eBay

To our Stockholders, Partners, Employees and the eBay Community:

A DeÑning Year for eBay

The year 2002 was a deÑning time in eBay's history Ì a time when all the aspects of the business

came together to demonstrate the company's true potential. The eBay community led the company to
another year of record performance, reÖected in extraordinary growth across all metrics. Registered users
grew to nearly 62 million by the end of the year, an increase of 46% from the year-ago level. And those
users listed more than 638 million items in 2002, a 51% year-over-year increase. Gross merchandise sales,
which is the value of all items sold on eBay, totaled nearly $15 billion in 2002, a 60% increase over 2001.
For the Ñrst time in our history, net revenues surpassed $1 billion, totaling $1.21 billion for the full year.

This growth strengthens our conÑdence in the depth of the US market, the potential of international

expansion, and the promise of online payments. But more importantly, the outstanding momentum we
achieved in 2002 fully validates our long-term strategy, and sets the stage for an even broader, larger and
more engaged community and a stronger company for years to come.

As we look back on the year, there were a few powerful trends that strengthened and expanded the

eBay marketplace:

e-commerce continues to broaden its appeal. Consumers are becoming increasingly comfortable with

shopping online, as reÖected in the fact that more people are coming online than ever before and more
Internet users are shopping each month, both in the US and around the world. According to the
US Department of Commerce, total retail e-commerce in the United States jumped 27% in 2002 to more
than $45 billion. eBay is beneÑting from this trend as it is one of the Ñrst places that consumers want to
visit.

eBay is now a global, mainstream shopping destination. A truly global marketplace, eBay ended
2002 with a presence in 27 markets around the world and 62 million users in more than 150 countries. As
a result, the eBay community fully reÖects the diversity of the Internet. And when these users come to
eBay, they are Ñnding unparalleled selection and value across a wide range of items, including everything
from collectibles to clothing, and everyday household items to automobiles. In total, our users can Ñnd
more than 16 million items listed in more than 27,000 categories on any given day. Providing this broad
and ever-changing selection are eBay sellers, now representing every link in the distribution chain, from
large manufacturers and wholesalers, to small businesses and individual merchants.

Our partnership with the eBay community continues to drive innovation and strengthen the
marketplace. Our sellers are quick to identify trends and oÅer new types of goods at a pace nearly
impossible anywhere else. Their constant innovation makes a compelling user proposition, which attracts
more shoppers and improves the overall marketplace.

eBay's strategy of managing the marketplace and listening to the community enables us to develop
features and functionality that assist sellers as well as buyers. We help our users become successful by
improving the experience, building out new and existing categories, helping sellers expand sales, attracting
and activating buyers, making online payments easier, and creating new communities around the world.

Perhaps nothing illustrates our role as marketplace manager better than our strategy to continuously

simplify and improve the trading process. eBay's most signiÑcant achievement in this area in 2002 was the
acquisition of PayPal, the leading online payment service that allows any business or consumer with an
email address to securely, conveniently, and cost-eÅectively send and receive payments online. Payment is
a vital function to trading on eBay and integrating PayPal's functionality into the eBay platform is
expanding trading, improving trust and safety, and making the eBay user experience easier, faster and safer
for everyone. Having only completed the acquisition of PayPal in October, our Payments business has
become a third major engine of growth, both on eBay and oÅ.

The eBay Community's Success is eBay's Success

Both individually and in the aggregate, these trends strengthened and expanded the company across

many elements in 2002. And combined with a continued focus on execution and careful investment, these
trends also led to outstanding Ñnancial performance for the company.

In every quarter throughout 2002, eBay's U.S. business, excluding payments, saw accelerating year-

over-year revenue growth. For the full year, eBay's International business grew 165% over 2001, reÖecting
outstanding growth in our largest international markets, such as Germany, the United Kingdom, and
Korea, and accelerating trends in many of our earlier stage European markets.

On a consolidated basis, net revenues in 2002 increased 62% over the prior year, operating margins
expanded more than ten percentage points, and net income increased 176% to a record $250 million. These
proÑts also drove record cash Öows Ì free cash Öows for 2002 increased 75% to $341 million. This left our
balance sheet in its strongest position ever, with more than $1.8 billion in cash and investments and total
assets of more than $4.1 billion.

A Promising Future

The eBay marketplace continues to deliver on its promise with each passing year, and 2002 was no

exception. There are few companies today achieving eBay's rate of growth, while expanding operating
margins and generating increasing amounts of cash, while continuing to make important investments to
strengthen the unique long-term prospects of the business. We are excited about eBay's future and we
believe that 2003 will be another year where we see increasing success for our users, strengthening core
capabilities of the company, and record Ñnancial performance.

In 2003 we will focus heavily on marketing and promotional activities to accelerate trading on the
site. We will make product development advances that will make it easier and faster for our users to trade,
and technology innovations that expand the platform itself. We are going to further integrate payments,
and continue to build customer support and trust & safety so that users can enjoy an even better
experience than they do today. We're going to invest heavily in international expansion, to tap the huge
potential that appears to be the hallmark of Germany, the UK, Korea and so many of the other markets
we've entered. And we're going to do all of this with the same Ñnancial discipline we have always shown
by staying true to our strategy of balancing returns with appropriate investment to capitalize on the
company's long-term opportunities.

We would like to express our gratitude to eBay's stockholders, partners, and employees for their

continued support. In particular, we would like to oÅer special thanks to the eBay community, who
continues to drive the growth and evolution of the business. Working together with our community, we
look forward to even greater success to come.

Pierre Omidyar
Founder and Chairman of the Board

Meg Whitman
President and CEO

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
≤ ANNUAL  REPORT  PURSUANT  TO  SECTION  13  OR  15(d)  OF  THE  SECURITIES

EXCHANGE ACT OF 1934 for the Ñscal year ended December 31, 2002.

OR

n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934 for the Transition Period from

to

.

Commission Ñle number 000-24821
eBay Inc.

(Exact name of registrant as speciÑed in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

2145 Hamilton Avenue
San Jose, California
(Address of principal executive oÇces)

77-0430924
(I.R.S. Employer
IdentiÑcation Number)

95125
(Zip Code)

(408) 376-7400
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: None
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: Common Stock

Indicate by check mark whether the registrant (1) Ñled all reports required to be Ñled 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 Ñle such reports), and (2) has been subject to such Ñling requirements for the past 90 days. Yes ≤ No n
Indicate by check mark if disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrant's knowledge, in deÑnitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. n

Indicate  by  check  mark  whether  the  registrant  is  an  accelerated  Ñler  (as  deÑned  in  Exchange  Act

Rule 12b-2). Yes ≤ No n

As of June 28, 2002, the last business day of the registrant's most recently completed second Ñscal quarter, there
were 281,627,707 shares of the registrant's common stock, $0.001 par value, outstanding, which is the only class of
common or voting stock of the registrant issued as of that date. The aggregate market value of the voting stock held by
non-aÇliates, computed by reference to the closing price for the common stock as quoted by the Nasdaq National Stock
Market as of that date, was approximately $10,505,600,000. Shares of common stock held by each executive oÇcer and
director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such
persons may be deemed to be aÇliates. This determination of aÇliate status is not necessarily a conclusive determination
for other purposes. 

As of March 1, 2003, there were 314,555,966 shares of the registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain exhibits Ñled with the registrant's prior annual reports to security holders, registration statements and current

reports are incorporated by reference into Item 15(a)(3) of this report.

FORWARD LOOKING STATEMENTS

PART I

This Annual Report on Form 10-K contains forward-looking statements based on our current

expectations about our company and our industry. You can identify these forward-looking statements when
you see us using words such as ""may,'' ""will,'' ""should,'' ""expect,'' ""anticipate,'' ""believe,'' ""estimate,''
""intend,'' ""plan'' and other similar expressions. You can also identify forward-looking statements by
discussions of strategy, plans or intentions. These forward-looking statements involve risks and
uncertainties. Our actual results could diÅer materially from those anticipated in these forward-looking
statements as a result of the factors described in the ""Risk Factors That May AÅect Results of Operations
and Financial Condition'' section of Management's Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this report. We undertake no obligation to publicly update any
forward-looking statements for any reason, even if new information becomes available or other events
occur in the future.

ITEM 1: BUSINESS

eBay Inc. was formed as a sole proprietorship in September 1995, and was incorporated in California

in May 1996. In April 1998, we reincorporated in Delaware and in September 1998 we completed the
initial public oÅering of our common stock. Our principal executive oÇces are located at 2145 Hamilton
Avenue, San Jose, California, 95125, and our telephone number is (408) 376-7400. When we refer to
""we,'' ""our'' or ""eBay'' in this Annual Report on Form 10-K, we mean the current Delaware corporation
(eBay Inc.) and its California predecessor, as well as all of our consolidated subsidiaries. When we refer to
""eBay.com,'' we mean the online marketplace located at www.ebay.com. When we refer to ""PayPal,'' or
""PayPal.com,'' we mean the global payments platform located at www.paypal.com.

Our Mission

Our mission is to build the world's most eÇcient and abundant marketplace in which anyone,
anywhere, can buy or sell practically anything. We pioneered online trading by developing a Web-based
marketplace in which a community of buyers and sellers are brought together in an entertaining, intuitive,
easy-to-use environment to browse, buy and sell an enormous variety of items. Through our PayPal service,
we enable any business or consumer with email to send and receive online payments securely, conveniently
and cost-eÅectively.

Our Marketplace

Our marketplace exists as an online trading platform that enables a global community of buyers and

sellers to interact and trade with one another. Our role is to create, maintain, and expand the technological
functionality, safety, ease-of-use, and reliability of the trading platform while at the same time, supporting
the growth and success of our community of users.

Our Platform

Our trading platform is a fully automated, topically arranged, intuitive and easy-to-use online service
that is available, 24 hours-a-day, seven days-a-week (subject to a weekly scheduled two-hour maintenance
period), enabling sellers to list items for sale in either auction or Ñxed-price formats, buyers to bid for
and/or purchase items of interest, and all eBay users to browse through listed items from any place in the
world at any time. The platform includes software tools and services available either for no charge or for a
fee, that allow buyers and sellers to more easily trade with one another. Our software tools such as: eBay
Anywhere, which provides wireless connectivity to eBay; Seller's Assistant, Turbo Lister, and Selling
Manager, which automate the selling process; the Freight Resource Center, which allows users to calculate
shipping costs; and PayPal, which facilitates online exchange of funds, are all designed to make our trading

2

process easier and more eÇcient. Whether provided by us or our commercial partners, services such as our
trust and safety programs, user veriÑcation, buyer protection and assurance programs, vehicle inspections,
escrow, authentication and appraisal are all intended to create a safer trading environment.

Our Community

Our community of users is the largest and one of the most loyal online trading communities on the
Web. We have aggregated a signiÑcant number of buyers, sellers and items listed for sale, which in turn
has resulted in an extremely vibrant trading environment. Our sellers enjoy generally high conversion rates
and buyers enjoy an extensive selection of broadly priced goods and services. Key components of our
community philosophy are maintaining an honest and open marketplace and treating individual users with
respect. We seek to maintain the satisfaction and loyalty of our frequent buyers and sellers by oÅering a
variety of community and support features such as announcement and bulletin boards, customer support
boards and personal pages as well as other topical or category-speciÑc information exchanges. By ensuring
that all users are subject to the same rules and fees, we have created a level playing Ñeld enabling
individuals and businesses of all types and sizes to access broad markets and compete equally.

Our Value Proposition

Our marketplace makes ineÇcient markets more eÇcient.

Traditional oÉine marketplaces can be ineÇcient because:

‚ They are fragmented and regional in nature making it diÇcult and expensive for buyers and sellers

to meet, exchange information and complete transactions;

‚ They oÅer a limited variety and breadth of goods;

‚ They often have high transaction costs due to intermediaries; and

‚ They are information ineÇcient, as buyers and sellers lack a reliable and convenient means of

setting prices.

We make these ineÇcient marketplaces more eÇcient because:

‚ Our global community of users can easily and inexpensively communicate, exchange information

and complete transactions;

‚ Our marketplace includes tens of millions of items creating a very wide variety and selection of

goods;

‚ We bring buyers and sellers together for a fee much lower than those of traditional intermediaries;

and

‚ Our marketplace provides for eÇcient information exchange.

In particular, large markets with broad buyer and seller bases, wide product ranges, and moderate

shipping costs have been successful on eBay. Our marketplace is most eÅective, relative to available
alternatives, at addressing markets of new and scarce goods, end-of-life products, and used and vintage
items.

Our Strategy

We intend to achieve our mission of becoming the world's most eÇcient and abundant marketplace
by creating marketplace conditions that enable our users' success. By continuing to foster the vibrancy of
the world's largest network of buyers and sellers and by making the online trading experience faster, easier
and safer, we better enable the success of our user community.

3

Growth of eBay User Activity

Our success has been largely dependent upon the success of our community of individual users. This
success is reÖected in the growth of conÑrmed, registered users from two million at December 31, 1998 to
62 million at December 31, 2002. At December 31, 2002, we had nearly 28 million active users, based on
activity over a trailing 12-month period, compared to nearly 18 million at December 31, 2001. We deÑne
an active user as any user who bid on, purchased, or listed an item during the prior 12 months. We attract
buyers and sellers to our community by oÅering:

Buyers

‚ Selection
‚ Convenience
‚ Entertainment
‚ Value

Sellers

‚ Access to broad markets
‚ Low distribution costs
‚ Ability to maximize prices and increase

sales

A Faster, Easier and Safer Trading Experience

Payment Services

Providing more eÇcient and more eÅective methods of payment is essential to creating a faster, easier
and safer online trading experience. Traditional payment methods such as checks, money orders, and credit
cards via merchant accounts all present various obstacles to the online trading experience, including
lengthy processing time, inconvenience, and high costs.

Through our acquisition of PayPal, Inc. on October 3, 2002, we intend to accelerate the velocity of

trade on eBay by eliminating the various obstacles presented by traditional payment methods. PayPal
enables any business or consumer with email access in 38 countries to send and receive online payments
securely, conveniently and cost-eÅectively. PayPal's network builds on the existing Ñnancial infrastructure
of bank accounts and credit cards to create an international payment system. PayPal delivers a product
well suited for small businesses, online merchants, individuals and others.

Our goal for PayPal is to become the Web's most convenient, secure, and cost-eÅective payment
solution. PayPal currently oÅers its account-based system in English to users in 38 countries including the
United States. For the post-acquisition period from October 4, 2002 through December 31, 2002, PayPal's
payment volume sent to business accounts, which we refer to as Total Payment Volume, or TPV, totaled
$2.1 billion. PayPal's TPV consists mainly of payments to small businesses. Currently, the majority of
these payments relate to sales of goods and services through online trading platforms, primarily on eBay.
As of December 31, 2002, PayPal had 23 million accounts. During the post-acquisition period from
October 4, 2002 through December 31, 2002, users of eight million of these accounts sent or received a
payment that resulted in a fee. As of December 31, 2001, PayPal had nearly 13 million total accounts, of
which eight million sent or received a payment that resulted in a fee during the year ended December 31,
2001.

PayPal has achieved its rapid growth through a combination of wide adoption on eBay.com and our

website in the United Kingdom, user convenience, competitive pricing and robust customer safeguards.
During the year ended December 31, 2002, PayPal's total number of accounts grew by 10.5 million, an
average of 29,000 per day. For the post-acquisition period from October 4, 2002 through December 31,
2002, PayPal processed an average of 440,000 payments per day, totaling $24.0 million in daily volume.
The average payment amount sent during this period was $55.

Geographic Expansion

The continued geographic expansion of the eBay marketplace is critical to creating a faster, easier and

safer online trading experience. In 2002, eBay, together with certain minority-owned companies,
unconsolidated subsidiaries and aÇliates, increased its geographic reach to 27 countries including websites

4

in the People's Republic of China and Taiwan. As of December 31, 2002, through our wholly owned and
majority-owned subsidiaries and aÇliates, we reached the following countries:

‚ Australia
‚ Austria
‚ Belgium
‚ Canada
‚ France
‚ Germany

‚ Ireland
‚ Italy
‚ the Netherlands
‚ New Zealand
‚ Singapore
‚ South Korea

‚ Spain
‚ Sweden
‚ Switzerland
‚ Taiwan
‚ United Kingdom
‚ United States

As of December 31, 2002, through investments in unconsolidated subsidiaries and aÇliates, we

reached the following countries:

‚ Argentina
‚ Brazil
‚ Chile
‚ Columbia

‚ Ecuador
‚ Mexico
‚ People's Republic of China

‚ Uruguay
‚ Venezuela

The globalization of the eBay marketplace provides buyers access to an even greater supply of items

and provides sellers an even broader audience of potential customers.

Category Growth

Category growth both in number and size within the eBay marketplace is a key element in creating a

faster, easier, and safer online trading experience. In 2002, we made signiÑcant investments to grow
existing categories and to expand the number of categories in the eBay marketplace. By focusing
development and marketing eÅorts around re-organized major categories, we achieved greater than 10%
growth in all of our major categories and increased the number of categories under which eBay users can
list goods for sale from 10, when eBay was Ñrst introduced, to more than 22,000 as of December 31, 2002.

As of December 31, 2002, listings on eBay were organized under the following categories:

Specialty Sites

‚ eBay Motors
‚ eBay Stores
‚ Half.com by eBay
‚ PayPal
‚ Sothebys.com

‚ Home

‚ Sports

‚ Baby
‚ Home Dπecor
‚ Lawn & Garden
‚ Kitchen
‚ Pet Supplies
‚ Tools

‚ Jewelry & Watches
‚ Movies & DVDs
‚ Music
‚ Musical Instruments
‚ Pottery & Glass
‚ Real Estate

‚ Fan Shop
‚ Memorabilia
‚ Sporting Goods

‚ Stamps
‚ Tickets
‚ Toys & Hobbies
‚ Crafts
‚ Diecast
‚ Travel
‚ Everything Else
‚ Gifts
‚ Health & Beauty
‚ More

Major Categories

‚ Antiques
‚ Art
‚ Books
‚ Business & Industrial
‚ Cars & Other Vehicles

‚ Cars
‚ Motorcycles
‚ Parts

‚ Clothing and
Accessories

‚ Coins
‚ Collectibles
‚ Dolls & Bears
‚ Electronics and
Computers
‚ Computers & OÇce
‚ Consumer
Electronics

‚ Networking
‚ PDAs
‚ Photo
‚ Video Games

5

Each major category has numerous subcategories, with the most popular items sold on eBay being
those that are relatively standardized, well represented with a photo, small and easily shipped and relatively
inexpensive.

The eBay Online Trading Experience

The eBay online trading experience begins with a visit to the eBay home page at www.ebay.com or
any of eBay's international sites. eBay's home page contains a listing of major categories, featured items
and theme-oriented promotions. Users can search for items to browse and buy, go to a speciÑc item
category, go to a specialty site such as eBay Motors, eBay Stores, or Half.com or begin listing an item for
sale.

Registration

Any visitor to eBay.com and our international websites can browse through the eBay service and view

the items listed for sale. To bid on, list or purchase an item, buyers and sellers must Ñrst register with
eBay by completing a short online form and conÑrmation process.

Buying on eBay

Users can search for speciÑc items by browsing through a list of items within a category or

subcategory and then ""click through'' to a detailed description for a particular item. Users can also search
speciÑc categories, interest pages or the entire database of listings using keywords to describe their areas of
interest. Our search engine generates lists of relevant items with links to detailed descriptions. Each item is
assigned a unique identiÑer so that users can easily search for and track speciÑc items. Users also can
search for a particular bidder or seller by name to review his or her listings and feedback history and
search for products by speciÑc region or other attributes. Once a user has found an item and registered on
eBay.com, the user may enter a bid for the maximum amount he or she is willing to pay at that time, or
for those listings that oÅer the Buy-It-Now feature, purchase the item by accepting the Buy-It-Now price
established by the seller. In the event of competitive bids, the eBay service automatically increases bidding
in increments based upon the current high bid, up to the bidder's maximum price.

