Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

OR

Commission file number 000-26299

ARIBA, INC.

(Exact name of registrant as specified in its charter)

(650) 390-1000

(Registrant’s telephone number, including area code)

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

None

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

Common Stock, $0.002 par value

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 ¨    No x

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

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

As of March 31, 2003, there were 266,639,620 shares of the Registrant’s Common Stock outstanding. The aggregate market value of the Common Stock held by non-affiliates of the Registrant (based on the closing price for the Common Stock on the Nasdaq Stock Market on March 28, 2002) was approximately $1.1 billion.

Table of Contents

ARIBA, INC.

FORM 10-K

September 30, 2002

TABLE OF CONTENTS

Table of Contents

PART I

ITEM 1.    BUSINESS

The information in this report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical facts may be deemed to be forward looking statements. For example, words such as “may,” “will,” “should,” “estimates,” “predicts,” “potential,” “continue,” “strategy,” “believes,” “anticipates,” “plans,” “expects,” “intends,” and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statement. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed elsewhere in this report in the section entitled “Risk Factors” and the risks discussed in our other Securities and Exchange Commission (“SEC”) filings. Ariba, Inc. is referred to herein as “Ariba” or “we.”

Recent Event

As a result of a review we initiated in December 2002, we have restated our consolidated financial statements for the fiscal years ended September 30, 2000 and 2001 and for the quarters ended December 31, 1999 through June 30, 2002. We have also adjusted the preliminary consolidated financial statement information for the quarter and fiscal year ended September 30, 2002 announced on October 23, 2002 and for the quarter ended December 31, 2002 announced on January 23, 2003, and any adjustments for those periods described herein are as compared to such preliminary consolidated financial statement information.

As discussed below, although adjustments vary significantly by period in some cases, the cumulative net effect of the adjustments for fiscal years 2000 through 2002 is to increase our accumulated deficit at September 30, 2002 by $1.8 million to $4.181 billion. The following table provides additional information regarding these adjustments.

Effects on Net Loss—(Increase) Decrease

(in millions)

3

Table of Contents

See Note 2 of Notes to Consolidated Financial Statements for additional information on the effect of these adjustments and Note 14 of Notes to Consolidated Financial Statements for adjustments to previously reported unaudited quarterly consolidated statements of operations data for the quarters ended December 31, 1999 through June 30, 2002 as a result of the restatements.

The following discussion addresses each of these items:

Expenses paid by significant stockholder and director.    As previously announced, the review initially focused on a $10.0 million payment in March 2001 from Keith Krach, our chairman and co-founder to Larry Mueller, our president and chief operating officer at the time, and Mr. Krach’s payment of $1.2 million for chartered air services provided to Mr. Mueller over the period from September 2000 through July 2001. Because no company funds were used in these transactions and there was no commitment to or from us, Ariba originally viewed these payments as personal. As previously announced, we have now concluded that, for accounting purposes, we should treat these transactions as if they were capital contributions from Mr. Krach which were then expensed by Ariba as compensation to Mr. Mueller. Accordingly, our restated consolidated financial statements for the fiscal years ended September 30, 2001 and 2000 reflect non-cash charges to operating expenses in connection with these transactions.

Stock options issued by acquired companies.    As previously announced, we also reviewed our accounting for stock options issued by companies we acquired in fiscal year 2000. We determined that certain stock options granted by these acquired companies to a limited number of individuals shortly before those acquisitions should be accounted for as stock-based compensation expense, rather than be included as part of the purchase price of these companies and amortized as goodwill. As a result, our restated consolidated financial statements for fiscal years 2000 and 2001 and our consolidated financial statements for fiscal year 2002 reflect an increase in non-cash stock-based compensation expense and a reduction of goodwill amortization expense. We also determined that the fair value of certain unvested stock options granted by one of these companies to several consultants was not included in the measurement of stock compensation expense as required by EITF No. 96-18. The cumulative effect of these adjustments is a non-cash charge of $10.9 million, consisting of increases to Ariba’s operating expenses for fiscal years 2000 and 2001 of $13.5 million and $10.5 million, respectively, and a non-cash reduction of $13.1 million for fiscal year 2002.

We also reviewed our accounting policies and their application to various additional items and identified a number of transactions in which our accounting policies had not been consistently or appropriately applied. We have included the adjustments described below for these items in our restated consolidated financial statements.

Revenue adjustments.    We identified three license arrangements that we entered into with vendors during fiscal years 2001 and 2000 at or about the same time we incurred obligations to purchase goods or services from those vendors. We have concluded that we should record expenditures associated with our obligations as reductions of license revenues received from the customer. The effect of these adjustments, while not affecting cumulative net loss, is to decrease revenues by $583,000, $8.2 million and $275,000 in fiscal years 2000, 2001 and 2002, respectively. We also determined that the timing of revenue recognition for several license arrangements should be adjusted between periods, which adjustments result in the acceleration of revenue in certain cases and the deferral of revenue in others. The net effect of these adjustments is to decrease revenues by $995,000 in fiscal year 2000 and to increase revenues by $6.4 million and $883,000 in fiscal years 2001 and 2002, respectively. As a result of all of these revenue adjustments, our revenues decreased by $1.6 million and $1.8 million in fiscal years 2000 and 2001, respectively, and increased by $608,000 in fiscal year 2002.

Other operating expense and income tax adjustments.    In addition, we identified several accrued expense items for which we concluded that the amount of the liability, the initial timing of recording the liability, or the timing of releasing the liability should be adjusted. These items include accruals for payroll taxes, royalties payable, litigation, bonuses and benefits, and income taxes. These accrued expense adjustments, together with expense reductions resulting from the revenue adjustments described above, caused operating expenses to

4

Table of Contents

decrease by $5.3 million in fiscal year 2000, $10.8 million in fiscal year 2001 and $6.0 million in fiscal year 2002 and caused the provision for income taxes to increase by $1.4 million in fiscal year 2001 and decrease by $2.4 million in fiscal year 2002. These adjustments include a subsequent event related to a tax claim resolved in fiscal year 2003 that reduces expenses in fiscal year 2002 and increases expenses in the quarter ended December 31, 2002 by $2.7 million compared to previously announced preliminary results for those periods.

None of the adjustments described in this “Recent Event” has any impact on our cash balances for any period. However, our consolidated statements of cash flows have been restated to reflect the reclassification of amounts received in connection with business partner warrants from operating activities to financing activities. The effect of these adjustments is to increase net cash used in operating activities by $5.0 million and $15.0 million for fiscal years 2001 and 2002, respectively, and to increase net cash provided by financing activities by $5.0 million and $15.0 million for fiscal years 2001 and 2002, respectively.

Overview

Ariba provides Enterprise Spend Management solutions that allow enterprises to manage efficiently the purchasing of all goods and services required to run their business. We refer to all non-payroll expenses associated with running a business as “spend.” Our solutions, which include software applications, services and network access, are designed to provide corporations with technology and business process improvements to better manage their corporate spending and, in turn, save money. Our software applications and services streamline and improve the business processes related to the identification of suppliers of goods and services, the negotiation of the terms of purchases, and ultimately the management of ongoing purchasing and settlement activities. These goods and services include commodities, raw materials, operating resources, services, temporary labor, travel, and maintenance, repair and operations equipment.

Our software applications were built to leverage the Internet and provide enterprises with real-time access to their business data and their business partners. We have built the Ariba Spend Management solutions to integrate seamlessly on all major platforms. Our software applications can be accessed via web browser.

Ariba Spend Management solutions integrate with and leverage the Ariba Supplier Network. The Ariba Supplier Network (ASN) is a scalable Internet infrastructure that connects Ariba customers with their business partners and suppliers to exchange product and service information as well as a broad range of business documents, such as purchase orders and invoices. Over 50,000 suppliers of a wide array of goods and services are connected to the Ariba Supplier Network. As a result, Ariba customers can connect once to the Ariba Supplier Network and access many suppliers simultaneously.

One of the key differentiators of Ariba Spend Management solutions is multi-ERP (enterprise resource management software application) capability. Ariba recognized that many large corporations use several different ERP platforms that cannot easily work with each other. For this reason, Ariba software applications are designed to run on top of major legacy or backend applications for business processes, such as human resource management and accounting. This eliminates the need for manual transfer of critical information from Ariba products to SAP, PeopleSoft, Oracle and other ERP systems. Ariba enterprise adapters can integrate with standard implementations of these systems or can be configured to integrate with custom installations to integrate Ariba software applications with multiple enterprise applications simultaneously.

In addition to application software, Ariba Spend Management solutions include implementation and consulting services, education and training, and access to the Ariba Supplier Network. All of these additional offerings are designed to improve the return on investment our customers receive through the use of Ariba software applications.

Ariba was incorporated in Delaware in September 1996 and from that date through March 1997 was in the development stage, conducting research and developing our initial products. Our principal executive offices are located at 807 11th Avenue, Sunnyvale, California 94089.

5

Table of Contents

Ariba Spend Management Solutions

Ariba Spend Management applications fall into three solution sets. Each solution set is designed to address a business process related to corporate spending: the Ariba Analysis Solution provides strategic planning and analysis capabilities that leverage historical spending patterns; the Ariba Sourcing Solution enables the sourcing, negotiation and creation of contracts for products and services; and the Ariba Procurement Solution enables contract compliance for the purchase of goods and services and manages purchasing workflow on an ongoing basis. All of the solutions leverage the Ariba Supplier Network for advanced functionality and connectivity between Ariba customers and their suppliers and may include both software applications and services.

Customers may purchase our software products for a specified term or in perpetuity, depending upon their business requirements. Currently, the license fee for a software application license is generally based on the customer’s employee count, whereas prior to the second quarter of fiscal year 2001, license capacity was typically based on the annual volume of business document transaction capacity. Employee-based licensing allows customers to scale the total cost of their Ariba Spend Management system implementations as their organizations grow or as they expand the breadth of their implementations enterprise-wide with no limitation on transaction capacity. Ariba customers pay annual maintenance fees that may include maintenance, upgrades and access to the Ariba Supplier Network.

Ariba Analysis Solution

The Ariba Analysis Solution currently includes Ariba Analysis, which is designed to provide our customers with a single, unified view of their spending activities across all of their suppliers, divisions, and purchased goods or services. Analytical tools summarize data into meaningful dashboards to help purchasing and sourcing professionals identify specific groups of goods and services with the largest opportunities for savings. Savings opportunities are frequently identified for goods or services which employees purchase without authorization or from a fragmented supply base. Ariba Analysis also allows businesses to compare their spending patterns with best practices from other companies of similar size and within their respective industries to drive strategic activities, such as creating category plans and prioritizing sourcing activities. By providing clear data and analysis, Ariba Analysis helps our customers identify and implement spend reduction programs. Ariba Analysis can be deployed as a hosted or an installed application.

Ariba Sourcing Solution

The Ariba Sourcing Solution includes Ariba Analysis as well as Ariba Enterprise Sourcing, Ariba Contracts, and Ariba Category Management. Together, these products help streamline and automate the entire sourcing process, from defining and aggregating spending requirements to supplier selection and contract negotiation. With the Ariba Sourcing Solution, customers can facilitate widespread user adoption with robust permissions and template capabilities, use collaborative workspaces and automate complex sourcing events to execute better contracts faster, identify top suppliers across a broad range of categories, and implement best practices for sourcing on an enterprise-wide basis.

Ariba Enterprise Sourcing is an enterprise-wide strategic sourcing application designed for all spend categories. It assists professional buyers at every step in the sourcing process, from defining spending baselines and category requirements to finding suppliers and negotiating agreements. It helps buyers and suppliers capture purchasing trade-offs and optimize sourcing activities with flexible bidding options and decision support tools. Ariba Enterprise Sourcing can be used for nearly every type of good or service and can be deployed as a hosted or an installed application.

Ariba Contracts is designed to provide comprehensive enterprise-wide management of the entire contract lifecycle and provides buyers access to a centralized repository of contracted products and services. From Ariba Contracts, buyers can create, search, amend, and re-source contracts, as well as monitor contract usage and supplier price compliance. Ariba Contracts can be deployed as a hosted or an installed application.

6

Table of Contents

Ariba Category Management helps companies source more strategically by enabling sourcing and procurement professionals to collaborate closely, gain greater organizational visibility and control, and capture category knowledge for re-use. It helps teams make better decisions and increases buy-in, compliance, and efficiency by providing workspaces for process and knowledge management. Ariba Category Management can be deployed as a hosted or an installed application.

These modules are tightly integrated to allow our customers to leverage the results of their sourcing process to create sustainable contracts with chosen suppliers and negotiated terms. This tight integration helps to ensure ongoing compliance with favorable contract terms and sustain the savings achieved through the sourcing process.

Ariba Procurement Solution

The Ariba Procurement Solution currently includes five software applications: our flagship Ariba Buyer application, as well as Ariba Invoice, Ariba Travel and Expense, Ariba eForms and Ariba Workforce. Ariba Procurement is a comprehensive set of solutions built around the success of Ariba Buyer to enable companies to manage their internal purchasing processes, supplier relationships and supplier catalogs, and to ensure purchasing compliance across their entire organizations.

Ariba Buyer is the cornerstone application of the Ariba Procurement solution. It is a robust, scalable and reliable application that enables organizations to manage actual purchasing transactions for any good or service. The automation of the procurement business process reduces processing costs, improves productivity and helps to ensure compliance with enterprise-wide contracts. Ariba Buyer links end-users throughout an organization with approvers, and links the procurement application to back-end financial, purchasing and human resource systems to access important procurement information, such as supplier product information, price lists, web sites and order status. Ariba Buyer allows customers to attain global user and supplier adoption, enforce purchasing compliance against corporate policies and contracts, and measure progress. All of these factors drive cost savings by reducing transaction expenses, decreasing cycle times and leveraging existing supplier relationships. Ariba Buyer leverages the Ariba Supplier Network to securely automate commerce transactions with suppliers on the Internet. Ariba Buyer is deployed as an installed application.

