ARIBA INC - 10-Q Quarterly Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as described in Exchange Act Rule 12b-2).

On March 31, 2003, 266,639,620 shares of the registrant’s common stock were issued and outstanding.

Note 1—Description of Business and Summary of Significant Accounting Policies

Ariba, Inc., along with its subsidiaries (collectively referred to herein as the “Company”), provides Enterprise Spend Management solutions that allow enterprises to manage efficiently the purchasing of all goods and services required to run their business. The Company refers to all non-payroll expenses associated with running a business as “spend.” The Company’s 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. The Company was founded in September 1996 and from that date through March 1997 was in the development stage, conducting research and developing its initial products. In March 1997, the Company began selling its products and related services and currently markets them in North America, Europe, Latin America, the Middle East, Asia and Australia primarily through its direct sales force and indirect sales channels.

The unaudited condensed consolidated financial statements of the Company have been prepared by the management of the Company and reflect all adjustments (all of which are normal and recurring in nature, except for the adjustments described in Note 2 to the extent applicable to the periods presented herein) that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending September 30, 2003. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted under the Securities and Exchange Commission’s rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, presented in the Company’s Annual Report on Form 10-K for the year ended September 30, 2002 filed on April 10, 2003 with the Securities and Exchange Commission.

Business combinations have been accounted for under the purchase method of accounting. The Company includes the results of operations of the acquired business from the acquisition date. Net assets of the companies acquired are recorded at their fair value at the acquisition date. The excess of the purchase price over the fair value of net assets acquired is included in goodwill and other intangible assets in the accompanying consolidated balance sheets. Amounts allocated to in-process research and development are expensed in the period in which the acquisition is consummated.

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported results of operations during the reporting period. Actual results could differ from those estimates. For example, actual sublease income attributable to the consolidation of excess

facilities might deviate from the assumptions used to calculate the Company’s accrual for lease abandonment costs; actual cash flows may differ from estimates used to assess the recoverability of goodwill and other intangible assets; and litigation settlement amounts may differ from estimated amounts. Actual experience in the collection of accounts receivable considered doubtful may differ from estimates used to develop allowances due to changes in the financial condition of customers or the outcomes of collection efforts.

The carrying value of the Company’s financial instruments, including cash and cash equivalents, investments, accounts receivable and long-term debt, approximates fair value. Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments and trade accounts receivable. The Company maintains its cash and cash equivalents and investments with high quality financial institutions. The Company’s customer base consists of businesses in North America, Europe, the Middle East, Asia, Australia and Latin America. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. The Company maintains allowances for potential credit losses.

No customer accounted for more than 10% of total revenues for the quarters ended December 31, 2002 and 2001. Net accounts receivable by individual customers comprising more than 10% of total net accounts receivable are as follows:

Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale, broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations, and changes the timing of recognizing losses on such discontinued operations. The Company adopted SFAS No. 144 on October 1, 2002. The adoption of SFAS No. 144 did not affect the Company’s condensed consolidated financial statements. In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to its estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Goodwill and intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

Prior to the adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.

On October 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. As a result, goodwill and other intangible assets with indefinite useful lives are no longer amortized, but instead are tested for impairment annually. Other intangible assets with definite useful lives will continue to be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. As of the date of adoption, the Company had a remaining unamortized goodwill balance of $176.4 million which would have otherwise resulted in additional amortization expense of $69.4 million for the quarter ended December 31, 2002. A transitional goodwill impairment test was required under SFAS No. 142 as of the date of adoption. During the quarter ended December 31, 2002, the Company completed the transitional goodwill impairment test and was not required to record an impairment charge upon completion of the test. As a result of the adoption of SFAS No. 142, neither the useful lives nor the residual value of the intangible assets acquired required adjustment. Furthermore, reclassifications of existing intangible assets to conform with new classification criteria in SFAS No. 141 were not required. The Company will perform an annual goodwill impairment test during the fourth quarter of each fiscal year. There can be no assurance that at the time the test is completed an impairment charge may not be recorded.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires that the Company record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that resulted from the acquisition, construction, development, and/or normal use of the assets. The Company would also record a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company’s adoption of SFAS No. 143 on October 1, 2002 did not have a significant impact on its condensed consolidated financial statements. However, in the event that the Company makes alterations in the future to certain leased facilities, its landlord may be entitled to require the Company to restore the property upon termination of the related lease at its expense. As such, any significant alterations might have a material impact on the Company’s condensed consolidated financial statements.

On October 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes both SFAS Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. For example, SFAS No. 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. SFAS No. 144 retains the basic provisions of APB No. 30 on how to present discontinued operations in the statement of operations but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS No. 142, Goodwill and Other Intangible Assets. The adoption of SFAS No. 144 did not impact the Company’s condensed consolidated financial statements.

The Company’s revenue consists of fees for licenses of the Company’s software products, maintenance, hosted services, customer training and consulting. Cost of license revenue primarily includes product, delivery, warranty and royalty costs. Cost of maintenance and service revenue primarily includes labor costs for engineers performing implementation services, consulting services and technical support, warranty and training personnel and facilities and equipment costs.

The Company’s spend management applications fall into three solution sets: the Ariba Analysis Solution, the Ariba Sourcing Solution, and the Ariba Procurement Solution. Ariba Enterprise Sourcing, which was introduced in late fiscal 2001, is derived from the Company’s Dynamic Trade and Sourcing applications which are still available as separate products. The modules that make up the Ariba Analysis Solution and the Ariba Sourcing Solution can be deployed as hosted or installed applications. In addition, the Ariba Workforce and Ariba Marketplace products are also available as hosted applications.

The Company licenses its products through its direct sales force and indirectly through resellers. The license agreements for the Company’s products generally do not provide for a right of return, and historically product returns have not been significant. The Company does not recognize revenue for refundable fees or agreements with cancellation rights until such rights to refund or cancellation have expired. The products are licensed under either a perpetual license or under a time-based license. Access to the Ariba Supplier Network is available to Ariba customers as part of their maintenance agreements for certain products.

The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9, and Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements. The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery of the product has occurred; the Company has no significant obligations with regard to implementation; the fee is fixed and determinable; and collectibility is probable. The Company considers 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 collectibility is not considered probable at the inception of the arrangement, then 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 the Company. The Company’s determination of the fair value of each element in multi-element arrangements is based on vendor-specific objective evidence (VSOE). The Company limits its 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 revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. Revenue allocated to maintenance and support is recognized ratably over the maintenance term (typically one year) and revenue allocated to training and other services is recognized as the services are performed. Revenue from hosting services is recognized ratably over the term of the arrangement. The proportion of total revenue from new license arrangements that is recognized upon delivery may vary from quarter to quarter depending upon the relative mix of types of licensing arrangements and the availability of VSOE of fair value for undelivered elements.

Certain of the Company’s perpetual and time-based licenses include unspecified additional products and/or payment terms that extend beyond twelve months. The Company recognizes revenue from perpetual and time- based licenses that include unspecified additional software products ratably over the term of the arrangement.

Revenue from those contracts with extended payment terms is recognized at the lesser of amounts due and payable or the amount of the arrangement fee that would have been recognized if the fee was fixed or determinable.

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 VSOE of fair value exists. If the Company provides consulting services that are considered essential to the functionality of the software products, both the software product revenue and service revenue are recognized under contract accounting in accordance with the provisions of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenues from these arrangements are recognized under the percentage of completion method except in limited circumstances where completion status cannot be reasonably estimated, in which case the completed contract method is used.

The Company’s customers include certain suppliers from whom, on occasion, the Company has purchased goods or services for the Company’s operations at or about the same time the Company has licensed its software to these organizations. These transactions are separately negotiated at terms the Company considers to be arm’s-length. To the extent that the fair value of either the software sold or the goods or services purchased in concurrent transactions cannot be reliably determined, revenues are reduced by the cost of the goods or services acquired. As a result, revenues of zero and $8.2 million for the quarters ended December 31, 2002 and 2001, respectively, were not recognized.

Equity instruments received in conjunction with licensing transactions are recorded at their estimated fair market value and included in the measurement of the related license revenue in accordance with Emerging Issues Task Force (EITF) No. 00-8, Accounting by a Grantee for an Equity Investment to Be Received in Conjunction with Providing Goods and Services. For the quarters ended December 31, 2002 and 2001, the Company recorded license revenue of $467,000 and $966,000, respectively, based on equity received in such transactions. These transactions were completed in fiscal 2000.

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.