We encourage direct interaction between buyers and sellers. Potential buyers wishing additional
information about a listed item can contact the seller through email. We believe that this interaction
between potential buyers and sellers enhances the trading experience on eBay and is an important element
of our service. Once each bid is made, we send an email conÑrmation to the bidder and an outbid notice
to the next highest bidder and automatically update the item's auction status. During the course of the
transaction, we notify bidders immediately via email if they are outbid. Buyers are not charged for making
bids or purchases through eBay. In addition, buyers can specify items of interest on a service called
""Favorite Searches'' (previously called ""Personal Shopper'') and receive automated email messages when
these particular items are available for sale on eBay.com.

Selling on eBay

Users can sell items on eBay.com by registering and selling items on their own, or with the help of a

Trading Assistant.

Registering and Selling Items

Registered sellers can list a product for sale by completing a short online form or using ""Seller's
Assistant,'' ""Turbo Lister'' or third-party tools that facilitate the listing of multiple items. The seller selects
a minimum price for opening bids for the item and chooses whether the sale will last three, Ñve, seven or
10 days. Additionally, a seller may select a reserve price for an item, which is the minimum price at which
the seller is willing to sell the item and is typically higher than the minimum price set for the opening bid.
The reserve price is not disclosed to bidders. Sellers with appropriate feedback ratings may also choose to

6

use the Buy-It-Now feature at the time of listing, which allows sellers to name a price at which they
would be willing to sell the item to any buyer. Listings that oÅer the Buy-It-Now feature are conducted in
the normal auction-style format, but will also feature a Buy-It-Now icon and price. Until the Ñrst bid is
placed, or in the case of a reserve auction, until the reserve price is met, buyers have the option to buy the
item instantly at the speciÑed price without waiting for the auction to end. A seller can elect to sell items
in individual item listings or, if he or she has multiple identical items, can elect to hold a ""Dutch
Auction.'' For example, an individual wishing to sell 10 identical watches could hold 10 individual auctions
or hold a Dutch Auction in which the 10 highest bidders would each receive a watch at the price bid by
the tenth highest bidder. To be eligible to hold a Dutch auction, a seller must have a suÇciently high
feedback rating and must have been a registered seller for at least 60 days. A seller may also specify that
an auction will be a private auction. With this format, bidders' email addresses are not disclosed on the
item screen or bidding history screen.

Sellers generally pay a nominal listing fee to list items for sale. By paying incremental placement fees,
sellers can have items featured in various ways. For example, a seller can highlight his or her item for sale
by utilizing a bold font for the item heading, have his or her auction displayed as a ""Featured Auction,''
which allows the seller's item to be rotated on the eBay home page, or utilize the Buy-It-Now feature,
which enables a seller to close an auction instantly once a speciÑed price is reached.

When an auction ends, the eBay system validates whether a bid has exceeded the minimum price,
and the reserve price if one has been set. If the auction was successful or if the buyer elected the Buy-It-
Now feature, we automatically notify the buyer and seller via email, and the buyer and seller can then
complete the transaction independent of us. At the time of the email notiÑcation, we generally charge the
seller a Ñnal value fee. eBay does not take possession of either the item being sold or the buyer's payment
for the item. Rather, the buyer and seller must independently arrange for the shipment of and payment for
the item, with the buyer typically paying for shipping.

Under the terms of our user agreement, if a seller receives one or more bids above the stated

minimum or reserve price, whichever is higher, the seller is obligated to complete a transaction. We have
no power to force the seller or buyer to complete the transaction, other than to suspend them from using
the eBay service in the future. In the event the buyer and seller are unable to complete the transaction
and the seller notiÑes us, we have the right to credit the seller the amount of the Ñnal value fee.

Invoices for listing, feature and Ñnal value fees are sent via email to sellers on a regular (at least
monthly) basis. We require all new sellers to have a credit card account on Ñle. Sellers who pay us by
credit card are charged shortly after the invoice is sent. A summary of our eBay.com fee structure, as of
March 15, 2003, is provided below. All pricing is subject to change.

Listing Fees
Minimum Bid, Opening
Value or Reserve Price

$0.01 - $9.99
$10.00 - $24.99
$25.00 - $49.99
$50.00 - $199.99
$200.00 and up

Listing Fee

Special Categories

Listing Fee

$0.30
$0.55
$1.10
$2.20
$3.30

Passenger Vehicles or
Other Vehicles

Motorcycles

Real Estate

$40.00

$25.00

$50.00 - $300.00

Reserve Price

Reserve Price Fee*

$0.01 - $24.99
$25.00 - $99.99
$100.00 and up

$0.50
$1.00
1% of reserve price
(up to a maximum
fee of $100.00)

* Reserve price fee is fully refundable if item sells

7

Feature Fees

Seller Feature

Home Page Featured

Featured Plus!

Highlight
Bold
Buy-It-Now

Final Value Fees

Sale Price

Up to $25
$25.01 to $1,000
Over $1,000

Description

Feature Fee

Item is listed in a Special Featured section and is also
rotated on the eBay home page.
Item appears in the category's Featured Item section and
in bidder's search results.
Item listing is emphasized with a colored band.
Item title is listed in bold.
Allows the seller to close an auction instantly for a
speciÑed price.

$99.95

$19.95

$5.00
$1.00
$0.05

Final Value Fee

5.25% of sale price
Above plus 2.75% of amount over $25
Above plus 1.5% of the amount over $1,000

Special Categories

Final Value Fee

Passenger Vehicles or
Other Vehicles

Motorcycles

Trading Assistants

$40.00
$25.00

The eBay Trading Assistants program is a network of experienced eBay sellers who have indicated
their willingness to assist others in the sale of items for a fee. Interested sellers can search the Trading
Assistant Directory to Ñnd someone to sell items on their behalf. The Trading Assistants and their clients
negotiate the terms and conditions of these services.

Payments

Following a completed transaction, eBay buyers and sellers can exchange funds by the payment
method of their choice, typically electronically through our PayPal global payments platform and also via
check or money order. PayPal enables any business or consumer with email to send and receive online
payments securely, conveniently and cost-eÅectively. PayPal's email-driven system builds on the legacy
Ñnancial infrastructure of bank accounts and credit cards to create an online payment network available to
users in 38 countries.

How PayPal Works

Joining the Network

To send or receive a payment, a user Ñrst must open a PayPal account. A new user typically opens an

account to send money for an eBay purchase or a purchase on another website, for services rendered, or
for a payment to an individual in lieu of cash. Allowing new users to join the network at the time of
making or receiving payments encourages PayPal's natural, user-driven growth. PayPal's account sign-up
process asks each new user to register with PayPal his or her name, street address and email address,
which serves as the unique account identiÑer.

8

Making Payments

Senders make payments at the PayPal website, at an item listing on eBay or another online

marketplace where the seller has integrated PayPal's Instant Purchase Feature, or at the sites of merchants
that have integrated PayPal's Web Accept feature. To make a payment at PayPal's website, a sender logs
in to his or her account and enters the recipient's email address and the amount of the payment. To make
a payment through Instant Purchase or Web Accept, a sender selects an item for purchase, conÑrms the
payment information and enters his or her email address and password to authorize the payment. In both
scenarios, PayPal debits the money from the sender's PayPal balance, credit card or bank account and
instantly credits it to the recipient's PayPal balance in the case of an eCheck payment, the funds are
credited to the recipient's PayPal balance after two to three business days. In turn, the recipient can make
payments to others or withdraw his or her funds at any time via check, electronic funds transfer, or via the
PayPal debit card. PayPal earns revenues when an account receives a payment.

Funding Payments

Senders fund payments in three ways:

‚ from the sender's existing PayPal balance;

‚ from the sender's bank account, using the Automated Clearing House, or ACH, network; or

‚ from the sender's credit card.

We incur funding costs on payments at varying levels based on the nature of the payment. To those

users who choose to maintain PayPal balances, we oÅer a money market rate of return on balances placed
in PayPal's Money Market Fund. The PayPal Money Market Fund, which is invested in a portfolio
managed by Barclays Global Fund Advisors, bore a current compound annual yield of 1.44% as of
December 31, 2002.

We use the terms ""balance'' and ""PayPal balance'' to refer to funds that PayPal customers choose

either to invest in the PayPal Money Market Fund (oÅered only to U.S. customers) or to authorize
PayPal to place in FDIC-insured pooled bank accounts as agent of PayPal's customers. These funds
belong to our customers and hence are not reÖected in our statement of Ñnancial position. Funds belonging
to our customers that are not invested in FDIC-insured accounts, such as funds in transit to or from the
customer's bank, are shown as a liability on our balance sheet.

VeriÑcation of PayPal's Account Holders

In order for senders to fund payments from their bank accounts, they Ñrst must become veriÑed
PayPal users through our Random Deposit technique. Under this technique, we make two deposits ranging
from 1 to 99 cents to the user's bank account. To verify ownership of the account, the user then enters the
two amounts as a four-digit code at the PayPal website. In addition to allowing funding via bank accounts,
veriÑcation also removes some spending limits on users' accounts and gives them reputational advantages
when transacting with other members of the PayPal community.

Withdrawing Money

Each U.S.-based account holder may withdraw money from his or her PayPal account via an ACH
transfer to his or her bank account or by a mailed check from PayPal. ACH withdrawals may take three
to Ñve business days to arrive in the account holder's bank account, depending on the bank. Mailed checks
may take one to two weeks to arrive and PayPal charges $1.50 per check. Qualifying PayPal business users
also can receive a PayPal ATM/debit card, which provides instant liquidity to their respective PayPal
account balances. ATM/debit card holders can withdraw cash, for a $1.00 fee per transaction, from any
ATM connected to the Cirrus or Maestro networks and can make purchases at any merchant accepting
MasterCard.

9

Other Services

Customer Support

We devote signiÑcant resources to providing personalized, accurate and timely support services to our

community of users. Buyers and sellers can contact us through a variety of means, including email, text
chat and an expanding phone capability. We are focusing our resources on expanding our accessibility and
capacity, increasing our category speciÑc support, extending our online self-help features, and improving
our systems and processes to enable us to provide the most eÇcient and eÅective support possible.

Value-Added Services

We provide a variety of ""pre-trade'' and ""post-trade'' services to enhance the user experience and

make trading faster, easier, and safer. ""Pre-trade'' services simplify the listing process and include photo
hosting, authentication and seller productivity software. ""Post-trade'' services make transactions easier and
more comfortable to complete, and include payment processing, insurance, vehicle inspections, escrow,
shipping and postage. We currently provide these services directly or through contractual arrangements
with third parties.

Trust and Safety Programs

We have developed a number of programs to make eBay users more comfortable dealing with

unknown trading partners and completing commerce transactions on the Internet.

Feedback Forum

eBay's Feedback Forum encourages every user to provide comments and feedback on other eBay

users with whom he or she interacts and enables every user to view other users' proÑles that include
feedback ratings and incorporate user experiences. Every registered eBay user has a feedback proÑle
containing compliments, criticisms and other comments by users who have conducted business or
interacted with the person. The Feedback Forum requires feedback to be related to speciÑc transactions
and provides an easy tool for users to match transaction numbers with the user names of their trading
partners. This information is recorded in a feedback proÑle that includes a feedback rating for the person
and comments from other eBay users who have interacted with that person over the past seven days, the
past month, the past six months and beyond. Users who develop positive reputations will have a color-
coded star symbols displayed next to their user names to indicate the number of positive feedback ratings
they have received. Before bidding on items listed for sale, eBay users are encouraged to review a seller's
feedback proÑle to check his or her reputation within the eBay community.

The terms of our user agreement prohibit actions that would undermine the integrity of the Feedback
Forum, such as a person's leaving positive feedback about himself or herself through multiple accounts or
leaving multiple negative feedback for others through multiple accounts. The Feedback Forum has several
automated features designed to detect and prevent some forms of abuse. For example, feedback posting
from the same account, positive or negative, cannot aÅect a user's net feedback rating (i.e., the number of
positive postings, less the number of negative postings) by more than one point, no matter how many
comments an individual makes. Also, a user can only leave feedback for completed transactions. Users
who receive a suÇciently negative net feedback rating have their registrations suspended and are unable to
bid on or list items for sale. We believe our Feedback Forum is extremely useful in overcoming initial user
hesitancy when trading over the Internet, as it reduces the anonymity and uncertainty of dealing with an
unknown trading partner.

SafeHarborTM Program

In addition to the Feedback Forum, we oÅer the SafeHarborTM program, which provides guidelines
for trading, provides information to resolve user disputes and responds to reports of misuses of the eBay
service. eBay's SafeHarborTM staÅ investigates users' complaints of possible misuse of the eBay service and

10

takes appropriate action, including issuing warnings to users or suspending users from bidding on or listing
items for sale. Some of the complaints the SafeHarborTM staÅ investigates include various forms of bid
manipulation, malicious posting of negative feedback and posting of illegal items for sale. The
SafeHarborTM group is organized into three areas: Investigations, Fraud Prevention and Community
Watch. The Investigations team investigates reported trading infractions and misuse of the eBay service.
The Fraud Prevention department provides information to assist users with disputes over the quality of the
goods sold or potentially fraudulent transactions and, upon receipt of an oÇcially Ñled, written claim of
fraud from a user, will generally suspend the oÅending user from the eBay service or take other action as
appropriate. The Community Watch department investigates the listing of illegal, infringing or
inappropriate items on the eBay.com site and our international websites and violations of certain of our
policies. Upon receipt of a valid written claim of intellectual property infringement by the owner of the
intellectual property, we will remove the oÅending item. Users who repeatedly infringe intellectual property
rights are suspended. In addition, we have increased the number of people reviewing potentially illegal
items. Our trust and safety initiatives, including user identity veriÑcation, insurance, integrated escrow and
authentication, are key elements of our programs designed to make eBay a safe place to trade.

My eBay

We oÅer My eBay, which permits users to receive a report of their recent eBay activity, including

bidding, selling, account balances, favorite categories and recent feedback. Users with their own Web
pages also may post links from their Web pages to eBay and list the items they are selling on eBay. We
also oÅer About Me, which provides users the opportunity to create their own personal home page free of
charge on eBay using step-by-step instructions. The About Me home page can include personal
information, items listed for sale, eBay feedback ratings, images and links to other favorite sites.

eBay Foundation

In June 1998, we donated 643,500 shares of our common stock to the Community Foundation Silicon

Valley, a tax-exempt donor-advised public charity, and established a fund known as the ""eBay
Foundation.'' Since its inception, the eBay Foundation has made millions of dollars in grants to dozens of
programs and initiatives focused on education and expanded access to technology. We also seek user
suggestions for worthwhile charities through our website, where charity auctions and other unique
promotions are held to support such causes.

Technology

Our eBay Platform

The eBay platform is composed of a scalable transaction processing system, consumer user interface,

and externally accessible Application Programming Interface, API, for third-party integrations. The
scalable system is primarily based on internally developed proprietary software, but also includes selected
vendor components. The eBay platform supports the full selling and buying processes, including initial
registration for the service, placing bids and managing outbids, listing items for sale, and auction close.
The platform also manages various notiÑcations for sellers and buyers, including daily status updates, bid
and outbid notices, registration conÑrmations, account change notices, billing notices, and end-of-auction
notices. The platform maintains user registration information, billing accounts, current item listings and
historical listings. All information is regularly archived for record-keeping and analysis purposes. The
platform regularly updates a comprehensive search engine with the titles and descriptions of items, as well
as pricing and bidding updates for active items. The platform also updates the seller's billing account every
time an item is listed, a feature is selected, or an auction closes with a bid in excess of the seller-speciÑed
minimum bid. The platform sends electronic invoices to all sellers on a regular (at least monthly) basis. In
addition to these features, the eBay service also supports a community bulletin board and chat areas where
users and eBay customer support personnel can interact. Our overall system volume is signiÑcant, with

11

peak usage of 580 million pageviews per day, 60 million item searches per day, and 4.5 gigabits per second
of data traÇc.

Our platform is designed around industry standard architectures to reduce downtime in the event of

outages or catastrophic occurrences. The eBay service provides 24 hours-a-day, seven days-a-week
availability, subject to a weekly scheduled two hour maintenance period. Substantially all of our system
hardware is hosted at Cable & Wireless and Qwest facilities in the San Jose, California, area and Sprint
Communications facilities in Sacramento, California, each of which provides redundant communications
lines and emergency power backup. These systems and operations are vulnerable to damage or interruption
from earthquakes, Öoods, Ñres, power loss, telecommunication failures and similar events. They are also
subject to break-ins, sabotage and intentional acts of vandalism, and also to potential disruption if the
operators of these facilities have Ñnancial diÇculties.

We do not maintain fully redundant systems or alternative providers of hosting services, and we do
not carry business interruption insurance suÇcient to compensate us for losses that may occur. Despite any
precautions we may take, the occurrence of a natural disaster, or any decision by Cable & Wireless, Sprint
or Qwest to close a facility we are using for Ñnancial reasons without providing us adequate notice or other
unanticipated problems could result in lengthy interruptions in our services. In addition, the failure by
Cable & Wireless, Qwest or Sprint to provide our required data communications capacity could result in
interruptions in our service. Any damage to or failure of our systems could result in interruptions in our
service. Interruptions in our service will reduce our net revenues and proÑts, and our future net revenues
and proÑts will be harmed if our users believe that our system is unreliable.

Our platform consists of Sun database servers running Oracle relational database management
applications with a mix of Sun and Hitachi storage devices along with a suite of Pentium-based Internet
servers running the Windows NT and Linux operating systems. We use F5 Networks, Inc.'s load balancing
systems and our own redundant servers along with select software from Veritas Inc. to provide for fault
tolerance, and we use IBM's WebSphere application server for certain platform functions. These third-
party technology licenses may not continue to be available to us on commercially reasonable terms. The
loss of these technologies could require us to obtain substitute technologies of lower quality or performance
standards or at greater cost.

We have experienced occasional system interruptions, which we believe will continue to occur from
time to time. These outages have stemmed from a variety of causes, including third-party hardware and
software problems, human error, intentional external attacks (denial of service attempts), and eBay
proprietary software issues. The volume of traÇc on our websites and the number of items being listed by
users has been increasing continually, requiring us to expand and upgrade our technology, transaction
processing systems, API capacity, security infrastructure, and network infrastructure and to add new
engineering and operations personnel. The process of upgrading and expansion is part of the regular
maintenance and site revisions. We may be unable to accurately project the rate or timing of increases, if
any, in the use of the eBay service or expand and upgrade our systems and infrastructure to accommodate
these increases in a timely manner. Any failure to expand or upgrade our systems at least as fast as the
growth in demand for capacity could cause the website and API functions to become unstable and possibly
cease to operate for periods of time. Unscheduled downtime would harm our business.

We use internally developed systems to operate our service and for transaction processing, including

billing and collections processing. We have announced our intention to enhance our billing system with
products from CSG Systems. We must continually improve our systems to accommodate the increasing
levels of use of our websites. In addition, we may add new features and functionality to our services that
would result in the need to develop or license additional technologies. The cost of our development eÅorts,
including the required capitalization of certain site-related software and development costs, totaled
$65.3 million in the year ended December 31, 2000, $82.0 million in 2001, and $120.1 million in 2002, and
are reÖected in our Consolidated Financial Statements under the heading ""Product Development.'' Our
inability to add additional software and hardware or to upgrade our technology, transaction processing
systems, security infrastructure, or network infrastructure to accommodate increased traÇc or transaction

12

volume could have adverse consequences. These consequences may include unanticipated system
disruptions, slower response times, degradation in levels of customer support, impaired quality of users'
experience on our services, impaired quality of services for third-party application developers using our
API, and delays in reporting accurate Ñnancial information. Our failure to provide new features or
functionality also could result in these consequences. We may be unable to upgrade and expand our
systems in a timely and eÅective manner or to integrate smoothly any newly developed or purchased
technologies with our existing systems. These diÇculties could harm or limit our ability to expand our
business.