Ariba Invoice streamlines and automates invoicing and reconciliation, thereby eliminating traditional paper processes and greatly reducing cycle times. Ariba Invoice is designed to allow our customers to gain more control of the invoice processing cycle, automate data entry, matching, and exception resolution processes, foster stronger partner relationships with more prompt and accurate handling of invoices, and centralize invoicing data. Ariba Invoice is designed to decrease the traditional cost of invoice reconciliation, exception handling and supplier communication, while improving the efficiency of the payment process. Ariba Invoice is deployed as an installed application that leverages the Ariba Supplier Network.

Ariba Travel and Expense helps to manage the procurement of corporate travel and expenses. The application automates the manual processes required for travel purchases to increase expense policy compliance, decrease administrative costs, and reduce travel approval and expense reimbursement cycle times. Ariba Travel and Expense provides a robust set of features to generate expense reports automatically from travel cards or procurement cards and can route expense reports to functional travel and expense managers. Ariba Travel and Expense is deployed as an installed application.

Ariba eForms allows organizations to automate non-standard business processes outside of the core requisitioning process. Users are able to attach custom forms to existing Ariba software applications or create new software applications for nearly any type of operating resource request. Ariba eForms are created using XML (eXtensible Markup Language), a robust definition language that allows organizations to design forms that capture information from end-users and route the information for internal approval. Each Ariba eForm can have its own approval rules and can incorporate standard data from Ariba Buyer, including financial accounting and human resources information. Ariba eForms is deployed as an installed application.

7

Table of Contents

Ariba Workforce helps companies facilitate the complex process of procuring and managing temporary workers, contractors and consultants. In particular, Ariba Workforce enables organizations to minimize billing inaccuracies through automated and collaborative management of bill tracking, change order, service delivery, and volume discount processes with suppliers online. We license the core technology for our Ariba Workforce product from our partner Cascadeworks (acquired by Elance, Inc. in February 2003). Ariba Workforce is deployed as a hosted application.

The Ariba Supplier Network

The Ariba Supplier Network connects buyers and suppliers via the Internet and offers electronic payment, catalog and content management, business document routing and multi-protocol translation for numerous standard business documents. Businesses can use the Ariba Supplier Network to: search an open directory of trading partners, including over 50,000 suppliers worldwide; subscribe to and manage catalog content; and conduct transactions, including order management and fulfillment, invoicing and settlement. By using the Ariba Supplier Network, businesses can realize cost savings through greater process efficiencies, better employee and contract compliance, reduced inventories and fair pricing opportunities.

Our multi-protocol network allows buyers to send transactions from Ariba Buyer in one standard format. It then converts the order into the supplier’s preferred transaction format, such as cXML (Commerce eXtensible Markup Language), a format used on the Internet to describe commerce data and documents, or EDI (Electronic Data Interchange), a format used to exchange data and documents electronically. This feature gives suppliers the freedom to transact in their preferred protocols.

The Ariba Supplier Network also provides business advantages to suppliers. Suppliers can send product and service information, or electronic catalogs, through standard formats such as CIF (Catalog Interchange Format), a format commonly used to transfer catalog information electronically, and cXML. In addition, by using a technology called cXML PunchOut, buyers can link to a supplier’s web site to select a product while keeping the purchasing process within our Ariba Buyer system for internal approval, accounting and administrative controls. This feature is particularly useful for suppliers with robust web sites, product configuration systems and large product catalogs. In addition, suppliers can utilize their existing investments in electronic commerce systems, including catalogs and product web pages. The Ariba Supplier Network is delivered over the Internet to suppliers and is accessible to our customers as part of their maintenance agreements.

Ariba Solutions Delivery

Ariba Solutions Delivery services include software implementation services as well as a broad range of strategic services. Since our inception, Ariba customers have leveraged our team of consultants who maintain deep knowledge of Ariba applications to lead or assist third party consultants during the implementation process to help ensure that Ariba solutions are implemented to adequately improve business processes and achieve the greatest return on investment.

During the past fiscal year, Ariba has broadened the expertise of the Ariba Solutions Delivery organization to provide customers with strategic services designed to speed time to benefit and increase potential return on investment (ROI). We have expanded our services group to include additional professionals with strategic sourcing expertise, business process re-engineering expertise, specific commodity expertise and best practices knowledge. These professionals work in concert with experts from third party consulting practices to bring our customers faster time to benefit and hard dollar results.

Strategic Relationships

We believe that strategic partnerships can assist us in gaining broader market acceptance as well as enhance our marketing, sales and distribution capabilities. Our hardware platform partners include Hewlett-Packard, IBM

8

Table of Contents

and Sun Microsystems. These relationships help ensure the reliability, scalability and performance of Ariba solutions on these platforms. Our software partners include BEA Systems, Cascadeworks (acquired by Elance, Inc. in February 2003), Entrust, IBM, TIBCO, Altavista and Dash, as well as over a dozen other software companies. Our network service providers, such as American Express, enrich services offered by the Ariba Supplier Network.

We have reselling and hosting relationships with IBM, Unisys, EDS, AMS, and Core Harbor. We also have strategic relationships with Softbank in Japan and Korea, and with Telefonica as well as several other regional distribution partners, to resell our products. We have business consulting relationships with IBM, Accenture, Cap Gemini Ernst & Young (CGEY), Deloitte Consulting and BearingPoint, formerly KPMG Consulting, as well as with over 50 regional consulting firms. These partners implement our products and assist us with sales lead generation. We have certified and trained consultants in these organizations for the implementation and operation of our products.

We rely, and expect to increasingly rely, on a number of third parties to implement, support and recommend our products and services during the evaluation stage of a customer’s purchase process. If we are unable to maintain or increase the quality of our relationships with providers that recommend, implement or support goods and services management systems, our business will be seriously harmed. A number of our competitors, including Oracle, SAP and PeopleSoft, have significantly more established relationships with such providers and, as a result, these firms may be more likely to recommend competitors’ products and services rather than our products and services. Furthermore, it is possible that our current implementation partners, many of which have significantly greater financial, technical, marketing and other resources than we have, could begin to market software products and services that compete with our products and services.

Employees

As of September 30, 2002, we had a total of 836 employees, including 295 in research and development, 205 in sales and marketing, 231 in customer support, professional services and training, and 105 in administration and finance. Of these employees, 681 were located in the United States and 155 were located outside the United States. Between April 2001 and December 2001, we significantly reduced our workforce to better align expenses with revenue levels. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good.

Our future operating results depend in significant part on the continued service of our key technical, sales and senior management personnel, none of whom is bound by an employment agreement. Our future success also depends on our continuing ability to attract and retain highly qualified technical, sales and senior management personnel. Competition for these personnel is intense, and we may not be able to retain our key technical, sales and senior management personnel or attract these personnel in the future. We have experienced difficulty in recruiting qualified technical, sales and senior management personnel, and we expect to experience these difficulties in the future. If we are unable to hire and retain qualified personnel in the future, this inability could seriously harm our business.

Sales

We sell our software in 22 countries primarily through our worldwide direct sales organization. As of September 30, 2002, our direct sales force consisted of 168 sales professionals, application specialists, and supporting personnel located in several domestic locations and in offices in North America, Europe, Asia, Australia and Latin America.

During our sales process, we typically engage the senior executive management teams of each prospective customer, including the chief financial officer, chief procurement officer, chief information officer and chief

9

Table of Contents

executive officer. We utilize sales teams led by sales professionals and consisting of sales, technical and business process experts who work with our strategic partners to create organization-specific proposals, presentations and demonstrations that address the specific needs of each potential customer.

Marketing

We focus our marketing efforts toward educating our target market, generating new sales opportunities, and creating awareness for our spend management solutions. We conduct a variety of marketing programs worldwide to educate our target market, including business seminars, trade shows, press relations and industry analyst programs, and user groups.

Our marketing organization also serves an integral role in acquiring, organizing and prioritizing customer and industry feedback in order to help provide product direction to our development organizations. We formalized this customer-driven approach by establishing advisory council meetings, made up of numerous industry experts, to provide forums for discussing customer needs and requirements. In addition to providing information to prospective customers, advisory council meetings provide a useful forum in which to share information, test product concepts and collect data on customer and industry needs. We intend to continue to pursue these programs in the future.

Customer Service, Training and Support

We believe that customer satisfaction is essential for our long-term success and we offer comprehensive customer assistance programs. Our technical support provides response to and resolution of customer technical inquiries and is available to clients by telephone, over the web or by electronic mail. We use a customer service automation system to track each customer inquiry until it is resolved.

Our education services group delivers education and training to our clients and partners. We offer a comprehensive series of classes to provide the knowledge and skills to successfully deploy, use and maintain our products and solutions. These courses focus on the technical aspects of our products as well as real-world business issues and processes. All of our classes include lecture, demonstration, discussion and hands-on use of our solutions. Classes are held regularly in our training facilities at our headquarters in Sunnyvale, California and in our London office.

Research and Development

We introduced our initial product, Ariba Buyer, in May 1997 and have released a number of product enhancements, including Ariba Travel and Expense and Ariba eForms, in six subsequent major releases. We began to operate the Ariba Supplier Network in April 1999 and continue to provide enhancements to it on an ongoing basis. We introduced Ariba Sourcing in August 2000, following our acquisition of SupplierMarket. More recently, we introduced Ariba Workforce in November 2001, Ariba Contracts, Ariba Invoice and Ariba Analysis in March 2002, and our newest product, Ariba Category Management, in March 2003.

Our research and development expenses were $64.4 million, $90.7 million and $38.9 million for the fiscal years ended September 30, 2002, 2001 and 2000, respectively. This represented 28%, 23%, and 14% of total revenues for each such fiscal year, respectively. In addition, for fiscal year 2000, we recorded a charge of $27.4 million for acquired in-process research and development costs in connection with our acquisitions of TradingDynamics, Tradex and SupplierMarket. In addition, for the years ended September 30, 2002, 2001 and 2000, we recorded amortization of acquired core technology of $6.6 million, $6.8 million and $2.6 million, respectively, in connection with these acquisitions.

Our research and development organization is divided into teams for each of our Ariba Spend Management solutions (Ariba Analysis, Ariba Sourcing and Ariba Procurement) and the Ariba Supplier Network, as well as for server and infrastructure development, user interface and Internet application design, tools development,

10

Table of Contents

enterprise integration, operations, quality assurance, documentation, release management and advanced development. These teams regularly share resources and collaborate on code development, quality assurance and documentation.

We cannot be sure that existing and future development efforts will be completed within our anticipated schedules or that, if completed, they will have the features or quality necessary to make them successful in the marketplace. Further, despite testing by us and by current and potential customers, errors could be found in our products. We may not be able to successfully correct these errors in a timely and cost-effective manner. If we are unable to develop new products or enhancements to existing products or corrections on a timely and cost-effective basis, or if these new products or enhancements do not have the features or quality necessary to make them successful in the marketplace, our business will be seriously harmed.

We expect that most of our enhancements to existing and future products will be developed internally or perhaps through acquisitions. However, we currently license certain externally developed technologies and will continue to evaluate externally developed technologies to integrate with our solutions. These externally- developed technologies, if suffering from defects, quality issues or the lack of product functionality required to make our solutions successful in the marketplace, may seriously impact and harm our business.

Acquisitions

In January 20, 2000, we acquired TradingDynamics, Inc. (“TradingDynamics”), a provider of Internet-based trading applications. On March 8, 2000, we acquired Tradex Technologies, Inc. (“Tradex”), a provider of solutions for enabling online marketplaces and exchanges. On August 28, 2000, we acquired SupplierMarket.com, Inc. (“SupplierMarket”), a provider of online collaborative sourcing technologies. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview and Note 6 of Notes to Consolidated Financial Statements for more detailed information.

International Operations

We currently have offices in 22 countries. All of our international operations are conducted through wholly owned subsidiaries, except for our Japanese subsidiary, Nihon Ariba K.K., and our Korean subsidiary, Ariba Korea, Ltd., in which Softbank and other strategic partners have purchased minority equity interests. Revenue from our international operations was $73.5 million, $109.4 million and $52.6 million for the fiscal years ended September 30, 2002, 2001 and 2000, respectively.

Competition

The market for our solutions is intensely competitive, evolving and subject to rapid technological change. The intensity of competition has increased and is expected to further increase in the future. This increased competition has resulted in overall price pressure and could result in reduced gross margins and loss of market share, either of which could seriously harm our business. Competitors vary in size and in the scope and breadth of the products and services offered. We compete with several major client server enterprise software companies including SAP, Oracle and PeopleSoft. In the area of sourcing solutions specifically, we compete with services companies such as FreeMarkets, as well as with other small software companies such as b2emarkets, eBreviate, Emptoris and Frictionless Commerce, among others. In addition, because spend management is a relatively new software category, we expect additional competition from other established and emerging companies if this market continues to develop and expand.

We believe that the principal competitive factors affecting our market include a significant base of reference customers, breadth and depth of solution, product quality and performance, customer service, core technology, product features, ability to implement solutions and value of solutions, and size of vendor. Although we believe that our solutions currently compete favorably with respect to these factors, our market is evolving rapidly. We

11

Table of Contents

may not be able to maintain our competitive position against current and potential competitors, especially those with significantly greater financial, marketing, service, support, technical and other resources.

Our larger competitors have longer operating histories, significantly greater current and potential financial, technical, marketing and other resources, significantly greater name recognition, and a larger installed base of customers than us. In addition, many of our competitors have well-established relationships with our current and potential customers and have extensive knowledge of our industry. In the past, we have lost potential customers to competitors for various reasons, including lower prices and other incentives not matched by us. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address customer needs. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Additionally, competition may increase as a result of industry consolidation.