In November 2001, the Emerging Issues Task Force reached consensus on EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products. The Company adopted EITF No. 01-9 in the quarter ended March 31, 2002. EITF No. 01-9 requires that consideration, including warrants, given by a vendor to a customer or a reseller of the vendor’s products be classified in the vendor’s financial statements as a reduction of revenue in certain circumstances. There was no reduction in revenue associated with this reclassification for the quarters ended December 31, 2002 and 2001, respectively. In addition, no consideration requiring such reclassification is expected in future periods.

In January 2002, the Financial Accounting Standards Board (FASB) issued EITF No. 01-14 (formerly EITF Topic No. D-103), Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred. EITF No. 01-14 requires that reimbursements received for out-of-pocket expenses be characterized as revenue in the income statement. The adoption of EITF No. 01-14 did not have a significant impact on the Company’s condensed consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 revises the accounting for specified employee and contract terminations that are part of restructuring activities and nullifies EITF No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. Companies will be able to record a liability for a cost associated with an exit or disposal activity only when the liability is incurred and can be measured at fair value. Commitment to an exit plan or a plan of disposal expresses only management’s intended future actions and therefore does not meet the requirement for recognizing a liability and related expense. SFAS No. 146 only applies to termination benefits offered for a specific termination event or a specified period. It will not affect accounting for the costs to terminate a capital lease. The Company is required to adopt SFAS No. 146 for exit or disposal activities initiated after December 31, 2002. The Company is evaluating this new standard but expects that the effects of adoption, if any, would relate solely to exit or disposal activities undertaken in the future.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company’s condensed consolidated financial statements. The Company has adopted the disclosure provisions as required. See Note 5.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, and provides alternative methods for accounting for a change by registrants to the fair value method of accounting for stock-based compensation. Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require disclosure in the significant accounting policy footnote of both annual and interim financial statements of the method of accounting for stock-based compensation and the related pro forma disclosures when the intrinsic value method continues to be used. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002, and disclosures are effective for the first fiscal quarter beginning after December 15, 2002. The Company does not believe that adoption of SFAS No. 148 will have a material effect on the Company’s condensed consolidated financial statements. The Company will continue to apply the intrinsic value based method of accounting prescribed by APB 25, Accounting for Stock Issued to Employees.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. FIN 46 addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003 the provisions of FIN 46 must be applied for the first interim period beginning after June 15, 2003. The application of FIN 46 is not expected to have a material effect on the Company’s condensed consolidated financial statements. The Company does not have any variable interest entities, therefore this Interpretation is not expected to have an impact on its consolidated financial statements.

As a result of a review the Company initiated in December 2002, the Company has restated its consolidated financial statements for the fiscal years ended September 30, 2001 and 2000 and for the quarters ended December 31, 1999 through June 30, 2002. Restated consolidated financial statements reflect the following adjustments during the past three fiscal years:

During fiscal years 2001 and 2000, Keith Krach, the Company’s chairman and co-founder, was deemed to have contributed $11.1 million and $43,000, respectively, to the Company in connection with a cash payment and chartered air travel services provided by him to Larry Mueller, the Company’s president and chief operating officer at the time of the payments. These amounts have been recorded as capital contributions in accordance with Interpretation No. 1 of APB No. 25 and charged to compensation expense in the Company’s restated consolidated financial statements as of and for the years ended September 30, 2001 and 2000.

During fiscal year 2000, certain individuals received stock options from target companies shortly before those companies were acquired by the Company. The Company has concluded that it should account for these employee grants as stock-based compensation expense to the Company. In addition, the Company has concluded that a fully vested grant to a consultant should be accounted for as stock-based compensation expense to the Company in accordance with EITF No. 96-18. As a result, additional stock-based compensation expense and a reduction of goodwill amortization expense have been reflected in the Company’s restated consolidated financial statements as of and for the years ended September 30, 2001 and 2000. The Company also determined that the fair value of certain unvested stock options granted to several consultants by one of these acquired companies was not considered in the measurement of stock compensation expense as required by EITF No. 96-18. As a result, stock-based compensation expense reflected in the Company’s restated consolidated financial statements has been increased in each of the years ended September 30, 2001 and 2000.

The Company identified three license arrangements that it entered into with vendors during fiscal years 2001 and 2000 at or about the same time it incurred obligations to purchase goods or services from those vendors. The Company has concluded that it should record expenditures associated with these obligations as reductions of license revenues received from the customer in accordance with the guidance provided by AICPA Technical Practice Aid No. 5100.46, Non-Monetary Exchanges of Software. The effect of these adjustments, while not affecting net loss in any year, is to decrease revenues by $275,000, $8.2 million and $583,000 in fiscal years 2002, 2001 and 2000, respectively. The Company also determined that the timing of revenue recognition for several license arrangements should be adjusted between periods to comply with the requirements of SOP 97-2. These adjustments primarily relate to accounting for multiple elements under the residual method, and result in the acceleration of revenue in certain cases and the deferral of revenue in others. The net effect of these adjustments is to increase revenues by $883,000 and $6.4 million in fiscal years 2002 and 2001, respectively, and to decrease revenues by $995,000 in fiscal year 2000. As a result of all of these revenue adjustments, revenues increased by $608,000 in fiscal year 2002 and decreased by $1.8 million and $1.6 million in fiscal years 2001 and 2000, respectively.

In addition, the Company identified several accrued expense items for which it concluded that the amount of the liability, the initial timing of recording the liability, or the timing of releasing the liability should be adjusted to comply with the requirements of SFAS No. 5 Accounting for Contingencies. 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 in each of the years ended September 30, 2002, 2001 and 2000 and caused the provision for income taxes to decrease in fiscal year 2002 and increase in fiscal year 2001. 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 compared to previously announced preliminary results for those periods.

The net effect of all of the adjustments described above is to decrease the Company’s net loss by $22.1 million in fiscal year 2002 and to increase the Company’s net loss by $14.1 million and $9.8 million in fiscal years 2001 and 2000, respectively. None of these adjustments has any impact on cash balances or net cash flows for any period. As a result of reclassifying amounts received in connection with business partner warrants from operating activities to financing activities, these adjustments also increase net cash used in operating activities by $15.0 million and $5.0 million for fiscal years 2002 and 2001, respectively, and increase net cash provided by financing activities by $15.0 million and $5.0 million for fiscal years 2002 and 2001, respectively. These adjustments caused non-cash investing and financing activities to increase by $11.1 million in fiscal year 2001 and decrease by $41.8 million in fiscal year 2000.

The following table provides additional information regarding the effect of these adjustments on net loss for the quarter ended December 31, 2001 and on preliminary net loss for the quarter ended December 31, 2002 announced on January 23, 2003:

As a result of the foregoing factors, the Company’s unaudited condensed consolidated financial statements for the three months ended December 31, 2001 have been restated from amounts previously reported. The accompanying condensed consolidated financial data presents the Company’s unaudited condensed consolidated statements of operations for this period on a comparative basis showing the amounts as originally reported and as restated.

Goodwill and other intangible assets as of December 31, 2002 and September 30, 2002 consisted of the following (in thousands):

As of December 31, 2002, the Company had unamortized goodwill and other intangible assets of approximately $225.4 million. Other intangible assets are being amortized on a straight-line basis over their total expected useful lives ranging from two to three years. As a result of its adoption of SFAS No. 142 on October 1, 2002 the Company ceased amortization of the remaining goodwill that had a net book value of approximately $176.4 million. Other identifiable intangible assets which include covenants not-to-compete, core technology and an intellectual property agreement with a net book value of approximately $48.9 million at December 31, 2002, will continue to be amortized over their remaining useful lives, substantially all of which expired in the quarter ended March 31, 2003. The other intangible asset of assembled workforce was fully amortized as of September 30, 2002.

The weighted average amortization periods for covenants not-to-compete, core technology, and the intellectual property agreement are one year, three years and three years, respectively.

Amortization of other intangible assets was $68.5 million for the quarter ended December 31, 2002 and amortization of goodwill and other intangible assets was $141.9 million for the quarter ended December 31, 2001. The following table reconciles the reported net loss and basic and diluted net loss per share for the quarters ended December 31, 2002 and 2001 as if the provisions of SFAS No. 142 were in effect:

Upon adoption of SFAS No. 142, the Company was required to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS No. 141 for recognition of intangible assets separate from goodwill. The Company was also required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. For intangible assets identified as having indefinite useful lives, the Company was required to test those intangible assets for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Impairment was measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. The results of this analysis did not require the Company to recognize an impairment loss. There was no impact on the financial statements upon adoption of the standard.

The Company incurred operating losses for the quarters ended December 31, 2002 and December 31, 2001. The Company recorded a valuation allowance for the full amount of the net deferred tax assets, as sufficient uncertainty exists that it is more likely than not that the deferred tax assets would not be realized. The Company incurred income tax expense of $338,000 and $1.1 million for the quarters ended December 31, 2002 and 2001, respectively, primarily attributable to its international subsidiaries.