Our competitive space is characterized by rapidly changing technology, evolving industry standards,
frequent new service and product announcements, introductions and enhancements and changing customer
demands. Accordingly, our future success will depend on our ability to adapt to rapidly changing
technologies, adapt our services to evolving industry standards and to improve the performance, features
and reliability of our services in response to competitive services and product oÅerings and evolving
demands of the Internet. Our failure to adapt to these changes would harm our business. In addition, the
widespread adoption of new Internet, networking or telecommunications technologies or other technological
changes could require substantial expenditures to modify or adapt our services or infrastructure. To address
the need for rapid change as well as stability, we have undertaken a project to enhance and evolve our
current architecture. The new architecture is intended to facilitate continued stability, improved scalability
and improved eÇciency. As of the fourth quarter of 2002, the new architecture is serving 70% of overall
traÇc on the eBay websites. This project is ongoing, with phased rollouts through 2004. We plan to time
these rollouts in a manner that minimizes the impact to our user community.

Our PayPal Platform

Our PayPal technology assures user access to the PayPal website, both to acquire new customers and
to allow existing ones to conduct Ñnancial transactions. We focus much of PayPal's development eÅorts on
creating specialized software that enhances its Internet-based customer functionality. One of PayPal's key
challenges remains building and maintaining a scalable and reliable system, capable of handling traÇc and
transactions for a growing customer base. The major components of our PayPal network reside at our
PayPal facilities in Mountain View, California, at an Equinix data center in San Jose, California, at a
Cable & Wireless data center in Santa Clara, California, and at our PayPal operations and customer
support facility in Omaha, Nebraska.

Because of the Ñnancial nature of the PayPal product, we seek to oÅer a high level of data security in

order to build customer conÑdence and to protect our customers' private information. We have designed
our PayPal security infrastructure to protect data from unauthorized access, both physically and over the
Internet. PayPal's most sensitive data and hardware reside at its Equinix data center and Cable & Wireless
data centers. These data centers have redundant connections to the Internet, as well as fault-tolerant power
and Ñre suppression systems. Because of PayPal's special security needs, we house our PayPal equipment
in physically secure areas and we tightly control physical access to our systems. PayPal's systems and
operations are located in the same geographic area and are vulnerable to damage or interruption from
earthquakes, Öoods, Ñres, power loss, telecommunication failures and similar events. They are also subject
to break-ins, sabotage and intentional acts of vandalism, and to potential disruption if the operators of
these facilities have Ñnancial diÇculties. PayPal does not maintain fully redundant systems or alternative
providers of hosting services, and does not carry business interruption insurance suÇcient to compensate it
for losses that may occur. Any damage to or failure of PayPal's systems could result in interruptions in its
service, which could reduce our net revenues and proÑts, and our future net revenues and proÑts will be
harmed if PayPal's users believe that its system is unreliable.

Multiple layers of network security and network intrusion detection devices further enhance the
security of our PayPal systems. We segment various components of the system logically and physically
from each other on our PayPal networks. Components of the system communicate with each other via
Secure Sockets Layer, or SSL, an industry standard communications security protocol, and require mutual
authentication. Access to a system component requires at least two authorized staÅ members

13

simultaneously to enter secret passphrases. This procedure is designed to protect us from the unauthorized
use of PayPal's infrastructure components. Finally, we store all PayPal data we deem private or sensitive
only in encrypted form in our PayPal database. PayPal decrypts data only on an as-needed basis, using a
specially designated component of our PayPal system that requires authentication before fulÑlling a
decryption request.

Competition

We encounter vigorous competition in our business from numerous sources. Our users can buy and

sell similar items through a variety of competing channels, including online and oÉine retailers,
distributors, liquidators, import and export companies, auctioneers, catalog and mail-order companies,
virtually all online and oÉine commerce participants (consumer-to-consumer, business-to-consumer and
business-to-business) and online and oÉine shopping channels and networks. For our PayPal service, our
users may choose to pay through a variety of competing channels, including other online payment services,
payment methods (e.g. cash, money order), and traditional online or oÉine merchant accounts. As our
product oÅering continues to broaden into new categories of items, we expect our competition to continue
to broaden to include other online and oÉine channels for those new oÅerings. We also compete on the
basis of price, product selection, and services, which are derived from our abundant and diverse user
community and the quality of the eBay user experience. To compete eÅectively, we may need to expend
signiÑcant resources in technology and marketing. These eÅorts may be expensive and could reduce our
margins and have a material adverse eÅect on our business, Ñnancial position, operating results, cash Öows
and reduce the value of our stock. We believe that we will be able to maintain proÑtability by preserving
and expanding the abundance and diversity of our user community and enhancing our user experience, but
there can be no assurance that we will be able to continue to manage our operating expenses to mitigate a
decline in net income. For more information regarding these risks, see ""Risk Factors That May AÅect
Results of Operations and Financial Condition Ì Our industry is intensely competitive.''

Seasonality

Our results of operations historically have been seasonal in nature because many of our users reduce

their activities on our websites during the holidays, such as during the Thanksgiving (in the U.S.) and
Christmas periods, and with the onset of good weather during the summer months. We have historically
experienced our strongest quarters of online growth in our Ñrst and fourth Ñscal quarters. PayPal has
shown similar seasonality, except that its strongest quarter of online growth has historically been the fourth
quarter.

Intellectual Property

We regard the protection of our trademarks, copyrights, patents, domain names, trade dress and trade
secrets as critical to our success. We have entered into conÑdentiality and invention assignment agreements
with our employees and contractors, and nondisclosure agreements with parties with whom we conduct
business in order to limit access to and disclosure of our proprietary information.

We aggressively protect our intellectual property rights by relying on a combination of trademark,

copyright, patent, trade dress and trade secret laws and through the domain name dispute resolution
system. As a result, we actively pursue the registration of our trademarks, copyrights, patents and domain
names in the U.S. and major countries internationally. Furthermore, we must also protect our trademarks,
patents and domain names in an increasing number of jurisdictions, a process that is expensive, may
require litigation, and may not be successful in every location. We have registered or applied for our
""eBay'' trademark in the U.S. and over 50 non-U.S. jurisdictions and have in place an active program to
continue securing the ""eBay'' and ""PayPal'' domain names in major non-U.S. jurisdictions. We have Ñled
to protect our rights to the ""eBay'' and ""PayPal'' names in certain new top level domains such as "".biz''
"".info'' and ''.us'' that have recently become operational. Our inability to secure our trademarks or domain
names could adversely aÅect us in any jurisdiction in which we are not able to register.

14

Third parties have from time to time claimed, and others may claim in the future, that we have

infringed their past, current or future intellectual property rights. We are involved in several such legal
proceedings. Please see the information under ""Risk Factors That May AÅect Results of Operations and
Financial Condition Ì We are subject to intellectual property and other litigation'' and ""Ì We may be
unable to protect or enforce our own intellectual property rights adequately'' and ""Item 3: Legal
Proceedings.''

Employees

As of December 31, 2002, eBay Inc. and its consolidated subsidiaries employed approximately 4,000

persons, of whom approximately 3,100 were in the United States. Our future success is substantially
dependent on the performance of our executive and senior management and key technical personnel, and
our continuing ability to Ñnd and retain highly qualiÑed technical and managerial personnel.

Segments

Segment selection is based upon our internal organization structure, the manner in which our

operations are managed, the measurement of the performance of our operations evaluated by management
in the chief operating decision-maker capacity, the availability of separate Ñnancial information and overall
materiality considerations.

During the fourth quarter of 2002, the growth of our international operations and our acquisition of
PayPal prompted us to change the basis for measuring our Ñnancial performance and evaluating resource
allocations, and therefore our reportable segments. We changed our business segments from Online and
OÉine services to U.S., International, and Payments operations. This new segment structure reÖects the
new composition of our business. Additionally, we changed the internal measurement basis of segment
performance from operating income before certain items to a direct contribution measure of proÑtability.

Direct contribution consists of net revenues less direct costs. Direct costs include speciÑc costs of net

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

The U.S. segment comprises U.S. online trading platforms other than PayPal and Billpoint, Inc. The

International segment comprises our international online trading platforms. The Payments segment
comprises our global payments platform consisting of our PayPal and Billpoint subsidiaries. The Payments
amounts reÖect Billpoint's historical operations and PayPal's operations for the post-acquisition period from
October 4, 2002 through December 31, 2002. We have previously announced that we intend to discontinue
Billpoint's operations in the Ñrst half of 2003. Billpoint's operations will continue to be reÖected in the
Payments segment results until the wind-down of Billpoint operations is completed.

For geographic reporting purposes, net revenues and long-lived assets of the Payments segment are
allocated between the U.S. and International regions based upon the country in which the revenue was
generated or in which the asset is located. See ""Note 4 Ì Segment Information'' of the notes to our
Consolidated Financial Statements, which is incorporated by reference herein.

Available Information

Our Internet address is www.ebay.com. Our investor relations website is located at

www.shareholder.com/ebay. We make available free of charge on this website under ""SEC Filings'' our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and

15

amendments to those reports as soon as reasonably practicable after we electronically Ñle or furnish such
materials to the U.S. Securities and Exchange Commission.

ITEM 2: PROPERTIES

On March 1, 2000, we entered into a Ñve-year lease for general oÇce facilities located in San Jose,
California. This Ñve-year lease is commonly referred to as a synthetic lease because it represents a form of
oÅ-balance sheet Ñnancing under which an unrelated third-party funds 100% of the costs of the acquisition
of the property and leases the asset to us as lessee. Under our lease structure, upon termination or
expiration, at our option, we must either purchase the property from the lessor for a predetermined amount
or sell the real property to a third party. Our San Jose lease consists of approximately 460,000 square feet
of oÇce space. As of December 31, 2002, we occupied approximately 314,000 square feet of this total
oÇce space and subleased additional space in the facility to third parties.

Payments under our lease are based on the $126.4 million cost of the property funded by the third

party and are adjusted as the London Interbank OÅered Rate, or LIBOR, Öuctuates. Under the terms of
the lease agreement, the lease terminates on March 1, 2005, unless extended to September 1, 2006. At any
time prior to the Ñnal 12 months of the lease term, we may, at our option, purchase the property for
approximately $126.4 million. If we elect not to purchase the property, we will undertake to sell the
facility to one or more third parties and have guaranteed to the lessor a residual value equal to
approximately 88% of the $126.4 million cost of the property. Our maximum exposure to loss is the entire
amount of $126.4 million if we default on any of certain lease obligations and Ñnancial covenants. If this
payment were made, we would then receive title to the property. At December 31, 2002, we had not made
a decision with respect to which option we will pursue at the end of the lease term. Management believes
that the contingent liability relating to the residual value guarantee will not have a material adverse eÅect
on our Ñnancial condition, results of operations or cash Öows. See ""Note 9 Ì Operating Lease
Arrangements'' and ""Note 6 Ì Derivative Instruments'' of the notes to our Consolidated Financial
Statements, which are incorporated by reference herein.

In January 2003, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation

No. 46, or FIN 46, ""Consolidation of Variable Interest Entities.'' This interpretation of Accounting
Research Bulletin No. 51, ""Consolidated Financial Statements,'' addresses consolidation by business
enterprises of certain variable interest entities where there is a controlling Ñnancial interest in a variable
interest entity or where the variable interest entity does not have suÇcient equity at risk to Ñnance its
activities without additional subordinated Ñnancial support from other parties. This interpretation applies
immediately to variable interest entities created after January 31, 2003 and applies in the Ñrst year or
interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. We expect that the adoption of FIN 46 will
require us to include our San Jose facilities lease and potentially certain investments in our Consolidated
Financial Statements eÅective July 1, 2003. In connection with our San Jose facilities lease arrangement,
our balance sheet following the July 1, 2003 adoption of FIN 46 will reÖect changes to record assets of
$126.4 million, liabilities of $122.5 million and non-controlling interests of $3.9 million. In addition, our
post-adoption income statement will reÖect the reclassiÑcation of rent expense payments from operating
expenses to interest expense as well as the recognition of depreciation expense, within operating expenses,
for our use of the buildings. We estimate that the income statement impact of consolidating our San Jose
facilities lease will consist of a charge against earnings, net of taxes, of $5.6 million upon the adoption of
FIN 46 on July 1, 2003. This charge will reÖect the accumulated depreciation charges that would have
been recorded in previous periods had consolidation of the San Jose facilities been required. Additionally,
we have not decided whether we will keep the existing Ñnancing arrangement or purchase the San Jose
facilities. Whether or not we keep the existing Ñnancing arrangement, we anticipate recording additional
annual operating expenses of $1.7 million, net of taxes, for the recognition of depreciation expense on the
buildings. In the event we purchase the San Jose facilities, we will also pay $126.4 million, eliminate
Ñnancing payments and settle our two interest rate swaps we used to establish a Ñxed rate of interest for
$95 million of our Ñnancing arrangement. During the year ended December 31, 2002, our Ñnancing

16

payments related to the San Jose facilities totaled $7.9 million. At December 31, 2002, settlement of our
two interest rate swaps would have resulted in a loss of $10.9 million.

Our U.S. segment occupies approximately 434,000 square feet of commercial oÇce space in the
United States. We occupy 314,000 square feet of commercial oÇce space in San Jose, California under
the terms of our synthetic lease for our corporate headquarters. We own and occupy approximately 72,000
square feet of commercial oÇce space in Salt Lake City, Utah for our domestic customer support center.
We lease and occupy an additional 48,000 square feet of commercial oÇce space in various domestic
locations for the operations of certain U.S. subsidiaries.

Our International segment leases approximately 210,000 square feet of commercial oÇce space in 12

countries for our international operations, including the operations of our South Korean majority-owned
subsidiary.

Our Payments segment leases approximately 126,000 square feet of commercial oÇce space in the

United States and the United Kingdom. In addition, our Payments segment owns approximately 22 acres
of land near Omaha, Nebraska, on which a 115,000 square foot facility is under construction. Upon
completion, this facility will house the primary customer service operations center for our Payments
segment.

In 2002, we sold commercial real estate properties in California and Indiana totaling approximately
551,000 square feet, primarily in connection with the sales of our ButterÑelds and Kruse subsidiaries. As of
December 31, 2002, we continued to be the majority interest holder in approximately 156,000 square feet
of commercial real estate in California.

In February 2003, we entered into an operating sublease for approximately 110,000 square feet of
commercial oÇce space (oÅset by a sublease back to the prime lessee of approximately 37,000 square feet
of that space) in Vancouver, British Columbia to house a customer support center. For further discussion
of the Vancouver lease, see ""Note 17 Ì Subsequent Events Ì Unaudited'' to our Consolidated Financial
Statements, which is incorporated by reference herein.

We are currently considering various alternatives related to our long-term facilities needs. While we

believe our existing facilities are adequate to meet our immediate needs, it may become necessary to lease
or acquire additional or alternative space to accomodate our future growth.

ITEM 3: LEGAL PROCEEDINGS

On April 25, 2001, our European subsidiaries, eBay GmbH and eBay International AG, were sued by
Montres Rolex S.A. and certain Rolex aÇliates, or Rolex, in the regional court of Cologne, Germany. The
suit subsequently was transferred to the regional court in Dusseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolex's trademarks as a result of users selling counterfeit Rolex watches
through our German website. The suit also alleges unfair competition. Rolex sought an order forbidding
the sale of Rolex watches on the website as well as damages. In December 2002, a trial was held in the
matter and the court ruled in favor of eBay on all causes of action. Rolex has appealed the ruling, but the
appeal has not yet been briefed or heard.

On September 26, 2001, a complaint was Ñled by MercExchange LLC against us, our Half.com

subsidiary and ReturnBuy, Inc. in the Eastern District of Virginia (No. 2:01-CV-736) alleging
infringement of three patents (relating to online auction technology, multiple database searching and
electronic consignment systems) and seeking a permanent injunction and damages (including treble
damages for willful infringement). We answered the complaint, denying the allegations. In April 2002, we
Ñled four motions for summary judgment relating to the three patents in suit. The court denied three of
those motions and deferred ruling on the fourth motion. A ""Markman'' hearing was held in July 2002 to
deÑne certain disputed terms in the patents, and in October 2002 the court issued its claim construction
Ñndings. In October 2002, the court gave us leave to amend our answer to include a claim that
MercExchange committed fraud on the patent oÇce during the prosecution of one of the patents. On the
same date, the court granted in part our pending summary judgment motion, eÅectively invalidating the

17

patent related to online auction technology and rendering it unenforceable. In November 2002, we Ñled
two additional summary judgment motions regarding the patents. One motion was denied as moot; the
other was denied because the court found there were triable issues of fact. In February 2003, we Ñled an
additional summary judgment motion, which is still pending. Only two patents remain in the case at this
time. Trial is scheduled for April 22, 2003. We believe we have meritorious defenses and will defend
ourselves vigorously. However, even if successful, our defense against this action will be costly and could
divert our management's time. If the plaintiÅ were to prevail on any of its claims, we might be forced to
pay signiÑcant damages and licensing fees, modify our business practices or even be enjoined from
conducting a signiÑcant part of our U.S. business. Any such results could materially harm our business.
We are unable to determine what potential losses we may incur if this lawsuit were to have an unfavorable
outcome.

On September 6, 2002, a complaint was Ñled by First USA Bank, N.A. against PayPal in the District

of Delaware (No. 02-CV-1462) alleging infringement of two patents relating to assigning an alias to a
credit card so as to eliminate the need for the physical presence of the card in a transaction and seeking a
permanent injunction and damages. PayPal believes it has meritorious defenses and intends to defend itself
vigorously. However, even if successful, our defense against this action will be costly and could divert
management's time. If the plaintiÅ were to prevail on its claims, PayPal might be forced to pay signiÑcant
damages and licensing fees or modify its business practices. Any such result could materially harm our
business. We are unable to determine what potential losses we may incur if this suit were to have an
unfavorable outcome.

On August 16, 2002, Charles E. Hill & Associates, Inc., or Hill, Ñled a lawsuit in the U.S. District

Court for the Eastern District of Texas (No. 2:02-CV-186) alleging that we and 17 other companies,
primarily large retailers, infringed three patents owned by Hill generally relating to electronic catalog
systems and methods for transmitting and updating data at a remote computer. The suit seeks an
injunction against continuing infringement, unspeciÑed damages, including treble damages for willful
infringement, and interest, costs, expenses and fees. In January 2003, the court granted the collective
defendants' motion to transfer the case from the court where it was Ñled in Marshall, Texas to the Federal
District Court for the Southern District of Indiana. We believe that we have meritorious defenses and
intend to defend ourselves vigorously.

On February 20, 2002, PayPal was sued in California state court in a purported class action alleging

that its restriction of customer accounts and failure to promptly unrestrict legitimate accounts violates state
consumer protection law and is an unfair business practice and a breach of PayPal's User Agreement. This
action was reÑled with a diÅerent named plaintiÅ on June 6, 2002, and a related action was Ñled in the
U.S. District Court for the Northern District of California on the same day. On March 12, 2002, PayPal
was sued in the U.S. District Court for the Northern District of California in a purported class action
alleging that its restrictions of customer accounts and failure to promptly unrestrict legitimate accounts
violates federal and state consumer protection and unfair business practice law. The court has denied
PayPal's motion to compel individual arbitration as required by the PayPal User Agreement and has
invalidated that provision of the User Agreement. The two federal court actions have been consolidated
into a single case. PayPal is defending itself vigorously, but if it is unable to prevail in these lawsuits, it
may have to change its anti-fraud operations in a manner that will harm its business and pay substantial
damages. Even if its defense is successful, the litigation could damage PayPal's reputation, could require
signiÑcant management time, will be costly and could require changes to its customer service and
operations that could increase its costs and decrease the eÅectiveness of its anti-fraud program.

