ARIBA INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES ACT OF 1934

For the Quarter Ended June 30, 2002

Commission File Number 000-26299

ARIBA, INC.

(Exact name of registrant as specified in its charter)

Delaware		77-0439730
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

807 11th Avenue

Sunnyvale, California 94089

(Address of principal executive offices)

(650) 390-1000

(Registrant’s telephone number, including area code)

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

Yes x No ¨

On July 31, 2002, 265,526,532 shares of the registrant’s common stock were issued and outstanding.

ARIBA, INC.

INDEX

		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of June 30, 2002 and September 30, 2001	3

	Condensed Consolidated Statements of Operations for the three and nine month periods ended June 30, 2002 and 2001	4

	Condensed Consolidated Statements of Cash Flows for the nine month periods ended June 30, 2002 and 2001	5

	Notes to the Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	45

Item 2.	Changes in Securities and Use of Proceeds	45

Item 3.	Defaults Upon Senior Securities	45

Item 4.	Submission of Matters to a Vote of Securities Holders	45

Item 5.	Other Information	45

Item 6.	Exhibits and Reports on Form 8-K	46

	SIGNATURES	47

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

ARIBA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

	June 30, 2002			September 30, 2001
ASSETS
Current assets:
Cash and cash equivalents	$	104,094		$	71,971
Short-term investments		63,508			145,931
Restricted cash		800			2,800
Accounts receivable, net		6,965			27,336
Prepaid expenses and other current assets		17,756			35,963

Total current assets		193,123			284,001
Property and equipment, net		34,048			50,353
Long-term investments		80,245			43,109
Restricted cash		29,782			29,771
Other assets		2,493			3,007
Goodwill and other intangible assets, net		442,764			877,806

Total assets	$	782,455		$	1,288,047


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	16,009		$	28,395
Accrued compensation and related liabilities		41,426			53,285
Accrued liabilities		51,363			56,072
Restructuring costs		18,660			18,339
Deferred revenue		66,863			70,006
Current portion of other long-term liabilities		180			296

Total current liabilities		194,501			226,393
Restructuring costs, net of current portion		47,461			12,855
Deferred revenue, net of current portion		94,950			107,055
Other long-term liabilities, net of current portion		2			106

Total liabilities		336,914			346,409

Minority interests		15,165			15,720


Commitments and contingencies (Note 4)

Stockholders’ equity:
Common stock		528			520
Additional paid-in capital		4,476,829			4,477,971
Deferred stock-based compensation		(8,260	)		(33,023	)
Accumulated other comprehensive loss		(2,024	)		(1,172	)
Accumulated deficit		(4,036,697	)		(3,518,378	)

Total stockholders’ equity		430,376			925,918

Total liabilities and stockholders’ equity	$	782,455		$	1,288,047

See accompanying notes to condensed consolidated financial statements.

ARIBA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2002			2001			2002			2001
Revenues:
License	$	26,636		$	47,885		$	75,272		$	229,316
Maintenance and service		31,907			36,245			95,713			109,615

Total revenues		58,543			84,130			170,985			338,931

Cost of revenues:
License		538			2,527			2,710			16,979
Maintenance and service (exclusive of stock-based compensation expense of $450 and $955 for the three months ended June 30, 2002 and 2001 and $1,471 and $3,814 for the nine month periods ended June 30, 2002 and 2001, respectively)		11,024			12,965			31,009			56,635

Total cost of revenues		11,562			15,492			33,719			73,614

Gross profit		46,981			68,638			137,266			265,317

Operating expenses:
Sales and marketing (exclusive of stock-based compensation expense of $1,247 and $3,190 for the three months ended June 30, 2002 and 2001 and $3,820 and $15,455 for the nine month periods ended June 30, 2002 and 2001, respectively and exclusive of business partner warrants expense of $0 and $18,975 for the three months ended June 30, 2002 and 2001 and $5,562 and $26,833 for the nine month periods ended June 30, 2002 and 2001, respectively)		21,840			59,448			68,930			223,090
Research and development (exclusive of stock-based compensation expense of $(34) and $2,363 for the three months ended June 30, 2002 and 2001 and $(203) and $7,929 for the nine month periods ended June 30, 2002 and 2001, respectively)		16,772			25,372			48,572			71,740
General and administrative (exclusive of stock-based compensation expense of $1,378 and $6,492 for the three months ended June 30, 2002 and 2001 and $6,181 and $21,830 for the nine month periods ended June 30, 2002 and 2001, respectively)		7,351			14,520			27,564			49,687
Amortization of goodwill and other intangible assets		144,776			144,208			434,964			800,307
Business partner warrants, net		—			18,975			5,562			26,833
Stock-based compensation, net		3,041			13,000			11,269			49,028
Restructuring and lease abandonment costs		57,125			70,041			62,609			70,041
Impairment of goodwill, other intangible assets and equity investments		—			—			—			1,433,292
Merger related costs		—			—			—			9,185

Total operating expenses		250,905			345,564			659,470			2,733,203

Loss from operations		(203,924	)		(276,926	)		(522,204	)		(2,467,886	)
Interest income		1,801			4,090			6,257			15,650
Interest expense		(7	)		(18	)		(126	)		(191	)
Other income		55			1,503			749			828

Net loss before income taxes		(202,075	)		(271,351	)		(515,324	)		(2,451,599	)
Income tax provision		(1,000	)		(2,173	)		(2,995	)		(4,725	)

Net loss	$	(203,075	)	$	(273,524	)	$	(518,319	)	$	(2,456,324	)

Basic and diluted net loss per share	$	(0.78	)	$	(1.10	)	$	(2.01	)	$	(10.15	)

Shares used in computing net loss per share—basic and diluted		260,180			249,103			258,184			241,935

See accompanying notes to condensed consolidated financial statements.

ARIBA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended June 30,
	2002			2001
Operating activities:
Net loss	$	(518,319	)	$	(2,456,324	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for doubtful accounts		(2,942	)		25,332
Depreciation and amortization		456,845			819,761
Amortization of stock-based compensation		11,269			49,028
Impairment of equity investments		—			24,385
Impairment of goodwill and other intangible assets		—			1,408,907
Impairment of leasehold improvements		(2,182	)		—
Business partner warrant expense, net		5,562			34,117
Minority interests in net loss of consolidated subsidiaries		(535	)		(1,921	)
Changes in operating assets and liabilities:
Accounts receivable		23,378			(6,386	)
Prepaid expenses and other assets		13,159			1,427
Accounts payable		(12,386	)		(11,614	)
Accrued compensation and related liabilities		(11,859	)		(11	)
Accrued liabilities		(709	)		53,954
Restructuring and lease abandonment costs		34,927			50,902
Deferred revenue		(15,248	)		(9,169	)

Net cash used in operating activities		(19,040	)		(17,612	)

Investing activities:
Purchases of property and equipment, net		(3,391	)		(83,869	)
Sales/purchases of investments, net		44,230			(39,381	)
Allocation from (to) restricted cash, net		1,989			(12,334	)

Net cash provided by (used in) investing activities		42,828			(135,584	)

Financing activities:
Repayments of long-term obligations		(220	)		(416	)
Proceeds from issuance of common stock		8,821			29,452
Proceeds from subsidiary stock offering		—			51,951
Repurchase of common stock		(471	)		(474	)

Net cash provided by financing activities		8,130			80,513

Net increase (decrease) in cash and cash equivalents		31,918			(72,683	)
Effect of foreign exchange rate changes		205			(4,274	)
Cash and cash equivalents at beginning of period		71,971			195,241

Cash and cash equivalents at end of period	$	104,094		$	118,284

See accompanying notes to condensed consolidated financial statements.

ARIBA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Description of business

Ariba, Inc., along with its subsidiaries (collectively referred to herein as the “Company”), provides software, services and network access to enable corporations to evaluate, manage and reduce the costs associated with running their business. The Company’s products and services are designed to allow customers to streamline their existing procurement processes and expand control over their spend by negotiating better contracts with suppliers. 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 the United States, Canada, Europe, Latin America, Asia and Asia Pacific primarily through its direct sales force and indirect sales channels.

Basis of presentation

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) 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, 2002. 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 Form 10-K for the year ended September 30, 2001, filed on December 31, 2001 with the Securities and Exchange Commission.

Acquisitions

To date, the Company’s 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 purchased intangibles 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.

Impairment of long-lived assets

The Company periodically assesses the impairment of long-lived assets, including identifiable intangibles and related goodwill, in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of. The Company also periodically assesses the impairment of enterprise level goodwill in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 17, Intangible Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important which 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 the Company’s overall business, significant negative industry or economic trends, a significant decline in the Company’s stock price for a sustained period, and the

Company’s market capitalization relative to net book value. When the Company determines that the carrying value of goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company measures any impairment based on a projected discounted cash flow method using a discount rate commensurate with the risk inherent in its current business model.

Revenue recognition

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 and royalty costs. Cost of maintenance and service revenue consists primarily of labor costs for engineers performing implementation services and technical support and training personnel and facilities and equipment costs.

The Company’s Ariba Spend Management solutions consist of three component solutions: Ariba Analysis, Ariba Enterprise Sourcing and Ariba Procurement. Fiscal 2001 also included significant sales of Ariba Dynamic Trade and Ariba Marketplace products. Ariba Enterprise Sourcing, which was introduced in late fiscal 2001, is derived from Ariba Dynamic Trade and Ariba Sourcing, which are still available as separate products. Ariba Sourcing and Ariba Marketplace 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 either purchased under a perpetual license model or under a time-based license model. Access to the Ariba Supplier Network, formerly known as the Ariba Commerce Services Network, is available to all Ariba customers as part of their maintenance agreements.

