83,402									157,067

Income from operations										90,117									155,872
Interest and other income, net										8,729									7,806
Interest expense										(50	)								(2,267	)
Impairment of certain equity investments										(2,600	)								—

Income before cumulative effect of accounting change, income taxes and minority interests									$	96,196								$	161,411



		Nine Months Ended September 30,


		2002										2003

		U.S.		International		Payments			Consolidated			U.S.		International		Payments		Consolidated

Net revenues from external customers		$	591,519	$	193,054	$	15,599		$	800,172		$	759,716	$	451,879	$	305,108	$	1,516,703
	Direct costs		214,134		85,340		18,784			318,258			282,630		175,094		171,438		629,162

Direct contribution		$	377,385	$	107,714	$	(3,185	)		481,914		$	477,086	$	276,785	$	133,670		887,541

Operating expenses and indirect costs of net revenues										241,640									461,442

Income from operations										240,274									426,099
Interest and other income, net										25,117									26,419
Interest expense										(1,433	)								(2,335	)
Impairment of certain equity investments										(3,781	)								(230	)

Income before cumulative effect of accounting change, income taxes and minority interests									$	260,177								$	449,953


	September 30,
	2003

One year or less	$	163,765
One year through two years		66,564
Two years through three years		639,201
More than four years		10,192
Restricted cash and investments expiring in less than four years		127,083
Equity investments		14,198

	$	1,021,003


Item 1:	*Financial Statements*


	*The Company*


	*Stock Split*


	*Use of Estimates*



							Options Exercisable at
	Options Outstanding at September 30, 2003						September 30, 2003

			Weighted		Weighted				Weighted
	Number of		Average		Average		Number of		Average
	Shares		Remaining		Exercise		Shares		Exercise
Range of Exercise Prices	Outstanding		Contractual Life		Price		Exercisable		Price

$ 0.01 – $23.44		13,007		6.9 years	$	16.08		7,081	$	13.63
$23.44 – $29.03		17,756		8.4		27.99		3,988		27.80
$29.03 – $35.05		12,486		8.0		31.80		3,881		31.53
$35.19 – $38.78		14,409		8.7		38.28		3,905		37.66
$38.78 – $54.75		13,810		9.1		48.62		2,223		45.23
$54.91 – $58.16		1,509		9.5		55.77		140		58.16

		72,977		8.3	$	33.03		21,218	$	27.59



	Exercisable				Unexercisable				Total

			Weighted				Weighted				Weighted
			Average				Average				Average
			Exercise				Exercise				Exercise
	Shares		Price		Shares		Price		Shares		Price

In-the-Money		20,956	$	27.23		46,528	$	33.04		67,484	$	31.24
Out-of-the-Money		262		56.56		5,231		54.95		5,493		55.02

Total options outstanding		21,218	$	27.59		51,759	$	35.26		72,977	$	33.03


Item 2:	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


	*Net Transaction Revenues from U.S. and International Segments*


	*There are many risks associated with our international operations.*


	*Our investment in EachNet is subject to risks and uncertainties relating to the laws and regulations of the People’s Republic of China.*


	*We are exposed to fluctuations in currency exchange rates.*


	*PayPal could incur substantial losses from employee fraud and, as a result, its business would suffer.*


	Changes to card association rules or practices could negatively affect PayPal’s service and, if it does not comply with the rules, could result in a termination of PayPal’s ability to accept credit cards. If PayPal is unable to accept credit cards, our business would suffer.


	*Increases in credit card processing fees could increase PayPal’s costs, affect its profitability, or otherwise limit its operations.*


	If PayPal were found to be subject to or in violation of any U.S. laws or regulations governing banking, money transmission or electronic funds transfers, it could be subject to liability and forced to change its business practices.


	PayPal is subject to laws and regulations on money laundering and reporting of suspicious activities that could have a material adverse impact on its business and could subject it to civil and criminal liability.


	PayPal’s status under banking or financial services laws or other laws in countries outside the U.S. is unclear. The cost of obtaining any required licenses or regulatory approvals in these countries could affect PayPal’s future profitability.


	PayPal’s financial success will remain highly sensitive to changes in the rate at which its customers fund payments using credit cards rather than bank account transfers or existing PayPal account balances. PayPal’s profitability could be harmed if the rate at which customers fund using credit cards goes up.


	*PayPal has limited experience in managing and accounting accurately for large amounts of customer funds. PayPal’s failure to manage these funds properly would harm its business.*


	*Our business is adversely affected by anything that causes our users to spend less time on their computers, including seasonal factors and national events.*


	*Our business may be harmed by the listing or sale by our users of illegal items or the use of our PayPal payment system for illegal purposes.*


	*We are subject to intellectual property and other litigation.*


	*Our business may be harmed by fraudulent activities on our websites.*


	*Government inquiries may lead to charges or penalties.*