Three purported class action complaints were Ñled following announcement of the PayPal merger in

July 2002 in the court of Chancery in the State of Delaware in and for New Castle County by alleged
stockholders of PayPal. Two additional purported class action complaints were Ñled in the Superior Court
of the State of California, County of Santa Clara, by alleged PayPal stockholders. These complaints name
as defendants PayPal and each member of its board of directors as well as eBay. The complaints are
purported class actions that allege, among other things, that eBay controlled PayPal prior to the execution
of their merger agreement, the defendants breached Ñduciary duties they assertedly owed to PayPal's

18

stockholders in connection with PayPal entering into the merger agreement and the exchange ratio in the
merger was unfair and inadequate. The plaintiÅs seek, among other things, an award of unspeciÑed
compensatory damages. We believe that each of the lawsuits is without merit and intend to defend
ourselves vigorously.

Other third parties have from time to time claimed, and others may claim in the future that we have

infringed their past, current or future intellectual property rights. We have in the past been forced to
litigate such claims. We may become more vulnerable to such claims as laws such as the Digital
Millennium Copyright Act and Communications Decency Act are interpreted by the courts and as we
expand into jurisdictions where the underlying laws with respect to the potential liability of online
intermediaries like ourselves is less favorable. We expect that we will increasingly be subject to copyright
and trademark infringement claims as the geographical reach of our services expands. We also expect that
we will increasingly be subject to patent infringement claims as our services expand. In particular, we
expect that patent infringement claims involving various aspects of our Payments business will continue to
be made. We have been notiÑed of several potential disputes and are subject to a suit by Tumbleweed
Communications Corporation that is currently ongoing. These claims, whether meritorious or not, could be
time-consuming, result in costly litigation, cause service upgrade delays, require expensive changes in our
methods of doing business or could require us to enter into costly royalty or licensing agreements, if
available. As a result, these claims could harm our business.

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

There were no submissions of matters to a vote of security holders during the fourth quarter ended

December 31, 2002.

19

PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER

MATTERS

Price Range of Common Stock

eBay's common stock has been traded on The Nasdaq Stock MarketSM under the symbol ""EBAY''

since September 24, 1998. The following table sets forth the intra-day high and low per share bid prices of
eBay's common stock for the periods indicated, as reported by The Nasdaq Stock MarketSM.

High

Low

Year Ended December 31, 2001

First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$55.13
71.30
70.20
72.74

Year Ended December 31, 2002

First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

69.50
64.10
62.47
70.85

$28.44
29.25
40.48
44.00

48.85
49.25
51.05
50.22

As of February 28, 2003, there were approximately 2,000 stockholders of record of eBay's common

stock, although eBay believes that there is a signiÑcantly larger number of beneÑcial owners of our
common stock.

Dividend Policy

We have never paid cash dividends on our stock, and currently anticipate that we will continue to

retain any future earnings to Ñnance the growth of our business.

Equity Compensation Plans

For information on securities authorized for issuance under our equity compensation plans, refer to

""Equity Compensation Plan Information'' under Item 12, which is incorporated by reference herein.

20

ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated Ñnancial data should be read in conjunction with, and is qualiÑed
by reference to, the Consolidated Financial Statements and Notes thereto and ""Management's Discussion
and Analysis of Financial Condition and Results of Operations'' appearing elsewhere in this Annual Report
on Form 10-K. The consolidated statement of income and the consolidated balance sheet data for the
years ended December 31, 1998, 1999, 2000, 2001 and 2002 are derived from, and are qualiÑed by
reference to, our audited Consolidated Financial Statements.

On October 3, 2002, we completed our acquisition of PayPal, Inc. in a tax-free, stock-for-stock

transaction. PayPal provides a global payments platform and is headquartered in Mountain View,
California. The PayPal Ñnancial statements are included in our Consolidated Financial Statements for the
post-acquisition period from October 4, 2002 through December 31, 2002.

1998

Year Ended December 31,
1999
2000
(in thousands, except per share data)

2001

2002

Consolidated Statement of Income Data:
Net revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cost of net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 86,129
16,094

$224,724
57,588

$431,424
95,453

$748,821
134,816

$1,214,100
213,876

Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

70,035

167,136

335,971

614,005

1,000,224

Operating expenses:

Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Product development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payroll taxes on stock option gains ÏÏÏÏÏÏ
Amortization of acquired intangible assets
Merger related costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income (loss) from operations ÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income (expense), net ÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment of certain equity investments ÏÏÏ

Income before income taxes and minority

interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in consolidated companies

35,976
4,640
15,849
Ì
805
Ì

57,270

12,765
1,799
(2,191)

Ì

12,373
(4,789)
(311)

96,239
24,847
43,919
Ì
1,145
4,359

166,767
55,863
73,027
2,337
1,433
1,550

253,474
75,288
105,784
2,442
36,591
Ì

170,509

300,977

473,579

(3,373)
23,833
(2,319)

Ì

34,994
46,337
(3,374)
Ì

140,426
41,613
(2,851)
(16,245)

349,650
104,636
171,785
4,015
15,941
Ì

646,027

354,197
49,209
(1,492)
(3,781)

18,141
(8,472)
(102)

77,957
(32,725)
3,062

162,943
(80,009)
7,514

398,133
(145,946)
(2,296)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$

7,273

$ 9,567

$ 48,294

$ 90,448

$ 249,891

Net income per share:

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$

$

0.07

0.03

$

$

0.04

0.04

$

$

0.19

0.17

$

$

0.34

0.32

$

$

0.87

0.85

Weighted average shares:

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

104,128

217,674

251,776

268,971

287,496

Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

233,519

273,033

280,346

280,595

292,820

21

1998

1999

Year Ended December 31,
2000
(in millions)

2001

2002

Supplemental Operating Data:
Number of registered users at end of period
Number of items listed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross merchandise sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PayPal accounts at end of period ÏÏÏÏÏÏÏÏÏÏ
PayPal number of payments(1) ÏÏÏÏÏÏÏÏÏÏÏ
PayPal total payment volume(1) ÏÏÏÏÏÏÏÏÏÏ

$

2.2
33.7
745
Ì
Ì
Ì

$

10.0
129.6
2,805
Ì
Ì
Ì

22.5
264.7
$ 5,422
Ì
Ì
Ì

$

$

42.4
423.1
9,319
Ì
Ì
Ì $

61.7
638.3
14,868
23.3
39.2
2,138

(1) Amounts shown are for the post-acquisition period from October 4, 2002 through December 31, 2002.

1998

1999

2000

2001

2002

(in thousands)

December 31,

Consolidated Balance Sheet Data:

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏ

$ 37,285

$221,801

$ 201,873

$ 523,969

$1,109,313

Short-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

40,401

Long-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Long-term restricted cash and

investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ì

Ì

Working capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

72,934

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

149,536

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

18,361

181,086

373,988

Ì

372,266

969,825

15,018

354,166

218,197

126,390

538,022

199,450

286,998

89,690

470,227

129,614

703,666

134,644

1,082,234

1,182,403

1,678,529

4,124,444

11,404

12,008

13,798

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏ

100,538

854,129

1,013,760

1,429,138

3,556,473

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements based on our current

expectations about our company and our industry. You can identify these forward-looking statements when
you see us using words such as ""may,'' ""will,'' ""should,'' ""expect,'' ""anticipate,'' ""believe,'' ""estimate,''
""intend,'' ""plan'' and other similar expressions. You can also identify forward-looking statements by
discussions of strategy, plans or intentions. These forward-looking statements involve risks and
uncertainties. Our actual results could diÅer materially from those anticipated in these forward-looking
statements as a result of the factors described in the ""Risk Factors That May AÅect Results of Operations
and Financial Condition'' section below and elsewhere in this report. We undertake no obligation to
publicly update any forward-looking statements for any reason, even if new information becomes available
or other events occur in the future.

Overview

About eBay

We pioneered online trading by developing a Web-based marketplace in which a community of buyers

and sellers are brought together in an entertaining, intuitive, easy-to-use environment to browse, buy and
sell an enormous variety of items. Through our PayPal service, we enable any business or consumer with
email to send and receive online payments securely, conveniently and cost-eÅectively.

22

Business Combinations

Historically, we have completed several business combinations accounted for using the pooling-of-
interests and purchase methods of accounting. The historical Ñnancial information related to companies
acquired in pooling-of-interests transactions was retroactively restated at the time of acquisition, whereas
the results of companies acquired under the purchase method of accounting were consolidated with our
results on a prospective basis from the acquisition date. During the years ended December 31, 2000, 2001
and 2002, the aggregate purchase price of acquisitions accounted for under the purchase method totaled
approximately $1.9 billion. This aggregate purchase price was allocated to goodwill of $1.5 billion,
identiÑable intangible assets of $297 million, net tangible assets of $189 million, deferred tax liabilities of
$43 million, minority interest of $34 million and unearned compensation of $10 million. See ""Note 3 Ì
Business Combinations, Goodwill and Intangible Assets'' to our Consolidated Financial Statements, which
is incorporated by reference herein.

Results of Operations

The following table sets forth, for the periods presented, certain data from our consolidated statement
of income as a percentage of net revenues. The information contained in the table below should be read in
conjunction with Critical Accounting Policies, Judgments and Estimates as well as the Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K.

Year Ended December 31,
2002
2001
2000

Net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

100.0% 100.0% 100.0%

Cost of net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Operating expenses:

Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Product development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Payroll taxes on stock option gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Amortization of acquired intangible assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Merger related costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Interest and other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

22.1

77.9

38.7

12.9

16.9

0.5

0.3

0.4

69.7

8.2

10.7

18.0

82.0

33.8

10.1

14.1

0.3

4.9

Ì

63.2

18.8

5.6

17.6

82.4

28.8

8.6

14.1

0.3

1.3

Ì

53.1

29.3

4.1

Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(0.8)

Impairment of certain equity investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ì

(0.4)

(2.2)

(0.1)

(0.3)

Income before income taxes and minority interests ÏÏÏÏÏÏÏÏÏÏ

18.1

21.8

32.8

Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(7.6)

(10.7)

(12.0)

Minority interests in consolidated companies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

0.7

1.0

(0.2)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

11.2% 12.1% 20.6%

23

Net Revenues

Transaction net revenues

2000

Percent
2001
Change
(in thousands, except percent changes)

Percent
Change

2002

U.S. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$315,193

51%

$474,970

51%

$ 718,239

International ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

PaymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

27,942

5,039

297%

235%

110,802

16,899

168%

452%

297,485

93,303

Total transaction net revenues ÏÏÏÏÏÏÏÏÏÏ

348,174

73%

602,671

84%

1,109,027

3rd party advertising net revenues

U.S. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

International ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

PaymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

11,986

1,036

Ì

572%

224%

Ì

80,493

3,360

Ì

(32)%

38%

Ì

Total 3rd party advertising net revenues ÏÏ

13,022

544%

83,853

(27)%

End-to-end services net revenues

U.S. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

30,756

(12)%

27,132

PaymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ì

Ì

749

Total end-to-end services net revenues ÏÏÏ

30,756

(9)%

27,881

OÉine net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

39,472

(13)%

34,416

(20)%

(22)%

(20)%

(37)%

54,906

4,651

1,478

61,035

21,647

587

22,234

21,804

Total net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$431,424

74%

$748,821

62%

$1,214,100

U.S. segment net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$397,407

55%

$617,011

32%

$ 816,596

International segment net revenues ÏÏÏÏÏÏÏÏÏÏ

Payments segment net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏ

28,978

5,039

294%

250%

114,162

17,648

165%

440%

302,136

95,368

$431,424

74%

$748,821

62%

$1,214,100

Net Revenues by Geography

2000

Percent
Percent
Change
2001
Change
(in thousands, except percent changes)

2002

U.S. net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$402,446

International net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

28,978

58%

294%

$634,659

41%

$ 897,701

114,162

177%

316,399

Total net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$431,424

74%

$748,821

62%

$1,214,100

Net revenues are allocated between U.S. and International geographies based upon the country in

which the seller, advertiser or end-to-end service provider is located.

24

2000

Percent
Change

2001
(in millions, except percents)

Percent
Change

Supplemental Operating Data:

ConÑrmed registered users at end of year ÏÏÏÏÏÏÏ

22.5

Number of items listedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

264.7

Gross merchandise salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$5,422

PayPal accounts at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

PayPal number of payments(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

PayPal total payment volume(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ì

Ì

Ì

89%

60%

72%

Ì

Ì

Ì

42.4

423.1

$9,319

Ì

Ì

Ì

45%

51%

60%

Ì

Ì

Ì

2002

61.7

638.3

$14,868

23.3

39.2

$ 2,138

(1) Amounts shown are for the post-acquisition period from October 4, 2002 through December 31, 2002.

Our net revenues result from fees associated with our transaction, third-party advertising, end-to-end

services, and oÉine services in our U.S., International and Payments segments. Transaction revenue is
derived primarily from listing, feature and Ñnal value fees paid by sellers and fees from payment processing
services. Revenue from third-party advertising is derived principally from the sale of online banner and
sponsorship advertisements for cash and through barter arrangements. End-to-end services revenue is
derived principally from contractual arrangements with third parties that provide transaction services to
eBay and PayPal users. OÉine services revenue is derived from a variety of sources including seller
commissions, buyer premiums, bidder registration fees and auction-related services including appraisal and
authentication.

The successive year-over-year growth in net revenues from 2000 through 2002, was primarily the
result of increased auction transaction activity, reÖected in the growth of the number of registered users,
listings and gross merchandise sales. Our acquisition of iBazar S.A. and of a majority interest in Internet
Auction Co., Ltd. during 2001 contributed less than 3% of our net revenues during the year ended
December 31, 2001. Acquisitions of PayPal, Inc., NeoCom Technology Co., Ltd. and the remaining 50%
interest in our Australian subsidiary during 2002, contributed approximately 6% of our net revenues during
the year ended December 31, 2002. Our revenue growth during these periods was also positively impacted
by fee increases in the U.S. and various international locations.

Revenue from U.S. and International Segments

Transaction Net Revenue

U.S. segment transaction net revenue increased 51% between 2000 and 2001 and 51% between 2001

and 2002. International segment transaction net revenue increased 297% between 2000 and 2001 and 168%
between 2001 and 2002. The successive year-over-year growth in U.S. and International segment
transaction net revenues from 2000 to 2002 was primarily the result of increased auction transaction
activity, reÖected in the growth of the number of registered users, listings and gross merchandise sales. We
experienced transaction net revenue growth across all categories during 2001 and 2002 with motors,
computers, consumer electronics, collectibles, and books/music/movies making the most signiÑcant
impact. International segment transaction net revenue as a percentage of consolidated transaction net
revenue was 8% in 2000, 18% in 2001 and 27% in 2002. This growth is primarily the result of strong
performance in Germany, the United Kingdom, Canada and South Korea. We expect international
segment transaction net revenues will continue to grow in signiÑcance to our business as we develop and
deploy our global marketplace. In addition, new regulations in the European Union relating to the
collection of value-added taxes, or VAT, on digital services will require us to collect and remit VAT on
our own fees beginning in July 2003. We intend to work with the relevant tax authorities to clarify our
obligations under these regulations and to change our software to permit the billing of these taxes. The
increased costs to our European users may reduce their activity on our websites and could adversely aÅect
our international transaction net revenues.

25

Third-party Advertising Net Revenue

U.S. third-party advertising net revenue increased as a percentage of total U.S. segment net revenues

from 3% in 2000 to 13% in 2001. The increase during 2001 was primarily the result of our strategy to
increase overall site monetization and the eÅorts of AOL Time Warner, Inc. or AOL, our exclusive
advertising sales representative. During the year ended December 31, 2002, U.S. segment third-party
advertising decreased in both absolute dollars, from $80.5 million in 2001 to $54.9 million in 2002, and as
a percentage of total U.S. segment net revenues, from 13% in 2001 to 7% in 2002. Revenues from
U.S. segment third-party advertising decreased during 2002 primarily as a result of a general deterioration
in the online advertising market that adversely impacted our advertising sales through AOL. International
segment third-party advertising net revenue decreased as a percentage of total International net revenues
from 4% to 3% to 2% in 2000, 2001 and 2002, respectively. Although the absolute dollar amount of
International segment third-party advertising net revenues increased during each of these periods, the
decreases in International segment third-party advertising as a percentage of total International segment
net revenues were primarily the result of transaction net revenues growing faster than advertising net
revenues. We continue to view our business as primarily transaction driven and we expect third-party
advertising net revenues in future periods to continue to decrease as a percentage of total net revenues and
in absolute dollars. Additionally, our advertising sales representative agreement with AOL has not been
extended or renewed and is scheduled to terminate on March 31, 2003, with AOL to continue its
electronic delivery of our online advertisements for a speciÑed wind-down period. After March 31, 2003,
our third-party advertising revenues will be dependent on the eÅorts of our existing internal sales staÅ.

End-to-End Services Net Revenue

U.S. segment end-to-end services net revenue decreased successively in absolute dollars from

$30.8 million in 2000 to $27.1 million in 2001 to $21.6 million in 2002 and as a percentage of total
U.S. segment net revenues from 8% in 2000 to 4% in 2001 to 3% in 2002. As end-to-end services are
contractual and are largely dependent upon contractual terms and our users' adoption of third-party
products and services, we expect end-to-end services revenue in future periods to Öuctuate from period to
period, however, in general, we expect these revenues to decrease as a percentage of total net revenues and
in absolute dollars.

OÉine Net Revenue

OÉine net revenue decreased as a percentage of total U.S. segment net revenues from 9% to 5% to
2% in 2000, 2001 and 2002, respectively. During the year ended December 31, 2001, oÉine net revenue
decreased in both absolute dollars and as a percentage of total U.S. segment net revenues compared to
2000, primarily as a result of a general softening in the oÉine auction and high-end art markets. During
the year ended December 31, 2002, oÉine net revenue decreased in both absolute dollars and as a
percentage of total U.S. segment net revenues compared to 2001, primarily as a result of our divestiture of
both our ButterÑelds and Kruse subsidiaries. Accordingly, we do not expect to earn oÉine net revenue in
the foreseeable future.

Net Revenues from Payments Segment

Net revenues from the Payments segment are generated from eBay's Billpoint operations for each of
the years presented and PayPal's operations for the post-acquisition period from October 4, 2002 through
December 31, 2002. See ""Note 3 Ì Business Combinations, Goodwill and Intangible Assets'' to the
consolidated notes to the Ñnancial statements for pro forma results of operations.

Transaction Net Revenue

Payments segment transaction net revenue increased 235% year-over-year between 2000 and 2001 and

452% between 2001 and 2002. The year-over-year growth in 2001 was the result of increased transaction
volume processed by eBay's Billpoint payment services. The growth in 2002 was primarily the result of our

26

acquisition of PayPal. For the post-acquisition period from October 4, 2002 through December 31, 2002,
PayPal recorded transaction net revenue of $72.6 million. We expect to wind-down our Billpoint payment
operations during the Ñrst half of 2003.

Third-party Advertising and End-to-End Services Net Revenues

Payments segment revenues from third-party advertising and end-to-end services decreased as a

percentage of total Payments segment net revenues from 4% in 2001 to 2% in 2002 as transaction net
revenues grew faster than third-party advertising and end-to-end services net revenues. We continue to
view our business as primarily transaction driven, and we expect Payments segment third-party advertising
and end-to-end net revenues in future periods to continue to decrease as a percentage of total net revenues
and in absolute dollars.