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, revenue is recognized when 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 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 service elements is recognized as the services are performed. Revenue from hosting services is recognized ratably over the term of the arrangement. The proportion of revenue recognized upon delivery may vary from quarter to quarter depending upon the relative mix 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 software services is recognized as the services are performed. 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 in accordance with the provisions of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Such contracts typically consist of implementation management services and are generally on a time and materials basis. These arrangements occur infrequently as implementation services are generally not considered essential to the functionality of the Company’s products and are typically managed by third party consultants.

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 and recorded at terms the Company considers to be arm’s-length. Revenues from such transactions were immaterial during the three and nine month periods ended June 30, 2001 and there were no such transactions during the three and nine month periods ended June 30, 2002.

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 June 30, 2002 and 2001, the Company recorded license revenue of $0.9 million and $0.9 million, respectively, from such transactions. For the nine month periods ended June 30, 2002 and 2001, the Company recorded license revenue of $2.8 million and $3.7 million, respectively, from such transactions. All of such transactions were completed in fiscal 2000. See note 2 of notes to condensed consolidated financial statements for additional information.

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. Adoption of EITF No. 01-9 had no effect on the Company’s condensed consolidated financial statements for any periods subsequent to September 30, 2001 as there has been no warrant expense requiring such reclassification. In addition, no warrant expense requiring such reclassification is expected in future periods. However, reclassifications have been made to prior year statements of operations to comply with the new requirements. As a result, warrant expense totaling $1.2 million and $7.3 million has been reclassified as a reduction of revenues for the quarter and nine month periods ended June 30, 2001, respectively. The total reduction in revenues associated with this reclassification will be $7.3 million and $3.6 million for fiscal 2001 and 2000, or 2% and 1% of total revenues, respectively. The adoption of EITF No. 01-9 did not affect the Company’s net loss, basic and diluted net loss per share, financial position, or cash flows.

In January 2002, the Financial Accounting Standards Board (FASB) issued EITF 01-14 (formerly Staff Announcement Topic No. D-103), Income Statement Characterization of Reimbursements Received for “Out-of-

Pocket” Expenses Incurred. EITF 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.

Fair value of financial instruments and concentration of credit risk

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, 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, 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. Historically, such losses have been within management’s expectations.

No customer accounted for more than 10% of total revenue for the three and nine month periods ended June 30, 2002 and 2001. Net accounts receivable by individual customers comprising more than 10% of total net accounts receivable are as follows:

	% of Net accounts receivable as of
	June 30, 2002		September 30, 2001
Customer A	15	%	—
Customer B	11	%	—
Customer C	—		11	%

Recent accounting pronouncements

In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria for determining intangible assets acquired in a purchase method business combination that must be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company has adopted the provisions of SFAS No. 141 and is required to adopt SFAS No. 142 effective October 1, 2002. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized until the adoption of SFAS No. 142, after which only intangible assets with definite useful lives will continue to be amortized. The adoption of SFAS No. 141 did not have a significant impact on the Company’s condensed consolidated financial statements. Further, management does not expect the adoption of SFAS No. 142 to have a significant impact on the Company’s condensed consolidated financial statements except for the cessation of amortization of goodwill.

In August 2001, the FASB issued 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 Company is required to adopt SFAS No. 144 no later than the fiscal year beginning after December 15, 2001, and plans to adopt its provisions effective October 1, 2002. Management does not expect the adoption of SFAS No. 144 to have a significant impact on the Company’s condensed consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The provisions of SFAS No. 145 relating to the rescission of SFAS No. 4 are effective for financial statements issued for fiscal years beginning after May 15, 2002, and the provisions relating to SFAS No. 13 are effective for transactions occurring after May 15, 2002. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, and amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company does not expect the adoption of SFAS No. 145 will have a significant impact on its 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. 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.

Note 2—Other Assets

Other assets include investments in equity instruments of privately held companies in fiscal 2000, which had a remaining net book value of $1.3 million at each of June 30, 2002 and September 30, 2001. These investments are accounted for using the cost method of accounting and consist of common stock, preferred stock and warrants for common stock, of which remaining net book value of $0.7 million at each of June 30, 2002 and September 30, 2001 was received as consideration in connection with software licensing transactions with customers and business partners.

The Company determines the fair value of common stock and preferred stock equity investments based on amounts paid by independent third parties in the investees’ most recent capital transactions. The fair value of common stock warrants received is determined using a Black-Scholes option pricing model. The fair value of warrant investments in private companies totaled approximately $0.5 million at each of June 30, 2002 and September 30, 2001. These investments are reviewed each reporting period for declines considered other-than-temporary, and, if appropriate, are written down to their estimated fair values.

During the second and fourth quarters of fiscal 2001, the Company determined that these investments had incurred a decline in value that was other-than-temporary, primarily as a result of the continuing economic

slowdown, particularly in the technology sector. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value of the Company’s equity investments may not be recoverable. Factors the Company considers important which could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or expected operating results of the Company’s investees, significant changes in the manner of use of the acquired assets or the strategy for the Company’s overall business and significant negative industry or economic trends. The Company determined that the carrying value of the equity investments had a decline that was other-than-temporary based upon the existence of one or more of the above indicators of impairment. The impairment charge reduced the equity investments to an estimated fair value consistent with the general economic environment within the technology sector, resulting in charges totaling $28.7 million to the consolidated statement of operations in fiscal 2001.

Note 3—Goodwill and Other Intangible Assets

Goodwill and other intangible assets consisted of the following (in thousands):

	June 30, 2002			September 30, 2001
Goodwill	$	907,034		$	907,103
Assembled workforce		11,127			11,127
Covenants not-to-compete		1,300			1,300
Core technology		17,392			17,392
Intellectual property agreement		786,929			786,929
Business partner warrants		—			11

		1,723,782			1,723,862
Less: accumulated amortization		(1,281,018	)		(846,056	)

Goodwill and other intangible assets, net	$	442,764		$	877,806

The Company recorded a total of $3.1 billion in goodwill and other intangible assets in fiscal 2000 relating to the acquisitions of TradingDynamics, Tradex and SupplierMarket. In the quarter ended March 31, 2001, the Company recorded a $1.4 billion impairment charge relating to goodwill and other intangible assets acquired in the Tradex acquisition.

During the third quarter of fiscal 2001, the Company determined that an intangible asset recorded in connection with the prior issuance of a business partner warrant was impaired. As a result, the Company recorded a $17.7 million impairment charge to business partner warrant expense to write off the remaining net book value of this intangible asset.

As of June 30, 2002, the Company had approximately $442.8 million of goodwill and other intangible assets relating to the acquisitions of TradingDynamics, Tradex and SupplierMarket and an intellectual property purchase agreement after giving effect to previous amortization and impairment charges. Amortization of goodwill and other intangible assets was $144.8 million and $144.2 million for the quarters ended June 30, 2002 and 2001, respectively. Amortization of goodwill and other intangible assets was $434.9 million and $800.3 million for the nine month periods ended June 30, 2002 and 2001, respectively. As a result of the Company’s planned adoption of SFAS No. 142 (see note 1) on October 1, 2002, amortization of the remaining goodwill with an expected net book value of approximately $181.0 million will cease. Other identifiable intangible assets with an expected net book value of approximately $117.0 million at October 1, 2002 will continue to be amortized over their remaining useful lives, substantially all of which will expire in the quarter ending March 31, 2003.

Note 4—Commitments and Contingencies

Leases

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 as 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 $347.9 million over the 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. As part of this agreement, the Company is required to hold certificates of deposit totaling $25.7 million as a form of security through fiscal 2013, which is classified as restricted cash on the condensed consolidated balance sheets. In the quarter ended March 31, 2002, a certificate of deposit totaling $2.5 million as a security deposit for the Company’s headquarters was released.

Restructuring and lease abandonment costs

In fiscal 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.

The following table details restructuring activity through June 30, 2002 (in thousands):

	Severance and benefits			Lease abandonment costs			Total
Balance as of September 30, 2001	$	851		$	30,343		$	31,194
Total charge to operating expense		4,946			696			5,642
Cash paid		(4,681	)		(6,748	)		(11,429	)

Balance as of December 31, 2001		1,116			24,291			25,407

Total charge to operating expense		—			—			—
Cash paid		(816	)		(6,045	)		(6,861	)

Balance as of March 31, 2002		300			18,246			18,546

Total charge (recovery) to operating expense		(183	)		57,308			57,125
Cash paid		(14	)		(7,835	)		(7,849	)
Reclassification of lessee deposits		—			(1,701	)		(1,701	)

Balance as of June 30, 2002	$	103		$	66,018		$	66,121

Worldwide workforce reduction

Severance and benefits primarily include involuntary termination and health benefits, outplacement costs, and payroll taxes. A majority of the terminations, which included sales and marketing, engineering and general and administrative personnel, were completed during the third and fourth quarters of fiscal 2001 and in the quarter ended December 31, 2001. During the quarter ended June 30, 2002, an immaterial amount of severance and benefits costs was paid and $0.2 million expense recorded in previous quarters was recovered due to changes in the Company’s involuntary termination assessment. As of June 30, 2002, total accrued charges for severance and benefits amounted to $0.1 million, consisting primarily of health benefits and outplacement costs and involuntary termination costs related to the Company’s international workforce. The Company expects all remaining cash expenditures will be made by the quarter ending December 31, 2002.

Consolidation of excess facilities

Lease abandonment costs incurred to date relate to the abandonment 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 for the remaining lease terms. 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.

In the quarter ended June 30, 2002, the Company revised its original estimates and expectations with respect to its 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 California. Based on these factors, and consultation with an independent appraisal firm retained by the Company, an additional charge to lease abandonment costs of $57.3 million was recorded in the quarter ended June 30, 2002.