We may not be able to compete successfully against our current and future competitors.

Intellectual Property and Other Proprietary Rights

We depend on our ability to develop and maintain the proprietary aspects of our technology. To protect our proprietary technology, we rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets, and patent, copyright and trademark laws.

We license rather than sell our software products and require our customers to enter into license agreements, which impose restrictions on their ability to utilize the software. In addition, we seek to avoid disclosure of our trade secrets through a number of means, including but not limited to requiring those persons with access to our proprietary information to execute confidentiality agreements with us and restricting access to our source code. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. We cannot assure you that any of our proprietary rights with respect to the Ariba Supplier Network will be viable or of value in the future since the validity, enforceability and type of protection of proprietary rights in Internet-related industries are uncertain and still evolving.

We presently have one U.S. patent issued and nine U.S. patent applications pending. We have also have filed patent applications in other countries. It is possible that the patents that we have applied for, if issued, or our potential future patents may be successfully challenged or that no patents will be issued from our pending patent applications. It is also possible that we may not develop proprietary products or technologies that are patentable, that any patent issued to us may not provide us with any competitive advantages, or that the patents of others will seriously harm our ability to do business.

We rely on technology that we license from third parties, including software that is integrated with internally developed software and used in our software products to perform key functions. For example, we license reporting software from Actuate and integration software from TIBCO for Ariba Buyer. In addition, our Ariba Workforce product consists of core technology we license from our partner, Cascadeworks (acquired by Elance, Inc. in February 2003). If we are unable to continue to license any of this software on commercially reasonable terms, we will face delays in releases of our software until equivalent technology can be identified, licensed or developed, and integrated into our current product. These delays, if they occur, could seriously harm our business.

Ariba and the Ariba logo are registered trademarks in the United States. In addition, we have Ariba, the Ariba logo and the Ariba “boomerang” design registered in one or more foreign countries. We also have filed applications to register these trademarks in several additional countries. The above-mentioned trademark applications are subject to review by the applicable governmental authority, may be opposed by private parties, and may not issue.

12

Table of Contents

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop similar technology, duplicate our products or design around patents issued to us or our other intellectual property.

There has been a substantial amount of litigation in the software and Internet industries regarding intellectual property rights. It is possible that in the future third parties may claim that we or our current or potential future products infringe their intellectual property rights. We expect that software product developers and providers of electronic commerce solutions will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business.

Risk Factors

In addition to other information in this Form 10-K, the following risk factors should be carefully considered in evaluating Ariba and its business because such factors may have a significant impact on Ariba’s business, operating results and financial condition. As a result of the risk factors set forth below and elsewhere in this Form 10-K, and the risks discussed in Ariba’s other Securities and Exchange Commission filings, actual results could differ materially from those projected in any forward-looking statements. We believe that our success in fiscal year 2003 will depend particularly upon our ability to effectively market our Enterprise Spend Management solutions and maintain tight control over expenses and cash. We believe that key risks include our market execution in Europe, the status of our relationship with Softbank, the overall level of information technology spending and the potential adverse impact resulting from the restatement of our consolidated financial statements and related inquiries and legal proceedings.

We Have a Relatively Limited Operating History and Compete in New and Rapidly Evolving Markets. These Facts Make it Difficult to Evaluate Our Future Prospects Based on Historical Operating Results.

We were founded in September 1996 and have a relatively limited operating history. Our limited operating history makes an evaluation of our future prospects very difficult. We introduced our first product, Ariba Buyer, in May 1997 and began to operate the predecessor to the Ariba Supplier Network in April 1999. We began shipping Ariba Dynamic Trade in February 2000 following our acquisition of TradingDynamics, Ariba Marketplace in March 2000 following our acquisition of Tradex, and Ariba Sourcing in August 2000 following our acquisition of SupplierMarket. Ariba Dynamic Trade and Ariba Sourcing were subsequently incorporated into Ariba Enterprise Sourcing. In addition, we repositioned our product offerings as the Ariba Spend Management solution in September 2001, and introduced additional procurement applications in March 2002 and March 2003. As we adjust to evolving customer requirements and competitor pressures, we may be required to further reposition our product and service offerings and introduce new products and services.

We will encounter risks and difficulties frequently encountered by companies in new and rapidly evolving markets. Many of these risks are described in more detail in this “Risk Factors” section. We may not successfully address any of these risks. If we do not successfully address these risks, our business will be seriously harmed.

13

Table of Contents

The Continuing Economic Slowdown, Particularly in Information Technology Spending, May Adversely Impact Our Business.

Our business has been adversely impacted by the economic slowdown, particularly the decline in information technology spending. The majority of Ariba’s business continues to be from sales of the Ariba Buyer product and related products and services, which sales are from a relatively small number of customers each quarter. As a result, the number of such sales could be significantly impacted by a decline in spending. We expect the economic slowdown to continue to adversely impact our business for the next few quarters and perhaps significantly longer. The adverse impacts from the slowdown include longer sales cycles, lower average selling prices and reduced bookings and revenues.

The Market for Our Products and Services is at an Early Stage. They May Not Achieve Continued Market Acceptance.

The market for spend management software applications and services is at an early stage of development. Our success depends on a significant number of large buying organizations implementing our products and services. We have recently announced several new products, which at this point have had limited deployment and which may be more challenging to implement than our more established products. If our products and services do not achieve continued market acceptance, our business will be seriously harmed.

We Have a History of Losses and Expect to Incur Significant Additional Losses in the Future.

We had an accumulated deficit of approximately $4.2 billion as of December 31, 2002, including cumulative charges for the amortization of goodwill and other intangible assets totaling $2.2 billion, impairment of goodwill and other intangible assets totaling $1.4 billion, amortization of stock-based compensation totaling $133.3 million and business partner warrant expense totaling $68.9 million, of which $9.0 million has been reclassified as a reduction of revenues due to our adoption of EITF No. 01-9. We may incur significant losses in the future for a number of reasons, including the following:

Our Quarterly Operating Results Are Volatile and Difficult to Predict.

Our quarterly operating results have varied significantly in the past and will likely vary significantly in the future. We believe that period-to-period comparisons of our results of operations may not be meaningful and should not be relied upon as indicators of future performance trends.

14

Table of Contents

Our quarterly operating results have varied or may vary depending on a number of factors, including the following:

Risks Related to Revenues

Risks Related to Expenses

Risks Related to Operations

Our Success Depends on Retaining Our Current Key Personnel and Attracting Additional Key Personnel.

Our future performance depends on the continued service of our senior management, product development and sales personnel, in particular Robert M. Calderoni, who was elected President and Chief Executive Officer in October 2001. Our Executive Vice President of Solutions Development and Delivery, Eileen McPartland, resigned on August 2, 2002 and our Executive Vice President of Worldwide Sales, James W. Steele, resigned on October 4, 2002. We do not carry key person life insurance. The loss of the services of one or more of our key personnel could seriously harm our business. In addition, our success depends on our continuing ability to attract, hire, train and retain a selected number of highly skilled managerial, technical, sales, marketing and customer

15

Table of Contents

support personnel. Our ability to retain key employees may be harder, given recent adverse changes in our business. In addition, new hires frequently require extensive training before they achieve desired levels of productivity. Competition for qualified personnel is intense, and we may fail to retain our key employees or to attract or retain other highly qualified personnel.

Our Revenues in Any Quarter Depend on a Relatively Small Number of Relatively Large Orders. We Have Experienced Lengthening Sales Cycles and Deferrals of a Number of Relatively Large Anticipated Orders.

Our quarterly revenues are especially subject to fluctuation because they depend on the sale of relatively large orders for our products and related services. Many of these relatively large orders are realized at the end of the quarter. As a result, our quarterly operating results, including average selling prices, may fluctuate significantly if we are unable to complete one or more substantial sales in any given quarter. We have experienced lengthening sales cycles and deferrals of a number of relatively large anticipated orders, which we believe, have been affected by general economic uncertainty. While no customer accounted for more than 10% of our revenue during fiscal year 2002 on an annual basis, for the quarter ended March 31, 2002 we recognized approximately 11% of total revenues from Softbank, a related party, pursuant to a long-term revenue commitment agreement. See Risk Factor elsewhere in this report entitled “We Depend on Strategic Relationships with Our Partners” for additional information.

Revenues in Any Quarter May Vary to the Extent Recognition of Revenue is Deferred when Contracts Are Signed.

We frequently enter into contracts where we recognize only a portion of the total revenue under the contract in the quarter in which we enter into the contract. For example, we may recognize revenue on a ratable basis over the life of the contract or enter into contracts where the recognition of revenue is conditioned upon delivery of future product or service elements. The portion of revenues recognized on a deferred basis may vary significantly in any given quarter, and revenues in any given quarter are a function of both contracts signed in such quarter and contracts signed in prior quarters. For example, the portion of revenues from contracts entered into in prior quarters generally declined in fiscal year 2000 and increased in fiscal year 2001. Since then, the portion of revenues from contracts entered into in prior quarters has remained relatively stable and has represented at least a majority of the revenues recognized in each quarter.

Our Acquisitions Will, and Any Future Acquisitions May, Require Us to Incur Significant Charges for Intangible Assets.

Our acquisitions will, and any future acquisitions may, require us to incur significant charges for goodwill and other intangible assets, which will negatively affect our operating income. As of September 30, 2002, we had unamortized goodwill and other intangible assets of approximately $293.9 million, which were being amortized on a straight-line basis over their total expected useful lives ranging from two years to three years. As a result of our adoption of SFAS No. 142 (see Note 1 of Notes to Consolidated Financial Statements) on October 1, 2002, we ceased amortization of the remaining goodwill that had a net book value of approximately $176.4 million.

A Decline in Revenues May Have a Disproportionate Impact on Operating Results And Require Further Reductions in Our Operating Expense Levels.

Because our expense levels are relatively fixed in the near term and are based in part on expectations of our future revenues, any decline in our revenues to a level that is below our expectations would have a disproportionately adverse impact on our operating results for that quarter. We incurred restructuring and lease abandonment charges of $62.6 million for the year ended September 30, 2002. We may incur additional restructuring charges if we experience additional revenue declines.

16

Table of Contents

In the Future, We May Need to Raise Additional Capital in Order to Remain Competitive. This Capital May Not Be Available on Acceptable Terms, If at All.

Although our existing cash, cash equivalent and investment balances together with our anticipated cash flow from operations should be sufficient to meet our anticipated working capital and operating resource expenditure requirements for at least the next 12 months, given the significant changes in our business and results of operations in the last 12 to 18 months, the fluctuation in cash, cash equivalents and investments balances may be greater than presently anticipated. For example, cash balances will be impacted to the degree that we implement our recently adopted common stock buyback program, pursuant to which we may expend up to $50.0 million in cash to repurchase our common stock. After the next 12 months, we may need to raise additional funds and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products and services, take advantage of future opportunities, grow our business or respond to competitive pressures or unanticipated requirements, which could seriously harm our business.

Implementation of Our Products by Large Customers Is Complex, Time Consuming and Expensive. We Frequently Experience Long Sales and Implementation Cycles.

Ariba Buyer, Ariba Enterprise Sourcing and our other products are complex applications that are generally deployed with many users. Implementation of these applications by buying organizations is complex, time consuming and expensive. In many cases, our customers must change established business practices. In addition, they must generally consider a wide range of other issues before committing to purchase our products and services, including product benefits, ease of installation, ability to work with existing computer systems, ability to support a larger user base, reliability and return on investment. Furthermore, the purchase of our products is often discretionary and generally involves a significant commitment of capital and other resources by a customer. It frequently takes several months to finalize a sale and requires approval at a number of management levels within the customer organization. The implementation and deployment of our products requires a significant commitment of resources by our customers and third parties and/or professional services organizations.

We May Continue to Depend on Ariba Buyer for a Substantial Portion of Our Business for the Foreseeable Future. This Business Could Be Concentrated in a Relatively Small Number of Customers.

We anticipate that revenues from Ariba Buyer and related products and services will continue to constitute a substantial portion of our revenues for the foreseeable future. For the year ended September 30, 2002 and the quarter ended December 31, 2002 revenues from Ariba Buyer and related products and services were a majority of our total revenues. If we experience price declines or fail to achieve broad market acceptance of Ariba Buyer, our business could be seriously harmed. In addition, for the year ended September 30, 2002 and the quarter ended December 31, 2002 a relatively small number of customers accounted for a substantial portion of revenues from sales of Ariba Buyer and related products. We may continue to derive a significant portion of our revenues attributable to Ariba Buyer from a relatively small number of customers.

Electronic Commerce Networks, Including the Ariba Supplier Network, Are at an Early Stage of Development and Market Acceptance.

We began operating the Ariba Supplier Network, formerly known as the Ariba Commerce Services Network, in April 1999. Our business would be seriously harmed if the Ariba Supplier Network does not achieve broad and timely market acceptance. Market acceptance of this network is subject to a number of significant risks. These risks include:

17

Table of Contents

If a Sufficient Number of Suppliers Do Not Join and Maintain Their Participation In the Ariba Supplier Network, the Network Will Not Attract a Sufficient Number of Buyers and Other Sellers Required to Make the Network Successful.

We depend on suppliers joining the Ariba Supplier Network. Any failure of suppliers to join the Ariba Supplier Network in sufficient numbers, or of existing suppliers to maintain their participation in the Ariba Supplier Network, would make the network less attractive to buyers and consequently other suppliers. In order to provide buyers on the Ariba Supplier Network an organized method for accessing goods and services, we rely on suppliers to maintain web-based product catalogs, indexing services (services that provide electronic product indices) and other content aggregation tools (software tools that allow users to aggregate information maintained in electronic format). Our inability to access and index these catalogs and services would result in our customers having fewer products and services available to them through our solution, which would adversely affect the perceived usefulness of the Ariba Supplier Network.