In March 2000, the Company entered into a facility lease agreement for approximately 716,000 square feet in four office buildings and an amenities building in Sunnyvale, California for the Company’s headquarters. The operating lease term commenced in phases from January through April 2001 and ends on January 24, 2013. Minimum monthly lease payments are approximately $2.2 million and will escalate annually with the total future minimum lease payments amounting to $335.3 million over the remaining lease term. The Company also contributed $80.0 million towards leasehold improvement costs of the facility and for the purchase of equipment and furniture, of which approximately $49.2 million was written off in connection with the abandonment of excess facilities. In the quarter ended March 31, 2002, a certificate of deposit totaling $2.2 million as a security deposit for the Company’s headquarters was released. As part of this agreement, the Company is required to hold certificates of deposit totaling $25.7 million as of December 31, 2002, as a form of security through fiscal year 2013, which is classified as restricted cash on the Company’s condensed consolidated balance sheets.

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

Restructuring and lease abandonment costs were zero and $5.6 million for the quarters ended December 31, 2002 and 2001, respectively. The following table details restructuring activity through December 31, 2002 (in thousands):

Severance and benefits primarily include involuntary termination and health benefits, outplacement costs and payroll taxes. During the quarter ended December 31, 2002, an immaterial amount of severance and benefits costs was paid. The Company expects all remaining cash expenditures will be made in the near future.

Lease abandonment costs incurred to date relate to the abandonment of the remaining lease terms of excess leased facilities in Mountain View and Sunnyvale, California, Tampa, Florida, Alpharetta, Georgia, Lisle, Illinois, Burlington, Massachusetts, Dallas, Texas, Hong Kong and Singapore. Total lease abandonment costs include the impairment of leasehold improvements, remaining lease liabilities and brokerage fees reduced by estimated sublease income. The estimated net costs of abandoning these leased facilities, including estimated sublease costs and income, were based on market information trend analyses provided by a commercial real estate brokerage firm retained by the Company.

During the quarter ended December 31, 2002, the Company made net cash payments totaling $6.8 million relating to the abandoned facilities. As of December 31, 2002, $55.2 million of lease abandonment costs, net of anticipated sublease income of $224.5 million, remains accrued and is expected to be utilized by fiscal 2013. Actual sublease payments due to the Company under noncancelable subleases of excess facilities totaled $79.6 million as of December 31, 2002, and the remainder of anticipated sublease income represents management’s best estimates. Actual future cash requirements and lease abandonment costs may differ materially from the accrual at December 31, 2002, particularly if actual sublease income is significantly different from current estimates. These differences could have a material adverse effect on the Company’s operating results and cash position. For example, as of December 31, 2002, 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 the Company’s Sunnyvale, California headquarters by approximately $9.1 million.

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 the Company, certain of its officers or former officers and directors and three of the underwriters of its initial public offering. These actions were purported to be brought on behalf of purchasers of the Company’s common stock in the period from June 23, 1999, the date of the Company’s initial public offering, to December 23, 1999 (or in some cases, to December 5 or 6, 2000), and made certain claims under the federal securities laws, including Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”) and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) relating to the Company’s 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 the Company 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 the Company 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 the Company’s 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 the Company’s underwriters with respect to their allocation to their customers of shares of common stock in the Company’s 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 the Company after the initial public offering, which had the effect of manipulating the market for the Company’s 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 the Company’s 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, the Company 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 the Company without prejudice. Plaintiffs have indicated that they intend to file an amended complaint. The Company intends to defend against these claims vigorously.

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 the Company and certain of its current and former officers and directors. These actions all purport to be brought on behalf of a class of purchasers of the Company’s 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 the Company’s announcement that the Company would restate certain of its consolidated financial statements, and, in the case of one complaint, relating to its acquisition activity and related accounting. Specifically, these actions allege that certain of its prior consolidated financial statements contained false and misleading statements or omissions relating to its 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 Company’s stock price to be artificially inflated. Plaintiffs seek compensatory damages as well as other relief.

These cases are still in their early stages, and the Company intends to defend against these claims vigorously.

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 the Company’s current and former officers and directors and against the Company as nominal defendant. These actions were filed by shareholders purporting to assert, on behalf of the Company, 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 the Company’s acquisition activity and related accounting implemented by the defendants, the alleged understatement of compensation expenses as reflected in the Company’s then proposed restatement, the alleged insider trading by certain defendants, the existence of the restatement class action litigation, in which the Company is alleged to be liable to defrauded investors, and the allegedly excessive compensation paid by the Company to one of its officers, as reflected in the Company’s then proposed restatement. The complaints seek the payment by the defendants to the Company of damages allegedly suffered by the Company, as well as other relief.

These cases are still in their early stages, and the Company intends to defend against them vigorously.

The Company is also subject to various claims and legal actions arising in the ordinary course of business. The Company has accrued for estimable and probable losses in the accompanying condensed consolidated financial statements for those matters where it believes that the likelihood that a loss has occurred is probable and the amount of loss is reasonably estimable. Although management currently believes that the outcome of other outstanding legal proceedings, claims and litigation involving the Company will not have a material adverse effect on its 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 the Company’s business, results of operations or financial condition or that the amount of accrued losses is sufficient for any actual losses that may be incurred.

The Company sells software licenses and services to its customers under contracts which the Company refers to as Software License and Service Agreements (each an “SLSA”). Each SLSA contains the relevant terms of the contractual arrangement with the customer, and generally includes certain provisions for indemnifying the customer against losses, expenses, and liabilities from damages that may be incurred by or awarded against the customer in the event the Company’s software or services are found to infringe upon a patent, copyright, trade secret, trademark, or other proprietary right of a third party. The SLSA generally limits the scope of remedies for such indemnification obligations in a variety of industry-standard respects, including but not limited to certain product usage limitations and geography-based scope limitations and a right to replace an infringing product or modify it to make it non-infringing. If the Company cannot address the infringement by replacing the product or services, or modifying the product or services, the Company is allowed to cancel the license or services and return the fees paid by the customer. The Company requires its employees to sign a proprietary information and inventions assignment agreement, which assigns the rights in its employees’ development work to the Company.

To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions and no material claims are outstanding as of December 31, 2002. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the SLSA, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. There can be no assurance that potential future payments will not have a material adverse effect on the Company’s business, results of operations or financial condition.

As of December 31, 2002, minority interests of approximately $15.9 million are recorded on the condensed consolidated balance sheet in order to reflect the share of the net assets of Nihon Ariba K.K. and Ariba Korea, Ltd. held by minority investors. In addition, the Company recognized approximately $528,000 as an increase to other loss and $867,000 as an increase to other income for the minority interests’ share in operating results of these majority-owned subsidiaries for the quarters ended December 31, 2002 and 2001, respectively.

The Company follows SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company has one operating segment, enterprise spend management solutions. The Company markets its products in the United States and in foreign countries through its direct sales force and indirect distribution channels. The Company’s chief operating decision maker evaluates resource allocation decisions and the performance of the Company based upon revenue recorded in geographic regions and does not receive financial information about expense allocations on a disaggregated basis.

Information regarding revenue for the quarters ended December 31, 2002 and 2001 and long-lived assets in geographic areas as of December 31, 2002 and September 30, 2002, is as follows (in thousands):

Revenues are attributed to countries based on the location of the Company’s customers. The Company’s international revenues were derived from sales in Europe, Canada, Asia, Australia and Latin America. The Company had net liabilities of $17.0 million and $67.9 million related to its international locations as of December 31 and September 30, 2002, respectively.

On October 22, 2002, the Company announced that its Board of Directors has authorized the repurchase of up to $50 million of its currently outstanding common stock to reduce the dilutive effect of its stock option and stock purchase plans. Stock purchases under the common stock repurchase program are expected to be made periodically in the open market based on market conditions. To date there have been no stock repurchases under this program.

On February 8, 2001, the Company announced a voluntary stock option exchange program for its 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 participant 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 the Company’s 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, the Company recorded $16.5 million of expense pursuant to the stock option exchange program. Members of the Company’s Board of Directors and its officers and senior executives did not participate in this program.

In March 2000, in connection with a sales and marketing alliance agreement with a third party, the Company issued an unvested warrant to purchase up to 3,428,572 shares of the Company’s common stock at an exercise price of $87.50 per share. Of the total shares underlying the warrant, 2,400,000 shares have expired unexercised and 1,028,572 shares remain unvested as of December 31, 2002. These unvested shares, if they remain unvested, will expire on a quarterly basis through March 2005. The business partner can partially vest in this warrant each quarter upon attainment of certain periodic milestones related to revenue targets. The warrant generally expires as to any earned or earnable portion when the milestone period expires or eighteen months after the specific milestone is met. The warrant can be earned over an approximately five-year period. During the quarter ended December 31, 2002, the business partner did not vest in any shares of this warrant and accordingly, no business partner warrant expense was recorded. No amounts related to the unvested warrants are reflected in the accompanying condensed consolidated financial statements.