Cost of Net Revenues

2000

Percent
Percent
Change
Change
2001
(in thousands, except percent changes)

2002

Cost of net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$95,453

41%

$134,816

59%

$213,876

As a percentage of net revenues ÏÏÏÏÏÏ

22%

18%

18%

Cost of net revenues consists primarily of costs associated with customer support, site operations, and

payment processing. SigniÑcant cost components include employee compensation and facilities costs for
customer support, site operations, Internet connectivity charges, depreciation of site equipment, payment
processing fees, amortization of required capitalization of major site and product development costs,
including the amortization of capitalized costs related to the development of our third generation ""V3'' site
architecture, costs to provide end-to-end services and promotions and corporate overhead allocations.

Cost of net revenues increased in absolute dollars but decreased as a percentage of net revenues from

2000 to 2001. This increase in absolute dollars was due almost entirely to our online business as we
continued to develop and expand our customer support and site operations infrastructure. The increases
were primarily the result of personnel costs, depreciation of the equipment required for site operations,
software licensing fees, Internet connectivity charges and the increased costs associated with acquired
businesses. The decrease in cost of net revenues as a percentage of net revenue resulted from cost
management initiatives and lower technology costs in site operations and increases in higher gross margin
businesses such as autos, third-party advertising and end-to-end services and promotions. The combined
eÅect of these activities resulted in our cost of net revenues per listing decreasing from $0.36 in 2000 to
$0.32 in 2001.

Cost of net revenues increased in absolute dollars but remained constant as a percentage of net
revenues from 2001 to 2002. This increase in absolute dollars was due to increased payment processing
costs resulting from our acquisition of PayPal and continued development and expansion of our customer
support and site operations infrastructure. The increase in payment processing costs totaled $50.4 million
and consists of bank charges, credit card interchange fees, and other processing charges. The increase in
customer support and site operations costs were primarily the result of increased depreciation of site
operations software and equipment of $10.9 million and personnel costs of $7.7 million. Cost of net
revenues stayed constant as a percentage of net revenue from 2001 to 2002 and reÖects cost eÇciencies in
both customer support and site operations oÅset by the addition of PayPal's lower margin payments
processing business. The combined eÅect of these activities resulted in our cost of net revenues per listing
increasing from $0.32 in 2001 to $0.34 in 2002. We expect the cost of net revenues to increase in absolute
dollars and increase as a percentage of net revenues in 2003 as a result of the addition of a full year of
PayPal's lower margin payments processing business.

27

Operating Expenses

Sales and Marketing

2000

Percent
Percent
Change
2001
Change
(in thousands, except percent changes)

2002

Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$166,767

52%

$253,474

38%

$349,650

As a percentage of net revenues ÏÏÏÏÏ

39%

34%

29%

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

The growth in absolute dollars from 2000 to 2001 was primarily the result of growth in online and

oÉine advertising, employee compensation costs, costs associated with the use of outside services and
consultants, additional costs associated with acquired businesses, and miscellaneous user and promotional
costs.

The growth in absolute dollars from 2001 to 2002 was primarily the result of increased advertising and

marketing costs. Our advertising costs increased by $54.7 million and were directed towards a national
television advertising campaign and several category focused print and on-line advertising campaigns.
Additionally, our referral fees paid to marketing partners increased by $12.6 million during the year in
connection with the growth of speciÑc categories, our expenses related to tradeshows and user programs
increased by $5.4 million and our professional services fees increased by $5.1 million. Our advertising
eÅorts target the acquisition of registered users and activation of existing users through television, print
media placements, promotional agreements with Internet portals and other online service providers. Sales
and marketing expenses are expected to increase in absolute dollars, and to decrease as a percentage of net
revenues in 2003. See ""Note 11 Ì Commitments and Contingencies Ì Advertising'' to our Consolidated
Financial Statements, which is incorporated by reference herein.

Product Development

2000

Percent
Percent
Change
Change
2001
(in thousands, except percent changes)

2002

Product developmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$55,863

35%

$75,288

39%

$104,636

As a percentage of net revenues ÏÏÏÏÏÏÏ

13%

10%

9%

Product development expenses consist primarily of employee compensation, payments to outside
contractors, depreciation on equipment used for development and corporate overhead allocations. Product
development expenses do not reÖect required capitalization of major site and product development eÅorts,
including the development of our third generation ""V3'' site architecture. These capitalized costs totaling
$9.4 million in 2000, $6.7 million in 2001, and $15.5 million in 2002 are reÖected as a cost of revenue
when amortized. We anticipate that we will continue to devote signiÑcant resources to product
development in the future as we add new features and functionality to the eBay and PayPal platforms.

The increase in absolute dollars from 2000 to 2001 was primarily the result of increases in employee

compensation costs, reÖected by the growth in our development staÅ, which increased from 203 at
December 31, 2000 to 320 at December 31, 2001, and maintenance and depreciation costs for equipment
used in product development. The increase in these costs results from the development of additional site
features and functionality such as eBay Stores, eBay Checkout, enhanced payment features and expanded
search capabilities.

The increase in absolute dollars from 2001 to 2002 was primarily as a result of an $18.9 million

increase in employee compensation costs, reÖected by the growth in our development staÅ, which
increased from 320 at December 31, 2001 to 635 at December 31, 2002, and a $7.3 million increase in

28

maintenance and depreciation costs for equipment used in research and development. The increase in these
costs results from the development of additional site features and functionality such as enhanced search
functionality, improved seller tools, expanded eBay Stores merchandising capabilities, added Ñxed price
functionality and improved site security. Product development expenses are expected to increase in
absolute dollars in 2003, as we develop new site features and functionality and continue to improve and
expand operations across all our segments. We expect product development expenses as a percentage of
net revenues in 2003 to remain generally consistent with 2002 levels.

General and Administrative

2000

Percent
Percent
Change
Change
2001
(in thousands, except percent changes)

2002

General and administrative ÏÏÏÏÏÏÏÏÏÏ

$73,027

45%

$105,784

62%

$171,785

As a percentage of net revenue ÏÏÏÏÏÏÏ

17%

14%

14%

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

The increase in absolute dollars from 2000 to 2001 was primarily the result of increases in employee
compensation costs, reÖected by the growth in our general and administrative staÅ, which increased from
302 at December 31, 2000 to 415 at December 31, 2001, provisions for doubtful accounts, fees for
professional services and facilities costs. The increase in these costs reÖected our investment in the
infrastructure that is necessary to support the growth of our business.

The increase in absolute dollars from 2001 to 2002 was primarily the result of increases of
$16.0 million in fees for professional services, $12.2 million in the provision for doubtful accounts,
$7.8 million in the provision for transaction losses, and $6.5 million in facilities costs. These costs
increased to meet the demands of our expanding business, including operations in new countries and the
integration of new businesses. To support this growth, we increased our general and administrative staÅ
from 415 at December 31, 2001 to 1,253 at December 31, 2002, which includes the addition of
approximately 360 general and administrative employees resulting from our acquisition of PayPal. Of these
incremental PayPal employees, a substantial number support PayPal's various trust and safety programs.
The headcount increase helped us strengthen the existing teams in corporate Ñnance, corporate
development, legal and accounting departments as well as in our growing international operations. We
expect that general and administrative expenses will increase in absolute dollars in 2003, as we continue to
invest in the infrastructure that is necessary to support our business. Additionally, we expect 2003 general
and administrative expense to increase as a percentage of net revenues with the addition of a full year of
PayPal's operations.

Payroll Taxes on Stock Option Gains

2000

Percent
Percent
Change
2001
Change
(in thousands, except percent changes)

2002

Payroll taxes on stock option gains ÏÏÏÏÏÏÏÏÏ

$2,337

4%

$2,442

64%

$4,015

As a percentage of net revenues ÏÏÏÏÏÏÏÏÏÏÏ

1%

0%

0%

We are subject to employer payroll taxes on employee gains resulting from exercises of non-qualiÑed
stock options. These employer payroll taxes are recorded as a charge to operations in the period in which
such options are exercised and sold based on actual gains realized by employees. Our quarterly results of
operations and cash Öows could vary signiÑcantly depending on the actual period that stock options are
exercised by employees and, consequently, the amount of employer payroll taxes assessed. We expect
exercises of employee stock option grants will result in increased payroll tax costs in 2003 partially as a

29

result of gains from the exercise of PayPal options assumed in the merger. In general, we expect payroll
taxes on employee stock option gains to increase during periods in which our stock price is high relative to
historic levels.

Amortization of Acquired Intangible Assets

2000

Percent
Percent
Change
Change
2001
(in thousands, except percent changes)

2002

Amortization of acquired intangible assets

$1,433

2,453%

$36,591

(56)% $15,941

As a percentage of net revenues ÏÏÏÏÏÏÏÏÏ

0%

5%

1%

From time to time we have purchased, and we expect to continue purchasing, assets or businesses to

accelerate category and geographic expansion, increase the features and functions available to our users
and maintain a leading role in online trading. These purchase transactions may result in the creation of
acquired intangible assets and lead to a corresponding increase in the amortization expense in future
periods.

Intangible assets are comprised of purchased customer lists, developed technologies, trade names, and

other intangible assets. Intangible assets, excluding goodwill, are being amortized using the straight-line
method over estimated useful lives ranging from two to seven years. We believe the straight-line method of
amortization best represents the distribution of economic value of the identiÑed intangible assets.

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

Amortization of acquired intangible assets decreased during 2002, primarily from the elimination of
goodwill amortization as part of our adoption of SFAS No. 142, ""Goodwill and Other Intangible Assets''
on January 1, 2002.

IdentiÑable intangible assets arising from our October 3, 2002 acquisition of PayPal consist of
PayPal's customer list of $196.9 million, its trade name of $63.6 million and developed technologies of
$16.5 million. The acquired intangible assets of PayPal will be amortized over the following estimated
useful lives: customer list Ì seven years; trade name Ì seven years; and developed technologies Ì three
years. This allocation will result in annual amortization of approximately $28.1 million for the customer
list, $9.1 million for the trade name and $5.5 million for the existing technologies. We expect the full year
of amortization from PayPal's acquired intangible assets to result in an increase of amortization expense in
2003.

Merger-related Costs

2000

Percent
Change

Percent
Change
(in thousands, except percent changes)

2001

Merger related costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,550

(100)%

$0

0%

As a percentage of net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

0%

0%

2002

$0

0%

Merger-related costs were primarily attributed to direct costs associated with mergers accounted for
under the pooling of interests method. These amounts consist primarily of professional services, contract
and facility termination expenses and various registration and Ñling fees. Direct costs associated with
mergers accounted for under the purchase method are capitalized in determining the purchase price.

We incurred direct merger-related transaction costs in 2000 related to the merger with Half.com. Due

to the elimination of the pooling of interests method of accounting, merger-related costs related to
acquisitions after July 2001 were capitalized as a component of purchase price.

30

Non-Operating Items

Interest and Other Income, Net

2000

Percent
Percent
Change
2001
Change
(in thousands, except percent changes)

2002

Interest and other income, netÏÏÏÏÏÏÏÏÏÏ

$46,337

(10)%

$41,613

18%

$49,209

As a percentage of net revenues ÏÏÏÏÏÏÏÏ

11%

6%

4%

Interest and other income, net consists of interest earned on cash, cash equivalents, and investments

as well as foreign exchange transaction gains and losses and other miscellaneous non-operating
transactions.

Our interest and other income, net decreased during 2001 as a result of a lower interest rate
environment. Our weighted-average interest rate was approximately 4.3% in 2000 and 3.6% in 2001.
Although, we maintained higher cash, cash equivalent and investment balances during 2001 as a result of
increased operating and Ñnancing cash Öows, the decrease in interest rates resulted in an overall decline in
interest income.

Our interest and other income, net increased during 2002 primarily as a result of gains from the sale
of our ButterÑelds subsidiary and certain real estate properties of $10.6 million, a gain on the sale of our
Kruse subsidiaries of $6.5 million and a gain on the sale of an equity investment in a privately held
company of $3.2 million. These gains were oÅset by a decrease in interest and investment income of
$4.1 million resulting from lower average interest rates, despite an increase in our cash, cash equivalents,
and investments balances in 2002 and from decreased realized gains on the sale of investments, and a
decrease in foreign exchange gains of $3.5 million. Our weighted-average interest rate was approximately
3.6% in 2001 and 2.8% in 2002. We expect that interest and other income, net will decrease in 2003, as we
do not expect signiÑcant gains from the sale of assets or subsidiaries in 2003.

Interest Expense

2000

Percent
Percent
Change
2001
Change
(in thousands, except percent changes)

2002

Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$3,374

(16)%

$2,851

(48)% $1,492

As a percentage of net revenues ÏÏÏÏÏÏÏÏÏÏÏ

1%

0%

0%

Interest expense consists of interest charges on mortgage notes and capital leases. Interest expense

decreased from 2000 to 2001, as a result of lower interest rates and a reduction in outstanding debt
balances. Interest expense decreased from 2001 to 2002 as a result of a reduction in the outstanding
mortgage notes balances in connection with the sale of several of the underlying properties.

In January 2003, the FASB issued FIN No. 46, ""Consolidation of Variable Interest Entities.'' This
interpretation of Accounting Research Bulletin No. 51, ""Consolidated Financial Statements,'' addresses
consolidation by business enterprises of certain variable interest entities where there is a controlling
Ñnancial interest in a variable interest entity or where the variable interest entity does not have suÇcient
equity at risk to Ñnance its activities without additional subordinated Ñnancial support from other parties.
This interpretation applies immediately to variable interest entities created after January 31, 2003 and
applies in the Ñrst year or interim period beginning after June 15, 2003 to variable interest entities in
which an enterprise holds a variable interest that it acquired before February 1, 2003. We expect that the
adoption of FIN 46 will require us to include our San Jose facilities lease arrangement and potentially
certain investments in our Consolidated Financial Statements eÅective July 1, 2003. In connection with
our San Jose facilities lease arrangement, our balance sheet following the July 1, 2003 adoption of FIN 46
will reÖect changes to record assets of $126.4 million, liabilities of $122.5 million and non-controlling
interests of $3.9 million. In addition, our post-adoption income statement will reÖect the reclassiÑcation of

31

rent expense payments from operating expenses to interest expense as well as the recognition of
depreciation expense, within operating expenses, for our use of the buildings. We estimate that the income
statement impact of consolidating our San Jose facilities lease will consist of a charge against earnings, net
of taxes, of $5.7 million upon the adoption of FIN 46 on July 1, 2003. This charge will reÖect the
accumulated depreciation charges that would have been recorded in previous periods had consolidation of
the San Jose facilities been required. Additionally, we have not decided whether we will keep the existing
Ñnancing arrangement or purchase the San Jose facilities. Whether or not we keep the existing Ñnancing
arrangement, we anticipate recording additional annual operating expenses of $1.7 million, net of taxes, for
the recognition of depreciation expense on the buildings. In the event we purchase the San Jose facilities,
we will also pay $126.4 million, eliminate Ñnancing payments and settle our two interest rate swaps we
used to establish a Ñxed rate of interest for $95 million of our Ñnancing arrangement. During the year
ended December 31, 2002, our Ñnancing payments related to the San Jose facilities totaled $7.9 million.
At December 31, 2002, settlement of our two interest rate swaps would have resulted in a loss of
$10.9 million.

Impairment of Certain Equity Investments

2000

Percent
Change
2001
(in thousands, except percent changes)

Percent
Change

2002

Impairment of certain equity investments ÏÏÏÏ

$0

100%

$16,245

(77)% $3,781

As a percentage of net revenues ÏÏÏÏÏÏÏÏÏÏÏÏ

0%

2%

0%

During the year ended December 31, 2001, we recorded impairment charges totaling $16.2 million
relating primarily to the impairment in the fair value of certain private equity investments. We recorded
impairment charges for these investments based upon the deterioration of the Ñnancial condition of certain
investees and based upon Ñnancing obtained by certain other investees at a valuation below which we
made our investment.

During the year ended December 31, 2002, we recorded impairment charges totaling $3.8 million
relating to the impairment in the fair value of certain equity investments. We recorded an approximately
$640,000 impairment charge for an equity investment in a public company based upon a signiÑcant decline
in the market value of our investment during 2002, which we determined to be other than temporary. We
recorded $3.2 million in impairment charges for certain private equity investments based upon the
deterioration of the Ñnancial condition of certain investees and as a result of Ñnancing obtained by certain
other investees at a valuation below which we made our investment.

We expect that the fair value of our equity investments will Öuctuate from time to time and future

impairment assessments may result in additional charges to our operating results.

Provision for Income Taxes

2000

Percent
Percent
Change
2001
Change
(in thousands, except percent changes)

2002

Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏ

$32,725

144%

$80,009

82%

$145,946

As a percentage of net revenues ÏÏÏÏÏÏÏ

EÅective tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

8%

40%

11%

47%

12%

37%

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

32

We receive tax deductions from the gains realized by employees on the exercise of certain non-
qualiÑed stock options for which the beneÑt is recognized as a component of stockholders' equity. We have
provided a full valuation allowance on the deferred tax assets relating to these stock option deductions due
to the uncertainties associated with our future stock price and the timing of employee stock option
exercises. To the extent that additional stock option deductions are not generated in future years, we will
have the ability, subject to carryforward limitations, to utilize up to $207.3 million of additional deferred
tax assets to reduce future income tax liabilities. When recognized, the tax beneÑt of tax deductions
related to stock options are accounted for as a credit to additional paid-in capital rather than a reduction
of the income tax provision.

Minority Interests in Consolidated Companies

2000

Percent
2001
Change
(in thousands, except percent changes)

Percent
Change

2002

Minority interests in consolidated

companies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
As a percentage of net revenue ÏÏÏÏÏÏÏÏÏÏÏ

$3,062

145% $7,514

1%

1%

(131)% $ (2,296)
0%

Minority interests in consolidated companies represents the minority investor's percentage share of

income or losses from subsidiaries in which we hold a majority ownership interest and consolidate the
subsidiaries' results in our Ñnancial statements.

Third parties held minority interests in Billpoint and eBay Japan in 2000; in Billpoint, Internet
Auction, and eBay Japan in 2001; in Billpoint for part of 2002 and Internet Auction for all of 2002. The
decrease in minority interests from 2001 to 2002 primarily resulted from Internet Auction generating net
income for the Ñrst time in 2002. Additionally, our January 2002 acquisition of the remaining 35%
minority interest in Billpoint previously held by Wells Fargo Bank also contributed to the decrease. We
expect that minority interests in consolidated companies will continue to Öuctuate in future periods. If
Internet Auction, our majority-owned South Korean subsidiary, continues to be proÑtable, the minority
interests adjustment on the statement of income will continue to decrease our net income by the minority
investor's share of Internet Auction's net income.

Impact of Foreign Currency Translation

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

A signiÑcant portion of our international net revenues, operating expenses and net income are
denominated in Euros. During the year ended December 31, 2002, the U.S. dollar weakened against the
Euro and our weighted-average translation rate used to convert Euro denominated transactions into
U.S. dollar equivalents, decreased by approximately 6% compared to the weighted-average translation rate
for the year ended December 31, 2001. This weighted-average translation rate change for the Euro resulted
in increased net revenues of approximately $11.0 million and increased operating expenses of
approximately $5.0 million during the year ended December 31, 2002.

We expect our international operations will continue to grow in signiÑcance as we develop and deploy

our global marketplace. As a result, foreign currency Öuctuations in future periods could become more
signiÑcant or even have a negative impact on our net revenues and net income.

33

Liquidity and Capital Resources

Cash Flows

Since inception, we have Ñnanced operations primarily from net cash generated from operating
activities. In addition, we have obtained additional Ñnancing from the sale of preferred stock and warrants,
proceeds from the exercise of those warrants, proceeds from the exercise of stock options and proceeds
from our initial and follow-on public oÅerings. During 2002, we were primarily Ñnanced by our income
from operations and from the proceeds of stock option exercises.