We Rely on Third Parties to Expand, Manage and Maintain the Computer and Communications Equipment and Software Needed for the Day-to-Day Operations of the Ariba Supplier Network.

We rely on several third parties to provide hardware, software and services required to expand, manage and maintain the computer and communications equipment and software needed for the day-to-day operations of the Ariba Supplier Network. Services provided by these parties include managing the Ariba Supplier Network web server, maintaining communications lines and managing network data centers. We may not successfully obtain these services on a timely and cost effective basis. For example, many of these third parties have experienced significant outages in the past and could experience outages, delays and other difficulties due to system failures unrelated to our systems. Any problems caused by these third parties could cause users of the Ariba Supplier Network to perceive our network as functioning improperly and to use other methods to buy goods and services.

We Depend on Strategic Relationships with Our Partners.

We have established strategic relationships with certain outside companies. These companies are entitled to resell our products and/or to host our products for their customers. We cannot be assured that any of these resellers, ASP partners or hosting partners, or those we may contract with in the future, will be able to resell our products to an adequate number of customers. If our current or future strategic partners are not able to successfully resell our products or experience financial difficulties that impair their operating capabilities, our business could be seriously harmed. For example, we have formed a strategic alliance with IBM to market and sell targeted solutions. We also have strategic relationships with Softbank and its affiliates, as a minority shareholder of our Japanese subsidiary, Nihon Ariba K.K. from which we derive significant revenues. Our strategic relationship with Softbank has not performed to our expectations, and we are reviewing ways to improve the performance of this relationship. Softbank is not currently in compliance with the performance levels contemplated by our strategic relationship, and we are currently in discussions to renegotiate our agreements with Softbank. There is no assurance we can achieve a mutually satisfactory amendment of these agreements. The failure to do so and to realize future revenues from Softbank at committed levels could have a material adverse impact on our business. There is no guarantee that these alliances will be successful in creating a larger market for our product offerings. If these alliances are not successful, our business, operating results and financial position could be seriously harmed.

18

Table of Contents

We Face Intense Competition From Many Participants in the Enterprise Software Applications Industry. If We Are Unable to Compete Successfully, Our Business Will Be Seriously Harmed.

The market for our solutions is intensely competitive, evolving and subject to rapid technological change. The intensity of competition has increased and is expected to further increase in the future. This increased competition has resulted in price reductions and could result in further price pressure, reduced profit margins and loss of market share, any one of which could seriously harm our business. Competitors vary in size, scope and breadth of the products and services they offer. In addition, because spend management is a relatively new software category, we expect additional competition from other established and emerging companies. For example, third parties that currently help implement Ariba Buyer and our other products could begin to market products and services that compete with our products and services. Also, there are consulting companies that offer services that may compete with parts of Ariba’s offering. We could also face competition from other companies who introduce Internet-based spend management solutions.

Many of our current and potential competitors, such as ERP vendors including Oracle, SAP and PeopleSoft, have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than us. In addition, many of our competitors have well-established relationships with our current and potential customers and have extensive knowledge of our industry. In the past, we have lost potential customers to competitors for various reasons, including lower prices and incentives not matched by us. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address customer needs. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. We also expect that competition will increase as a result of industry consolidations. We may not be able to compete successfully against our current and future competitors.

If We Fail to Develop Products and Services in a Timely and Cost-Effective Basis, Our Business Will Be Seriously Harmed.

In developing new products and services, we may:

For example, the introduction of Version 7.0 of Ariba Buyer was delayed significantly in the first quarter of fiscal year 2001, and we have experienced delays in the introduction of other products and releases in the past. If new releases of our products or potential new products are delayed, we could experience a delay or loss of revenues and customer dissatisfaction.

Our Business Will Be Seriously Harmed If We Fail to Establish and Maintain Relationships With Third Parties That Will Effectively Implement Ariba Buyer, Ariba Enterprise Sourcing and Our Other Products.

We rely on a number of third parties to implement Ariba Buyer, Ariba Enterprise Sourcing and our other products at customer sites. These products are enterprise-wide solutions that must be deployed within the customer’s organization. The implementation process is complex, time-consuming and expensive. We rely on third parties such as IBM, Accenture, Cap Gemini Ernst & Young, Deloitte Consulting and Bearing Point (formerly KPMG Consulting) to implement our products, because we lack the internal resources to implement our products at current and potential customer sites. If we are unable to establish and maintain effective, long-term relationships with our implementation providers, or if they do not meet the needs or expectations of their customers, our business would be seriously harmed. Our current implementation partners are not contractually required to continue to help implement our products, and since calendar 2000, many systems integrators have

19

Table of Contents

reduced their levels of investment in the procurement space from prior years. As a result of the limited resources and capacities of many third-party implementation providers, we may be unable to establish or maintain relationships with third parties having sufficient resources to provide the necessary implementation services to support our needs. If these resources are unavailable, we will be required to provide these services internally, which would significantly limit our ability to meet our customers’ implementation needs. For example, a number of our competitors, including Oracle, SAP and PeopleSoft, have significantly more well-established relationships with these third party systems integrators, and these systems integrators may be more likely to recommend competitors’ products and services than our own. In addition, we cannot control the level and quality of service provided by our current and future implementation partners.

Some of Our Customers May Represent Credit Risks.

Some of our customers include small emerging growth companies. Many of these companies have limited operating histories, are operating at a loss and have limited access to capital. With the significant slowdown in global economic growth over the past several years and uncertainty relating to its near-term prospects, some of our customers, including these small emerging growth customers, may represent a credit risk. If our customers experience financial difficulties or fail to experience commercial success, we may have difficulty collecting on our accounts receivable. Although we maintain allowances for doubtful accounts based on estimates of non-collectible amounts, the actual level of non-collectible amounts may exceed the level of such allowances.

New Versions and Releases of Our Products May Contain Errors or Defects.

Ariba Buyer, Ariba Enterprise Sourcing and our other products are complex. They may contain undetected errors or failures when first introduced or as new versions are released. This may result in loss of, or delay in, market acceptance of our products. We have in the past discovered software errors in our new releases and new products after their introduction. For example, in fiscal year 2000 we discovered problems with respect to the ability of software written in Java to scale to allow for large numbers of concurrent users of Ariba Buyer. We have experienced delays in product release, lost revenues and customer frustration during the periods required to correct these errors. We may in the future discover errors and additional scalability limitations in new releases or new products after the commencement of commercial shipments.

Litigation Regarding Our IPO Could Seriously Harm Our Business.

Between March 20, 2001 and June 5, 2001, a number of purported shareholder class action complaints were filed in the United States District Court for the Southern District of New York against us, certain of our officers or former officers and directors and three of the underwriters of our initial public offering. These actions purport to be brought on behalf of purchasers of our common stock in the period from June 23, 1999, the date of our initial public offering, to December 23, 1999 (in some cases, to December 5 or 6, 2000), and make certain claims under the federal securities laws, including Sections 11 and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act, relating to our initial public offering.

On June 26, 2001, these actions were consolidated into a single action bearing the title In re Ariba, Inc. Securities Litigation, 01 CIV 2359. On August 9, 2001, that consolidated action was further consolidated before a single judge with cases brought against additional issuers (who numbered in excess of 300) and their underwriters that made similar allegations regarding the initial public offerings of those issuers. The latter consolidation was for purposes of pretrial motions and discovery only. On February 14, 2002, the parties signed and filed a stipulation dismissing the consolidated action without prejudice against us and certain individual officers and directors, which the court approved and entered as an order on March 1, 2002. On April 19, 2002, the plaintiffs filed an amended complaint in which they dropped their claims against us and the individual officers and directors under Sections 11 and 15 of the Securities Act, but elected to proceed with their claims against such defendants under Sections 10(b) and 20(a) of the Exchange Act.

20

Table of Contents

The amended complaint alleges that the prospectus pursuant to which shares of common stock were sold in our initial public offering, which was incorporated in a registration statement filed with the SEC, contained certain false and misleading statements or omissions regarding the practices of our underwriters with respect to their allocation to their customers of shares of common stock in our initial public offering and their receipt of commissions from those customers related to such allocations. The complaint further alleges that the underwriters provided positive analyst coverage of Ariba after the initial public offering, which had the effect of manipulating the market for our stock. Plaintiffs contend that such statements and omissions from the prospectus and the alleged market manipulation by the underwriters through the use of analysts caused our post-initial public offering stock price to be artificially inflated. Plaintiffs seek compensatory damages in unspecified amounts as well as other relief.

On July 15, 2002, Ariba and the officer and director defendants, along with other issuers and their related officer and director defendants, filed a joint motion to dismiss based on common issues. Opposition and reply papers were filed. On November 23, 2002, the court entered as an order a stipulation by which all of the individual defendants were dismissed from the case without prejudice in return for executing a tolling agreement.

The court rendered its decision on the motion to dismiss on February 19, 2003, granting a dismissal of the remaining Section 10(b) claim against us without prejudice. Plaintiffs have indicated that they intend to file an amended complaint. We intend to defend against the complaint vigorously.

Defending against securities class action relating to our initial public offering may require significant management time and, regardless of the outcome, result in significant legal expenses. If our defenses are unsuccessful or we are unable to settle on favorable terms, we could be liable for large damages that could seriously harm our business and results of operations.

Litigation and Regulatory Proceedings Regarding the Restatement of Our Consolidated Financial Statements Could Seriously Harm Our Business.

Beginning January 21, 2003, a number of purported shareholder class action complaints were filed in the United States District Court for the Northern District of California against us and certain of our current and former officers and directors. These actions all purport to be brought on behalf of a class of purchasers of our common stock in the period from January 11, 2000 to January 15, 2003. The complaints bring claims under the federal securities laws, specifically Sections 10(b) and 20(a) of the Exchange Act, relating to our announcement that we would restate certain of our consolidated financial statements, and also, in the case of one complaint, relating to our acquisition activity and related accounting. Specifically, these actions allege that certain of our prior consolidated financial statements contained false and misleading statements or omissions relating to our failure to properly recognize expenses and other financial items, as reflected in the then proposed restatement. Plaintiffs contend that such statements and omissions caused our stock price to be artificially inflated. Plaintiffs seek compensatory damages as well as other relief.

These cases are still in their early stages, and we intend to defend against them vigorously.

Beginning on January 27, 2003, several shareholder derivative actions were filed in the Superior Court of California for the County of Santa Clara, against certain of our current and former officers and directors and against us as nominal defendant. These actions were filed by shareholders purporting to assert, on our behalf, claims for breach of fiduciary duties, aiding and abetting, violations of the California insider trading law, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and contribution and indemnification. Specifically, the claims are based on our acquisition activity and related accounting implemented by the defendants, the alleged understatement of compensation expenses as reflected in our then proposed restatement, the alleged insider trading by certain defendants, the existence of the restatement class action litigation, in which we are alleged to be liable to defrauded investors, and the allegedly excessive compensation paid by us to one of our officers, as reflected in our then proposed restatement. The complaints seek the payment by the defendants to us of damages allegedly suffered by us, as well as other relief.

21

Table of Contents

These cases are still in their early stages, and we intend to defend against them vigorously.

Defending against existing and potential securities and class action litigation relating to the restatement of our consolidated financial statements will likely require significant attention and resources of management and, regardless of the outcome, result in significant legal expenses. If our defenses were ultimately unsuccessful, or if we were unable to achieve a favorable settlement, we could be liable for large damage awards that could seriously harm our business and results of operations.

In addition, the SEC has commenced an informal inquiry regarding the circumstances leading up to the restatement of our consolidated financial statements. Responding to any such review could require significant diversion of management's attention and resources in the future. For example, if the SEC elects to pursue an enforcement action, the defense against this type of action could be costly and require additional management resources. If we are unsuccessful in defending against this or other investigations or proceedings, we may face civil or criminal penalties or fines that would seriously harm our business and results of operations.

We Could Be Subject to Potential Product Liability Claims and Third Party Liability Claims Related to Our Products and Services or Products and Services Purchased Through the Ariba Supplier Network.

Our customers use our products and services to manage their spend. Any errors, defects or other performance problems could result in financial or other damages to our customers. A product liability claim brought against us, even if not successful, would likely be time consuming and costly and could seriously harm our business. Although our customer license agreements typically contain provisions designed to limit our exposure to product liability claims, existing or future laws or unfavorable judicial decisions could negate these limitation of liability provisions.

The Ariba Supplier Network provides our customers with indices of products that can be purchased from suppliers participating in the Ariba Supplier Network. The law relating to the liability of providers of listings of products and services sold over the Internet for errors, defects or other performance problems with respect to those products and services is currently unsettled. We do not pre-screen the types of products and services that may be purchased through the Ariba Supplier Network. Some of these products and services could contain performance or other problems. We may not successfully avoid civil or criminal liability for problems related to the products and services sold through the Ariba Supplier Network or other electronic networks using our market maker applications. Any claims or litigation could require expenditures in terms of management time and other resources to defend ourselves. Liability of this sort could require us to implement measures to reduce our exposure to this liability, which may require us, among other things, to expend substantial resources or to discontinue certain product or service offerings or to take precautions to ensure that certain products and services are not available through the Ariba Supplier Network or other electronic networks using our market maker applications.

In addition, we warrant the performance of the Ariba Supplier Network’s availability to customers to conduct their transactions. To the extent we fail to meet warranted performance levels, we could be obligated to provide refunds of maintenance fees or credits toward future maintenance fees. Further, to the extent that a customer incurs significant financial hardship due to the failure of the Ariba Supplier Network to perform as warranted, we could be exposed to additional liability claims.

Our Stock Price Is Highly Volatile.