The Company has recorded deferred stock-based compensation totaling approximately $263.7 million from inception through December 31, 2002. Of this amount, $38.4 million related to the issuance of stock options prior to the Company’s initial public offering in June 1999 and $71.0 million and $124.6 million related to the acquisitions of TradingDynamics, Inc. and SupplierMarket.com, Inc., respectively, each consummated in fiscal year 2000. These amounts are amortized in accordance with Financial Accounting Standards Board Interpretation No. 28 (FIN 28), Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans over the vesting period of the individual options and restricted common stock, generally between two to five years.

As disclosed in Note 2 of Notes to Condensed Consolidated Financial Statements, certain individuals received stock options from companies acquired by the Company. The total intrinsic value and fair value for the options granted was $71.0 million and $40.5 million, respectively. The intrinsic value of these options was recorded as deferred stock-based compensation and is being amortized over the four year vesting period using an accelerated method consistent with FIN 28. The stock-based compensation benefit recorded for these options, net of the effect of cancellations, was $777,000 and $58,000 during the quarters ended December 31, 2002 and 2001, respectively. In addition, certain consultants to these companies received options that vested based on providing services to the Company. The compensation charge recorded for these options was zero for each of the quarters ended December 31, 2002 and 2001, respectively.

During the quarters ended December 31, 2002 and 2001, the Company recorded $275,000 and $3.3 million of stock-based compensation, respectively. As of December 31, 2002, the Company had an aggregate of approximately $1.6 million of deferred stock-based compensation remaining to be amortized.

SFAS No. 130, Reporting Comprehensive Income, establishes standards of reporting and display of comprehensive income and its components of net income and other comprehensive income. Other comprehensive income refers to revenues, expenses, gains and losses that are not included in net income but rather are recorded directly in stockholders’ equity. The components of comprehensive loss for the quarters ended December 31, 2002 and 2001 are as follows (in thousands):

The income tax effects related to unrealized losses on securities and foreign currency translation adjustments are not considered material.

The components of accumulated other comprehensive loss as of December 31, 2002 and September 30, 2002 are as follows (in thousands):

The following table presents the calculation of basic and diluted net loss per common share (in thousands, except per share data):

At December 31, 2002 and 2001, 42,023,974 and 46,757,597 potential common shares, respectively, are excluded from the determination of diluted net loss per share, as the effect of such shares is anti-dilutive. Further, the potential common shares for the three months ended December 31, 2002 and 2001 exclude 1,028,572 shares and 7,286,246 shares, respectively, which would be issuable under certain warrants contingent upon completion of certain milestones.

The weighted-average exercise price of stock options outstanding was $3.70 and $4.22 as of December 31, 2002 and 2001, respectively. The weighted average repurchase price of unvested stock was $0.23 and $0.21 as of December 31, 2002 and 2001, respectively. The weighted average exercise price of warrants outstanding was $87.50 and $107.39 as of December 31, 2002 and 2001, respectively.

In the first and third quarters of fiscal 2001, the Company sold approximately 41% of its consolidated subsidiary, Nihon Ariba K.K., and approximately 42% of its consolidated subsidiary, Ariba Korea, Ltd., respectively, to Softbank, a Japanese corporation and its subsidiaries (collectively, “Softbank”). An affiliate of Softbank also received the right to distribute Ariba products from these subsidiaries in their respective jurisdictions. Related to transactions with Softbank, the Company recorded revenue of $6.1 million and $2.6 million for the quarters ended December 31, 2002 and 2001, respectively, pursuant to a long-term revenue commitment.

During fiscal year 2001, Keith Krach, the Company’s chairman and co-founder, was deemed to have contributed $4.0 million to the Company in connection with a loan of $4.0 million in cash by an entity controlled

by him to Robert Calderoni in connection with his hiring as the Company’s chief financial officer. Because the Company is not the beneficiary of the loan and would not receive any cash upon repayment of the loan, the Company recorded the principal amount of this loan as compensation expense in fiscal year 2001. The loan, along with accrued interest, is expected to be forgiven in annual installments over four years, conditioned on Mr. Calderoni’s continued employment with the Company. The Company has entered into an agreement with Mr. Calderoni pursuant to which he is entitled to receive annual cash payments from the Company to compensate him for income tax incurred as a result of such forgiveness and payments. As a result, the Company incurs additional compensation expense of approximately $300,000 per quarter related to this tax reimbursement agreement.

The Company entered into an agreement with an executive officer in October 2001 which provides for an unsecured loan from the Company in the amount of $1,500,000. The principal amount of the loan becomes payable in full immediately after the individual’s employment with the Company terminates for any reason other than a termination by the Company without cause. Further, the agreement provides that the loan will be forgiven over three years based on continued service.

The Company entered into an agreement with another executive officer in April 2002 which provides for two unsecured loans from the Company, the first in the amount of $600,000 and the second in the amount of $400,000. The principal amount of the loans becomes immediately payable in full if the individual’s employment with the Company terminates. The agreement provides that the principal amounts will be forgiven over three years based on continued service.

The Company recorded the principal amounts of these loans as operating expense in fiscal year 2002 based upon its assessment that recoverability of the loans in the event of the employees’ termination prior to the expiration of the related forgiveness periods was remote.

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

The information in this discussion 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 under the heading “Risk Factors” and the risks discussed in our other Securities Exchange Commission (“SEC”) filings, including our Annual Report on Form 10-K as filed with the SEC on April 10, 2003. Except as otherwise noted, the discussion of financial results gives effect to the accounting adjustments described in “Recent Event” below.

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 is to increase our accumulated deficit at December 31, 2002 by $3.8 million to $4.240 billion. None of these adjustments has any impact on our cash balances for any period. However, our

condensed 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. The following table provides additional information regarding these adjustments as they affect the three months ended December 31, 2001 and 2002.

See Note 2 of Notes to Condensed Consolidated Financial Statements for additional information on the effect of these adjustments.

Expenses paid by significant stockholder and director. As previously announced, the review initially focused on a $10 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 at December 31, 2002 is a non-cash charge of $10.1 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 and $777,000 for fiscal year 2002 and the quarter ended December 31, 2002, respectively.

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, $275,000 and zero in fiscal years 2000, 2001 and 2002 and the quarter ended December 31, 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, increase revenues by $6.4 million and $883,000 in fiscal years 2001 and 2002, respectively, and decrease revenues by $311,000 in the quarter ended December 31, 2002. As a result of all of these revenue adjustments, revenues decreased by $1.6 million and $1.8 million in fiscal years 2000 and 2001, respectively, increased by $608,000 in fiscal year 2002 and decreased by $311,000 in the quarter ended December 31, 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, $6.0 million in fiscal year 2002 and $221,000 in the quarter ended December 31, 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.

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.

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, Australia and Middle East primarily through our direct sales force and indirect sales channels.

We have incurred significant losses since inception. As of December 31, 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, 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, and amortization of stock-based compensation totaling $133.3 million.

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 December 31, 2002, we had unamortized goodwill and other intangible assets of approximately $225.4 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 $48.9 million at December 31, 2002 will continue to be amortized over their remaining useful lives, all of which will expire in the quarter ending March 31, 2003. See Note 3 of Notes to Condensed 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 December 31, 2002 after giving effect to the restatement of our condensed consolidated financial statements. Of this amount, $71.0 million and $124.6 million related to the acquisitions of TradingDynamics and SupplierMarket, respectively, were recorded 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 quarter ended December 31, 2002, we recorded $275,000 of related stock-based compensation amortization expense. As of December 31, 2002, we have approximately $1.6 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 2007. The amortization of stock-based compensation is presented as a separate component of operating expenses in our Condensed Consolidated Statements of Operations. See Note 8 of Notes to Condensed Consolidated Financial Statements for more detailed information.

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. As of December 31, 2002, we had 829 full-time employees. See Note 5 of Notes to Condensed 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 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, subject to certain effects of SFAS No. 142, Goodwill and Other Intangible Assets, as adopted on October 1, 2002 and as described in Note 3 of Notes to Condensed Consolidated Financial Statements. As a result, we may incur substantial losses in 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. 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 inquiries and legal proceedings. Our prospects must also 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.

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 the Condensed Consolidated Financial Statements.

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.