In the quarter ended June 30, 2002, the Company made net cash payments totaling $7.8 million relating to the abandoned facilities (including $1.8 million for early terminations) and reclassified deposits made by lessees totaling $1.7 million to accrued liabilities. As of June 30, 2002, $66.0 million of lease abandonment costs, net of anticipated sublease income of $237.2 million, remains accrued and is expected to be utilized by fiscal 2013. Actual future cash requirements and lease abandonment costs may differ materially from the accrual at June 30, 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.

Litigation

Between March 20, 2001 and June 5, 2001, several 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 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, relating to the Company’s initial public offering. Specifically, among other things, these actions alleged 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, and that such statements and omissions caused the Company’s post-initial public offering stock price to be artificially inflated. The actions were seeking compensatory damages in unspecified amounts as well as other relief.

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 over a hundred additional issuers and their underwriters that make 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 of 1933, but elected to proceed with their claims against such defendants under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. 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 are yet to be filed. The Company intends to defend against these claims vigorously.

The Company is also subject to various claims and legal actions arising in the ordinary course of business. The Company has accrued for estimated 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.

Note 5—Minority Interests in Subsidiaries

As of June 30, 2002, minority interests of approximately $15.2 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 $0.2 million as an increase to other loss and $1.3 million as an increase to other income for the minority interests’ share in operating results of these majority-owned subsidiaries for the quarters ended June 30, 2002 and 2001, respectively. For the nine month periods ended June 30, 2002 and 2001, the Company recognized approximately $0.5 million and $1.9 million, respectively, as an increase to other income for the minority interests’ share in operating results of Nihon Ariba K.K. and Ariba Korea, Ltd.

Note 6—Segment Information

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 only one segment, software 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 three and nine month periods ended June 30, 2002 and 2001, and information regarding long-lived assets in geographic areas as of June 30, 2002 and September 30, 2001, are as follows (in thousands):

	Three months ended June 30,				Nine months ended June 30,
	2002		2001		2002		2001
Revenues:
United States	$	41,212	$	66,076	$	110,539	$	253,774
International		17,331		18,054		60,446		85,157

Total	$	58,543	$	84,130	$	170,985	$	338,931


	June 30, 2002		September 30, 2001
Long-Lived Assets:
United States	$	474,843	$	923,351
International		3,151		6,477

Total	$	477,994	$	929,828

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, Asia, Asia Pacific, Canada and Latin America. The Company had net liabilities of $56.9 million in its international locations as of June 30, 2002.

Note 7—Stockholders’ Equity

Stock option exchange 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 an equal number of 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, a one-for-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. The exchange program did not result in any additional compensation charges or variable plan accounting. Members of the Company’s Board of Directors and its officers and senior executives did not participate in this program.

Warrants

In the past, the Company has issued warrants for the purchase of its common stock to certain business partners which vested either immediately or vest contingent upon the achievement of certain milestones related to targeted revenue. Each reporting period, the Company determines which warrants have vested or are deemed probable of vesting. Business partner warrant expense is measured based on the total fair value of such warrants using the Black-Scholes option pricing model. The fair value of contingent warrants deemed probable of vesting is remeasured at the end of each subsequent quarter until the warrant vests, at which time the fair value attributable to that warrant is fixed. In the event such remeasurement results in an increase or decrease to the initial or previously determined estimate of the total fair value of a particular warrant, a cumulative adjustment of warrant expense is made in the current quarter.

In February 2000, in connection with a sales and marketing alliance agreement with a third party, the Company issued unvested warrants to purchase up to 4,800,000 shares of the Company’s common stock at various exercise prices based on future prices of the Company’s common stock or at predetermined exercise prices. In December 2001, all of these warrants were cancelled in connection with an amendment of the related sales and marketing agreement. Business partner warrant expense related to these warrants was insignificant for all periods.

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. 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 approximately a five-year period. Through September 30, 2001, the business partner vested in 982,326 shares of this warrant. During the nine months ended June 30, 2002, the business partner did not vest in any shares of this warrant and accordingly, no business partner warrant expense was recorded. A total of $8.5 million of business partner warrant expense was recorded for the nine months ended June 30, 2001, of which $2.7 million has been recorded as a reduction of revenues in accordance with EITF No. 01-9. See note 1 of notes to condensed consolidated financial statements for additional information. No amounts related to the unvested warrants are reflected in the accompanying condensed consolidated financial statements.

In April 2000, the Company entered into an agreement with a third party as part of the Company’s vertical industry strategy to obtain a major partner in the financial services industry. In connection with the agreement, the Company issued warrants to purchase up to 6,776,000 shares of the Company’s common stock at an exercise price based on the ten-day average of the Company’s stock price prior to the vesting date. Upon signing of this agreement, 1,936,000 shares of the Company’s common stock with a fair value of $56.2 million were immediately vested. The agreement provided that the Company would receive $25.0 million in guaranteed

gainshare to be paid over a period of two years which the Company determined to represent payment for the vested warrants. Accordingly, $31.2 million representing the fair value of the vested warrants less the guaranteed gainshare was recorded as an intangible asset to be amortized over the three year term of the agreement. During the third quarter of fiscal 2001, the Company determined that the carrying value of the intangible asset was impaired and wrote off the remaining net book value with a $17.7 million charge to business partner warrant expense. The guaranteed gainshare of $25.0 million was recorded as a receivable in “Other Current Assets” and as of December 31, 2001, $20.0 million remained outstanding. During the quarter ended March 31, 2002, this receivable’s outstanding balance of $20.0 million was settled for a cash payment of $15.0 million, which was received in April 2002, and the cancellation of the remaining unvested warrants to purchase 4,840,000 shares of the Company’s common stock. As a result, the Company recorded a charge of $5.6 million representing the uncollected receivable and related settlement costs as business partner warrant expense during the quarter ended March 31, 2002. A total of $7.9 million of business partner warrant expense related to this agreement was recorded for the nine months ended June 30, 2001, of which $4.6 million has been recorded as a reduction of revenues in accordance with EITF No. 01-9. See note 1 of notes to the condensed consolidated financial statements for additional information.

Stock-based compensation

The Company accounts for its employee stock-based compensation plans in accordance with APB Opinion No. 25, and Financial Accounting Standards Board Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation—an Interpretation of APB No. 25. Accordingly, no compensation cost is recognized for any of the Company’s fixed stock options granted to employees when the exercise price of each option equals or exceeds the fair value of the underlying common stock as of the grant date.

During the nine months ended June 30, 2002, 3.6 million restricted shares of common stock at prices below current fair market value were issued to certain officers and employees of the Company. Restrictions on restricted shares lapse ratably over a two to five year period or have up to five year vesting periods that are subject to acceleration if individual performance goals are achieved. These issuances include 2.0 million shares which vested upon issuance in connection with the severance of a former executive. Based on the intrinsic value at the date of grant, the Company recorded approximately $12.1 million of deferred stock-based compensation related to the issuance of the restricted common stock. This amount includes $6.4 million related to the severance of the former executive which was fully expensed as stock-based compensation in the quarter ended December 31, 2001. The remaining $5.7 million of deferred stock-based compensation is being charged to operating expenses as the shares vest 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.

The Company has recorded deferred stock-based compensation totaling approximately $192.7 million from inception through June 30, 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 $124.6 million related to the acquisition of SupplierMarket, consummated in August 2000. These amounts are amortized in accordance with FIN 28 over the vesting period of the individual options and restricted common stock, generally between two to five years. During the quarters ended June 30, 2002 and 2001, the Company recorded $3.0 million and $13.0 million of stock-based compensation, respectively. During the nine months ended June 30, 2002 and 2001, the Company recorded $11.3 million and $49.0 million of stock-based compensation, respectively.

Comprehensive loss

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 three and nine month periods ended June 30, 2002 and 2001 are as follows (in thousands):

	Three months ended June 30,						Nine months ended June 30,
	2002			2001			2002			2001
Net loss	$	(203,075	)	$	(273,524	)	$	(518,319	)	$	(2,456,324	)
Unrealized gain (loss) on securities		780			(834	)		(1,057	)		(547	)
Foreign currency translation adjustments		3,567			(646	)		205			(4,274	)

Comprehensive loss	$	(198,728	)	$	(275,004	)	$	(519,171	)	$	(2,461,145	)

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

The components of accumulated other comprehensive loss as of June 30, 2002 and September 30, 2001 are as follows (in thousands):

	June 30, 2002			September 30, 2001
Unrealized gain on securities	$	382		$	1,439
Foreign currency translation adjustments		(2,406	)		(2,611	)

Accumulated other comprehensive loss	$	(2,024	)	$	(1,172	)

Note 8—Net Loss Per Share

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

	Three months ended June 30,						Nine months ended June 30,
	2002			2001			2002			2001
Net loss	$	(203,075	)	$	(273,524	)	$	(518,319	)	$	(2,456,324	)

Weighted-average common shares outstanding		264,446			257,252			263,368			253,238
Less: Weighted-average common shares subject to repurchase		(4,266	)		(7,545	)		(5,184	)		(8,497	)
Less: Weighted-average shares held in escrow related to acquisitions		—			(604	)		—			(2,806	)

Weighted-average common shares used in computing basic and diluted net loss per common share		260,180			249,103			258,184			241,935

Basic and diluted net loss per common share	$	(0.78	)	$	(1.10	)	$	(2.01	)	$	(10.15	)

At June 30, 2002 and 2001, 48,664,838 and 46,327,000 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 June 30, 2002 and 2001 exclude 2,446,246 shares and 12,086,246 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 $3.96 and $6.04 as of June 30, 2002 and 2001, respectively. The weighted average repurchase price of unvested stock was $0.14 and $0.22 as of June 30, 2002 and 2001, respectively. The weighted average exercise price of warrants outstanding was $87.50 and $85.93 as of June 30, 2002 and 2001, respectively.