Our stock price has fluctuated dramatically. There is a significant risk that the market price of our common stock will decrease in the future in response to any of the following factors, some of which are beyond our control:

22

Table of Contents

We Are at Risk of Further Securities Class Action Litigation Due to Our Stock Price Volatility.

In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We have recently experienced significant volatility in the price of our stock. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources, which could seriously harm our business.

If the Protection of Our Intellectual Property Is Inadequate, Our Competitors May Gain Access to Our Technology, and We May Lose Customers.

We depend on our ability to develop and maintain the proprietary rights of our technology. To protect our proprietary technology, we rely primarily on a combination of contractual provisions, including customer licenses that restrict use of our products, confidentiality agreements and procedures, and patent, copyright, trademark and trade secret laws. We have only one issued patent and may not develop proprietary products that are patentable. Despite our efforts, we may not be able to adequately protect our proprietary rights, and our competitors may independently develop similar technology, duplicate our products or design around any patents issued to us or our other intellectual property. This is particularly true because some foreign laws do not protect proprietary rights to the same extent as those of the United States and, in the case of the Ariba Supplier Network, because the validity, enforceability and type of protection of proprietary rights in Internet-related industries are uncertain and evolving.

In the quarter ended March 31, 2000, we entered into an intellectual property agreement with an independent third party. This intellectual property agreement protects our products against any claims of infringement regarding patents of this outside party that are currently issued, pending and are to be issued over the three year period subsequent to the date of the agreement.

There has been a substantial amount of litigation in the software industry and the Internet industry regarding intellectual property rights. We expect that software product developers and providers of electronic commerce solutions will increasingly be subject to infringement claims, and third parties may claim that we or our current or potential future products infringe their intellectual property. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business.

We must now, and may in the future have to, license or otherwise obtain access to intellectual property of third parties. For example, we are currently dependent on developers’ licenses from enterprise resource planning, database, human resource and other system software vendors in order to ensure compliance of our products with their management systems. We may not be able to obtain any required third party intellectual property in the future.

23

Table of Contents

If We Do Not Effectively Manage Our Growth, Our Business Will be Harmed.

Even after giving effect to our recent workforce reductions, the scope of our operations and our workforce has expanded significantly over a relatively short period. This expansion has placed a significant strain upon our management systems and resources. If we are unable to manage our expanded operations, our business will be seriously harmed. Our ability to compete effectively and to manage future expansion of our operations, if any, will require us to continue to review, evaluate and, as appropriate, enhance our financial and management controls, reporting systems and procedures on a timely basis, and expand, train and manage our employee workforce.

Failure or Circumvention of Our Controls and Procedures Could Seriously Harm our Business.

Although we have reviewed our disclosure and internal controls and procedures in order to determine whether they are effective, our controls and procedures may not be able to prevent all error or fraud in the future. Faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established controls and procedures may make it impossible for us to ensure that the objectives of the control system are met. A failure of our controls and procedures to detect error or fraud could seriously harm our business and results of operations.

Our Business Is Susceptible to Numerous Risks Associated with International Operations.

International operations have represented an increasing portion of our revenues over the past three years. We have committed and expect to continue to commit significant resources to our international sales and marketing activities. We are subject to a number of risks associated with these activities. These risks generally include:

While international revenues have increased as a percentage of total revenue from fiscal 2001, there can be no assurance that such relative performance can be sustained in light of such risks.

Our international sales are denominated in U.S. dollars and in foreign currencies. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and, therefore, potentially less competitive in foreign markets. For international sales and expenditures denominated in foreign currencies, we are subject to risks associated with currency fluctuations. We hedge risks associated with foreign currency transactions in order to minimize the impact of changes in foreign currency exchange rates on earnings. We utilize forward contracts to hedge trade and intercompany receivables and payables. All hedge contracts are marked to market through operations each period. There can be no assurance that such hedging strategy will be successful and that currency exchange rate fluctuations will not have a material adverse effect on our operating results.

24

Table of Contents

We May Be Unable to Complete Any Future Acquisitions. Our Business Could Be Adversely Affected as a Result.

In the quarter ended September 30, 2000, we acquired SupplierMarket, a provider of online collaborative sourcing technologies. We anticipate that it may be necessary or desirable to acquire additional businesses, products or technologies. If we identify an appropriate acquisition candidate, we may not be able to negotiate the terms of the acquisition successfully, finance the acquisition or integrate the acquired business, products or technologies into our existing business and operations. For example, in the second quarter of fiscal 2001, we entered into, but subsequently terminated, an agreement to acquire Agile Software Corporation. If our acquisition efforts are not successful, our business could seriously be harmed.

Any Future Acquisitions May Dilute Our Equity and Adversely Effect Our Financial Position.

Any future acquisition in which the consideration consists of stock or other securities may significantly dilute our equity. Any future acquisition in which the consideration consists of cash may require us to use a substantial portion of our available cash. Financing for future acquisitions may not be available on favorable terms, or at all.

Our Acquisitions Are, and Any Future Acquisitions Will Be, Subject to a Number of Risks.

Our acquisitions are, and any future acquisitions will be, subject to a number of risks, including:

We Have Implemented Certain Anti-Takeover Provisions That Could Make it More Difficult for a Third Party to Acquire Us.

Provisions of our amended and restated certificate of incorporation and bylaws, including certain anti-takeover provisions, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders.

We Depend on the Acceptance of the Internet as a Commercial Marketplace, and This Acceptance May Not Occur on a Timely Basis.

The Internet may not be accepted as a viable long-term commercial marketplace for a number of reasons. These reasons include:

25

Table of Contents

Since our business depends on the increased acceptance and use of the Internet as a medium of commerce, if the Internet is not accepted as a viable medium of commerce or if that acceptance takes place at a rate that is slower than anticipated, our business would be harmed.

Security Risks and Concerns May Deter the Use of the Internet for Conducting Electronic Commerce.

A significant barrier to electronic commerce and communications is the secure transmission of confidential information over public networks. Advances in computer capabilities, new innovations in the field of cryptography or other events or developments could result in compromises or breaches of our security systems or those of other Internet sites to protect proprietary information. If any well-publicized compromises of security were to occur, it could have the effect of substantially reducing the use of the Internet for commerce and communications. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. The Internet is a public network, and data is sent over this network from many sources. In the past, computer viruses, software programs that disable or impair computers, have been distributed and have rapidly spread over the Internet. Computer viruses could be introduced into our systems or those of our customers or suppliers, which could disrupt the Ariba Supplier Network or make it inaccessible to customers or suppliers. We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. To the extent that our activities may involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could expose us to a risk of loss or litigation and possible liability. Our security measures may be inadequate to prevent security breaches, and our business would be harmed if it does not prevent them.

Increasing Government Regulation Could Limit the Market for, or Impose Sales and Other Taxes on the Sale of, Our Products and Services or on Products and Services Purchased Through the Ariba Supplier Network.

As Internet commerce evolves, we expect that federal, state or foreign agencies will adopt regulations covering issues such as user privacy, pricing, content and quality of products and services. It is possible that legislation could expose companies involved in electronic commerce to liability, which could limit the growth of electronic commerce generally. Legislation could dampen the growth in Internet usage and decrease our acceptance as a communications and commercial medium. If enacted, these laws, rules or regulations could limit the market for our products and services.

We do not collect sales or other similar taxes in respect of goods and services purchased through the Ariba Supplier Network. However, one or more states may seek to impose sales tax collection obligations on out-of-state companies like us that engage in or facilitate electronic commerce. A number of proposals have been made at the state and local level that would impose additional taxes on the sale of goods and services over the Internet. These proposals, if adopted, could substantially impair the growth of electronic commerce and could adversely affect our opportunity to derive financial benefit from such activities. Moreover, a successful assertion by one or more states or any foreign country that we should collect sales or other taxes on the exchange of goods and services through the Ariba Supplier Network could seriously harm our business.

Legislation limiting the ability of the states to impose taxes on Internet-based transactions has been enacted by the U.S. Congress. This legislation is presently set to expire on November 1, 2003. Failure to enact or renew this legislation could allow various states to impose taxes on electronic commerce, and the imposition of these taxes could seriously harm our business.

ITEM 2.    PROPERTIES

Our principal sales, marketing, research, development, and administrative offices occupy approximately 233,000 square feet in a 716,000 square foot, five building office park in Sunnyvale, California which is our corporate headquarters. Our lease for the entire office park commenced January 25, 2001 and expires on January 24, 2013. We currently sublease one building of 175,100 square feet to a third party. This sublease

26

Table of Contents

expires on July 31, 2007. In addition, we also sublease one building and part of another building totaling approximately 180,000 square feet to another third party. This sublease expires on May 13, 2008. Our regional offices are located in Tampa, Florida, Alpharetta, Georgia, Lisle, Illinois, Burlington, Massachusetts and Bridgewater, New Jersey. These leases total approximately 99,300 square feet and expire at various dates between 2004 and 2007. We are in the process of subleasing some of our excess leased facilities located in Sunnyvale and Mountain View, California, Alpharetta, Georgia, Lisle, Illinois, Burlington, Massachusetts, Singapore and Australia for the remaining lease terms.

Prior to moving to our new corporate headquarters, we leased 131,560 square feet in Mountain View, California under a lease that expires October 31, 2006. We are currently subleasing 29,700 square feet of this facility to a third party for the remaining lease term. We leased an additional 33,000 square feet in Sunnyvale, California under a lease that expires on August 31, 2004. We are currently subleasing this facility to a third party for the remaining lease term. Our North American sales and support offices leases are in the metropolitan areas of Dallas, Texas, Detroit, Michigan, Los Angeles, California, Minneapolis, Minnesota, New York, New York, Philadelphia, Pennsylvania, St. Louis, Missouri, Washington D.C., and Toronto, Canada. We also lease sales and support offices outside of North America in locations including Australia, France, Germany, India, Ireland, Italy, Japan, Korea, Mexico, the Netherlands, Singapore, Spain, Switzerland and the United Kingdom.

ITEM 3.    LEGAL PROCEEDINGS

IPO Class Action Litigation

Between March 20, 2001 and June 5, 2001, a number of purported shareholder class action complaints were filed in the United States District Court for the Southern District of New York against us, certain of our officers or former officers and directors and three of the underwriters of our initial public offering. These actions purport to be brought on behalf of purchasers of our common stock in the period from June 23, 1999, the date of our initial public offering, to December 23, 1999 (or in some cases, to December 5 or 6, 2000), and make certain claims under the federal securities laws, including Sections 11 and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act, relating to our initial public offering.

On June 26, 2001, these actions were consolidated into a single action bearing the title In re Ariba, Inc. Securities Litigation, 01 CIV 2359. On August 9, 2001, that consolidated action was further consolidated before a single judge with cases brought against additional issuers (who numbered in excess of 300) and their underwriters that made similar allegations regarding the initial public offerings of those issuers. The latter consolidation was for purposes of pretrial motions and discovery only. On February 14, 2002, the parties signed and filed a stipulation dismissing the consolidated action without prejudice against us and certain individual officers and directors, which the court approved and entered as an order on March 1, 2002. On April 19, 2002, the plaintiffs filed an amended complaint in which they dropped their claims against us and the individual officers and directors under Sections 11 and 15 of the Securities Act, but elected to proceed with their claims against such defendants under Sections 10(b) and 20(a) of the Exchange Act.

The amended complaint alleges that the prospectus pursuant to which shares of common stock were sold in our initial public offering, which was incorporated in a registration statement filed with the SEC, contained certain false and misleading statements or omissions regarding the practices of our underwriters with respect to their allocation to their customers of shares of common stock in our initial public offering and their receipt of commissions from those customers related to such allocations. The complaint further alleges that the underwriters provided positive analyst coverage of Ariba after the initial public offering, which had the effect of manipulating the market for our stock. Plaintiffs contend that such statements and omissions from the prospectus and the alleged market manipulation by the underwriters through the use of analysts caused our post-initial public offering stock price to be artificially inflated. The actions seek compensatory damages in unspecified amounts as well as other relief.

27

Table of Contents

On July 15, 2002, Ariba and the officer and director defendants, along with other issuers and their related officer and director defendants, filed a joint motion to dismiss based on common issues. Opposition and reply papers were filed. On November 23, 2002, the Court entered as an order a stipulation by which all of the individual defendants were dismissed from the case without prejudice in return for executing a tolling agreement.

The court rendered its decision on the motion to dismiss on February 19, 2003, granting a dismissal of the remaining Section 10(b) claim against us without prejudice. Plaintiffs have indicated that they intend to file an amended complaint. We intend to defend against the complaint vigorously.

Restatement Class Action Litigation

Beginning January 21, 2003, a number of purported shareholder class action complaints were filed in the United States District Court for the Northern District of California against us and certain of our current and former officers and directors. These actions all purport to be brought on behalf of a class of purchasers of our common stock in the period from January 11, 2000 to January 15, 2003. The complaints bring claims under the federal securities laws, specifically Sections 10(b) and 20(a) of the Exchange Act, relating to our announcement that we would restate certain of our consolidated financial statements, and, in the case of one complaint, relating to our acquisition activity and related accounting. Specifically, these actions allege that certain of our prior consolidated financial statements contained false and misleading statements or omissions relating to our failure to properly recognize expenses and other financial items, as reflected in the then proposed restatement. Plaintiffs contend that such statements and omissions caused the stock price to be artificially inflated. Plaintiffs seek compensatory damages as well as other relief.

These cases are still in their early stages, and we intend to defend against them vigorously.