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 recognized 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 recognized from contracts entered into in prior quarters has remained relatively stable and has represented at least a majority of the revenues recognized each quarter. See Note 1 of Notes to condensed consolidated financial statements for detailed discussion of our revenue recognition policies.

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.

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.

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, as of December 31, 2002, 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 $9.1 million.

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 condensed 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.

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 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.

The following table sets forth statements of operations data for the periods indicated (in thousands, except per share data). The data has been derived from the unaudited Condensed Consolidated Financial Statements contained in this Form 10-Q which, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments except for the restatement adjustments described under “Recent Event” (to the extent applicable to the periods presented herein), necessary to present fairly the financial position and results of operations for the interim periods. 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 and Notes thereto included in our Form 10-K for the fiscal year ended September 30, 2002 filed with the SEC April 10, 2003.

License revenues for the quarter ended December 31, 2002 were $30.4 million, a 32% increase over license revenues of $23.1 million for the quarter ended December 31, 2001. This increase is primarily attributable to revenue from Softbank as discussed below, an expansion of our customer base in our domestic operations, new product introductions and enhancements and the timing of revenue recognition of certain large contracts. License revenues in the quarter ended December 31, 2002 were higher than expected and may not be indicative of the level of license revenues in future quarters. In particular, new license sales from our international operations did not meet our expectations in the quarter ended December 31, 2002 and could remain flat or decrease in the future. In addition, we have experienced recent declines in deferred revenues that may adversely affect revenues over the long term.

We recognized license revenues of $5.1 million and $1.8 million for the quarters ended December 31, 2002 and 2001, respectively, from Softbank, a related party, pursuant to a long-term revenue commitment. These amounts represent 17% and 8% of license revenues for the quarters ended December 31, 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 for the quarters ended December 31, 2002 and 2001 to decrease by $311,000 and $533,000, respectively.

Maintenance and service revenues for the quarter ended December 31, 2002 were $31.3 million, a 1% decrease from maintenance and service revenues of $31.6 million for the quarter ended December 31, 2001. This decrease principally relates to reduced maintenance revenues for our Marketplace and Dynamic Trade products and the deferment of maintenance and service revenues for contracts entered into in the current quarter where the recognition of revenue is conditioned upon delivery of future service elements.

Cost of license revenues for the quarter ended December 31, 2002 was $749,000, a 98% increase over cost of license revenues of $378,000 for the quarter ended December 31, 2001. The increase is primarily related to increases in royalties payable to third parties for integrated technology, offset by a reduction in warranty costs.

Cost of maintenance and service revenues for the quarter ended December 31, 2002 was $10.1 million, a 4% increase over cost of maintenance and service revenues of $9.7 million for the quarter ended December 31, 2001. The increase is primarily attributable to increased headcount in our services organization and utilization of internal consultants related to implementations, offset by reductions in maintenance support and warranty costs.

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 quarter ended December 31, 2002 were $20.6 million, a 21% decrease from sales and marketing expenses of $26.0 million for the quarter ended December 31, 2001. The decrease is primarily attributable to a reduction in overall compensation and benefits and, to a lesser extent, reduced overhead. Although the restructuring of our operations in prior years reduced our sales and marketing expenses for the current quarter, these expenses may increase over the longer term.

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 quarter ended December 31, 2002 were $14.0 million, a decrease of 10% from research and development expenses of $15.6 million for the quarter ended December 31, 2001. The decrease is primarily attributable to a reduction in fees paid to outside service providers and reduced overhead, offset by an increase in compensation and benefits. 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 prior years reduced our research and development expenses for the current quarter, these expenses may increase over the longer term.

General and administrative expenses consist primarily of compensation and benefits costs for executive, finance and administrative personnel. General and administrative expenses for the quarter ended December 31, 2002 were $7.1 million, a decrease of 26% from general and administrative expenses of $9.5 million for the quarter ended December 31, 2001. The decrease is primarily attributable to a reduction in overall compensation and benefits and reduced overhead, offset by an increase in fees paid to outside professional service providers. Although the restructuring of our operations in prior years reduced our general and administrative expenses for the current quarter, 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.

Our acquisitions of TradingDynamics, Tradex and SupplierMarket were accounted for under the purchase method of accounting. Accordingly, we recorded a total of $3.1 billion in goodwill and other intangible assets in fiscal 2000 representing the excess of the purchase price paid over the fair value of net assets acquired related to these acquisitions. The total amortization of other intangible assets related to these acquisitions totaled $2.9 million for the quarter ended December 31, 2002. The total amortization of goodwill and other intangible assets related to these acquisitions totaled $76.3 million for the quarter ended December 31, 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 the value of this intellectual property was $65.6 million for each of the quarters ended December 31, 2002 and 2001.

Amortization of other intangible assets was $68.5 million for the quarter ended December 31, 2002. Amortization of goodwill and other intangible assets was $141.9 million for the quarter ended December 31, 2001. 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, which include covenants not-to-compete, core technology and the intellectual property agreement and which had a net book value of approximately $48.9 million at December 31, 2002, will continue to be amortized over their remaining useful lives, all of which will expire in the quarter ending March 31, 2003. See Note 3 of Notes to Condensed Consolidated Financial Statements. As a result of the adjustments described in “Recent Event,” amortization expense for the quarter ended December 31, 2001 has been reduced by $3.5 million to reflect changes in purchase accounting related to stock options issued by target companies acquired in fiscal year 2000.

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 Condensed 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. For the quarters ended December 31, 2002 and 2001, stock-based compensation expense, net of the effects of cancellations, is attributable to various operating expense categories as follows (in thousands):

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 decrease by $58,000 in the quarter ended December 31, 2001. See “Recent Event.” As of December 31, 2002, we had an aggregate of approximately $1.6 million of deferred stock-based compensation remaining to be amortized through fiscal year 2007.

In fiscal year 2001, we initiated a restructuring program to conform 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. Restructuring and lease abandonment costs were zero and $5.6 million for the quarters ended December 31, 2002 and 2001, respectively. The following table details restructuring activity through December 31, 2002 (in thousands):

Severance and benefits primarily include involuntary termination and health benefits, outplacement costs and payroll taxes. During the quarter ended December 31, 2002, an immaterial amount of severance and benefits costs was paid. We expect all remaining cash expenditures will be made in the near future.

Lease abandonment costs incurred to date relate to the abandonment for the remaining lease terms of excess leased facilities in Mountain View and Sunnyvale, California, Tampa, Florida, Alpharetta, Georgia, Lisle, Illinois, Burlington, Massachusetts, Florham Park, New Jersey, Dallas, Texas, Hong Kong and Singapore. Total lease abandonment costs include the impairment of leasehold improvements, remaining lease liabilities and brokerage fees offset by estimated sublease income. The estimated net costs of abandoning these leased facilities, including estimated sublease costs and income, were based on market information trend analyses provided by a commercial real estate brokerage firm retained by us.

During the quarter ended December 31, 2002, we made net cash payments totaling $6.8 million relating to the abandoned facilities. As of December 31, 2002, $55.2 million of lease abandonment costs, net of anticipated sublease income of $224.5 million, remains accrued and is expected to be utilized by fiscal year 2013. Actual sublease payments due to us under noncancelable subleases of excess facilities totaled $79.6 million as of December 31, 2002, and the remainder of anticipated sublease income represents management’s best estimates. Actual future cash requirements and lease abandonment costs may differ materially from the accrual at December 31, 2002, particularly if actual sublease income is significantly different from current estimates. These differences could have a material adverse effect on our operating results and cash position. For example, as of December 31, 2002, 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 $9.1 million.

Interest income for the quarter ended December 31, 2002 was $1.6 million, a decrease of 38% from interest income of $2.5 million for the quarter ended December 31, 2001. The decrease is primarily attributable to lower invested cash, cash equivalents and investment balances and a decline in interest rates.

In December 2000, our consolidated subsidiary, Nihon Ariba K.K., issued and sold approximately 41% of its common stock for cash consideration of approximately $40.0 million to Softbank and its affiliate. In April 2001, Nihon Ariba K.K. issued and sold an additional 2% of its common stock for cash consideration of approximately $4.0 million to third parties. Prior to the transactions, we held 100% of the equity of Nihon Ariba K.K. in the form of common stock. Nihon Ariba K.K.’s operations consist of the marketing, distribution, service and support of our products in Japan.

As of December 31, 2002, minority interest of approximately $13.0 million is recorded on the condensed consolidated balance sheets in order to reflect the share of the net assets of Nihon Ariba K.K. held by minority investors. We recognized $573,000 as an increase to other loss and $644,000 as an increase to other income for the minority interest’s share of Nihon Ariba K.K.’s income and loss for the quarters ended December 31, 2002 and 2001, respectively.