Note 9—Income Taxes

The Company incurred operating losses for the quarters and nine month periods ended June 30, 2002 and June 30, 2001. The Company has 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 will not be realized. The Company incurred income tax expense of $1.0 million and $2.2 million during the quarters ended June 30, 2002 and 2001, respectively, and $3.0 million and $4.7 million during the nine month periods ended June 30, 2002 and 2001, respectively, primarily attributable to its international subsidiaries.

Note 10—Related Party Transactions

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.

From April through December 2001, the Chief Executive Officer of Softbank was a member of the Company’s Board of Directors. Related to transactions with Softbank, the Company recorded revenue of $4.3 million and $0.2 million for the quarters ended June 30, 2002 and 2001, respectively, and $13.5 million and $6.9 million for the nine month periods ended June 30, 2002 and 2001, respectively, pursuant to a long-term revenue commitment.

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, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 on December 31, 2001 with the SEC.

Overview

Ariba (referred to herein as “we”) provides software, services and network access to enable corporations to evaluate, manage and reduce the costs associated with running their business (their “spend”). Our Ariba Spend Management solutions consist of a suite of applications and services which provide customers with solutions to analyze and manage their spend on items such as commodities, raw materials, operating resources, services, temporary labor, travel, and maintenance, repair and operations equipment. The Ariba Spend Management solutions are offered as standalone applications or as an integrated suite. Our solutions are designed to allow customers to streamline their existing procurement processes and expand control over their spend by negotiating better contracts with suppliers. We also offer access to our Ariba Supplier Network, which allows customers to contact suppliers via the Internet and offers electronic payment, access to catalog information and the ability to route orders.

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 the United States, Latin America, Europe, Canada, Asia and Asia Pacific primarily through our direct sales force and to a lesser extent through indirect sales channels.

Our Ariba Spend Management solutions consist of three component solutions: Ariba Analysis, Ariba Enterprise Sourcing and Ariba Procurement. Fiscal 2001 also included significant sales of our Ariba Dynamic Trade and Ariba Marketplace products. Ariba Enterprise Sourcing, which was introduced in late fiscal 2001, is derived from Ariba Dynamic Trade and Ariba Sourcing, which are still available as separate products. Ariba Sourcing and Ariba Marketplace are also available as hosted applications.

We have incurred significant losses since inception. As of June 30, 2002, we had an accumulated deficit of approximately $4.0 billion, including cumulative charges for the amortization of goodwill and other intangible assets totaling $2.1 billion, impairment of goodwill and other intangible assets totaling $1.4 billion, amortization of stock-based compensation totaling $81.5 million and business partner warrant expense totaling $68.9 million.

We believe maintaining and growing our current revenue level is contingent on growing our customer base, developing our products and services, and adapting to current information technology purchasing patterns. We intend to continue to invest in sales, marketing, research and development and, to a lesser extent, support infrastructure. We will also have significant expenses going forward related to the amortization of our goodwill and other intangible assets, subject to certain effects of the new accounting pronouncements as described in note 1 of notes to condensed consolidated financial statements. We therefore expect to continue to incur substantial losses for the foreseeable 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. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly given that we operate in new and rapidly evolving markets, have recently completed several acquisitions and face an uncertain economic environment. We may not be successful in addressing such risks and difficulties. Please refer to the “Risk Factors” section for additional information.

Application of Critical Accounting Policies and Estimates

Accounting policies, methods and estimates are an integral part of the condensed consolidated financial statements prepared by management and 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 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 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 policies and our practices related to these policies are described below and in note 1 of notes to the accompanying condensed consolidated financial statements.

Through June 30, 2002, our revenues have been principally derived from licenses of our products, from maintenance and support contracts and from the delivery of implementation, consulting and training services. Customers who license Ariba Buyer and our other products also generally purchase maintenance contracts which provide software updates and technical support over a stated term, which is usually a twelve-month period. Customers may purchase implementation services from us, but we rely extensively on third-party consulting organizations to deliver these services directly to our customers. We also offer fee-based training services to our customers.

We license our products through our direct sales force and indirectly through resellers. The license agreements for our products generally do not provide for a right of return, and historically product returns have not been significant. We do not recognize revenue for refundable fees or agreements with cancellation rights until such rights to refund or cancellation have expired. Our products are either purchased under a perpetual license model or under a time-based license model. Access to the Ariba Supplier Network, formerly known as the Ariba Commerce Services Network, is available to all Ariba customers as part of their maintenance agreements.

We recognize revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9, and SEC Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements. 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 collectibility is not considered probable, revenue is recognized when 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 fair value of each element in multi-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.

Certain of our perpetual and time-based licenses include unspecified additional products and/or payment terms that extend beyond twelve months. We recognize 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 software services is recognized as the services are performed. 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 in accordance with the provisions of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Such contracts typically consist of implementation management services and are generally on a time and materials basis. These arrangements occur infrequently as implementation services are generally not considered essential to the functionality of our products and are typically managed by third party consultants.

contracts where revenue under those contracts is recognized in future periods and revenues in any given quarter will therefore be a function of both contracts signed in such quarter and contracts signed in prior quarters. For example, during the nine months ended June 30, 2002, the portion of license revenues recognized on a ratable basis remained relatively stable, compared to the nine months ended June 30, 2001, during which the portion of license revenues recognized on a ratable basis was more variable.

Our customers include certain suppliers from whom, on occasion, we have purchased goods or services for our operations at or about the same time we have licensed our software to these organizations. These transactions are separately negotiated and recorded at terms we consider to be arm’s-length. Revenues from such transactions were immaterial during the three and nine month periods ended June 30, 2001 and there were no such transactions during the three and nine month periods ended June 30, 2002.

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 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 June 30, 2002 and 2001, we recorded license revenue of $0.9 million and $0.9 million, respectively, from such transactions. For the nine month periods ended June 30, 2002 and 2001, we recorded license revenue of $2.8 million and $3.7 million, respectively, from such transactions. All of such transactions were completed in fiscal 2000. See note 2 of notes to condensed consolidated financial statements for additional information.

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 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.

We maintain an allowance for doubtful accounts at an amount we estimate to be sufficient to provide adequate protection against 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 may be required.

As discussed in note 1 of notes to condensed consolidated financial statements, 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 which 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 our market capitalization relative to 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.

As discussed in note 4 of notes to condensed consolidated financial statements, we have recorded significant restructuring charges in connection with our abandonment of certain operating leases as part of our program to restructure our operations and related facilities initiated in the third quarter of fiscal 2001 and have recorded an additional charge in the third quarter of fiscal 2002. In the quarter ended June 30, 2002, we revised our estimates and expectations with respect to 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 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 can be 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.

As discussed in note 4 of notes to condensed consolidated financial statements, we are also 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 the outcome of outstanding legal proceedings, claims and litigation involving us 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 amount of accrued losses is sufficient for any actual losses that may be incurred.

Stock Option Exchange Program

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

Pro Forma Financial Results

We prepare and release quarterly unaudited financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We also disclose and discuss certain pro forma financial information in the related earnings release and investor conference call. This pro forma financial information excludes certain non-cash and special charges, consisting primarily of the amortization of goodwill and other intangible assets, impairment of goodwill, other intangible assets and equity investments, business partner warrants expense, stock-based compensation and restructuring and lease abandonment costs. We believe the disclosure of the pro forma financial information helps investors more meaningfully evaluate the results of our ongoing operations. However, we urge 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.

Results of Operations

The following table sets forth statements of operations data for the periods indicated. 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, 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, 2001 filed December 31, 2001 (in thousands, except per share data).

	Three Months Ended June 30,						Nine Months Ended June 30,
	2002			2001			2002			2001
Revenues:
License	$	26,636		$	47,885		$	75,272		$	229,316
Maintenance and service		31,907			36,245			95,713			109,615

Total revenues		58,543			84,130			170,985			338,931

Cost of revenues:
License		538			2,527			2,710			16,979
Maintenance and service (exclusive of stock-based compensation expense of $450 and $955 for the three months ended June 30, 2002 and 2001 and $1,471 and $3,814 for the nine month periods ended June 30, 2002 and 2001, respectively)		11,024			12,965			31,009			56,635

Total cost of revenues		11,562			15,492			33,719			73,614

Gross profit		46,981			68,638			137,266			265,317

Operating expenses:
Sales and marketing (exclusive of stock-based compensation expense of $1,247 and $3,190 for the three months ended June 30, 2002 and 2001 and $3,820 and $15,455 for the nine month periods ended June 30, 2002 and 2001, respectively and exclusive of business partner warrants expense of $0 and $18,975 for the three months ended June 30, 2002 and 2001 and $5,562 and $26,833 for the nine month periods ended June 30, 2002 and 2001, respectively)		21,840			59,448			68,930			223,090
Research and development (exclusive of stock-based compensation expense of $(34) and $2,363 for the three months ended June 30, 2002 and 2001 and $(203) and $7,929 for the nine month periods ended June 30, 2002 and 2001, respectively)		16,772			25,372			48,572			71,740
General and administrative (exclusive of stock-based compensation expense of $1,378 and $6,492 for the three months ended June 30, 2002 and 2001 and $6,181 and $21,830 for the nine month periods ended June 30, 2002 and 2001, respectively)		7,351			14,520			27,564			49,687
Amortization of goodwill and other intangible assets		144,776			144,208			434,964			800,307
Business partner warrants, net		—			18,975			5,562			26,833
Stock-based compensation, net		3,041			13,000			11,269			49,028
Restructuring and lease abandonment costs		57,125			70,041			62,609			70,041
Impairment of goodwill, other intangible assets and equity investments		—			—			—			1,433,292
Merger related costs		—			—			—			9,185