Shareholder Derivative Litigation

Beginning January 27, 2003, several shareholder derivative actions were filed in the Superior Court of California for the County of Santa Clara, against certain of our current and former officers and directors and against us as nominal defendant. These actions were filed by shareholders purporting to assert, on our behalf, claims for breach of fiduciary duties, aiding and abetting, violations of the California insider trading law, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and contribution and indemnification. Specifically, the claims are based on our acquisition activity and related accounting implemented by the defendants, the alleged understatement of compensation expenses as reflected in our then proposed restatement, the alleged insider trading by certain defendants, the existence of the restatement class action litigation, in which we are alleged to be liable to defrauded investors, and the allegedly excessive compensation paid by us to one of our officers, as reflected in our then proposed restatement. The complaints seek the payment by the defendants to us of damages allegedly suffered by us, as well as other relief.

These cases are still in their early stages, and we intend to defend against them vigorously.

General

We are subject to various claims and legal actions arising in the ordinary course of business. We have accrued for estimable and probable losses in the accompanying consolidated financial statements for those matters where we believe that the likelihood that a loss has occurred is probable and the amount of loss is reasonably estimable based on estimates by management after consultation with legal counsel. However, litigation is inherently uncertain, and there can be no assurance that existing or future litigation will not result in outcomes that differ significantly from these estimates.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

28

Table of Contents

ITEM 4A.    EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of Ariba and their ages as of February 28, 2003 are as follows:

Robert M. Calderoni has served as Ariba’s President and Chief Executive Officer and a Director since October 2001. From October 2001 to December 2001, Mr. Calderoni also served as Ariba’s Interim Chief Financial Officer. From January 2001 to October 2001, Mr. Calderoni served as Ariba’s Executive Vice President and Chief Financial Officer. Mr. Calderoni was also an employee of the Company from November 2000 to January 2001. From November 1997 to January 2001, he was Chief Financial Officer at Avery Dennison Corporation, a manufacturer of pressure-sensitive materials and office products. From June 1996 to November 1997, Mr. Calderoni was Senior Vice President of Finance at Apple Computer, Inc. Prior to that time, Mr. Calderoni held various positions with IBM Storage Systems Division, most recently as Vice President of Finance. Mr. Calderoni holds a Bachelor of Science degree in Accounting and Finance from Fordham University.

James W. Frankola has served as Ariba’s Executive Vice President and Chief Financial Officer since December 2001. Mr. Frankola was also an employee of the company from October 2001 to December 2001. From December 1997 to October 2001, Mr. Frankola held various positions with Avery Dennison Corporation, a manufacturer of pressure-sensitive materials and office products, most recently as Vice President of Finance and IS, Fasson Roll Worldwide. From May 1995 to December 1997, Mr. Frankola held various positions with IBM Storage Systems Division, most recently as Director of Financial Analysis. Mr. Frankola holds a Bachelor of Science degree in accounting from Pennsylvania State University and a Master of Business Administration from New York University.

John True has served as Ariba’s Executive Vice President of Worldwide Sales since October 2002. From January 2000 through September 2002, Mr. True held various positions with Ariba, most recently as Senior Vice President of North American Operations. From October 1996 until December 1999, Mr. True held various positions at Parametric Technology Corporation, a product development software company, most recently as Sector Vice President of Sales. Mr. True holds a Bachelor of Science degree in Computer Science from the University of Missouri-Rolla.

Kevin Costello has served as Ariba’s Executive Vice President, Ariba Solutions Delivery since May 2002. From June 1984 until May 2002, Mr. Costello worked at Andersen Business Consulting, most recently as a Partner. Mr. Costello holds a Bachelor of Science degree in Accounting from the University of Illinois.

Michael Schmitt has served as Ariba’s Executive Vice President and Chief Marketing Officer since February 2001. From June 1992 to July 2000, Mr. Schmitt held various positions with J.D. Edwards, a business software company, most recently as Senior Vice President, Sales and Marketing. Mr. Schmitt holds a Bachelor of Science degree in Business Administration and Marketing from California Polytechnic State University, San Luis Obispo.

29

Table of Contents

PART II

Our common stock is traded on the Nasdaq Stock Market under the symbol “ARBAE.” Our initial public offering of stock was June 23, 1999 at $5.75 per share. The price range per share in the table below reflects the highest and lowest sale prices for our stock as reported by the Nasdaq Stock Market during the last two fiscal years. Our present policy is to retain earnings, if any, to finance future growth. We have never paid cash dividends and have no present intention to pay cash dividends. At February 28, 2003, there were approximately 2,228 stockholders of record, and on February 28, 2003 the closing price per share of our common stock was $2.91.

The above information has been adjusted to reflect the two-for-one stock splits, each effected in the form of a stock dividend to each stockholder, on November 16, 1999 and March 2, 2000.

ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements, the notes to the consolidated financial statements, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this report. The consolidated statements of operations data for each of the five fiscal years in the period ended September 30, 2002, and the consolidated balance sheet data as of the end of each such fiscal year, are derived from our audited consolidated financial statements (in thousands, except per share data).

30

Table of Contents

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Event” and Note 2 and Note 14 of Notes to Consolidated Financial Statements for more detailed information regarding the restatement of our consolidated financial statements for the fiscal years ended September 30, 2001 and 2000 and restated unaudited quarterly data for fiscal quarters during the years ended September 30, 2002, 2001 and 2000, respectively.

See Note 12 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used to compute basic and diluted net loss per share. Ariba has paid no cash dividends during the five year period ended September 30, 2002. The above information has been restated to reflect the two-for-one stock splits, each effected in the form of a stock dividend to each stockholder, on November 16, 1999 and March 2, 2000.

The information in this report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical facts may be deemed to be forward looking statements. For example, words such as “may,” “will,” “should,” “estimates,” “predicts,” “potential,” “continue,” “strategy,” “believes,” “anticipates,” “plans,” “expects,” “intends,” and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward looking statement. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed elsewhere in this report in the section entitled “Risk Factors” and the risks discussed in our other Securities and Exchange Commission (“SEC”) filings. Except as otherwise noted, the discussion of financial results gives effect to the accounting adjustments described in “Recent Event” below.

Recent Event

As a result of a review we initiated in December 2002, we have restated our consolidated financial statements for the fiscal years ended September 30, 2000 and 2001 and for the quarters ended December 31, 1999 through June 30, 2002. We have also adjusted the preliminary consolidated financial statement information for the quarter and fiscal year ended September 30, 2002 announced on October 23, 2002 and for the quarter ended December 31, 2002 announced on January 23, 2003, and any adjustments for those periods described herein are as compared to such preliminary consolidated financial statement information.

As discussed below, although adjustments vary significantly by period in some cases, the cumulative net effect of the adjustments for fiscal years 2000 through 2002 is to increase our accumulated deficit at

31

Table of Contents

September 30, 2002 by $1.8 million to $4.181 billion. The following table provides additional information regarding these adjustments.

Effects on Net Loss—(Increase) Decrease

(in millions)

See Note 2 of Notes to Consolidated Financial Statements for additional information on the effect of these adjustments and Note 14 of Notes to Consolidated Financial Statements for adjustments to previously reported unaudited quarterly consolidated statements of operations data for the quarters ended December 31, 1999 through June 30, 2002 as a result of the restatements.

The following discussion addresses each of these items:

Expenses paid by significant stockholder and director.    As previously announced, the review initially focused on a $10.0 million payment in March 2001 from Keith Krach, our chairman and co-founder to Larry Mueller, our president and chief operating officer at the time, and Mr. Krach’s payment of $1.2 million for chartered air services provided to Mr. Mueller over the period from September 2000 through July 2001. Because no company funds were used in these transactions and there was no commitment to or from us, Ariba originally viewed these payments as personal. As previously announced, we have now concluded that, for accounting purposes, we should treat these transactions as if they were capital contributions from Mr. Krach which were then expensed by Ariba as compensation to Mr. Mueller. Accordingly, our restated consolidated financial statements for the fiscal years ended September 30, 2001 and 2000 reflect non-cash charges to operating expenses in connection with these transactions.

Stock options issued by acquired companies.    As previously announced, we also reviewed our accounting for stock options issued by companies we acquired in fiscal year 2000. We determined that certain stock options granted by these acquired companies to a limited number of individuals shortly before those acquisitions should be accounted for as stock-based compensation expense, rather than be included as part of the purchase price of these companies and amortized as goodwill. As a result, our restated consolidated financial statements for fiscal years 2000 and 2001 and our consolidated financial statements for fiscal year 2002 reflect an increase in non-cash stock-based compensation expense and a reduction of goodwill amortization expense. We also determined that the fair value of certain unvested stock options granted by one of these companies to several consultants was

32

Table of Contents

not included in the measurement of stock compensation expense as required by EITF No. 96-18. The cumulative effect of these adjustments is a non-cash charge of $10.9 million, consisting of increases to Ariba’s operating expenses for fiscal years 2000 and 2001 of $13.5 million and $10.5 million, respectively, and a non cash reduction of operating expenses of $13.1 million for fiscal year 2002.

We also reviewed our accounting policies and their application to various additional items and identified a number of transactions in which our accounting policies had not been consistently or appropriately applied. We have included the adjustments described below for these items in our restated consolidated financial statements.

Revenue adjustments.    We identified three license arrangements that we entered into with vendors during fiscal years 2001 and 2000 at or about the same time we incurred obligations to purchase goods or services from those vendors. We have concluded that we should record expenditures associated with our obligations as reductions of license revenues received from the customer. The effect of these adjustments, while not affecting cumulative net loss, is to decrease revenues by $583,000, $8.2 million and $275,000 in fiscal years 2000, 2001 and 2002, respectively. We also determined that the timing of revenue recognition for several license arrangements should be adjusted between periods, which adjustments result in the acceleration of revenue in certain cases and the deferral of revenue in others. The net effect of these adjustments is to decrease revenues by $995,000 in fiscal year 2000 and to increase revenues by $6.4 million and $883,000 in fiscal years 2001 and 2002, respectively. As a result of all of these revenue adjustments, our revenues decreased by $1.6 million and $1.8 million in fiscal years 2000 and 2001, respectively, and increased by $608,000 in fiscal year 2002.

Other operating expense and income tax adjustments.    In addition, we identified several accrued expense items for which we concluded that the amount of the liability, the initial timing of recording the liability, or the timing of releasing the liability should be adjusted. These items include accruals for payroll taxes, royalties payable, litigation, bonuses and benefits, and income taxes. These accrued expense adjustments, together with expense reductions resulting from the revenue adjustments described above, caused operating expenses to decrease by $5.3 million in fiscal year 2000, $10.8 million in fiscal year 2001 and $6.0 million in fiscal year 2002 and caused the provision for income taxes to increase by $1.4 million in fiscal year 2001 and decrease by $2.4 million in fiscal year 2002. These adjustments include a subsequent event related to a tax claim resolved in fiscal year 2003 that reduces expenses in fiscal year 2002 and increases expenses in the quarter ended December 31, 2002 by $2.7 million compared to previously announced preliminary results for those periods.

None of the adjustments described in this “Recent Event” has any impact on our cash balances for any period. However, our consolidated statements of cash flows have been restated to reflect the reclassification of amounts received in connection with business partner warrants from operating activities to financing activities. The effect of these adjustments is to increase net cash used in operating activities by $5.0 million and $15.0 million for fiscal years 2001 and 2002, respectively, and to increase net cash provided by financing activities by $5.0 million and $15.0 million for fiscal years 2001 and 2002, respectively.

Overview

Ariba (referred to herein as “Ariba” or “we”) provides Enterprise Spend Management solutions that allow enterprises to manage efficiently the purchasing of all goods and services required to run their business. We refer to all non-payroll expenses associated with running a business as “spend.” Our solutions, which include software applications, services and network access, are designed to provide corporations with technology and business process improvements to better manage their corporate spending and, in turn, save money. Our software applications and services streamline and improve the business processes related to the identification of suppliers of goods and services, the negotiation of the terms of purchases, and ultimately the management of ongoing purchasing and settlement activities. These goods and services include commodities, raw materials, operating resources, services, temporary labor, travel, and maintenance, repair and operations equipment.

Our software applications were built to leverage the Internet and provide enterprises with real-time access to their business data and their business partners. We have built the Ariba Spend Management solutions to integrate seamlessly on all major platforms. Our software applications can be accessed via web browser.

33

Table of Contents

Ariba Spend Management applications fall into three solution sets, each designed to address a business process related to corporate spending. The Ariba Analysis Solution provides strategic planning and analysis capabilities that leverage historical spending patterns. The Ariba Sourcing Solution enables the sourcing, negotiation and creation of contracts for products and services. Finally, the Ariba Procurement Solution enables contract compliance for the purchase of goods and services and manages purchasing workflow on an ongoing basis. The Ariba Procurement Solution, which includes our flagship product Ariba Buyer, continues to represent a majority of our current business, which is focused on managing unplanned spend.

Ariba Spend Management solutions integrate with and leverage the Ariba Supplier Network. The Ariba Supplier Network (ASN) is a scalable Internet infrastructure that connects our customers with their business partners and suppliers to exchange product and service information as well as a broad range of business documents such as purchase orders and invoices. Over 50,000 suppliers of a wide array of goods and services are connected to the Ariba Supplier Network. As a result, our customers can connect once to the Ariba Supplier Network and access many suppliers simultaneously.

In addition to application software, Ariba Spend Management solutions include implementation and consulting services, education and training, and access to the Ariba Supplier Network. All of these additional offerings are designed to improve the return on investment our customers receive through the use of our software applications.

We were incorporated in Delaware in September 1996 and from that date through March 1997 were in the development stage, conducting research and developing our initial products. In March 1997, we began selling our products and related services and currently market them in North America, Latin America, Europe, Asia and Australia primarily through our direct sales force and through indirect sales channels.

We have incurred significant losses since inception. As of September 30, 2002, we had an accumulated deficit of approximately $4.2 billion, including cumulative charges for the amortization of goodwill and other intangible assets totaling $2.2 billion, impairment of goodwill and other intangible assets totaling $1.4 billion, amortization of stock-based compensation totaling $133.1 million, and business partner warrant expense totaling $68.9 million, of which $9.0 million has been reclassified as a reduction of revenues due to our adoption of EITF No. 01-9.