In April 2001, our consolidated subsidiary, Ariba Korea, Ltd., issued and sold approximately 42% of its common stock for cash consideration of approximately $8.0 million to Softbank and its affiliate. Prior to the transaction, we held 100% of the equity of Ariba Korea, Ltd. in the form of common stock. Ariba Korea, Ltd.’s operations consist of the marketing, distribution, service and support of our products in Korea.

As of December 31, 2002, minority interest of approximately $2.9 million is recorded on the Condensed Consolidated Balance Sheets in order to reflect the share of the net assets of Ariba Korea, Ltd. held by minority investors. We recognized $44,000 and $223,000 as an increase to other income for the minority interest’s share of Ariba Korea, Ltd.’s loss for the quarters ended December 31, 2002 and 2001, respectively.

Our relationship with Softbank has not performed to our expectations, and we are reviewing ways to improve the performance of this relationship. The failure to realize future revenues from Softbank at committed levels could have a material adverse impact on our business. 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.

We incurred operating losses for the quarters ended December 31, 2002 and December 31, 2001. We have recorded a valuation allowance for the full amount of the net deferred tax assets, as sufficient uncertainty exists that it is more likely than not that the deferred tax assets would not be realized. We incurred income tax expense of $338,000 and $1.1 million for the quarters ended December 31, 2002 and 2001, respectively, primarily attributable to our international subsidiaries.

Subsequent to September 30, 2002, the Company settled certain outstanding foreign tax withholding claims and released $2.7 million of accrued liabilities which generated an income tax benefit for the quarter ended September 30, 2002.

As of December 31, 2002, we had $153.9 million in cash, cash equivalents and short-term investments, $88.3 million in long-term investments and $29.5 million in restricted cash, for total cash and investments of $271.7 million, and $31.8 million in working capital. All significant cash and investments are held in accounts in the United States except for approximately $44.0 million and $7.0 million held by Nihon Ariba K.K. and Ariba Korea, Ltd, respectively, our majority-owned subsidiaries in Japan and Korea, respectively, in foreign accounts to fund their activities and operations. As of September 30, 2002, we had $157.3 million in cash, cash equivalents and short-term investments, $88.0 million in long-term investments and $30.3 million in restricted cash, for total cash and investments of $275.6 million, and $25.7 million in working capital.

Net cash used in operating activities was approximately $5.9 million for the quarter ended December 31, 2002, compared to $18.3 million of net cash used in operating activities for the quarter ended December 31, 2001. Net cash used in operating activities for the quarter ended December 31, 2002 is primarily attributable to

decreases in accrued liabilities, restructuring and lease abandonment costs and deferred revenue, and to a lesser extent, the net loss for the period (less non-cash expenses). These cash flows used in operating activities were partially offset by an increase in accounts receivable.

Net cash provided by investing activities was approximately $12.8 million for the quarter ended December 31, 2002 compared to $16.4 million of net cash provided by investing activities for the quarter ended December 31, 2001. Net cash provided by investing activities for the quarter ended December 31, 2002 is primarily attributable to the redemption of our investments. Although the recent restructuring of our operations will reduce our capital expenditures over the near term, these expenditures may increase over the longer term.

Net cash provided by financing activities was approximately $2.0 million for the quarter ended December 31, 2002 compared to $2.1 million of net cash provided by financing activities for the quarter ended December 31, 2001. Net cash provided by financing activities for the quarter ended December 31, 2002 is primarily attributable to proceeds from the exercise of stock options, offset by the payment of capital lease obligations.

In March 2000, we entered into a new facility lease agreement for approximately 716,000 square feet constructed in four office buildings and an amenities building in Sunnyvale, California for our headquarters. The operating lease term commenced in phases from January through April 2001 and ends on January 24, 2013. Minimum monthly lease payments are $2.2 million and will escalate annually with the total future minimum lease payments amounting to $335.3 million over the remaining lease term. We also contributed $80.0 million towards leasehold improvement costs of the facility and for the purchase of equipment and furniture, of which approximately $49.2 million was written off in connection with the abandonment of excess facilities. In the quarter ended March 31, 2002, a certificate of deposit totaling $2.2 million as a security deposit for our headquarters was released. As part of this agreement, we are required to hold certificates of deposit totaling $25.7 million as of December 31, 2002, as a form of security through fiscal 2013, which is classified as restricted cash on our Condensed Consolidated Balance Sheets.

Future minimum lease payments under all noncancelable operating leases are as follows as of December 31, 2002 (in thousands):

Operating lease payments shown above exclude any adjustment for lease income due under noncancelable subleases of excess facilities, which amounted to $79.6 million as of December 31, 2002. Interest expense related to capital lease obligations is immaterial for all periods presented.

We do not have commercial commitments under lines of credit, standby repurchase obligations or other such debt arrangements. We do have standby letters of credit, which are cash collateralized. These instruments are issued by our banks in lieu of a cash security deposit required by landlords for our real estate leases. We have approximately $29.5 million in standby letters of credit related to real estate lease requirements classified as restricted cash on our Condensed Consolidated Balance Sheets.

We expect to incur significant operating expenses, particularly research and development and sales and marketing expenses, for the foreseeable future in order to execute our business plan. We anticipate that such operating expenses, as well as planned capital expenditures, will constitute a material use of our cash resources. As a result, our net cash flows will depend heavily on the level of future sales, our ability to manage infrastructure costs and the outcome of our subleasing activities related to the costs of abandoning excess leased facilities and the level of expenditures relating to our recently completed accounting review and ongoing litigation.

Additionally, on October 22, 2002, we announced that our Board of Directors authorized the repurchase of up to $50 million of our currently outstanding common stock to reduce the dilutive effect of our stock option and purchase plans. Stock purchases under the common stock repurchase program are expected to be made periodically in the open market based on market conditions. To date there have been no stock repurchases under this program. Cash flows from operations and existing cash balances may be used to repurchase our common stock. As a result, we may incur a significant impact on cash flows and cash balances.

Although our existing cash, cash equivalents and investment balances together with our anticipated cash flow from operations should be sufficient to meet our 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. See “Risk Factors.” After the next 12 months, we may find it necessary to obtain additional funds. In the event additional funds are required, we may not be able to obtain additional financing on favorable terms or at all.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 revises the accounting for specified employee and contract terminations that are part of restructuring activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. Companies will be able to record a liability for a cost associated with an exit or disposal activity only when the liability is incurred and can be measured at fair value. Commitment to an exit plan or a plan of disposal expresses only management’s intended future actions and therefore does not meet the requirement for recognizing a liability and related expense. SFAS No. 146 only applies to termination benefits offered for a specific termination event or a specified period. It will not affect accounting for the costs to terminate a capital lease. We are required to adopt SFAS No. 146 for exit or disposal activities initiated after December 31, 2002. We are evaluating this new standard but expect that the effects of adoption, if any, would relate solely to exit or disposal activities undertaken in the future.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on our condensed consolidated financial statements. The Company has adopted the disclosure provisions as required. See Note 5 of Notes to Condensed Consolidated Financial Statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock Based Compensation and provides alternative methods for accounting for a change by registrants to the fair value method of accounting for stock-based compensation. Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require disclosure in the significant accounting policy footnote of

both annual and interim financial statements of the method of accounting for stock-based compensation and the related pro-forma disclosures when the intrinsic value method continues to be used. SFAS No. 148 is effective for fiscal years ending after December 15, 2002, and disclosures are effective for the first fiscal quarter beginning after December 15, 2002. We do not believe that adoption of SFAS No. 148 will have a material effect on our financial condition or results of operations. The Company will continue to apply the intrinsic value based method of accounting prescribed by APB 25, Accounting for Stock Issued to Employees.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. FIN 46 addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003 the provisions of FIN 46 must be applied for the first interim period beginning after June 15, 2003. The application of FIN 46 is not expected to have a material effect on our condensed consolidated financial statements. The Company does not have any variable interest entities, therefore this Interpretation is not expected to have an impact on our condensed consolidated financial statements.

In addition to other information in this Form 10-Q, 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-Q, 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 June 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.

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 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.

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

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 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 the quarter ended December 31, 2002 and for the fiscal year 2002 however, 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 from contracts entered into in prior quarters 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 recognized 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 recognized from contracts entered into in prior quarters has remained relatively stable and has represented at least a majority of the revenues recognized 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 December 31, 2002, we had unamortized goodwill and other intangible assets of approximately $225.4 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.

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.

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 solutions 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 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 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:

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 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.

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.

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 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 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.

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.

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.

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 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 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. The 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.

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 damages 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 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:

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.

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 for the quarter ended December 31, 2002 have remained fairly stable as a percentage of total revenue from the quarter ended September 30, 2002, 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.

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.com, 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 year 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:

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.