Total operating expenses		250,905			345,564			659,470			2,733,203

Loss from operations		(203,924	)		(276,926	)		(522,204	)		(2,467,886	)
Interest income		1,801			4,090			6,257			15,650
Interest expense		(7	)		(18	)		(126	)		(191	)
Other income		55			1,503			749			828

Net loss before income taxes		(202,075	)		(271,351	)		(515,324	)		(2,451,599	)
Income tax provision		(1,000	)		(2,173	)		(2,995	)		(4,725	)

Net loss	$	(203,075	)	$	(273,524	)	$	(518,319	)	$	(2,456,324	)

Basic and diluted net loss per share	$	(0.78	)	$	(1.10	)	$	(2.01	)	$	(10.15	)

Shares used in computing net loss per share—basic and diluted		260,180			249,103			258,184			241,935

Comparison of the Three and Nine Month Periods Ended June 30, 2002 and 2001

Revenues

License

License revenues for the quarter ended June 30, 2002 were $26.6 million, a 44% decrease from license revenues of $47.9 million for the quarter ended June 30, 2001. License revenues for the nine months ended June 30, 2002 were $75.3 million, a 67% decrease from license revenues of $229.3 million for the nine months ended June 30, 2001. These decreases are primarily attributable to the reduced number of license sales and a different product mix in the quarter and nine month periods ended June 30, 2002, reflecting the economic slowdown and the significant decline in information technology spending. We recognized license revenues of $3.5 million and $0 for the quarters ended June 30, 2002 and 2001, respectively, and $10.7 million and $6.4 million for the nine month periods ended June 30, 2002 and 2001, respectively, from Softbank, a related party, pursuant to a long-term revenue commitment. Our strategic 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. We expect the economic slowdown to continue to adversely impact our license business growth opportunity for the next few quarters and perhaps significantly longer.

Maintenance and service

Maintenance and service revenues for the quarter ended June 30, 2002 were $31.9 million, a 12% decrease from maintenance and service revenues of $36.2 million for the quarter ended June 30, 2001. Maintenance and service revenues for the nine months ended June 30, 2002 were $95.7 million, a 13% decrease from maintenance and service revenues of $109.6 million for the nine months ended June 30, 2001. The decreases are primarily attributable to the decline in license sales which resulted in a decrease in revenues from customer implementations, training fees and maintenance contracts and a decline in hosted licenses which are included as service revenues. The decrease is also attributable to a decrease in consulting and training headcount offset by increases in renewals of our maintenance contracts.

Cost of Revenues

License

Cost of license revenues for the quarter ended June 30, 2002 was $0.5 million, a 79% decrease from cost of license revenues of $2.5 million for the quarter ended June 30, 2001. Cost of license revenues for the nine months ended June 30, 2002 was $2.7 million, an 84% decrease from cost of license revenues of $17.0 million for the nine months ended June 30, 2001. The decreases are primarily related to a reduction in royalties payable to third parties for integrated technology, lower co-sale fees due to the reduced number of certain alliance partner deals and a reduction in incremental costs associated with major upgrade introductions of our products.

Maintenance and service

Cost of maintenance and service revenues for the quarter ended June 30, 2002 was $11.0 million, a 15% decrease from cost of maintenance and service revenues of $13.0 million for the quarter ended June 30, 2001. Cost of maintenance and service revenues for the nine months ended June 30, 2002 was $31.0 million, a 45% decrease from cost of maintenance and service revenues of $56.6 million for the nine months ended June 30, 2001. The decreases are primarily attributable to reduced license sales resulting in decreased utilization of internal consultants related to implementations, reduced customer support and training costs, a reduction in incremental costs associated with major upgrade introductions of our products and, to a lesser extent, a decrease in headcount. As part of Ariba’s increased focus on delivering the Ariba Spend Management solutions to our customers, we have recently begun increasing headcount in our services organization which we expect will increase cost of maintenance and service revenues.

Operating Expenses

Sales and marketing

Sales and marketing expenses for the quarter ended June 30, 2002 were $21.8 million, a 63% decrease from sales and marketing expenses of $59.4 million for the quarter ended June 30, 2001. Sales and marketing expenses for the nine months ended June 30, 2002 were $68.9 million, a 69% decrease from sales and marketing expenses of $223.1 million for the nine months ended June 30, 2001. The decreases are primarily attributable to the reductions in force in fiscal 2001 and the quarter ended December 31, 2001 which resulted in fewer personnel and a reduction in overall compensation and benefits, a decrease in company-wide bonuses and sales commissions due to a decline in overall sales activity, a reduction in our marketing programs for tradeshows and customer advisory council meetings, a decrease in our provision for doubtful accounts and, to a lesser extent, reduced overhead. Although the restructuring of our operations in fiscal 2001 through the quarter ended March 31, 2002 reduced our sales and marketing expenses for the current quarter, these expenses may increase over the longer term.

Research and development

Research and development expenses for the quarter ended June 30, 2002 were $16.8 million, a decrease of 34% from research and development expenses of $25.4 million for the quarter ended June 30, 2001. Research and development expenses for the nine months ended June 30, 2002 were $48.6 million, a decrease of 32% from research and development expenses of $71.7 million for the nine months ended June 30, 2001. The decreases are primarily attributable to the reductions in force in fiscal 2001 and the quarter ended December 31, 2001 which resulted in fewer personnel and a reduction in overall compensation and benefits, a decrease in localization of our software and, to a lesser extent, reduced overhead. To date, all software development costs have been expensed in the period incurred. We believe that continued investment in research and development is critical to attaining our strategic objectives. Although the restructuring of operations in fiscal 2001 through the quarter ended March 31, 2002 reduced our research and development expenses for the current quarter, these expenses may increase over the longer term.

General and administrative

General and administrative expenses for the quarter ended June 30, 2002 were $7.3 million, a decrease of 49% from general and administrative expenses of $14.5 million for the quarter ended June 30, 2001. General and administrative expenses for the nine months ended June 30, 2002 were $27.6 million, a decrease of 45% from general and administrative expenses of $49.7 million for the nine months ended June 30, 2001. The decreases are primarily attributable to the reductions in force in fiscal 2001 and the quarter ended December 31, 2001 which resulted in fewer personnel and a reduction in overall compensation and benefits, and, to a lesser extent, reduced overhead. Although the restructuring of our operations in fiscal 2001 through the quarter ended March 31, 2002 reduced our general and administrative expenses for the current quarter, these expenses may increase over the longer term.

Amortization of goodwill and other intangible assets

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 representing the excess of the purchase price paid over the fair value of net assets acquired related to these acquisitions in fiscal 2000. The total amortization of goodwill and other intangible assets related to the acquisitions noted above totaled $79.2 million and $78.6 million for the quarters ended June 30, 2002 and 2001, respectively. The total amortization of goodwill and other intangible assets related to the acquisitions noted above totaled $238.1 million and $603.5 million for the nine month periods ended June 30, 2002 and 2001, respectively.

In fiscal 2000, we sold 5,142,858 shares of common stock with a fair market value of $834.4 million to an independent third party in connection with an intellectual property agreement. As part of the sale we received intellectual property and $47.5 million in cash. The intellectual property is valued at the difference between the fair market value of the stock being exchanged and the cash received, which is $786.9 million. This amount is classified within other intangible assets and is being amortized over three years based on the terms of the related intellectual property purchase agreement. The total amortization of this intellectual property agreement was $65.6 million and $196.8 million for each of the quarters and nine month periods ended June 30, 2002 and 2001, respectively.

The total amortization of goodwill and other intangible assets was $144.8 million and $144.2 million for the quarters ended June 30, 2002 and 2001, respectively. Total amortization of goodwill and other intangible assets was $434.9 million and $800.3 million for the nine month periods ended June 30, 2002 and 2001, respectively.

As of June 30, 2002, we had unamortized goodwill and other intangible assets of approximately $442.8 million which are 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 planned adoption of SFAS No. 142 (see note 1 of notes to condensed consolidated financial statements) on October 1, 2002, amortization of the remaining goodwill with an expected net book value of approximately $181.0 million will cease. Other identifiable intangible assets with an expected net book value of approximately $117.0 million at October 1, 2002, will continue to be amortized over their remaining useful lives, substantially all of which will expire in the quarter ending March 31, 2003.

Business partner warrants

In the past, we have issued warrants for the purchase of our common stock to certain business partners which vested either immediately or vested contingent upon the achievement of certain milestones related to targeted revenue. For the quarters ended June 30, 2002 and 2001, we recognized business partner warrant expenses associated with these warrants totaling $0 and $19.0 million, respectively. For the nine month periods ended June 30, 2002 and 2001, we recognized business partner warrant expense associated with these warrants totaling $5.6 million and $26.8 million, respectively. Related to the business partner warrant expense for the quarter and nine months ended June 30, 2001, $1.2 million and $7.3 million, respectively, has been recorded as a reduction of revenues in accordance with EITF No. 01-9. See notes 1 and 7 of condensed consolidated financial statements for additional information.

In February 2000, in connection with a sales and marketing alliance agreement with a third party, we issued unvested warrants to purchase up to 4,800,000 shares of our common stock at various exercise prices based on future prices of our common stock or at predetermined exercise prices. In December 2001, all of these warrants were cancelled in connection with an amendment of the related sales and marketing agreement. Business partner warrant expense related to these warrants was insignificant for all periods.