Our operating expenses include amortization of goodwill and other intangible assets that we recorded in fiscal year 2000 in connection with our acquisitions of TradingDynamics, Tradex and SupplierMarket and an intellectual property agreement with a third party. During the year ended September 30, 2000, we also had a charge related to the purchase of in-process research and development related to these acquisitions. During the year ended September 30, 2001, we recorded a $1.4 billion impairment charge relating to goodwill and other intangible assets acquired in the Tradex acquisition as a result of an impairment assessment of goodwill and identifiable assets recorded in connection with our various acquisitions. As of September 30, 2002, we had unamortized goodwill and other intangible assets of approximately $293.9 million, which were being amortized on a straight-line basis over their total expected useful lives ranging from two years to three years. As a result of our adoption of SFAS No. 142 on October 1, 2002, we ceased amortization of the remaining goodwill that had a net book value of approximately $176.4 million. Other identifiable intangible assets with a net book value of approximately $117.5 million at October 1, 2002 will continue to be amortized over their remaining useful lives, substantially all of which will expire in the quarter ending March 31, 2003. See Note 6 of Notes to Consolidated Financial Statements for more detailed information.

Our operating expenses also include non-cash charges for business partner warrants. These expenses relate to warrants that have been earned by our business partners pursuant to alliance agreements entered into during fiscal 2000. During fiscal year 2001, we determined that the carrying value of the intangible asset received in exchange for one such business partner warrant was impaired and recorded a $17.7 million impairment charge to business partner warrant expense to write off the remaining net book value of this asset. During fiscal 2002, we recorded a charge of $5.6 million representing the uncollected receivable and related settlement costs related to this intangible asset as a business partner warrant expense. Fully vested warrants issued in connection with

34

Table of Contents

business partner agreements were recorded as intangible assets based on their estimated fair value and were amortized over the life of the agreement. See Note 11 of Notes to Consolidated Financial Statements for more detailed information.

In connection with certain stock options granted to our employees, stock options issued pursuant to the TradingDynamics and SupplierMarket acquisitions and restricted common stock issued to certain senior executives, officers and employees, we have recorded deferred stock-based compensation totaling approximately $263.7 million from inception through September 30, 2002 after giving effect to the restatement of our consolidated financial statements. Of this amount, $38.4 million related to the issuance of stock options prior to our initial public offering in June 1999 and $71.0 million and $124.6 million related to the acquisitions of TradingDynamics and SupplierMarket, respectively, each, consummated in fiscal 2000. Deferred stock-based compensation is included as a component of stockholders’ equity and is being amortized by charges to operations over the vesting period of the options and restricted stock. During the year ended September 30, 2002, we recorded $14.8 million of related stock-based compensation amortization expense. As of September 30, 2002, we have approximately $4.5 million of deferred stock-based compensation remaining to be amortized. The amortization of the remaining deferred stock-based compensation is expected to result in additional charges to operations through fiscal year 2007. The amortization of stock-based compensation is presented as a separate component of operating expenses in our Consolidated Statements of Operations. See Note 11 of Notes to Consolidated Financial Statements for more detailed information.

We had 836 full-time employees as of September 30, 2002, representing a 26% reduction from September 30, 2001. During fiscal year 2001, we initiated a restructuring program to align our expense and revenue levels and to better position us for growth and profitability. In addition, we implemented a further reduction of our worldwide workforce during the quarter ended December 31, 2001 and recorded an additional restructuring charge in the quarter ended June 30, 2002 related to our abandonment of certain operating leases as part of our program to restructure our operations and related facilities. Our recent restructurings have placed significant demands on our management and operational resources. To position our company for future growth, we must continue to invest in and implement scalable operational systems, procedures and controls. We must also be able to recruit and retain qualified employees and expect any future expansion to continue to challenge our ability to hire, train, manage and retain our employees. See Note 8 of Notes to Consolidated Financial Statements for more detailed information.

The market for our solutions is intensely competitive, evolving and subject to rapid technological change. The intensity of competition has increased and is expected to further increase in the future. This increased competition has resulted in price pressure and could result in reduced gross margins and loss of market share, either one of which could seriously harm our business. Competitors vary in size and in the scope and breadth of the products and services offered. We compete with several major client server enterprise software companies including SAP, Oracle and PeopleSoft. In the area of sourcing solutions specifically, we compete with services companies such as FreeMarkets, as well as other small software companies such as b2emarkets, eBreviate, Emptoris and Frictionless Commerce, among others. In addition, because spend management is a relatively new software category, we expect additional competition from other established and emerging companies, if this market continues to develop and expand.

To maintain and grow our current revenue level, we must grow our customer base, develop our products and services, and adapt to current information technology purchasing patterns. However, if we continue to sell an increasing percentage of our newer lower priced products, our average selling prices may decline. We intend to continue to invest in sales, marketing, research and development and, to a lesser extent, support infrastructure. We may also have significant expenses going forward related to the amortization of our other intangible assets. See Note 6 of Notes to Consolidated Financial Statements. As a result, we may incur substantial losses the future.

Our limited operating history makes the prediction of future operating results very difficult. We believe that period-to-period comparisons of operating results should not be relied upon as predictive of future performance.

35

Table of Contents

Our operating results are expected to vary significantly from quarter to quarter and are difficult or impossible to predict. We believe that our success in fiscal year 2003 will depend particularly upon our ability to effectively market our Enterprise Spend Management solutions and maintain tight control over expenses and cash. We believe that key risks include our market execution in Europe, the status of our relationship with Softbank, the overall level of information technology spending and the potential adverse impact resulting from the restatement of our consolidated financial statements and related regulatory inquiries and legal proceedings. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly given that we operate in new and rapidly evolving markets, have completed several acquisitions and face an uncertain economic environment. We may not be successful in addressing such risks and difficulties. Please refer to the “Risk Factors” section for additional information.

Application of Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Accounting policies, methods and estimates are an integral part of the preparation of consolidated financial statements in accordance with GAAP and, in part, are based upon management’s current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly sensitive because of their significance to the consolidated financial statements and because of the possibility that future events affecting them may differ markedly from management’s current judgments. While there are a number of accounting policies, methods and estimates affecting our consolidated financial statements, areas that are particularly significant include revenue recognition policies, the assessment of recoverability of goodwill and other intangible assets, restructuring liabilities related to abandoned operating leases and contingencies related to the collectibility of accounts receivable and pending litigation. These critical accounting policies and estimates, their related disclosures and other accounting policies, methods and estimates have been reviewed by our senior management and audit committee. These policies and our practices related to these policies are described below and in Note 1 of Notes to Consolidated Financial Statements.

Revenue recognition

Our revenues are principally derived from licenses of our products, from maintenance and support contracts and from the delivery of implementation, consulting and training services. Our products are licensed under a perpetual license model or under a time-based license model. Access to the Ariba Supplier Network is available to Ariba customers as part of their maintenance agreements for certain products.

We recognize revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended. We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery of the product has occurred; we have no significant obligations with regard to implementation; the fee is fixed and determinable; and collectibility is probable. We consider all arrangements with payment terms extending beyond one year to not be fixed and determinable, and revenue is recognized as payments become due from the customer. If, at the inception of the arrangement, collectibility is not considered probable, revenue is not recognized until the fee is collected.

SOP 97-2, as amended, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. Revenue recognized from multiple-element arrangements is allocated to undelivered elements of the arrangement, such as maintenance and support services and professional services, based on the relative fair values of the elements specific to us. Our determination of the fair value of each element in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). We limit our assessment of VSOE for each element to either the price charged when the same element is sold separately or the price established by management, having the relevant authority to do so, for an element not yet sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.

36

Table of Contents

Arrangements that include consulting services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When services are not considered essential, the revenue allocable to the services is recognized separately from the software, provided that VSOE of fair value exists for the services. If we provide consulting services that are considered essential to the functionality of the software products, both the software product revenue and service revenue are recognized using contract accounting in accordance with the provisions of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.

We frequently enter into contracts where we recognize only a portion of the total revenue under the contract in the quarter in which we enter into the contract. For example, we may recognize revenue on a ratable basis over the life of the contract or enter into contracts where the recognition of revenue is conditioned upon delivery of future product or service elements. The portion of revenues recognized on a deferred basis may vary significantly in any given quarter, and revenues in any given quarter are a function of both contracts signed in such quarter and contracts signed in prior quarters. For example, the portion of revenues from contracts entered into in prior quarters generally declined in fiscal year 2000 and increased in fiscal year 2001. Since then, the portion of revenues from contracts entered into in prior quarters has remained relatively stable and has represented at least a majority of the revenues recognized in each quarter. See Note 1 of Notes to Consolidated Financial Statements for detailed discussion of our revenue recognition policies.

Deferred revenue includes amounts received from customers for which revenue has not been recognized that generally results from deferred maintenance and support, consulting or training services not yet rendered and license revenue deferred until all requirements under SOP 97-2 are met. Deferred revenue is recognized as revenue upon delivery of our product, as services are rendered, or as other requirements requiring deferral under SOP 97-2 are satisfied. Accounts receivable include amounts due from customers for which revenue has been recognized.

Allowance for doubtful accounts receivable

We maintain an allowance for doubtful accounts at an amount we estimate to be sufficient to provide for actual losses resulting from collecting less than full payment on our receivables. A considerable amount of judgment is required when we assess the realizability of receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts might be required. Alternatively, if the financial condition of our customers were to improve such that their ability to make payments was no longer considered impaired, we would reduce related estimated reserves with a credit to the provision for doubtful accounts.

Recoverability of goodwill and other intangible assets

Management is required to regularly review all of its long-lived assets, including goodwill and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, and decreases in our market capitalization below net book value. When management determines that an impairment review is necessary based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate commensurate with the risk inherent in our current business model. Significant judgment is required in the development of projected cash flows for these purposes including assumptions regarding the appropriate level of aggregation of cash flows, their term and discount rate as well as the underlying forecasts of expected future revenue and expense. We have recorded significant impairment charges for goodwill and intangible assets in the past, and to the extent that events or circumstances cause our assumptions to change, additional charges may be required which could be material.

37

Table of Contents

Lease abandonment costs

We initially recorded a significant restructuring charge in the third quarter of fiscal 2001 upon abandoning certain operating leases as part of our program to restructure our operations and related facilities and we recorded an additional charge in the third quarter of fiscal 2002. In the quarter ended June 30, 2002, we revised our estimates and expectations for our corporate headquarters and field offices disposition efforts as a result of changed estimates of sublease commencement dates and rental rate projections to reflect continued sharp declines in market conditions in the commercial real estate market in Northern California. Lease abandonment costs for the abandoned facilities were estimated to include the impairment of leasehold improvements, remaining lease liabilities and brokerage fees offset by estimated sublease income. Estimates related to sublease costs and income are based on assumptions regarding the period required to locate and contract with suitable sub-lessees and sublease rates which were achieved using market trend information analyses provided by a commercial real estate brokerage firm retained by us. Each reporting period we review these estimates, and to the extent that our assumptions change, the ultimate restructuring expenses for these abandoned facilities could vary significantly from current estimates. For example, a change in assumed market lease rates of $0.25 per square foot per month for the next 10 years, with all other assumptions remaining the same, would change the estimated lease abandonment loss of our Sunnyvale, California headquarters by approximately $11.0 million.

Legal contingencies

We are subject to various claims and legal actions arising in the ordinary course of business. We have accrued for estimated losses in the accompanying Consolidated Financial Statements for those matters where we believe that the likelihood that a loss has occurred is probable and the amount of loss is reasonably estimable. Although we currently believe that we have adequately accrued for estimable and probable losses regarding the outcome of outstanding legal proceedings, claims and litigation involving us and that such outcome will not have a material adverse effect on our business, results of operations or financial condition, litigation is inherently uncertain, and there can be no assurance that existing or future litigation will not have a material adverse effect on our business, results of operations or financial condition or that the current amount of accrued losses is sufficient for any actual losses that may be incurred.

Stock Option Exchange Program

On February 8, 2001, we announced a voluntary stock option exchange program for our employees. Under the program, Ariba employees were given the opportunity to cancel outstanding stock options previously granted to them in exchange for replacement options to be granted at a future date, at least six months and a day from the cancellation date, which was May 14, 2001. On December 3, 2001, the grant of replacement options to participating employees was approved resulting in the issuance of options for approximately 7.8 million shares of common stock. Each participating employee received, for each option included in the exchange, one replacement option. The exercise price of each replacement option is $4.02 per share, which was the fair market value of our common stock on December 3, 2001. The replacement options have terms and conditions that are substantially the same as those of the canceled options. In the quarter ended June 30, 2001, we recorded $16.5 million of expense pursuant to the stock option exchange program. Members of our Board of Directors and our officers and senior executives did not participate in this program.

Pro Forma Financial Results

We prepare and release quarterly unaudited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the past we have also disclosed and discussed certain pro forma financial information. This pro forma financial information excluded certain non-cash and special charges, consisting primarily of the amortization of goodwill and other intangible assets, impairment of goodwill and equity investments, business partner warrants expense, stock-based compensation and restructuring and lease abandonment costs. However, we urged investors to carefully review the financial information prepared in accordance with GAAP included as part of our Quarterly Reports on

38

Table of Contents

Form 10-Q, our Annual Reports on Form 10-K, and our quarterly earnings releases, compare GAAP financial information with the pro forma financial results disclosed in our quarterly earnings releases and investor calls, and read the associated reconciliation. We do not expect to disclose pro forma financial results in the future.