We develop products in the United States and market our products in the United States, Latin America, Europe, Canada, Australia, Middle East and Asia. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Since the majority of our sales are currently made in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets. If any of the events described above were to occur, our net sales could be seriously impacted, since a significant portion of our net sales are derived from international operations. For the quarters ended December 31, 2002 and 2001, approximately 35% and 29%, respectively, of our total net sales were derived from customers outside of the United States. As a result, our U.S. dollar earnings and net cash flows from international operations may be adversely affected by changes in foreign currency exchange rates.

We use derivative instruments to manage 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 reduce our net exposures, by currency, related to the monetary assets and liabilities of our foreign operations

denominated in local currency. In addition, from time to time, we may enter into forward exchange contracts to establish with certainty the U.S. dollar amount of future firm commitments denominated in a foreign currency. The forward contracts do not qualify for hedge accounting and accordingly, all of these instruments are marked to market at each balance sheet date by a charge to earnings. We believe that these forward contracts do not subject us to undue risk due to foreign exchange movements because gains and losses on these contracts are generally offset by losses and gains on the underlying assets and liabilities. We do not use derivatives for trading or speculative purposes. All contracts have a maturity of less than one year.

The following table provides information about our foreign exchange forward contracts outstanding as of December 31, 2002 (in thousands):

The unrealized gain (loss) represents the difference between the contract value and the market value of the contract based on market rates as of December 31, 2002.

Given our foreign exchange position, a ten percent change in foreign exchange rates upon which these forward exchange contracts are based would result in unrealized exchange gains and losses of approximately $100,000. In all material aspects, these exchange gains and losses would be fully offset by exchange losses and gains on the underlying net monetary exposures for which the contracts are designated as hedges. We do not expect material exchange rate gains and losses from other foreign currency exposures.

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified investments, consisting only of investment grade securities such as debt, equity or both. We do hold investments in both fixed rate and floating rate interest earning instruments, and both carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.

Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which may have declined in market value due to changes in interest rates. Our investments may fall short of expectations due to changes in market conditions and as such we may suffer losses at the time of sale due to the decline in market value. All investments in the table below are carried at market value, which approximates cost.

The table below represents principal (or notional) amounts and related weighted-average interest rates by year of maturity of our investment portfolio (in thousands, except for interest rates).

Note that these amounts exclude equity investments totaling $1.2 million and uninvested cash of $42.0 million.

As of April 6, 2003 (the “Evaluation Date”), we evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” for purposes of filing reports under the Exchange Act, and our “internal controls and procedures” for financial reporting purposes. This evaluation (the “controls evaluation”) was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). As part of their controls evaluation, the CEO and CFO considered the results of the review undertaken at the direction of the Board of Directors that resulted in the restatement of our consolidated financial statements, including the controls and corporate governance initiatives that were adopted by the Board of Directors. Rules adopted by the Securities and Exchange Commission require that we present the conclusions of the CEO and the CFO about the effectiveness of our disclosure controls and internal controls based on and as of the Evaluation Date.

Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal controls and procedures are designed with the objective of providing reasonable assurance that (i) our transactions are properly authorized; (ii) our assets are safeguarded against unauthorized or improper use; and (iii) our transactions are properly recorded and reported, all to permit the preparation of our consolidated financial statements in conformity with generally accepted accounting principles.

Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

We plan to evaluate our disclosure and internal controls and procedures on a quarterly basis in accordance with the Exchange Act and the regulations hereunder so that the conclusions concerning controls effectiveness can be reported in our quarterly reports on Form 10-Q and our annual reports on Form 10-K. The overall goals of these various evaluations activities are to monitor our disclosure and internal controls and procedures and to make modifications as necessary; our intent in this regard is that these controls and procedures will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant.

Among other matters, we sought in our evaluation to determine whether there were any “significant deficiencies” or “material weaknesses” in our internal controls and procedures, or whether we had identified any acts of fraud involving personnel who have a significant role in our internal controls and procedures. This information was important both for the controls evaluation generally and because the CEO and CFO certification requirement pursuant to items 5 and 6 of Section 302 of the Sarbanes-Oxley Act of 2002 mandates that they disclose that information to our Audit Committee and to our independent auditors and to report on related matters

in this section of the quarterly report on Form 10-Q. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions”; those control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the consolidated financial statements. A “material weakness” is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the consolidated financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to address other controls matters in the controls evaluation and where appropriate to consider what revision, improvement and/or correction to make in accord with our ongoing procedures.

Based upon the controls evaluation, our CEO and CFO have concluded that, subject to the limitations noted above, as of the Evaluation Date our disclosure controls and procedures are effective to ensure that material information relating to the company and our consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our internal controls and procedures are effective to provide reasonable assurance that our consolidated financial statements are fairly presented in conformity with generally accepted accounting principles. In accordance with SEC requirements, the CEO and CFO note that, since the Evaluation Date to the date of this quarterly report on Form 10-Q, there have been no significant changes in internal controls and procedures or in other factors that could significantly affect internal controls and procedures, including any corrective actions with regard to significant deficiencies and material weaknesses.

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.

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.

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.

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.

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 condensed 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.

On October 31, 2002, we filed a current report on Form 8-K to report the authorized repurchase of up to $50,000,000 of our common stock.

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

ARIBA, INC.

By:		/s/ JAMES W. FRANKOLA
		James W. Frankola Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

/s/ ROBERT M. CALDERONI

Robert M. Calderoni

President and Chief Executive Officer

/s/ JAMES W. FRANKOLA

James W. Frankola

Executive Vice President and Chief Financial Officer

		Page No.
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of December 31, 2002 and September 30, 2002	3

	Condensed Consolidated Statements of Operations for the three month periods ended December 31, 2002 and 2001*	4

	Condensed Consolidated Statements of Cash Flows for the three month periods ended December 31, 2002 and 2001*	5

	Notes to the Condensed Consolidated Financial Statements	6

	* The Condensed Consolidated Statement of Operations and the Condensed Consolidated Statement of Cash Flows for the three months ended December 31, 2001 have been restated as described in Note 2 of Notes to Condensed Consolidated Financial Statements.

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52

Item 4.	Controls and Procedures	54

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	56

Item 2.	Changes in Securities and Use of Proceeds	57

Item 3.	Defaults Upon Senior Securities	57

Item 4.	Submission of Matters to a Vote of Securities Holders	57

Item 5.	Other Information	57

Item 6.	Exhibits and Reports on Form 8-K	58

	SIGNATURES	59

	CERTIFICATIONS	60

	December 31, 2002			September 30, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	96,734		$	86,935
Short-term investments		57,197			70,346
Restricted cash		800			800
Accounts receivable, net		11,554			7,984
Prepaid expenses and other current assets		15,629			15,590

Total current assets		181,914			181,655
Property and equipment, net		26,071			29,168
Long-term investments		88,344			87,970
Restricted cash		28,656			29,482
Other assets		2,243			2,428
Goodwill, net		176,451			176,451
Other intangible assets, net		48,950			117,464

Total assets	$	552,629		$	624,618

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,565		$	15,187
Accrued compensation and related liabilities		29,964			30,411
Accrued liabilities		35,601			39,029
Restructuring costs		16,837			18,716
Deferred revenue		52,174			52,459
Current portion of other long-term liabilities		—			106

Total current liabilities		150,141			155,908
Restructuring costs, net of current portion		38,416			43,353
Deferred revenue, net of current portion		93,140			99,302

Total liabilities		281,697			298,563

Minority interests		15,900			15,027
Commitments and contingencies (Note 5)
Stockholders’ equity:
Common stock		533			531
Additional paid-in capital		4,496,434			4,497,288
Deferred stock-based compensation		(1,586	)		(4,507	)
Accumulated other comprehensive loss		(815	)		(1,412	)
Accumulated deficit		(4,239,534	)		(4,180,872	)

Total stockholders’ equity		255,032			311,028

Total liabilities and stockholders’ equity	$	552,629		$	624,618

	Three Months Ended December 31,
	2002			2001
				(As Restated)
Revenues:
License	$	30,449		$	23,127
Maintenance and service		31,280			31,590

Total revenues		61,729			54,717

Cost of revenues:
License		749			378
Maintenance and service (exclusive of stock-based compensation expense (benefit) of $(743) and $1,182 for the three months ended December 31, 2002 and 2001, respectively)		10,137			9,709