Net cash provided by operating activities was $100.1 million in 2000, $252.1 million in 2001, and
$479.9 million in 2002. Net cash provided by operating activities resulted primarily from our net income,
tax beneÑts on the exercise of stock options, non-cash charges for depreciation and amortization and
changes in assets and liabilities.

Net cash used in investing activities was $206.1 million in 2000, $29.8 million in 2001, and

$157.8 million in 2002. The primary use for invested cash in the periods presented was for purchases of
property and equipment and acquisitions, net of proceeds from the sale of investments and assets.

Net cash provided by Ñnancing activities was $86.0 million in 2000, $101.5 million in 2001, and
$252.1 million in 2002. Net cash provided by Ñnancing activities was primarily due to the issuance of
common stock associated with stock option exercises.

Commitments and Contingencies

Capital Expenditures

We expect capital expenditures to approximate $200 million during 2003, without taking into account

any acquisitions or costs associated with the potential purchase of additional oÇce facilities, and consists
primarily of hardware and software for our platform architecture, site operations and corporate information
systems. In the event we purchase additional oÇce facilities in 2003, our capital expenditures would be
substantially larger. As of December 31, 2002, we have commitments to purchase a total of $28.8 million
in computer equipment, software and related services from two vendors.

In June 2002, we entered into an agreement to purchase computer equipment, software and related

services to expand our data warehousing capabilities. Under the agreement we are obligated to pay a
minimum of $16.0 million to a third-party vendor during a 30-month period ending in December 2004.
Minimum purchases under the commitment total $7.2 million in 2002, $4.5 million in 2003, and
$4.3 million in 2004. During the year ended December 31, 2002, we purchased $8.6 million under this
contract.

In December 2002, we entered into an agreement to purchase computer equipment, software and
related services to further expand our platform architecture, site operations and corporate information
systems. Under the agreement, we are obligated to pay a minimum of $20.0 million to a third-party vendor
during 2003. The commitment may include a maximum of $5.4 million in services purchases, and the
remainder must consist of equipment and software purchases. The agreement automatically renews for
additional one-year periods through 2005, if we do not cancel the agreement at the conclusion of each
year. In addition, this vendor amended an existing promotions agreement and has agreed to pay us
$5.0 million in quarterly payments for promotion of its auctions on eBay.com in 2003 and to spend an
additional $666,000 in joint promotions during the year. The promotions agreement, as amended, can be
renewed with the mutual agreement of both parties for additional one-year terms through 2005.
Equipment, software and services purchases will be expensed or capitalized in accordance with our
capitalization policy. Promotions will be recognized as transaction revenue over the period of delivery.

34

Leases

On March 1, 2000, we entered into a Ñve-year lease for general oÇce facilities located in San Jose,
California. This Ñve-year lease is commonly referred to as a synthetic lease because it represents a form of
oÅ-balance sheet Ñnancing under which an unrelated third-party funds 100% of the costs of the acquisition
of the property and leases the asset to us as lessee. Under our lease structure, upon termination or
expiration, at our option, we must either purchase the property from the lessor for a predetermined amount
or sell the real property to a third party. Our San Jose lease consists of approximately 460,000 square feet
of oÇce space. As of December 31, 2002, we occupied approximately 314,000 square feet of this total
oÇce space and subleased additional space in the facility to third parties.

Payments under our lease are based on the $126.4 million cost of the property funded by the third

party and are adjusted as the London Interbank OÅered Rate, or LIBOR, Öuctuates. Under the terms of
the lease agreement, the lease terminates on March 1, 2005, unless extended to September 1, 2006. At any
time prior to the Ñnal 12 months of the lease term, we may, at our option, purchase the property for
approximately $126.4 million. If we elect not to purchase the property, we will undertake to sell the
facility to one or more third parties and have guaranteed to the lessor a residual value equal to
approximately 88% of the $126.4 million cost of the property. Our maximum exposure to loss is the entire
amount of $126.4 million if we default on any of certain lease obligations and Ñnancial covenants. If this
payment were made, we would then receive title to the property. At December 31, 2002, we had not made
a decision with respect to the option we will pursue at the end of the lease term. Management believes
that the contingent liability relating to the residual value guarantee will not have a material adverse eÅect
on our Ñnancial condition, results of operations or cash Öows.

In addition, we are required to maintain $126.4 million of cash and investment securities as collateral

for the term of the lease and to maintain certain Ñnancial covenants. The cash and investment securities
are restricted as to their withdrawal from a third-party trustee and are classiÑed as long-term restricted
cash and investments on our balance sheet. In the event of a default under the lease, the collateral could
be used to pay the purchase price of the property and the lease would be terminated. At December 31,
2002, we were in compliance with our Ñnancial covenants under the lease.

If our lease were terminated, and we became obligated to pay the purchase price of the land and

buildings, we would show the cost as an asset on our balance sheet and our restricted cash and
investments position would be reduced by the amount of the purchase price. Currently, we reÖect rent
payments as an operating expense on our statement of income. In the event we were required to purchase
the land and buildings, our rent expense would cease and we would subsequently record depreciation
expense for the buildings over their estimated useful lives.

We entered into two interest rate swaps on June 19, 2000 and July 20, 2000, to reduce the impact of
changes in interest rates on a portion of the Öoating rate operating lease for our facilities. See ""Item 7A:
Quantitative and Qualitative Disclosures About Market Risk'' and ""Note 6 Ì Derivative Instruments'' to
our Consolidated Financial Statements, which is incorporated by reference herein.

In January 2003, the FASB issued FIN 46, ""Consolidation of Variable Interest Entities.'' This
interpretation of Accounting Research Bulletin No. 51, ""Consolidated Financial Statements,'' addresses
consolidation by business enterprises of certain variable interest entities where there is a controlling
Ñnancial interest in a variable interest entity or where the variable interest entity does not have suÇcient
equity at risk to Ñnance its activities without additional subordinated Ñnancial support from other parties.
This interpretation applies immediately to variable interest entities created after January 31, 2003 and
applies in the Ñrst year or interim period beginning after June 15, 2003 to variable interest entities in
which an enterprise holds a variable interest that it acquired before February 1, 2003. We expect that the
adoption of FIN 46 will require us to include our San Jose facilities lease and potentially certain
investments in our Consolidated Financial Statements eÅective July 1, 2003. In connection with our San
Jose facilities lease arrangement, our balance sheet following the July 1, 2003 adoption of FIN 46 will
reÖect changes to record assets of $126.4 million, liabilities of $122.5 million and non-controlling interests
of $3.9 million. In addition, our post-adoption income statement will reÖect the reclassiÑcation of rent

35

expense payments from operating expenses to interest expense as well as the recognition of depreciation
expense, within operating expenses, for our use of the buildings. We estimate that the income statement
impact of consolidating our San Jose facilities lease will consist of a charge against earnings, net of taxes,
of $5.6 million upon the adoption of FIN 46 on July 1, 2003. This charge will reÖect the accumulated
depreciation charges that would have been recorded in previous periods had consolidation of the San Jose
facilities been required. Additionally, we have not decided whether we will keep the existing Ñnancing
arrangement or purchase the San Jose facilities. Whether or not we keep the existing Ñnancing
arrangement, we anticipate recording additional annual operating expenses of $1.7 million, net of taxes, for
the recognition of depreciation expense on the buildings. In the event we purchase the San Jose facilities,
we will also pay $126.4 million, eliminate Ñnancing payments and settle our two interest rate swaps we
used to establish a Ñxed rate of interest for $95 million of our Ñnancing arrangement. During the year
ended December 31, 2002, our Ñnancing payments related to the San Jose facilities totaled $7.9 million.
At December 31, 2002, settlement of our two interest rate swaps would have resulted in a loss of
$10.9 million.

Our U.S. segment occupies approximately 434,000 square feet of commercial oÇce space in the
United States. We occupy 314,000 square feet of commercial oÇce space in San Jose, California under
the terms of our synthetic lease for our corporate headquarters. We own and occupy approximately 72,000
square feet of commercial oÇce space in Salt Lake City, Utah for our domestic customer support center.
We lease and occupy an additional 48,000 square feet of commercial oÇce space in various domestic
locations for the operations of certain U.S. subsidiaries.

Our International segment leases approximately 210,000 square feet of commercial oÇce space in
12 countries for our international operations, including the operations of our South Korean majority-owned
subsidiary.

Our Payments segment leases approximately 126,000 square feet of commercial oÇce space in the

United States and the United Kingdom. In addition, our Payments segment owns approximately 22 acres
of land near Omaha, Nebraska, on which a 115,000 square foot facility is under construction. Upon
completion, this facility will house the primary customer service operations center for our Payments
segment.

We also have lease obligations under certain other non-cancelable operating leases. Future minimum
rental payments under all non-cancelable operating leases, exclusive of the residual value guarantee on our
general oÇce facilities located in San Jose, California, at December 31, 2002 are as follows (in
thousands):

Year Ending
December 31,

Operating
Leases

2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$16,410

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

17,056

2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

9,630

7,568

6,108

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

19,909

Total minimum lease payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$76,681

36

Minimum annual repayments on notes payable and capital leases at December 31, 2002 are as follows

(in thousands):

Year ending
December 31,

Total

2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 4,145

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2,513

1,478

616

Ì

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

9,192

$17,944

Marketing Agreements

From time to time and in the ordinary course of business, we enter into arrangements to purchase
online and oÉine promotions. Such arrangements typically involve minimum purchase commitments with
terms ranging from several months to Ñve years.

AOL interactive marketing agreement

In April 2002, we amended our Interactive Marketing Agreement with AOL Time Warner, Inc., or

AOL. AOL attained certain performance goals in the contract year ending March 23, 2003, and extended
the amended agreement for an additional year, through March 23, 2004. Under the terms of the amended
agreement, we will pay AOL for its advertising services on a new user performance basis, up to a
maximum of $15 million. We are recognizing these fees as sales and marketing expense as such services
are provided. From time to time, we have also entered into incremental, discretionary purchases of
advertising from AOL. Discretionary purchases totaled $1.4 million during 2000, $8.5 million during 2001,
and $7.6 million during 2002.

In the event that AOL's advertising services during the year achieve certain speciÑed performance
goals, AOL has the right to extend the term of the amended agreement through March 23, 2005. Our
Ñnancial obligation for this renewal year, if any, will also be determined on a new user performance basis
and will amount to a maximum of $10.0 million.

Disney marketing agreement

In February 2000, we entered a four-year marketing agreement with The Walt Disney Company, or

Disney, to provide us with online and oÉine advertising and promotions and develop a co-branded version
of our online service. Subject to certain Disney performance obligations, we were obligated to pay a
minimum of $30 million to Disney over the four-year term of the agreement. In August 2001, we
amended the terms of the initial agreement and agreed to purchase a minimum of $23.0 million in online
and oÉine promotions through September 2004. We also committed to provide Disney with online
advertising on the eBay.com website valued at $3.5 million. Through December 31, 2002, we have
recognized $16.9 million in sales and marketing expense associated with the amended agreement.

Microsoft marketing and services agreements

During 2001, we entered into a series of marketing and services agreements with Microsoft that

obligate us to purchase online advertising promotions, software and related services through September
2003, totaling $8 million. In addition, Microsoft has agreed to purchase online advertising and other
services from us totaling $7 million over a three-year period ending June 2004. Through December 31,
2002, we have recognized $4.3 million in sales and marketing expenses for advertising services received,

37

incurred $3.0 million for Microsoft software products used to support our operations and recognized
$5.4 million in revenues for advertising services delivered to Microsoft.

Subsequent Events

Vancouver Lease

In February 2003, we entered into an operating sublease for approximately 110,000 square feet of

commercial oÇce space in Vancouver, British Columbia for a customer support center. The sublease
commences on July 1, 2003 and ends on October 30, 2011. Rental commitments under the sublease total
$11.8 million, including operating costs and taxes. In addition, we are subleasing approximately 37,000
square feet of the leased space back to the prime lessee for substantially the same lease term. The prime
lessee's rental commitments to eBay under the sublease total $5.2 million, including operating costs and
taxes. The prime lessee has provided an irrevocable letter of credit for $7.8 million as security for their
obligations under this sublease arrangement. The commitment under our sublease, as well as the prime
lessee's sublease and letter of credit, are denominated in Canadian dollars. The dollar Ñgures above are in
U.S. dollars, converted from Canadian dollars at the exchange rate as of December 31, 2002.

Integration of Half.com Platform

In March 2003, we announced our intention to fully integrate the platform of Half.com, a wholly
owned subsidiary acquired in July 2000, with the eBay.com platform by the end of 2004. Half.com's oÇce
in Pennsylvania, where 65 of its employees work, will be shut down once this process is complete.
Management is in the process of formalizing an exit and integration plan and expects to Ñnalize the plan
by the end of 2003. Based on our preliminary estimates, we anticipate costs related to employee retention
and severance will total approximately $3 million. If we decide to exit Half's leased oÇce facility, the
amount of lease termination costs, excluding any possible sublease income, and Ñxed asset write-oÅs will
total approximately $2 million. Costs related to our exit plan will be recorded as charges on our income
statement over the exit and integration period in accordance with SFAS No. 146, ""Accounting for Costs
Associated with Exit or Disposal Activities.''

PayPal's Prior Services to Online Gambling Merchants

PayPal completed its exit from the business of processing payments for online gambling merchants in

November 2002. Approximately 6% of PayPal's revenues in 2002 were derived from this business.
Beginning in July 2002, PayPal provided documents and information related to its services to online
gambling merchants in response to a federal grand jury subpoena issued at the request of the U.S.
Attorney for the Eastern District of Missouri. On March 28, 2003, PayPal received a letter from the U.S.
Attorney for the Eastern District of Missouri indicating its contention that PayPal's provision of services to
online gambling merchants violated 18 U.S.C. Û 1960 of the USA PATRIOT Act, which prohibits the
transmission of funds that are known to have been derived from a criminal oÅense or are intended to be
used to promote or support unlawful activity, thereby subjecting PayPal to potential civil forfeiture of the
amounts it received in connection with such activities as well as potential criminal liability. The letter
oÅered a complete settlement of all possible claims and charges from the U.S. Attorney for the Eastern
District of Missouri if Paypal paid the purported amount of its earnings derived from online gambling
merchants during the nine-month period from October 26, 2001 to July 31, 2002, plus interest. PayPal
acted in the good faith belief that its conduct did not violate 18 U.S.C. Û 1960 and PayPal calculates that
the amount of its earnings from online gaming activities was less than asserted in the letter. Although the
outcome of this matter is not yet determinable, the monetary amounts associated with this matter are not
expected to have a material impact on our Ñnancial position, results of operations or cash Öows.

General

We believe that existing cash, cash equivalents and investments, together with any cash generated

from operations, will be suÇcient to fund our operating activities, capital expenditures and other

38

obligations for the foreseeable future. However, if during that period or thereafter we are not successful in
generating suÇcient cash Öows from operations or in raising additional capital when required in suÇcient
amounts and on terms acceptable to us, our business could suÅer.

Critical Accounting Policies, Judgments and Estimates

The following description of critical accounting policies and estimates should be read in conjunction

with our Consolidated Financial Statements and other disclosures included in this Annual Report on
Form 10-K for the year ended December 31, 2002. Senior management and the Audit Committee of our
Board of Directors regularly review the appropriateness of the methodologies and estimates used in
connection with the application of our critical accounting policies.

Provisions for Doubtful Accounts and Authorized Credits

Our U.S. and International segments are exposed to losses due to uncollectible accounts and credits

to sellers. Provisions for these items represent our estimate of actual losses and credits based on our
historical experience, are monitored monthly, and are made at the time the related revenue is recognized.
The provision for doubtful accounts is recorded as a charge to operating expense, while the provision for
authorized credits is recorded as a reduction of revenues. The following table illustrates the provision for
doubtful accounts and authorized credits as a percentage of net revenues for 2000, 2001, and 2002 (in
thousands, except percents).

Net revenues from the U.S. and International segments ÏÏÏ

$426,385

$731,173

$1,118,732

Provision for doubtful accounts and authorized credits ÏÏÏÏÏ

18,237

25,243

25,455

Provision for doubtful accounts and authorized credits as a

% of net revenues from the U.S. and International
segments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

4.3%

3.5%

2.3%

2000

2001

2002

Historically, our actual losses and credits have been consistent with these provisions. However,

unexpected or signiÑcant future changes in trends could result in a material impact to future statements of
income and cash Öows. Based on our results for the year ended December 31, 2002, a 25 basis point
deviation from our estimates would have resulted in an increase or decrease in expense and/or net
revenues of approximately $3 million. The following analysis demonstrates the potential eÅect a 25 basis
point deviation from our estimates would have upon our Ñnancial statements and is not intended to provide
a range of exposure or expected deviation (in thousands, except per share data):

¿25 Basis
Points

Management's
2002
Estimate

°25 Basis
Points

Provision for doubtful accounts and authorized

credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 22,934

$ 25,455

$ 28,528

Income from operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

356,718

251,482

0.86

354,197

249,891

0.85

351,124

247,951

0.85

Provision for Transaction Losses

Our Payments segment is exposed to transaction losses due to fraud, as well as non-performance of
third parties and customers. We establish allowances for estimated losses arising from processing customer
transactions, such as charge-backs for unauthorized credit card use and merchant related charge-backs due
to non-delivery of goods or services, ACH returns, and debit card overdrafts. These allowances represent
an accumulation of the estimated amounts, using an actuarial technique, necessary to provide for

39

transaction losses incurred as of the reporting date, including those to which we have not yet been notiÑed.
The allowances are monitored monthly and are updated based on actual claims data reported by our
claims processors. Customers typically have up to 180 days to Ñle transaction disputes. Consequently, the
time between estimating the loss provisions and realization of the actual amount is short. The allowances
are based on known facts and circumstances, internal factors including our experience with similar cases,
historical trends involving loss payment patterns and the mix of transaction and loss types. Additions to the
allowance, in the form of provisions, are reÖected as a general and administrative expense in our results of
operations, while write-oÅs to the allowance are made when a loss is determined to have occurred.
Recoveries, when collected, are recorded as an increase to the allowance for transaction losses. As of
December 31, 2002, the allowance for transaction losses totaled $10.1 million and was included in other
current liabilities in our consolidated balance sheet.

The following table illustrates the provision for transaction losses as a percentage of total payment

volume from PayPal operations for the post-acquisition period from October 4, 2002 through
December 31, 2002 (in thousands, except percents).

Total Payment Volume from the PayPal operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$2,138,093

Provision for transaction losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

7,832

Provision for transaction losses as a % of total payment volume from PayPal

operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

0.37%

2002

Prior to our October 3, 2002 acquisition of PayPal, no provision for transaction losses was recorded as

our third-party banking service provider assumed all transaction loss exposure. The fees charged to us by
this banking service provider reÖected the assumption of this loss exposure and other services rendered.
Charges for the services were reported as a cost of net revenues.

The establishment of appropriate allowances for transaction losses is an inherently uncertain process,
and ultimate losses may vary from the current estimates. We regularly update our allowance estimates as
new facts become known and events occur that may impact the settlement or recovery of losses. The
allowances are maintained at a level deemed appropriate by management to adequately provide for losses
incurred at the balance sheet date. Based on our results for the post-acquisition period from October 4,
2002 through December 31, 2002, a Ñve basis point deviation from our estimates would have resulted in an
increase or decrease in expense of approximately $1.0 million. The following analysis demonstrates the
potential eÅect a Ñve basis point deviation from our estimates would have upon our Ñnancial statements
for the period that we consolidated PayPal's operations and is not intended to provide a range of exposure
or expected deviation (in thousands, except per share data):

¿5 Basis
Points

Management's
2002
Estimate

°5 Basis
Points

Provision for transaction losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$

6,842

$

7,832

$

8,980

Income from operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

355,187

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

250,516

Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

0.86

354,197

249,891

0.85

353,049

249,166

0.85

Legal Contingencies

In connection with certain pending litigation and other claims, we have estimated the range of

probable loss and provided for such losses through charges to our income statement. These estimates have
been based on our assessment of the facts and circumstances at each balance sheet date and are subject to
change based upon new information and future events.