In March 2000, in connection with a sales and marketing alliance agreement with a third party, we issued an unvested warrant to purchase up to 3,428,572 shares of our common stock at an exercise price of $87.50 per share. 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 approximately a five-year period. Through September 30, 2001, the business partner vested in 982,326 shares of this warrant. During the nine months ended June 30, 2002, the business partner did not vest in any shares of this warrant and accordingly, no business partner warrant expense was recorded. A total of $8.5 million of business partner warrant expense was recorded for the nine months ended June 30, 2001 of which $2.7 million has been recorded as a reduction of revenues in accordance with EITF No. 01-9. See notes 1 and 7 of condensed consolidated financial statements for additional information. No amounts related to the unvested warrants are reflected in the accompanying condensed consolidated financial statements.

In April 2000, we entered into an agreement with a third party as part of our vertical industry strategy to obtain a major partner in the financial services industry. In connection with the agreement, we issued warrants to purchase up to 6,776,000 shares of our common stock at an exercise price based on the ten-day average of our stock price prior to the vesting date. Upon signing of this agreement, 1,936,000 shares of our common stock with a fair value of $56.2 million were immediately vested. The agreement provided that we would receive $25.0 million in guaranteed gainshare to be paid over a period of two years which we determined to represent payment for the vested warrants. Accordingly, $31.2 million representing the fair value of the vested warrants less the guaranteed gainshare was recorded as an intangible asset to be amortized over the three year term of the agreement. During the third quarter of fiscal 2001, we determined that the carrying value of the intangible asset was impaired and wrote off the remaining net book value with a $17.7 million charge to business partner warrant expense. The guaranteed gainshare of $25.0 million was recorded as a receivable in “Other Current Assets” and as of December 31, 2001, $20.0 million remained outstanding. During the quarter ended March 31, 2002, this receivable’s outstanding balance of $20.0 million was settled for a cash payment of $15.0 million, which was received in April 2002, and the cancellation of the remaining unvested warrants to purchase 4,840,000 shares of our common stock. As a

result, we recorded a charge of $5.6 million representing the uncollected receivable and related settlement costs as business partner warrant expense during the quarter ended March 31, 2002. A total of $7.9 million of business partner warrant expense related to this agreement was recorded for the nine months ended June 30, 2001, of which $4.6 million has been recorded as a reduction of revenues in accordance with EITF No. 01-9.

Stock-based compensation

We have recognized deferred stock-based compensation associated with stock options granted to employees at prices below market value on the date of grant, unvested stock options issued to employees in conjunction with the consummation of the SupplierMarket acquisition in August 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 in the case of restricted stock, consistent with the method described in FIN No. 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 for cancellation of unvested stock options previously amortized to expense under FIN No. 28. For the quarters ended June 30, 2002 and 2001, stock-based compensation expense, net of the effects of cancellations, is attributable to various operating expense categories as follows (in thousands):

	Three months ended June 30,					Nine months ended June 30,
	2002			2001		2002			2001
Cost of revenues	$	450		$	955	$	1,471		$	3,814
Sales and marketing		1,247			3,190		3,820			15,455
Research and development		(34	)		2,363		(203	)		7,929
General and administrative		1,378			6,492		6,181			21,830

Total	$	3,041		$	13,000	$	11,269		$	49,028

As of June 30, 2002, we had an aggregate of approximately $8.3 million of deferred stock-based compensation remaining to be amortized.

Restructuring and lease abandonment costs

In fiscal 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.

The following table details restructuring activity through June 30, 2002 (in thousands):

	Severance and benefits			Lease abandonment costs			Total
Balance as of September 30, 2001	$	851		$	30,343		$	31,194
Total charge to operating expense		4,946			696			5,642
Cash paid		(4,681	)		(6,748	)		(11,429	)

Balance as of December 31, 2001		1,116			24,291			25,407

Total charge to operating expense		—			—			—
Cash paid		(816	)		(6,045	)		(6,861	)

Balance as of March 31, 2002		300			18,246			18,546

Total charge (recovery) to operating expense		(183	)		57,308			57,125
Cash paid		(14	)		(7,835	)		(7,849	)
Reclassification of lessee deposits		—			(1,701	)		(1,701	)

Balance as of June 30, 2002	$	103		$	66,018		$	66,121

Worldwide workforce reduction

Severance and benefits primarily include involuntary termination and health benefits, outplacement costs, and payroll taxes. A majority of the terminations, which included sales and marketing, engineering and general and administrative personnel, were completed during the third and fourth quarters of fiscal 2001 and in the quarter ended December 31, 2001. During the quarter ended June 30, 2002, an immaterial amount of severance and benefits costs was paid and $0.2 million expense recorded in previous quarters was recovered due to changes in our involuntary termination assessment. As of June 30, 2002, total accrued charges for severance and benefits amounted to $0.1 million, consisting primarily of health benefits and outplacement costs and involuntary termination costs related to our international workforce. We expect all remaining cash expenditures will be made by the quarter ending December 31, 2002.

Consolidation of excess facilities

Lease abandonment costs incurred to date relate to the abandonment 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 for the remaining lease terms. 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.

In the quarter ended June 30, 2002, we revised our original estimates and expectations with respect to 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 California. Based on these factors, and consultation with an independent appraisal firm retained by us, an additional charge to lease abandonment costs of $57.3 million was recorded in the quarter ended June 30, 2002.

In the quarter ended June 30, 2002, we made net cash payments totaling $7.8 million relating to the abandoned facilities (including $1.8 million for early terminations) and reclassified deposits made by lessees totaling $1.7 million to accrued liabilities. As of June 30, 2002, $66.0 million of lease abandonment costs, net of anticipated sublease income of $237.2 million, remains accrued and is expected to be utilized by fiscal 2013. Actual future cash requirements and lease abandonment costs may differ materially from the accrual at June 30, 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.

Impairment of goodwill, other intangible assets and equity investments

In the quarter ended March 31, 2001, we recorded a $1.4 billion impairment charge relating to goodwill and other intangible assets acquired in the Tradex acquisition. As part of our review of our second quarter financial results for fiscal 2001, we performed an impairment assessment of identifiable intangible assets and goodwill recorded in connection with our various acquisitions. The assessment was performed primarily due to the significant decline in our stock price, the net book value of assets significantly exceeding our market capitalization, the significant underperformance of this acquisition relative to projections and the overall decline in industry growth rates which indicated that this trend may continue for an indefinite period.

During the quarters ended March 31, 2001 and September 30, 2001, we determined that certain equity investments in privately held companies had incurred a decline in value that was considered other-than-temporary. We recorded a charge of $24.4 million and $4.3 million during the quarters ended March 31, 2001 and September 30, 2001, respectively, in our results of operations to write down the investments to their estimated fair values.

There has been no impairment charge related to goodwill and other intangible assets recorded in fiscal 2002.

Merger related costs

On January 29, 2001, we signed a definitive agreement to acquire Agile Software Corporation (“Agile”), a provider of collaborative commerce solutions. However, Ariba and Agile mutually agreed to terminate their proposed merger without

payment of any termination fees due to the existing challenging economic and market conditions. We incurred merger related costs totaling $9.2 million related to financial advisor and other professional fees which were all expensed during the quarter ended March 31, 2001.

Interest income

Interest income for the quarter ended June 30, 2002 was $1.8 million, a decrease of 56% from interest income of $4.1 million for the quarter ended June 30, 2001. Interest income for the nine months ended June 30, 2002 was $6.3 million, a decrease of 60% from interest income of $15.7 million for the nine months ended June 30, 2001. The decrease was primarily attributable to lower invested cash, cash equivalents and investment balances and a decline in interest rates as of June 30, 2002.

Minority interests

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 June 30, 2002, minority interest of approximately $12.3 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 $0.3 million as an increase to other loss and $1.1 million 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 June 30, 2002 and 2001, respectively. We recognized $0.4 million and $1.8 million as an increase to other income for the minority interest’s share of Nihon Ariba K.K.’s loss for the nine month periods ended June 30, 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 June 30, 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 $54,000 and $0.2 million as an increase to other income for the minority interest’s share of the Ariba Korea, Ltd. loss for the quarters ended June 30, 2002 and 2001, respectively. We recognized $0.1 million and $0.2 million as an increase to other income for the minority interest’s share of the Ariba Korea, Ltd. loss for the nine month periods ended June 30, 2002 and 2001, respectively.

Provision for income taxes

We incurred operating losses for the quarters and nine month periods ended June 30, 2002 and 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 will not be realized. We incurred income tax expense of $1.0 million and $2.2 million during the quarters ended June 30, 2002 and 2001, respectively, and $3.0 million and $4.7 million during the nine month periods ended June 30, 2002 and 2001, respectively, primarily attributable to our international subsidiaries.

Liquidity and Capital Resources

As of June 30, 2002, we had $167.6 million in cash, cash equivalents and short-term investments, $80.2 million in long-term investments and $30.6 million in restricted cash, for total cash and investments of $278.4 million and ($1.4 million) in working capital. As of September 30, 2001, we had $217.9 million in cash, cash equivalents and short-term investments, $43.1 million in long-term investments and $32.6 million in restricted cash, for total cash and investments of $293.6 million and $57.6 million in working capital. Our working capital declined $59.0 million from September 30, 2001 to June 30, 2002, reflecting a reduction of current assets by $90.8 million (of which $37.1 million related to transfers of investments to non-current investments due to longer maturities) and a $31.9 million reduction of current liabilities.