Total cost of revenues		10,886			10,087

Gross profit		50,843			44,630

Operating expenses:
Sales and marketing (exclusive of stock-based compensation expense (benefit) of $500 and $(1,572) for the three months ended December 31, 2002 and 2001, respectively)		20,589			25,974
Research and development (exclusive of stock-based compensation expense of $118 and $35 for the three months ended December 31, 2002 and 2001, respectively)		13,958			15,590
General and administrative (exclusive of stock-based compensation expense of $400 and $3,665 for the three months ended December 31, 2002 and 2001, respectively)		7,064			9,541
Amortization of goodwill and other intangible assets		68,514			141,929
Stock-based compensation		275			3,310
Restructuring and lease abandonment costs		—			5,642

Total operating expenses		110,400			201,986

Loss from operations		(59,557	)		(157,356	)
Interest income		1,577			2,531
Interest expense		(9	)		(15	)
Other income (expense)		(335	)		780

Net loss before income taxes		(58,324	)		(154,060	)
Provision for income taxes		338			1,091

Net loss	$	(58,662	)	$	(155,151	)

Basic and diluted net loss per share	$	(0.22	)	$	(0.61	)

Weighted average shares used in computing net loss per share—basic and diluted		264,053			255,625

	Three Months Ended December 31,
	2002			2001
				(As Restated)
Operating activities:
Net loss	$	(58,662	)	$	(155,151	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for (recovery of) doubtful accounts		(319	)		873
Depreciation and amortization		72,177			152,044
Amortization of stock-based compensation		275			3,310
Impairment (recovery) of leasehold improvements		—			(2,182	)
Minority interests in net income (loss) of consolidated subsidiaries		528			(867	)
Changes in operating assets and liabilities:
Accounts receivable		(3,251	)		11,795
Prepaid expenses and other assets		146			971
Accounts payable		378			(4,309	)
Accrued compensation and related liabilities		(447	)		(11,838	)
Accrued liabilities		(3,428	)		131
Restructuring and lease abandonment costs		(6,816	)		(5,787	)
Deferred revenue		(6,447	)		(7,334	)

Net cash used in operating activities		(5,866	)		(18,344	)

Investing activities:
Purchases of property and equipment, net		(568	)		(1,730	)
Sales/purchases of investments, net		12,586			18,659
Allocation from (to) restricted cash, net		826			(510	)

Net cash provided by investing activities		12,844			16,419

Financing activities:
Repayments of lease obligations		(106	)		(72	)
Proceeds from issuance of common stock		2,140			2,578
Repurchase of common stock		—			(363	)

Net cash provided by financing activities		2,034			2,143

Net increase in cash and cash equivalents		9,012			218
Effect of foreign exchange rate changes		787			(3,225	)
Cash and cash equivalents at beginning of period		86,935			71,971

Cash and cash equivalents at end of period	$	96,734		$	68,964

	% of Net Accounts Receivable as of
	December 31, 2002		September 30, 2002
Customer A	12	%	—
Customer B	11	%	—

	Three Months Ended December 31,
	2002			2001
				(As Restated)
Expenses paid by significant stockholder and director	$	—		$	—
Stock options issued by acquired companies, net of goodwill amortization offset		0.8			3.5
Revenue adjustments		(0.3	)		(0.5	)
Other operating expense adjustments		0.2			3.1
Income tax adjustments		(2.7	)		—

Total effect on net loss—(increase) decrease	$	(2.0	)	$	6.1

	Three Months Ended
	December 31, 2001
	(As Reported)			(As Restated)
	(in thousands, except per share data)
Revenues:
License(1)(2)	$	23,660		$	23,127
Maintenance and service		31,590			31,590

Total revenues		55,250			54,717

Cost of revenues:
License		378			378
Maintenance and service		9,709			9,709

Total cost of revenues		10,087			10,087

Gross profit		45,163			44,630

Operating expenses:
Sales and marketing(1)(3)		28,134			25,974
Research and development(3)		15,608			15,590
General and administrative(3)		10,481			9,541
Amortization of goodwill and other intangible assets(4)		145,414			141,929
Stock-based compensation(5)		3,368			3,310
Restructuring and lease abandonment costs		5,642			5,642

Total operating expenses		208,647			201,986

Loss from operations		(163,484	)		(157,356	)
Interest income		2,531			2,531
Interest expense		(15	)		(15	)
Other income		780			780

Net loss before income taxes		(160,188	)		(154,060	)
Provision for income taxes		1,091			1,091

Net loss	$	(161,279	)	$	(155,151	)

Net loss per share—basic and diluted	$	(0.63	)	$	(0.61	)

Weighted average shares used in computing net loss per share—basic and diluted		255,625			255,625

	December 31, 2002							September 30, 2002
	Gross carrying amount		Accumulated amortization			Net carrying amount		Gross carrying amount		Accumulated amortization			Net carrying amount
Goodwill	$	864,938	$	(688,487	)	$	176,451	$	864,938	$	(688,487	)	$	176,451

Other Intangible Assets
Covenants not-to-compete		1,300		(1,266	)		34		1,300		(1,173	)		127
Core technology		17,392		(16,038	)		1,354		17,392		(13,194	)		4,198
Intellectual property agreement		786,929		(739,367	)		47,562		786,929		(673,790	)		113,139

Total	$	805,621	$	(756,671	)	$	48,950	$	805,621	$	(688,157	)	$	117,464

	Severance and benefits			Lease abandonment costs			Total
Accrued restructuring costs as of September 30, 2002	$	103		$	61,966		$	62,069
Cash paid		(22	)		(6,794	)		(6,816	)

Accrued restructuring costs as of December 31, 2002	$	81		$	55,172			55,253

Less: current portion								16,837

Accrued restructuring costs, less current portion							$	38,416

	December 31, 2002			September 30, 2002
Unrealized gain on securities	$	1,712		$	1,902
Foreign currency translation adjustments		(2,527	)		(3,314	)

Accumulated other comprehensive loss	$	(815	)	$	(1,412	)

	Three Months Ended December 31,
	2002			2001(1)
				(As Restated)
Revenues:
License	$	30,449		$	23,127
Maintenance and service		31,280			31,590

Total revenues		61,729			54,717

Cost of revenues:
License		749			378
Maintenance and service (exclusive of stock-based compensation expense (benefit) of $(743) and $1,182 for the three months ended December 31, 2002 and 2001, respectively)		10,137			9,709

Total cost of revenues		10,886			10,087

Gross profit		50,843			44,630

Operating expenses:
Sales and marketing (exclusive of stock-based compensation expense (benefit) of $500 and $(1,572) for the three months ended December 31, 2002 and 2001, respectively)		20,589			25,974
Research and development (exclusive of stock-based compensation expense of $118 and $35 for the three months ended December 31, 2002 and 2001, respectively)		13,958			15,590
General and administrative (exclusive of stock-based compensation expense of $400 and $3,665 for the three months ended December 31, 2002 and 2001, respectively)		7,064			9,541
Amortization of goodwill and other intangible assets		68,514			141,929
Stock-based compensation		275			3,310
Restructuring and lease abandonment costs		—			5,642

Total operating expenses		110,400			201,986

Loss from operations		(59,557	)		(157,356	)
Interest income		1,577			2,531
Interest expense		(9	)		(15	)
Other income (expense)		(335	)		780

Net loss before income taxes		(58,324	)		(154,060	)
Provision for income taxes		338			1,091

Net loss	$	(58,662	)	$	(155,151	)

Net loss per share—basic and diluted	$	(0.22	)	$	(0.61	)

Weighted average shares used in computing net loss per share—basic and diluted		264,053			255,625

Year Ending December 31,	Operating leases
2003	$	37,504
2004		37,591
2005		36,697
2006		36,253
2007		33,156
Thereafter		185,531

Total minimum lease payments	$	366,732

		Contract Value			Unrealized Gain (Loss) in USD
Foreign Currency	Buy/Sell	Foreign Currency	USD		Unrealized Gain (Loss) in USD
Swiss Francs	Buy	465	$	318	$	15
European Currency Units	Sell	660	$	666	$	(21	)

	Year Ending December 31, 2003			Year Ending December 31, 2004			Year Ending December 31, 2005			Year Ending December 31, 2006		Year Ending December 31, 2007		Thereafter		Total
Cash equivalents	$	84,245		$	—		$	—		$	—	$	—	$	—	$	84,245
Average interest rate		1.69	%		—			—			—		—		—		1.69	%
Investments	$	57,197		$	54,279		$	34,064			—		—		—	$	145,540
Average interest rate		3.53	%		4.31	%		4.42	%		—		—		—		4.03	%

Total investment securities	$	141,442		$	54,279		$	34,064		$	—	$	—	$	—	$	229,785


10.35		Sublease, dated October 18, 2002, by and between Netscreen Technologies, Inc. and the Registrant.

99.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit No.		Exhibit Title
10.35		Sublease, dated October 18, 2002, by and between Netscreen Technologies, Inc. and the Registrant.
99.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.