40

From time to time, we are involved in disputes that arise in the ordinary course of business, and we
do not expect this trend to change in the future. We are currently involved in certain legal proceedings as
discussed in ""Item 3: Legal Proceedings'' and ""Note 11 Ì Commitments and Contingencies Ì Litigation''
to our Consolidated Financial Statements, which is incorporated by reference herein. We believe that we
have meritorious defenses to the claims against us, and we will defend ourselves vigorously. However, even
if successful, our defense against certain actions will be costly and could divert our management's time. If
the plaintiÅs were to prevail on certain claims, we might be forced to pay signiÑcant damages and
licensing fees, modify our business practices or even be prohibited from conducting a signiÑcant part of our
U.S. business. Any such results could materially harm our business and could result in a material adverse
impact on the Ñnancial position, results of operations or cash Öows of each of our three segments.

Accounting for Income Taxes

We are required to recognize a provision for income taxes based upon the taxable income and
temporary diÅerences for each of the tax jurisdictions in which we operate. This process requires a
calculation of taxes payable under currently enacted tax laws around the world and an analysis of
temporary diÅerences between the book and tax bases of our assets and liabilities, including various
accruals, allowances, depreciation and amortization. The tax eÅect of these temporary diÅerences and the
estimated tax beneÑt from our tax net operating losses are reported as deferred tax assets and liabilities in
our consolidated balance sheet. We also assess the likelihood that our net deferred tax assets will be
realized from future taxable income. To the extent we believe that it is more likely than not that some
portion of or all of the deferred tax asset will not be realized, we establish a valuation allowance. To the
extent we establish a valuation allowance or change the allowance in a period, we reÖect the change with a
corresponding increase or decrease in our tax provision in our income statement. Where the change in the
valuation allowance relates to the deduction for employee stock option exercises, the change is reÖected as
a credit to additional paid-in-capital. As employee stock option exercises are highly dependent upon the
performance of our stock price, it is extremely diÇcult to predict the amount of deductions that will be
generated from future option exercises and, therefore, it is diÇcult for us to ascertain the amount of
deferred tax assets related to employee stock option exercises that may be realized in future periods. We
have consequently provided a valuation allowance equal to 100% of our deferred tax assets related to
employee stock option exercises. The deferred tax asset, net of a valuation allowance of $145.2 million,
totaled $100.2 million at December 31, 2002. The following table illustrates the provision for income taxes
as a percentage of income before income taxes for 2000, 2001, and 2002 (in thousands, except percents):

2000

2001

2002

Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$81,019

$170,457

$395,837

Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

32,725

80,009

145,946

Provision for income taxes as a % of income before income

taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

40%

47%

37%

Historically, these provisions have adequately provided for our actual income tax liabilities. However,
unexpected or signiÑcant future changes in trends could result in a material impact to future statements of
income and cash Öows. Based on our results for the year ended December 31, 2002, a one-percentage
point change in our provision for income taxes as a percentage of income before taxes would have resulted
in an increase or decrease in expense of approximately $4.0 million. The following analysis demonstrates
the potential eÅect such a one-percentage point deviation change would have upon our Ñnancial statements

41

and is not intended to provide a range of exposure or expected deviation (in thousands, except per share
data):

Management's
2002
Estimate

°1%

¿1%

Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$142,105

$145,946

$150,022

Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

395,837

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

253,732

Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

0.87

395,837

249,891

0.85

395,837

245,815

0.84

Third-party Advertising Revenues

Our third-party advertising revenues are derived principally from the sale of online banner and
sponsorship advertisements for cash and through barter arrangements. To date, the duration of our banner
and sponsorship advertising contracts has ranged from one week to three years, but is generally one week
to three months. Advertising revenues on both banner and sponsorship contracts are recognized as
""impressions'' (i.e., the number of times that an advertisement appears in pages viewed by users of our
websites) are delivered or ratably over the term of the agreement where such agreements provide for
minimum monthly or quarterly advertising commitments or where such commitments are Ñxed throughout
the term. Barter transactions are valued based on amounts realized in similar cash transactions occurring
within six months prior to the date of the barter transaction. To the extent that signiÑcant delivery
obligations remain at the end of a period or collection of the resulting account receivable is not considered
probable, revenues are deferred until the obligation is satisÑed or the uncertainty is resolved. These
amounts are included in deferred revenue in our balance sheet. Third-party advertising net revenues,
including barter transactions, totaled 3%, 11% and 5% of our consolidated net revenues for the years ended
December 31, 2000, 2001 and 2002, respectively and were primarily from our U.S. segment. Revenue from
barter arrangements totaled $2.5 million in 2000, $10.4 million in 2001, and $10.1 million in 2002.

Third-party advertising revenues may be aÅected by the Ñnancial condition of our customers and by

the success of online promotions in general. Recently, the industry pricing of online advertisements has
deteriorated. Our third-party advertising revenue is dependent in signiÑcant part on the performance of
AOL Time Warner, Inc., or AOL, over which we do not have control. Reduction in third-party
advertising, whether due to softening of the demand for online advertising in general or particular problems
facing parties with whom we have contractual arrangements, would adversely aÅect our operating results.
Unlike our transaction revenues, third-party advertising revenues are derived from a highly concentrated
customer base. During the years ended December 31, 2000 and 2001, third-party advertising revenues were
all attributable to approximately 20 customers each year. During the year ended December 31, 2002, third-
party advertising revenues were all derived from approximately 30 customers. We continue to view our
business as primarily transaction driven and we expect third-party advertising revenues in future periods to
decrease as a percentage of total net revenues, and in absolute dollars. Additionally, our advertising sales
representative agreement with AOL has not been extended or renewed and is scheduled to terminate on
March 31, 2003, with AOL to continue its electronic delivery of our online advertisements for a speciÑed
wind-down period. After March 31, 2003, our third-party advertising revenues will be dependent on the
eÅorts of our existing internal sales staÅ.

End-to-End Services Revenues

Our end-to-end services revenues are derived principally from contractual arrangements with third
parties that provide transaction services to eBay users. To date, the duration of our end-to-end services
contracts has ranged from one to three years. End-to-end services revenues are recognized as the
contracted services are delivered to end-users. To the extent that signiÑcant obligations remain at the end
of a period or collection of the resulting receivable is not considered probable, revenues are deferred until

42

the obligation is satisÑed or the uncertainty is resolved. End-to-end services net revenues were 7%, 4% and
2% of our consolidated net revenues for the years ended December 31, 2000, 2001 and 2002, respectively
and were primarily from our U.S. segment.

Similar to our third-party advertising revenues, our end-to-end services revenues may be aÅected by
the Ñnancial condition of the parties with whom we have these relationships and by the success of online
services and promotions in general. Additionally, end-to-end services revenues are also concentrated among
a small customer base. End-to-end services revenues were derived from approximately 10 customers in
2000 and from approximately 20 customers in each of 2001 and 2002. We continue to view our business as
primarily transaction driven and expect end-to-end services revenues in future periods to decrease as a
percentage of total net revenues and in absolute dollars.

Impairment of Long-Lived Assets, Goodwill and Investments

Our long-lived assets at December 31, 2002 are property and equipment of $218.0 million and other

intangible assets of $279.5 million. We evaluate long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable in
accordance with SFAS No. 144, ""Accounting for the Impairment or Disposal of Long-Lived Assets.'' An
asset is considered impaired if its carrying amount exceeds the future net cash Öow the asset is expected to
generate. If such asset is considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair market value. We assess the
recoverability of our long-lived and intangible assets by determining whether the unamortized balances can
be recovered through undiscounted future net cash Öows of the related assets. The amount of impairment,
if any, is measured based on projected discounted future net cash Öows using a discount rate reÖecting our
average cost of capital.

Our goodwill at December 31, 2002 totaled $1.46 billion. We evaluate goodwill, at a minimum, on an
annual basis and whenever events and changes in circumstances suggest that the carrying amount may not
be recoverable in accordance with SFAS No. 142 ""Goodwill and Other Intangible Assets.'' Impairment of
goodwill is tested at the reporting unit level by comparing the reporting unit's carrying amount, including
goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using a
combination of the income or discounted cash Öows approach and the market approach, which utilizes
comparable companies' data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is
considered impaired and a second step is performed to measure the amount of impairment loss, if any.

To date, we have recorded no impairment of property and equipment, goodwill, or intangible assets.
However, if our estimates or the related assumptions change in the future, we may be required to record
impairment charges in any or all of our three segments to reduce the carrying amount of these assets.

The fair value of long-term investments are dependent on the performance of the companies and
instruments in which we have invested, as well as the volatility inherent in external markets for these
investments. In assessing potential impairment, we consider these factors as well as the forecasted Ñnancial
performance of the companies in which we invest. If forecasted performance levels are not met or if other
events occur, we may have to record additional impairment charges in our U.S. and International segments
to reduce the carrying amount of these assets. During the year ended December 31, 2002, we recognized
$3.8 million of impairment losses relating to the impairment in value of certain equity investments. At
December 31, 2002, the total value of our equity investments in unconsolidated companies was
$44.2 million, with $4.9 million in our U.S segment, $37.5 million in our International segment, and none
in our Payments segment.

Recent Accounting Pronouncements

Accounting for Costs Associated with Exit or Disposal Activities

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 or SFAS

No. 146, ""Accounting for Costs Associated with Exit or Disposal Activities,'' which nulliÑes Emerging

43

Issues Task Force, or EITF, Issue No. 94-3, ""Liability Recognition for Certain Employee Termination
BeneÑts and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).''
SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred and states that an entity's commitment to an exit plan, by itself, does not
create a present obligation that meets the deÑnition of a liability. SFAS No. 146 also establishes that fair
value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are eÅective
for exit or disposal activities initiated after December 31, 2002. We do not expect the adoption of SFAS
No. 146 to have a material impact upon our Ñnancial position, cash Öows or results of operations.

Guarantor's Accounting and Disclosure Requirements for Guarantees

In November 2002, the FASB issued FIN 45, ""Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others.'' FIN 45 requires a guarantor to
recognize a liability for obligations it has undertaken in relation to the issuance of a guarantee. It requires
that the liability be recorded at fair value on the date that the guarantee is issued. It also requires a
guarantor to provide additional disclosures regarding guarantees, including the nature of the guarantee, the
maximum potential amount of future payments under the guarantee, the carrying amount of the liability, if
any, for the guarantor's obligations under the guarantee, and the nature and extent of any recourse
provisions or available collateral that would enable the guarantor to recover the amounts paid under the
guarantee. The disclosure requirements under FIN 45 are eÅective for the interim and annual periods
ending after December 15, 2002. The recognition and measurement provisions under FIN 45 are eÅective
for guarantees issued or modiÑed after December 31, 2002. We do not expect the adoption of FIN 45 to
have a material impact upon our Ñnancial position, cash Öows or results of operations. See ""Note 11 Ì
Commitments and Contingencies'' to our Consolidated Financial Statements, which is incorporated by
reference herein.

Accounting for Stock Based Compensation

In December 2002, the FASB issued SFAS No. 148, ""Accounting for Stock Based Compensation Ì

Transition and Disclosure.'' SFAS 148 provides two additional transition methods for entities that
voluntarily adopt the fair value method of recording expenses when accounting for stock based
compensation. Further, the statement requires disclosure of comparable information for all companies
regardless of whether, when, or how an entity adopts the preferable, fair value based method of accounting.
These disclosures are now required for interim periods in addition to the traditional annual disclosure. The
amendments to SFAS No. 123, which provides for additional transition methods, are eÅective for periods
beginning after December 15, 2002. The disclosure provisions are eÅective for Ñscal years ending after
December 15, 2002 and have been incorporated into the notes to the accompanying Ñnancial statements.
We have chosen not to voluntarily adopt the fair value method of accounting for employee stock option
grants at this time.

Consolidation of Variable Interest Entities

In January 2003, the FASB issued FIN 46, ""Consolidation of Variable Interest Entities.'' This
interpretation of Accounting Research Bulletin No. 51, ""Consolidated Financial Statements,'' addresses
consolidation by business enterprises of certain variable interest entities where there is a controlling
Ñnancial interest in a variable interest entity or where the variable interest entity does not have suÇcient
equity at risk to Ñnance its activities without additional subordinated Ñnancial support from other parties.
This interpretation applies immediately to variable interest entities created after January 31, 2003 and
applies in the Ñrst year or interim period beginning after June 15, 2003 to variable interest entities in
which an enterprise holds a variable interest that it acquired before February 1, 2003. We expect that the
adoption of FIN 46 will require us to include our San Jose facilities lease arrangement and potentially
certain investments in our Consolidated Financial Statements eÅective July 1, 2003. In connection with
our San Jose facilities lease arrangement, our balance sheet following the July 1, 2003 adoption of FIN 46
will reÖect changes to record assets of $126.4 million, liabilities of $122.5 million and non-controlling

44

interests of $3.9 million. In addition, our post-adoption income statement will reÖect the reclassiÑcation of
rent expense payments from operating expenses to interest expense as well as the recognition of
depreciation expense, within operating expenses, for our use of the buildings. We estimate that the income
statement impact of consolidating our San Jose facilities lease will consist of a charge against earnings, net
of taxes, of $5.6 million upon the adoption of FIN 46 on July 1, 2003. This charge will reÖect the
accumulated depreciation charges that would have been recorded in previous periods had consolidation of
the San Jose facilities been required. Additionally, we have not decided whether we will keep the existing
Ñnancing arrangement or purchase the San Jose facilities. Whether or not we keep the existing Ñnancing
arrangement, we anticipate recording additional annual operating expenses of $1.7 million, net of taxes, to
for the recognition of depreciation expense on the buildings. In the event we purchase the San Jose
facilities, we will also pay $126.4 million, eliminate Ñnancing payments and settle our two interest rate
swaps we used to establish a Ñxed rate of interest for $95 million of our Ñnancing arrangement. During the
year ended December 31, 2002, our Ñnancing payments related to the San Jose facilities totaled
$7.9 million. At December 31, 2002, settlement of our two interest rate swaps would have resulted in a
loss of $10.9 million.

45

Risk Factors That May AÅect Results of Operations and Financial Condition

The risks and uncertainties described below are not the only ones facing eBay. Additional risks and

uncertainties not presently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks or such other risks actually occur, our business could be
harmed.

Our operating results may Öuctuate.

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

‚ our ability to retain an active user base, to attract new users who list items for sale, who purchase
items through our service or who use our payment services and to maintain customer satisfaction;

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

‚ the amount and timing of operating costs and capital expenditures relating to the maintenance and

expansion of our businesses, operations and infrastructure;

‚ foreign, federal, state or local government regulation, including investigations prompted by items

listed, sold or paid for by our users;

‚ our ability to comply with the requirements of entities whose services are required for our

operations, such as the credit card associations;

‚ the success of our geographical and product expansion;

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

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

‚ consumer conÑdence in the safety and security of transactions on our websites;

‚ our ability to upgrade and develop our systems, infrastructure and customer service capabilities to

accommodate growth at a reasonable cost;

‚ our ability to develop product enhancements at reasonable cost;

‚ our ability to integrate successfully and cost eÅectively manage our acquisitions, including the

acquisition of PayPal;

‚ our ability to manage fraud loss and credit card charge back rates and the payment funding mix at

PayPal;

‚ the cost and demand for advertising on our websites;

‚ technical diÇculties or service interruptions involving our websites or services provided to our users

by third parties (such as photo hosting);

‚ our ability to attract new personnel in a timely and eÅective manner;

‚ our ability to retain key employees in our online businesses, including PayPal;

‚ our ability to expand our product oÅerings involving Ñxed-price trading successfully;

‚ the costs and results of litigation that involves us;

‚ the results of regulatory decisions that aÅect us;

‚ the timing, cost and availability of advertising in traditional media and on other websites and online

services;

46

‚ the timing of payments to us and of marketing and other expenses under existing and future

contracts;

‚ the success of our brand building and marketing campaigns;

‚ the continued Ñnancial strength of our commercial partners and technology suppliers;

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

‚ increasing consumer acceptance of the Internet and other online services for commerce and, in

particular, for the trading of products such as those listed on our websites;

‚ general economic conditions and those economic conditions speciÑc to the Internet and e-commerce

industries; and

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

Our limited operating history and the increased variety of services oÅered on our websites makes it

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

We may not maintain our level of proÑtability.

We believe that our continued proÑtability at historical levels will depend in large part on our ability

to do the following:

‚ maintain suÇcient transaction volume to attract buyers and sellers;

‚ manage the costs of our business, including the costs associated with maintaining and developing
our websites, customer support, fraud and chargebacks and international and product expansion;

‚ increase the awareness of our brands; and

‚ provide our customers with superior community and trading experiences.

We are investing heavily in marketing and promotion, customer support, further development of our
websites, technology and operating infrastructure development. The costs of these investments are expected
to remain signiÑcant into the future. In addition, many of our acquisitions require continuing investments
in these areas and we have signiÑcant ongoing contractual commitments in some of these areas. As a
result, we may be unable to adjust our spending rapidly enough to compensate for any unexpected revenue
shortfall, which may harm our proÑtability. The existence of several larger and more established companies
that are enabling online sales as well as other companies, some of whom do not charge for transactions on
their sites and others who are facilitating trading through varied pricing formats (e.g., Ñxed-price, reverse
auction, group buying) may limit our ability to raise user fees in response to declines in proÑtability. In
addition, we are spending in advance of anticipated growth, which may also harm our proÑtability. In view
of the rapidly evolving nature of our business and our limited operating history, we believe that period-to-
period comparisons of our operating results are not necessarily meaningful. You should not rely upon our
historical results as indications of our future performance.

Our integration of PayPal may be diÇcult.

While eBay has acquired smaller companies in the past, the acquisition of PayPal represents by far
the largest acquisition by eBay to date. We expect that the process of integrating PayPal's business into

47

the eBay platform, and pursuing opportunities for PayPal's growth outside of the eBay platform, will be
relatively diÇcult and will require signiÑcant attention from management. This may divert management's
attention from its focus on eBay's principal business for an extended period of time. In addition, PayPal
will continue to operate as an independent wholly owned subsidiary of eBay. Because PayPal will be
relatively independent, eÇcient cooperation between eBay and PayPal following the merger will be crucial
for a successful integration of PayPal's business into the eBay platform. PayPal's pre-merger Chief
Executive OÇcer left the company at the time the merger was consummated and the pre-merger Chief
Technical OÇcer, Chief Operating OÇcer and Chief Financial OÇcer left the company shortly thereafter.
Accordingly, PayPal's new Chief Executive OÇcer and certain other members of its management have
only limited experience with PayPal. There can be no assurance that PayPal's business will be integrated
into the eBay platform in a timely and eÇcient manner or that any of the anticipated beneÑts of the
merger will be realized. If these beneÑts are not realized, our business and operating results will be
harmed.

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

Anything that diverts our users from their customary level of usage of our websites could adversely
aÅect our business. We would therefore be adversely aÅected by geopolitical events such as war, the threat
of war or terrorist activity. Similarly, our results of operations historically have been seasonal in nature
because many of our users reduce their activities on our websites during the holidays, such as during the
Thanksgiving (in the U.S.) and Christmas periods, and with the onset of good weather during the summer
months. We have historically experienced our strongest quarters of online growth in our Ñrst and fourth
Ñscal quarters. PayPal has shown similar seasonality, except that its strongest quarter of online growth has
historically been the fourth Ñscal quarter.