Net cash used in operating activities was approximately $19.0 million for the nine months ended June 30, 2002, compared to $17.6 million of net cash provided by operating activities for the nine months ended June 30, 2001. Net cash used in operating activities for the nine months ended June 30, 2002 is primarily attributable to decreases in accounts payable, accrued compensation and related liabilities, accrued liabilities 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 decreases in accounts receivable and, to a lesser extent, prepaid expenses and other assets.

Net cash provided by investing activities was approximately $42.8 million for the nine months ended June 30, 2002 compared to $135.6 million of net cash used in investing activities for the nine months ended June 30, 2001. Net cash provided by investing activities for the nine months ended June 30, 2002 is primarily attributable to the redemption of our investments partially offset by the purchases of property and equipment. 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 $8.1 million for the nine months ended June 30, 2002 compared to $80.5 million of net cash provided by financing activities for the nine months ended June 30, 2001. Net cash provided by financing activities for the nine months ended June 30, 2002 is primarily from the proceeds from the exercise of stock options offset by the repurchase of our common stock and 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 as 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 $347.9 million over the 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. As part of this agreement, we are required to hold certificates of deposit totaling $25.7 million as a form of security through fiscal 2013, which is classified as restricted cash on the condensed consolidated balance sheets. In the quarter ended March 31, 2002, a certificate of deposit totaling $2.5 million as a security deposit for our headquarters was released.

Future minimum lease payments under all noncancelable capital and operating leases are as follows as of June 30, 2002 (in thousands):

Year ending June 30,	Capital leases		Operating leases
2003	$	180	$	43,096
2004		2		42,264
2005		—		40,851
2006		—		37,468
2007		—		33,483
Thereafter		—		179,520

Total minimum lease payments	$	182	$	376,682

Operating lease payments shown above exclude any adjustment for lease income due under noncancelable subleases of excess facilities, which amounted to $82.9 million as of June 30, 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 lines of credit, guarantees, standby repurchase obligations or other such arrangements.

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 our assumptions about estimated sublease income related to the estimated costs of abandoning excess leased facilities.

Although our existing cash, cash equivalent and investment balances together with our anticipated cash flows from operations will 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. After the next 12 months, we may find it necessary to obtain additional equity or debt financing. In the event additional financing is required, we may not be able to raise it on acceptable terms or at all.

Recent Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria for determining intangible assets acquired in a purchase method business combination that must be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. We have adopted the provisions of SFAS No. 141 and are required to adopt SFAS No. 142 effective October 1, 2002. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized until to the adoption of SFAS No. 142, after which only intangible assets with definite useful lives will continue to be amortized. The adoption of SFAS No. 141 did not have a significant impact on our condensed consolidated financial statements. Further, management does not expect the adoption of SFAS No. 142 to have a significant impact on our condensed consolidated financial statements except for the cessation of amortization of goodwill.

In August 2001, the FASB issued 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 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. We are required to adopt SFAS No. 144 no later than the fiscal year beginning after December 15, 2001, and plan to adopt its provisions effective October 1, 2002. Management does not expect the adoption of SFAS No. 144 to have a significant impact on our condensed consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The provisions of SFAS No. 145 relating to the rescission of SFAS No. 4 are effective for financial statements issued for fiscal years beginning after May 15, 2002, and the provisions relating to SFAS No. 13 are effective for transactions occurring after May 15, 2002. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, and amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. 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 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. 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 do not expect the adoption of SFAS No. 146 will have a significant impact on our condensed consolidated financial statements.

Risk Factors

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 currently 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 including our Form 10-K for our fiscal year ended September 30, 2001 as filed on December 31, 2001, actual results could differ materially from those projected in any forward-looking statements.

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 began shipping 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. As we adjust to evolving customer requirements and competitor pressures, we must 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, including risks associated with our recent acquisitions. 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. We expect the economic slowdown to continue to adversely impact our business for the next few quarters and perhaps significantly longer. As a result of the economic slowdown and other factors, we anticipate that total license revenues in fiscal 2002 will decline compared to fiscal 2001. 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. 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 $4.0 billion as of June 30, 2002, including cumulative charges for the amortization of goodwill and other intangible assets totaling $2.1 billion, impairment of goodwill and other intangible assets

totaling $1.4 billion, amortization of stock-based compensation totaling $81.5 million and business partner warrant expense totaling $68.9 million. We expect to incur significant losses for the foreseeable future for a number of reasons, including the following:

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We will continue to incur substantial non-cash expenses resulting from amortization of goodwill and other intangibles relating to acquisitions, deferred compensation and potentially the issuance of warrants;

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Although revenues for the quarter ended June 30, 2002 increased slightly compared to the quarter ended March 31, 2002, revenues from products and services declined in each of the three quarters preceding December 31, 2001 and may decline in the future;

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Although we have significantly reduced expense levels, we may need to further reduce expenses in the future should revenues decline; and

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We have significant cash commitments under noncancelable leases for excess office space. Net cash commitments, related expense accruals and possible future restructuring charges will depend on the level of sublease income we receive for this office space.

As of June 30, 2002, we had unamortized goodwill and other intangible assets of approximately $442.8 million which are 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 planned adoption of SFAS No. 142 (see note 1 of notes to condensed consolidated financial statements) on October 1, 2002, amortization of the remaining goodwill with an expected net book value of approximately $181.0 million will cease. Other identifiable intangible assets with an expected net book value of approximately $117.0 million at October 1, 2002 will continue to be amortized over their remaining useful lives, substantially all of which will expire in the quarter ending March 31, 2003. As a result of amortization of these intangible assets, we expect to incur significant losses at least through fiscal 2003 and perhaps beyond, even if our results of operations excluding amortization of intangible assets, deferred charges and special charges would otherwise be profitable.

Our Quarterly Operating Results Are Volatile and Difficult to Predict

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

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

Risks Related to Revenues

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fluctuations in demand for our products and services;

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changes in the average selling price of our products;

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changes in the timing of sales of our products and services;

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changes in the mix and number of our products and services;

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changes in the mix of our licensing arrangements and related timing of revenue recognition;

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actions taken by our competitors, including new product introductions and enhancements; and

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the current economic slowdown and recession affecting the economy generally or our industry in particular.

Risks Related to Expense

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payment of compensation to sales personnel based on achieving sales quotas and co-sale payments, referral fees and other commissions to our strategic partners based on our sales;

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royalties paid to third parties for technology incorporated into our products and services;

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our ability to control costs, including managing planned reductions in expense levels;

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costs resulting from the write off of intangible assets relating to recent and any future acquisitions; and

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fluctuations in non-cash charges related to the issuance of warrants to purchase common stock due to fluctuations in our stock price.

Risks Related to Operations

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our ability to develop, introduce and market new products and enhancements to our existing products on a timely basis;

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changes in our pricing policies and business model or those of our competitors;

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integration of our recent acquisitions and any future acquisitions; and

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our ability to scale our network and operations to support large numbers of customers, suppliers and transactions.

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 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. 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 Recently 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. In 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. Our strategic 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.

Revenues in Any Future Quarter May Be Adversely Affected to the Extent We Defer Recognizing Revenue from Contracts Signed That Quarter.

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. As a result, revenues in any given quarter may vary to the extent we enter into contracts where revenue under those contracts is recognized in future periods and revenues in any given quarter will therefore be a function of both contracts signed in such quarter and contracts signed in prior quarters. For example, during the nine month period ended June 30, 2002, the portion of license revenues recognized on a ratable basis remained relatively stable, compared to the nine month period ended June 30, 2001, during which the portion of license revenues recognized on a ratable basis was more variable.

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 June 30, 2002, we had unamortized goodwill and other intangible assets of approximately $442.8 million which are 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 planned adoption of SFAS No. 142 (see note 1 of notes to condensed consolidated financial statements) on October 1, 2002, amortization of the remaining goodwill with an expected net book value of approximately $181.0 million will cease. Other identifiable intangible assets with an expected net book value of approximately $117.0 million at October 1, 2002 will continue to be amortized over their remaining useful lives, substantially all of which will expire in the quarter ending March 31, 2003.

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 for a given quarter 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 $57.3 million for the three months ended June 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 in the Electronic Commerce Industry. 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 will 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 fluctuations in cash, cash equivalents and investments balances may be greater than presently anticipated. 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 enterprise-wide solutions that must be deployed with many users within a buying organization. Implementation of these solutions 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 June 30, 2002, revenues from Ariba Buyer and related products 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 June 30, 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:

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the market for Internet-based spend management applications is new;

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our network may not be able to support large numbers of buyers and suppliers, and increases in the number of buyers and suppliers may cause slower response times and other problems;

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our need to enhance the interface between Ariba Buyer, Ariba Enterprise Sourcing, our other Ariba products and the Ariba Supplier Network;

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our need to significantly enhance the features and services of the Ariba Supplier Network to achieve widespread commercial acceptance of our network; and

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our need to significantly expand our internal resources to support planned growth of the Ariba Supplier Network.

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

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

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

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

We Depend on Strategic Relationships with Our Partners.

We have established strategic relationships with certain outside companies. These companies are entitled to resell our products and/or to host our products for their customers. We cannot be assured that any of these resellers, ASP partners or hosting partners, or those we may contract with in the future, will be able to resell our products to an adequate number of customers. If our current or future strategic partners are not able to successfully resell our products or experience financial difficulties that impair their operating capabilities, our business could be seriously harmed. For example, we have formed a strategic alliance with IBM to market and sell targeted solutions. We also have strategic relationships with Softbank and its affiliates, as a minority shareholder of our Japanese subsidiary, Nihon Ariba K.K. from which we derive significant revenues. 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 could result in price reductions and reduced profit margins, and could result in loss of market share, any one of which could seriously harm our business. Competitors vary in size and in the 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 as this market continues to expand. 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. 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 Our Products and Services in a Timely and Cost-Effective Basis, Our Business Will Be Seriously Harmed.