Results of Operations

The following table sets forth the consolidated statements of operations for the periods indicated (in thousands, except per share data). These statements have been derived from the consolidated financial statements contained in this report. The operating results for any period should not be considered indicative of results for any future period. This information should be read in conjunction with the consolidated financial statements included in this report.

39

Table of Contents

Comparison of the Fiscal Years Ended September 30, 2002 and 2001

Revenues

License

License revenues for the year ended September 30, 2002 were $98.4 million, a 62% decrease from license revenues of $260.2 million for the year ended September 30, 2001. This decrease is primarily attributable to a reduced number of license sales, reflecting the economic slowdown and the significant decline in information technology spending, and a decline in average selling prices, reflecting primarily a different product mix in the year ended September 30, 2002. We have experienced recent declines in deferred revenues that may adversely affect revenues over the long term.

We recognized license revenues of $15.3 million and $6.4 million for the years ended September 30, 2002 and 2001, respectively, from Softbank, a related party, pursuant to a long-term revenue commitment. These amounts represent 16% and 3% of license revenues for fiscal years 2002 and 2001, respectively. Our strategic relationship with Softbank has not performed to our expectations. We have in the past extended the time period over which Softbank must provide committed levels of revenue, thereby reducing their quarterly revenue commitments. Softbank is not currently in compliance with the performance levels contemplated by our strategic relationship, and we are currently in discussions to renegotiate our agreements with Softbank. There is no assurance we can achieve a mutually satisfactory amendment of these agreements. The failure to realize future revenues from Softbank at committed levels could have a material adverse impact on our business.

Our revenue adjustments described in “Recent Event” caused license revenues to increase by $608,000 in fiscal year 2002 and to decrease by $1.8 million in fiscal year 2001 and $1.6 million in fiscal year 2000.

Maintenance and service

Maintenance and service revenues for the year ended September 30, 2002 were $131.4 million, a 6% decrease from maintenance and service revenues of $139.6 million for the year ended September 30, 2001. This decrease is primarily attributable to the decline in license sales as noted above, offset by increases in our total installed base of maintenance contracts.

Cost of Revenues

License

Cost of license revenues for the year ended September 30, 2002 was $4.3 million, a 75% decrease from cost of license revenues of $17.4 million for the year ended September 30, 2001. This decrease is primarily related to a reduction in royalties payable to third parties for integrated technology, lower co-sale fees due to the reduced number of sales under co-marketing arrangements with alliance partners and a reduction in costs associated with major upgrade introductions of our products.

Maintenance and service

Cost of maintenance and service revenues for the year ended September 30, 2002 was $42.9 million, a 37% decrease from cost of maintenance and service revenues of $68.2 million year for the ended September 30, 2001. This decrease is primarily attributable to reduced license sales resulting in decreased utilization of internal consultants related to customer implementations, reduced customer support and training costs, a reduction in costs associated with major upgrade introductions of our products and, to a lesser extent, a decrease in headcount. As part of Ariba’s increased focus on delivering the Ariba Spend Management solutions to our customers, we have recently begun increasing headcount in our services organization, which will increase cost of maintenance and service revenues in the longer term.

40

Table of Contents

Operating Expenses

Sales and marketing

Sales and marketing expenses include costs associated with our sales and marketing personnel and product marketing personnel and consist primarily of compensation and benefits, commissions and bonuses, promotional and advertising expenses, travel and entertainment expenses related to these personnel and the provision for doubtful accounts. Sales and marketing expenses for the year ended September 30, 2002 were $81.0 million, a 71% decrease from sales and marketing expenses of $280.6 million for the year ended September 30, 2001. The decrease is primarily attributable to the reductions in force in fiscal 2001 and in the first quarter of fiscal 2002 which resulted in a reduction of personnel and related compensation and benefits, a decrease in bonuses and commissions due to a decline in overall sales activity, the recovery of previously recorded provisions for doubtful accounts based on improved collections experience, and a reduction in our marketing programs for tradeshows and customer advisory council meetings.

During fiscal years 2001 and 2000, we added significant provisions to our allowance for doubtful accounts due to the rapid and dramatic decline of the e-commerce marketplace industry totaling $29.4 million and $14.2 million, respectively. During fiscal 2002, we determined that some of these reserves were no longer warranted due to improvements in customers’ financial condition and our ability to settle a number of at-risk accounts. As a result, for fiscal 2002, we recorded a net credit to the provision for doubtful accounts of $8.4 million. Although the restructuring of our operations in fiscal 2001 and fiscal 2002 reduced our sales and marketing expenses for fiscal 2002, these expenses may increase over the longer term.

Sales and marketing expenses for fiscal 2001 have been restated to include $11.2 million of compensation expense paid by Mr. Krach, our chairman and co-founder, to Mr. Mueller, our president and chief operating officer during a portion of this period. In addition, Mr. Mueller received $348,645 of salary, bonus and other compensation paid by us in fiscal 2001.

Research and development

Research and development expenses include costs associated with the development of new products, enhancements of existing products for which technological feasibility has not been achieved, and quality assurance activities, and primarily include employee compensation and benefits, consulting costs and the cost of software development tools and equipment. Research and development expenses for the year ended September 30, 2002 were $64.4 million, a 29% decrease from research and development expenses of $90.7 million for the year ended September 30, 2001. The decrease is primarily attributable to the reductions in force in fiscal 2001 and in the first quarter of fiscal 2002 which resulted in a reduction of personnel and related compensation and benefits and a decrease in localization of our software, partially offset by an increase for license fees due for the use of third party software. To date, all software development costs have been expensed in the period incurred. We believe that continued investment in research and development is critical to attaining our strategic objectives. Although the restructuring of operations in fiscal 2001 and fiscal 2002 reduced our research and development expenses for fiscal 2002, these expenses may increase over the longer term.

General and administrative

General and administrative expenses consist primarily of compensation and benefits costs for executive, finance and administrative personnel. General and administrative expenses for the year ended September 30, 2002 were $31.8 million, a 48% decrease from general and administrative expenses of $60.5 million for the year ended September 30, 2001. The decrease is primarily attributable to various cost savings initiatives including reductions in personnel and related compensation and benefits, a reduction in implementation costs for financial and human resources infrastructure and a decrease in fees paid to outside professional services providers. Although the restructuring of our operations in fiscal 2001 and fiscal 2002 reduced our general and administrative expenses for the year ended September 30, 2002, these expenses may increase over the longer term. Over the near term and perhaps for much longer, we expect to incur significant fees and expenses relating to our recently completed accounting review and our ongoing litigation, including litigation relating to the recent restatement of our consolidated financial statements.

41

Table of Contents

Amortization of goodwill and other intangible assets

Our acquisitions of TradingDynamics, Tradex and SupplierMarket in fiscal 2000 were accounted for under the purchase method of accounting. Accordingly, we recorded a total of $3.1 billion in goodwill and other intangible assets representing the excess of the purchase price paid over the fair value of net assets acquired related to these acquisitions in fiscal 2000. The total amortization of goodwill and other intangible assets related to these acquisitions noted above totaled $303.5 million and $665.3 million for the years ended September 30, 2002 and 2001, respectively. In the second quarter of fiscal 2001, we recorded a $1.4 billion impairment charge relating to goodwill and other intangible assets acquired in the Tradex acquisition. See below for detailed discussion. The decrease in amortization in fiscal 2002 is primarily attributable to the reduction in carrying value of goodwill and other intangible assets due to the impairment recorded in fiscal 2001.

In fiscal 2000, we sold 5,142,858 shares of common stock with a fair market value of $834.4 million to an independent third party in connection with an intellectual property agreement. As part of the sale we received intellectual property and $47.5 million in cash. The intellectual property is valued at the difference between the fair market value of the stock being exchanged and the cash received, which is $786.9 million. This amount is classified within other intangible assets and is being amortized over three years based on the terms of the related intellectual property purchase agreement. The total amortization of this intellectual property agreement was $262.3 million for each of the years ended September 30, 2002 and 2001.

The amortization of goodwill and other intangible assets was $565.8 million and $927.6 million for the years ended September 30, 2002 and 2001, respectively.

As of September 30, 2002, we had unamortized goodwill and other intangible assets of approximately $293.9 million. Other intangible assets were being amortized on a straight-line basis over their total expected useful lives ranging from two years to three years. As a result of our adoption of SFAS No. 142 (see Note 1 of Notes to Consolidated Financial Statements) on October 1, 2002, we ceased amortization of the remaining goodwill that had a net book value of approximately $176.4 million. Other identifiable intangible assets with a net book value of approximately $117.5 million at October 1, 2002 will continue to be amortized over their remaining useful lives, substantially all of which expired in the quarter ended March 31, 2003.

As a result of the adjustments described in “Recent Event,” amortization expense for the years ended September 30, 2002 and 2001 has been reduced by $13.9 million and $13.9 million, respectively, to reflect changes in purchase accounting related to stock options issued by companies acquired in fiscal year 2000.

Business partner warrants

In the past, we have issued warrants for the purchase of our common stock to certain business partners which either vested immediately or vested on a contingent basis upon the achievement of certain milestones related to targeted revenue. For the years ended September 30, 2002, 2001 and 2000, we recognized business partner warrant expense associated with these warrants totaling $5.6 million, $27.8 million and $26.6 million, respectively. The business partner warrant expense for the years ended September 30, 2001 and 2000 excludes $6.3 million and $2.7 million, respectively, which has been recorded as a reduction of revenues in accordance with EITF No. 01-9. See Notes 1 and 11 of Notes to Consolidated Financial Statements for additional information.

In March 2000, we issued an unvested warrant to purchase up to 3,428,572 shares of our common stock, of which 2,228,572 shares have expired unexercised and 1,200,000 shares remain unvested as of September 30, 2002.

These unvested shares, if they remain unvested, will expire unexercised on a quarterly basis through March 2005. The business partner can partially vest in this warrant each quarter upon attainment of certain milestones related to revenue targets. The warrant can be earned over approximately a five-year period. During the year ended September 30, 2002, the business partner did not vest in any shares of this warrant and accordingly, no business

42

Table of Contents

partner warrant expense was recorded. A total of $8.5 million and $23.6 million, respectively, of business partner warrant expense was recorded for the years ended September 30, 2001 and 2000, of which $2.7 million and $250,000, respectively, has been recorded as a reduction of revenues in accordance with EITF No. 01-9. See Notes 1 and 11 of Notes to Consolidated Financial Statements for additional information. No amounts related to the unvested warrants are reflected in the accompanying consolidated financial statements.

In April 2000, we entered into an agreement with a third party as part of our vertical industry strategy to obtain a major partner in the financial services industry. In connection with the agreement, we issued warrants to purchase up to 6,776,000 shares of our common stock. Upon signing of this agreement, warrants for 1,936,000 shares of our common stock with a fair value of $56.2 million were immediately vested. The agreement provided that we would receive $25.0 million in guaranteed gainshare to be paid over a period of two years which we determined to represent partial payment for the vested warrants rather than revenue. Accordingly, $31.2 million representing the fair value of the vested warrants less the guaranteed gainshare was recorded as an intangible asset related to the strategic relationship to be amortized over the three year term of the agreement. During the third quarter of fiscal 2001, we determined that the carrying value of the intangible asset was impaired since performance under the agreement was substantially less than expected, and wrote off the remaining net book value of $17.7 million to business partner warrant expense. The guaranteed gainshare of $25.0 million was recorded as a receivable in “Other Current Assets”. A total of $7.9 million and $5.6 million, respectively, of business partner warrant expense related to this agreement was recorded for the years ended September 30, 2001 and 2000, of which $3.6 million and $2.4 million, respectively, was recorded as a reduction of revenues in accordance with EITF No. 01-9. During the quarter ended March 31, 2002, the obligation to pay the outstanding balance of $20.0 million guaranteed gainshare was settled for a cash payment of $15.0 million received in the quarter ended June 30, 2002 and the cancellation of the remaining unvested warrants to purchase 4,840,000 shares of our common stock. As a result, we recorded a charge of $5.6 million representing the uncollected receivable and related settlement costs as business partner warrant expense during the quarter ended March 31, 2002.

Stock-based compensation

We have recognized deferred stock-based compensation associated with stock options granted to employees at prices below market value on the date of grant, stock options issued to certain employees in conjunction with the consummation of the TradingDynamics and SupplierMarket acquisitions in fiscal 2000 and the issuance of restricted shares of common stock to certain senior executives, officers and employees. These amounts are included as a component of stockholders’ equity and are charged to operations over the vesting period of the options or the lapse of restrictions for the restricted stock, consistent with the method described in FIN 28. Stock-based compensation expense is presented as a separate line item in our Consolidated Statements of Operations, net of the effects of reversals related to terminated employees for cancellation of unvested stock options previously amortized to expense under FIN 28. We recorded $16.5 million of expense in the quarter ended June 30, 2001, representing the unamortized deferred stock-based compensation expense of options voluntarily cancelled pursuant to our stock option exchange program. For the years ended September 30, 2002 and 2001, stock-based compensation expense, net of the effects of cancellations, is attributable to various operating expense categories as follows (in thousands):

43

Table of Contents

Our changes in the accounting for certain stock options issued by acquired companies caused stock-based compensation expense, net of the effect of cancellations, to increase by $794,000, $24.4 million and $23.6 million in fiscal years 2002, 2001 and 2000, respectively. See “Recent Event.” As of September 30, 2002, we had an aggregate of approximately $4.5 million of deferred stock-based compensation remaining to be amortized through fiscal year 2007.

Restructuring and lease abandonment costs

In fiscal year 2001, we initiated a restructuring program to align our expense and revenue levels and to better position us for growth and profitability. As part of the restructuring program, we restructured our worldwide operations including a worldwide reduction in workforce and the consolidation of excess facilities.

The following table details our accrued restructuring liabilities and related restructuring activity through September 30, 2002 (in thousands):