We may fail to introduce or deliver new releases of our products or new potential offerings on a timely and cost-effective basis, or at all, particularly given the expansion of our product offering as a result of our recent acquisitions. The life cycles of our products are difficult to predict, because the market for our products is new and characterized by rapid technological change, changing customer needs and evolving industry standards. In developing new products and services, we may:

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fail to develop and market products that respond to technological changes or evolving industry standards in a timely or cost-effective manner;

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encounter products, capabilities or technologies developed by others that render our products and services obsolete or noncompetitive or that shorten the life cycles of our existing products and services;

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experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products and services;

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experience deferrals in orders in anticipation of new products or releases; or

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fail to develop new products and services that adequately meet market requirements or achieve market acceptance.

The introduction of Version 7.0 of Ariba Buyer was delayed significantly in the first quarter of fiscal 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, KPMG Consulting and PricewaterhouseCoopers 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 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. 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. A number of our competitors, including Oracle, SAP and PeopleSoft, have significantly more well-established relationships with these third party systems integrators, and these systems integrators may be more likely to recommend competitors’ products and services than our own. In addition, we cannot control the level and quality of service provided by our current and future implementation partners.

Some of Our Customers May Represent Credit Risks.

Some of our customers include small emerging growth companies. Many of these companies have limited operating histories, are operating at a loss and have limited access to capital. With the significant slowdown in U.S. economic growth in the past year and uncertainty relating to the prospects for near-term U.S. economic growth, 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.

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

Ariba Buyer, Ariba Enterprise Sourcing and our other products are complex. They may contain undetected errors or failures when first introduced or as new versions are released. This may result in loss of, or delay in, market acceptance of our products. We have in the past discovered software errors in our new releases and new products after their introduction. For example, in fiscal 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 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.

We Are the Target of Several Securities Class Action Complaints and are at Risk of Securities Class Action Litigation, Which Could Result in Substantial Costs and Divert Management Attention and Resources.

Between March 20, 2001 and June 5, 2001, several 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 of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, relating to our initial public offering. Specifically, among other things, these actions allege 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, and that such statements and omissions 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.

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 of 1933, but elected to proceed with their claims against such defendants under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. 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 are yet to be filed. We intend to defend against the complaints vigorously. Securities class action litigation could result in substantial costs and divert our management’s attention and resources, which could seriously harm our business.

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 goods and services procurement and other business processes. 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 still 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.

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 do United States laws 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.

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

Even after giving effect to our recent workforce reductions, the scope of our operations and our workforce has expanded significantly over a relatively short period. This expansion has placed a significant strain upon our management systems and resources. If we are unable to manage our expanded operations, our business will be seriously harmed. Our ability to compete effectively and to manage future expansion of our operations, if any, will require us to continue to improve our financial and management controls, reporting systems and procedures on a timely basis, and expand, train and manage our employee workforce. We have implemented new systems to manage our financial and human resources infrastructure. We may find that these systems and our personnel, procedures and controls are inadequate to support our future operations.

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

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:

•

currency exchange rate fluctuations;

•

seasonal fluctuations in purchasing patterns;

•

unexpected changes in regulatory requirements;

•

tariffs, export controls and other trade barriers;

•

longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

•

difficulties in managing and staffing international operations;

•

potentially adverse foreign tax consequences, including withholding in connection with the repatriation of earnings;

•

the burdens of complying with a wide variety of foreign laws;

•

the risks related to the recent global economic turbulence and adverse economic circumstances in Asia; and

•

political instability.

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 earnings every 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 March 31, 2000, we acquired TradingDynamics, a provider of Internet-based trading applications, and Tradex Technologies, a provider of solutions for electronic marketplaces. 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 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:

•

the diversion of management time and resources;

•

the difficulty of assimilating the operations and personnel of the acquired companies;

•

the potential disruption of our ongoing businesses;

•

the difficulty of incorporating acquired technology and rights into our products and services;

•

unanticipated expenses related to technology integration;

•

difficulties in maintaining uniform standards, controls, procedures and policies;

•

the impairment of relationships with employees and customers as a result of any integration of new management personnel; and

•

potential unknown liabilities associated with acquired businesses.

Our Stock Price Is Highly Volatile.

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

•

variations in our quarterly operating results;

•

announcements that our revenue or income are below analysts’ expectations;

•

changes in analysts’ estimates of our performance or industry performance;

•

general economic slowdowns;

•

changes in market valuations of similar companies;

•

sales of large blocks of our common stock;

•

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

•

loss of a major customer or failure to complete significant license transactions;

•

additions or departures of key personnel; and

•

fluctuations in stock market prices and volumes, which are particularly common among highly volatile securities of software and Internet-based companies.

We Disclose Pro Forma Financial Information.

We prepare and release quarterly unaudited financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We also disclose and discuss certain pro forma financial information in the related earnings release and investor conference call. This pro forma financial information excludes certain non-cash and special charges, consisting primarily of the amortization of goodwill and other intangible assets, impairment of goodwill, other intangible assets and equity investments, business partner warrants expense, stock-based compensation and restructuring and lease abandonment costs. We believe the disclosure of the pro forma financial information helps investors more meaningfully evaluate the results of our ongoing operations. However, we urge investors to carefully review the GAAP financial information 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 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.

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:

•

potentially inadequate development of the necessary communication and computer network technology, particularly if rapid growth of the Internet continues;

•

delayed development of enabling technologies and performance improvements;

•

delays in the development or adoption of new standards and protocols; and

•

increased governmental regulation.

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 Web 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 Web for commerce and communications. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. The Internet is a public network, and data is sent over this network from many sources. In the past, computer viruses, software programs that disable or impair computers, have been distributed and have rapidly spread over the Internet. Computer viruses could be introduced into our systems or those of our customers or suppliers, which could disrupt the Ariba Supplier Network or make it inaccessible to customers or suppliers. We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. To the extent that our activities may involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could expose us to a risk of loss or litigation and possible liability. Our security measures may be inadequate to prevent security breaches, and our business would be harmed if it does not prevent them.

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

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

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

In the normal course of business, we are exposed to market risk related to fluctuations in interest rates, market prices and foreign currency exchange rates. We address these risks through a risk management program that includes the use of derivative financial instruments. Under established procedures and controls, we enter into contractual arrangements or derivatives to hedge our exposure to foreign exchange rate risk. The counter parties to these contractual arrangements are major financial institutions. We do not use derivative financial instruments for speculative or trading purposes.

We develop products in the United States and market our products in the United States, Latin America, Europe, Canada, Asia Pacific 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 June 30, 2002 and 2001, approximately 30% and 22%, 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.

Foreign Currency Exchange Rate Risk

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 operations denominated in non-functional 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 through earnings every period. 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 and we do not defer any gains and losses, as they are all accounted for through operations each period.

The following table provides information about our foreign exchange forward contracts outstanding as of June 30, 2002 (in thousands):

		Contract Value					Unrealized Gain in USD
Foreign Currency	Buy/Sell	Currency		USD			Unrealized Gain in USD
AUD	Sell	(1,500	)	$	(854	)	$	14
CHF	Buy	500		$	321		$	15
GBP	Buy	800		$	1,176		$	47
EUR	Buy	1,200		$	1,137		$	46

The unrealized gain represents the difference between the contract value and the market value of the contract based on market rates as of June 30, 2002. Ariba had no foreign exchange forward contracts in place prior to fiscal 2001.

Given our foreign exchange position, a ten percent change in foreign exchange rates upon which these forward exchange contracts are based would result in exchange gains and losses. 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.

Interest Rate Risk

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. We do hold investments in both fixed rate and floating rate interest earning instruments which 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 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).

	Year ending June 30, 2003			Year ending June 30, 2004			Year ending June 30, 2005			Year ending June 30, 2006		Year ending June 30, 2007		Thereafter		Total
Cash equivalents	$	94,202		$	—		$	—		$	—	$	—	$	—	$	94,202
Average interest rate		1.81	%		—			—			—		—		—		1.81	%
Investments	$	63,508		$	55,850		$	24,391			—		—		—	$	143,749
Average interest rate		3.87	%		3.87	%		4.34	%		—		—		—		4.19	%

Total investment securities	$	157,710		$	55,850		$	24,391		$	—	$	—	$	—	$	237,951

Note that these amounts exclude equity investments and uninvested cash.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

Between March 20, 2001 and June 5, 2001, several 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 of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, relating to our initial public offering. Specifically, among other things, these actions allege 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, and that such statements and omissions 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.

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 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 base on estimates by management after consultation with legal counsel. However, litigation is inherently uncertain, and there can be no assurance that existing or future litigation will not result in outcomes that differ significantly from these estimates.

Item 2. Changes in Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

10.29*		Offer Letter, dated April 10, 2002, by and between Registrant and Kevin Costello.

10.30*		First Amendment to Standby Purchase Agreement, dated June 30, 2002, by and among Registrant, SOFTBANK EC HOLDINGS CORP. and Nihon Ariba K.K.

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

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

Confidential treatment has been requested with respect to certain provisions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

(b) Reports on Form 8-K

Not applicable.

SIGNATURES

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)

Date: August 14, 2002

EXHIBIT INDEX

Exhibit No.		Exhibit Title
10.29*		Offer Letter, dated April 10, 2002, by and between Registrant and Kevin Costello.

10.30*		First Amendment to Standby Purchase Agreement, dated June 30, 2002, by and among Registrant, SOFTBANK EC HOLDINGS CORP. and Nihon Ariba K.K.

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

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

Confidential treatment has been requested with respect to certain provisions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.