There are many risks associated with our international operations.

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

‚ regulatory requirements, including regulation of auctioneering, banking, and money transmitting,

that may limit or prevent the oÅering of our services in some jurisdictions, may prevent enforceable
agreements between sellers and buyers, may prohibit certain categories of goods, may require
special licensure, or may limit the transfer of information between our foreign subsidiaries and
ourselves;

‚ legal uncertainty regarding liability for the listings of our users, including less Internet-friendly legal

systems, unique local laws and lack of clear precedent or applicable law;

‚ diÅerent employee/employer relationships and the existence of workers' councils and labor unions;

‚ diÇculties in staÇng and managing foreign operations;

‚ longer payment cycles, diÅerent accounting practices and greater problems in collecting accounts

receivable;

‚ potentially adverse tax consequences, including local taxation of our fees or of transactions on our

websites;

48

‚ higher telecommunications and Internet service provider costs;

‚ strong local competitors;

‚ more stringent consumer and data protection laws;

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

‚ seasonal reductions in business activity;

‚ expenses associated with localizing our products, including oÅering customers the ability to transact

business in the local currency;

‚ laws and business practices that favor local competitors;

‚ proÑt repatriation restrictions, foreign currency exchange restrictions and exchange rate Öuctuations;

‚ changes in a speciÑc country's or region's political or economic conditions; and

‚ diÅering intellectual property laws.

Some of these factors may cause our international costs to exceed our domestic costs of doing
business. To the extent we expand our international operations and have additional portions of our
international revenues denominated in foreign currencies, we also could become subject to increased
diÇculties in collecting accounts receivable and risks relating to foreign currency exchange rate
Öuctuations.

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

Our business may be subject to sales and other taxes.

We do not collect sales or other similar taxes on goods or services sold by users through our services.
One or more states or any foreign country may seek to impose value-added taxes, or VAT, or sales or use
tax collection or record-keeping obligations on companies such as ours that engage in or facilitate online
commerce. Such taxes could be imposed if, for example, we were ever deemed to be an auctioneer or the
agent of our sellers. Several proposals have been made at the state and local level that would impose
additional taxes on the sale of goods and services through the Internet. These proposals, if adopted, could
substantially impair the growth of e-commerce, and could diminish our opportunity to derive Ñnancial
beneÑt from our activities. In 1998, the U.S. federal government enacted legislation prohibiting states or
other local authorities from imposing new taxes on Internet commerce for a period of three years, which
has been extended through November 1, 2003. This moratorium does not prohibit states or the Internal
Revenue Service from collecting taxes on our income, if any, or from collecting taxes that are due under
existing tax rules. New regulations in the European Union relating to the collection of VAT on digital
services will require us to collect and remit VAT on our own fees beginning in July 2003. We intend to
work with relevant tax authorities to clarify our obligations under these regulations and to change our
software to permit the billing of these taxes. We expect substantial ongoing costs associated with
complying with the VAT rules throughout Europe and the increased cost to our users may reduce their
activity on our websites. Both of these eÅects could adversely aÅect our business. A successful assertion by
one or more states or any foreign country that we should collect sales or other taxes on the exchange of
merchandise on our system would harm our business.

49

PayPal is subject to unique risks that could harm our business.

PayPal faces signiÑcant risks of loss due to fraud and disputes between senders and recipients. If PayPal is
unable to deal eÅectively with fraudulent transactions, PayPal's losses from fraud would increase, and its
business would be harmed.

PayPal faces signiÑcant risks of loss due to fraud and disputes between senders and recipients,

including:

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

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

‚ potential breaches of system security;

‚ potential employee fraud; and

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

For the years ended December 31, 2001, and December 31, 2002, PayPal's provision for transaction

losses totaled $14.8 million and $28.8 million, respectively, representing 0.42% and 0.41% of PayPal's total
payment volume. In January 2003 PayPal increased the withdrawal limit for unveriÑed international users
to $500 per month in certain countries. This increase may result in higher transaction losses.

PayPal incurs chargebacks and other losses from merchant fraud, payment disputes and insuÇcient funds,
and its liability from these items could have a material adverse eÅect on its business and result in PayPal
losing the right to accept credit cards for payment. If PayPal is prohibited from accepting credit cards for
payment, its ability to compete could be impaired, and our business would suÅer.

PayPal incurs substantial losses from merchant fraud, including claims from customers that merchants

have not performed, that their goods or services do not match the merchant's description or that the
customer did not authorize the purchase. PayPal also incurs losses from erroneous transmissions and from
customers who have closed bank accounts or have insuÇcient funds in them to satisfy payments. PayPal's
liability for such items could have a material adverse eÅect on its business, and if they become excessive,
could result in PayPal losing the right to accept credit cards for payment. If PayPal were unable to accept
credit cards, the velocity of trade on eBay could decrease, in which case our business would suÅer. PayPal
has been assessed substantial Ñnes in the past, and excessive chargebacks may arise in the future. PayPal
has taken measures to detect and reduce the risk of fraud, but these measures may not be eÅective. If
these measures do not succeed, our business will suÅer.

Unauthorized use of credit cards and bank accounts could expose PayPal to substantial losses. If PayPal is
unable to detect and prevent unauthorized use of cards and bank accounts, its business would suÅer.

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

50

PayPal's processes to reduce fraud losses depend in part on its ability to restrict the withdrawal of
customer funds while it investigates suspicious transactions. PayPal has been and could be sued by
plaintiÅs alleging that PayPal's restriction and investigation processes violate federal and state law on
consumer protection and unfair business practice, and are inconsistent with PayPal's user agreement. If
PayPal is unable to defend itself successfully, it could be required to restructure its anti-fraud processes in
ways that would harm its business, and to pay substantial damages.

As part of PayPal's program to reduce fraud losses, it may temporarily restrict the ability of customers
to withdraw their funds if those funds or their account activity are identiÑed by PayPal's anti-fraud models
as suspicious. PayPal is subject to several purported class action lawsuits challenging its procedures and
disclosures with respect to suspicious accounts (See ""Item 3: Legal Proceedings''), and if PayPal's
processes are found to violate federal or state law on consumer protection and unfair business practices, it
could be subject to an enforcement action or Ñnes. If PayPal loses this litigation or is subject to an
enforcement action, it could be required to restructure its anti-fraud processes in ways that would harm its
business, and to pay substantial damages. Even if PayPal is able to defend itself successfully, the litigation
or enforcement action could cause damage to its reputation, could consume substantial amounts of its
management's time and attention, and could require PayPal to change its customer service and operations
in ways that could increase its costs and decrease the eÅectiveness of its anti-fraud program.

Any failure to provide eÅective customer support could result in the loss of customers and inability to
attract new customers, which would harm PayPal's business.

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

Security and privacy breaches in PayPal's electronic transactions may expose PayPal to additional liability
and result in the loss of customers, either of which events could harm its business.

Any inability on PayPal's part to protect the security and privacy of its electronic transactions could

have a material adverse eÅect on its proÑtability. A security or privacy breach could:

‚ expose PayPal to additional liability;

‚ increase PayPal's expenses relating to resolution of these breaches; and

‚ deter customers from using PayPal's product.

PayPal's data security measures may not eÅectively counter evolving security risks or address the

security and privacy concerns of existing and potential customers. Any failures in PayPal's security and
privacy measures could have a material adverse eÅect on our business.

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

The large volume of payments that PayPal handles for its customers makes it vulnerable to employee
fraud or other internal security breaches. PayPal is required to reimburse customers for any funds stolen as
a result of such breaches. We cannot assure you that PayPal's internal security systems will prevent
material losses from employee fraud.

51

PayPal's payment system might be used for illegal or improper purposes, which could expose it to
additional liability and harm its business.

Despite measures PayPal has taken to detect and prevent identity theft, unauthorized uses of credit

cards and similar misconduct, its payment system remains susceptible to potentially illegal or improper
uses. These may include illegal online gambling, fraudulent sales of goods or services, illicit sales of
prescription medications or controlled substances, software and other intellectual property piracy, money
laundering, bank fraud, child pornography traÇcking, prohibited sales of alcoholic beverages and tobacco
products and online securities fraud. Despite measures PayPal has taken to detect and lessen the risk of
this kind of conduct, these measures may not succeed. The processing of these payments could expose
PayPal to liability. In addition, future regulations under the USA PATRIOT Act may require PayPal to
revise the procedures it takes to verify the identity of customers and to monitor more closely international
transactions. PayPal's business could suÅer if customers use its system for illegal or improper purposes, or
if usage of its system is reduced because of increased veriÑcation requirements.

PayPal's discontinuance of its processing of payments for online gambling merchants will reduce its
revenue and proÑts; its past processing of these accounts could subject it to liability.

PayPal completed its exit from the business of processing payments for online gambling merchants in
November 2002. Approximately 6% of PayPal's revenues in 2002 were derived from this business. The loss
of these revenues and related proÑts will adversely aÅect PayPal's Ñnancial results. As a result of having
been in this business, PayPal has become subject to two inquiries related to payments made through its
service to online gambling merchants. In August 2002, PayPal reached agreement with the Attorney
General of the State of New York that it would cease processing payments from its New York members
to such merchants and pay the State of New York $200,000 in penalties and disgorged proÑts and to cover
the cost of investigation. Beginning in July 2002, PayPal provided documents and information related to its
services to online gambling merchants in response to a federal grand jury subpoena issued at the request of
the U.S. Attorney for the Eastern District of Missouri. On March 28, 2003, PayPal received a letter from
the U.S. Attorney for the Eastern District of Missouri indicating its contention that PayPal's provision of
services to online gambling merchants violated 18 U.S.C. Û 1960 of the USA PATRIOT Act, which
prohibits the transmission of funds that are known to have been derived from a criminal oÅense or are
intended to be used to promote or support unlawful activity, thereby subjecting PayPal to potential civil
forfeiture of the amounts it received in connection with such activities as well as potential criminal
liability. The letter oÅered a complete settlement of all possible claims and charges from the
U.S. Attorney for the Eastern District of Missouri if Paypal paid the purported amount of its earnings
derived from online gambling merchants during the nine-month period from October 26, 2001 to July 31,
2002, plus interest. PayPal acted in the good faith belief that its conduct did not violate 18 U.S.C. Û 1960
and PayPal calculates that the amount of its earnings from online gaming activities was less than asserted
in the letter. Should this investigation lead to a civil or criminal charge against PayPal, we would be
harmed by negative publicity, the cost of litigation and the diversion of management time, even if PayPal
ultimately prevails. Any Ñnding of a civil or criminal violation by PayPal, or potentially any settlement,
could also endanger PayPal's ability to obtain, maintain or renew money transmitter licenses in
jurisdictions where it requires such licenses to operate, which would materially harm our business.

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

Because PayPal is not a bank, it cannot belong to and directly access the Visa and MasterCard credit
card associations or the Automated Clearing House, or ACH, payment network. As a result, PayPal must
rely on banks and their service providers to process its transactions. PayPal must comply with the
operating rules of the credit card associations and the National Automated Clearing House Association, or
NACHA, as they apply to merchants. The associations' member banks set these rules, and the
associations interpret the rules. Some of those member banks compete with PayPal. Visa, MasterCard,

52

American Express or Discover could adopt new operating rules or interpretations of existing rules which
PayPal or its processors might Ñnd diÇcult or even impossible to comply with, in which case PayPal could
lose its ability to give customers the option of using credit cards to fund their payments. If PayPal were
unable to accept credit cards, its business would be seriously damaged. In addition, if PayPal were unable
to accept credit cards, the velocity of trade on eBay could decrease and our business would suÅer.

MasterCard has announced that a clariÑcation of its rules, eÅective May 1, 2002, requires each
commercial customer that regularly uses PayPal to accept payment for goods or services, to enter into a
contract directly with the bank that processes MasterCard transactions for PayPal and to agree to observe
MasterCard rules. PayPal is complying with this rule through changes to its User Agreement, its internal
processes, its contractual relationship with its credit card processor, and by obtaining additional information
about its larger customers. As a result, PayPal has changed the interrelationship among itself, its larger
customers and its credit card processing bank in ways that will increase PayPal's costs and may reduce the
attractiveness of its service.

In 2001, Visa indicated that some of PayPal's practices violated its operating rules, and PayPal

implemented changes in response. In January 2002, PayPal received correspondence through its credit card
processor that three issues remained unresolved. These issues relate to PayPal's international membership
fees, its fees for international credit card funded payments, and its process for obtaining authorization to
charge a customer's Visa account if the customer's ACH transfer fails. In connection with these issues,
PayPal's processor was assessed Ñnes totaling $130,000 by Visa in 2002, $110,000 of which PayPal's
processor has passed through to PayPal. PayPal has implemented changes to its practices to resolve these
issues, and believes these changes have resolved all outstanding issues that resulted in compliance Ñnes
from Visa. However, these changes could make the PayPal service less attractive to its customers.

PayPal's status under state, federal and international Ñnancial services regulation is unclear. Violation of
or compliance with present or future regulation could be costly, expose PayPal to substantial liability, force
PayPal to change its business practices or force PayPal to cease oÅering its current product.

PayPal operates in an industry subject to government regulation. PayPal currently is subject to some

states' money transmitter regulations, to federal regulations in its role as transfer agent and investment
adviser to the PayPal Money Market Fund, and to federal electronic fund transfer and money laundering
regulations. In the future, PayPal might be subjected to:

‚ state or federal banking regulations;

‚ additional states' money transmitter regulations and federal money laundering regulations;

‚ international banking or Ñnancial services regulations or laws governing other regulated industries;

or

‚ U.S. and international regulation of Internet transactions.

If PayPal is found to be in violation of any current or future regulations, PayPal could be:

‚ exposed to Ñnancial liability, including substantial Ñnes which could be imposed on a per

transaction basis and disgorgement of its proÑts;

‚ forced to change its business practices; or

‚ forced to cease doing business altogether or with the residents of one or more states or countries.

Any change to PayPal's business practices that makes the service less attractive to customers or
prohibits its use by residents of a particular jurisdiction could decrease the velocity of trade on eBay, in
which case our business would suÅer.

53

If PayPal were found to be subject to or in violation of any laws or regulations governing banking, it could
be subject to liability and forced to change its business practices.

PayPal believes that the licensing or approval requirements of the OÇce of the Comptroller of the
Currency, the Federal Reserve Board and other federal or state agencies that regulate banks, bank holding
companies or other types of providers of electronic commerce services do not apply to PayPal, except for
certain money transmitter licenses mentioned below. However, one or more states may conclude that,
under its or their statutes, PayPal is engaged in an unauthorized banking business. PayPal received written
communications from regulatory authorities in New York, most recently in February 2002, and Louisiana
expressing the view that its service as it formerly operated constituted an unauthorized banking business,
and from authorities in California and Idaho in 2001 that its service might constitute an unauthorized
banking business. PayPal has taken steps to address these states' concerns, and has received a conclusion
from the New York Banking Department that its current business model does not constitute illegal
banking. PayPal also has obtained licenses to operate as a money transmitter in California, Louisiana and
Idaho. However, we cannot assure you that the steps PayPal has taken to address state regulatory concerns
will be eÅective in all states. If PayPal is found to be engaged in an unauthorized banking business in one
or more states, it might be subject to monetary penalties and adverse publicity and might be required to
cease doing business with residents of those states. Even if the steps it has taken to resolve these states'
concerns are deemed suÇcient by the state regulatory authorities, PayPal could be subject to Ñnes and
penalties for its prior activities. The need to comply with state laws prohibiting unauthorized banking
activities could also limit PayPal's ability to enhance its services in the future. Any change to PayPal's
business practices that makes the service less attractive to customers or prohibits its use by residents of a
particular jurisdiction could decrease the velocity of trade on eBay, in which case our business would
suÅer.

If PayPal were found to be subject to or in violation of any laws or regulations governing money
transmitters, it could be subject to liability and forced to change its business practices.

A number of states have enacted legislation regulating money transmitters and PayPal has applied for
licenses under this legislation in 28 jurisdictions. To date, PayPal has obtained licenses in 20 states and the
District of Columbia. As a licensed money transmitter, PayPal is subject to bonding requirements,
restrictions on its investment of customer funds, reporting requirements and inspection by state regulatory
agencies. If PayPal's pending applications were denied, or if it were found to be subject to and in violation
of any money services laws or regulations, PayPal also could be subject to liability or forced to cease doing
business with residents of certain states or to change its business practices. Any change to PayPal's
business practices that makes the service less attractive to customers or prohibits its use by residents of a
particular jurisdiction could decrease the velocity of trade on eBay, in which case our business would
suÅer. Even if PayPal is not forced to change its business practices, it could be required to obtain licenses
or regulatory approvals that could impose a substantial cost on PayPal.

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

Although there have been no deÑnitive interpretations to date, PayPal has assumed that its service is
subject to the Electronic Fund Transfer Act and Regulation E of the Federal Reserve Board. As a result,
among other things, PayPal must provide advance disclosure of changes to its service, follow speciÑed error
resolution procedures and absorb losses from transactions not authorized by the consumer. In addition,
PayPal is subject to the Ñnancial privacy provisions of the Gramm-Leach-Bliley Act and related
regulations. As a result, some customer Ñnancial information that PayPal receives is subject to limitations
on reuse and disclosure. Additionally, pending legislation at the state and federal levels may restrict further
PayPal's information gathering and disclosure practices. Existing and potential future privacy laws may
limit PayPal's ability to develop new products and services that make use of data gathered through its
service. The provisions of these laws and related regulations are complicated, and PayPal does not have
extensive experience in complying with these laws and related regulations. Even technical violations of

54

these laws can result in penalties of up to $1,000 assessed for each non-compliant transaction. During the
years ended December 31, 2001 and December 31, 2002, PayPal processed approximately 189,000 and
348,000 transactions per day, respectively, and any violations could expose PayPal to signiÑcant liability.

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

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

PayPal's status under banking or Ñnancial services laws or other laws in countries outside the U.S. is
unclear. The cost of obtaining any required licenses or regulatory approvals in these countries could aÅect
PayPal's future proÑtability.

PayPal currently oÅers its product to customers with credit cards in 37 countries outside the U.S. In

19 of these countries, customers can withdraw funds to local bank accounts. In these countries, it is not
clear whether, in order to provide its product in compliance with local law, PayPal needs to be regulated as
a bank or Ñnancial institution or otherwise. If PayPal were found to be subject to and in violation of any
foreign laws or regulations, it could be subject to liability, forced to change its business practices or forced
to suspend operations in one or more countries. Alternatively, PayPal could be required to obtain licenses
or regulatory approvals that could impose a substantial cost on it and involve considerable delay to the
provision or development of its product. Implementation of PayPal's plans to enhance the attractiveness of
its product for international customers, in particular its plans to oÅer customers the ability to transact
business in major currencies in addition to the U.S. dollar, will increase the risks that it could be found to
be in violation of laws or regulations in countries outside the U.S. In the fourth quarter of 2002, PayPal
began oÅering customers the ability to send or receive payments in Pounds, Euros, Canadian Dollars or
Yen, in addition to U.S. dollars.

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

PayPal pays signiÑcant transaction fees when senders fund payment transactions using credit cards,

nominal fees when customers fund payment transactions by electronic transfer of funds from bank
accounts and no fees when customers fund payment transactions from an existing PayPal account balance.
For the years ended December 31, 2001 and December 31, 2002, senders funded 51.5% and 49.8%,
respectively, of PayPal's payment volume using credit cards. Senders may resist funding payments by
electronic transfer from bank accounts because of the greater protection oÅered by credit cards, including

55

the ability to dispute and reverse merchant charges, because of frequent Öier miles or other incentives
oÅered by credit cards or because of generalized fears regarding privacy or loss of control in surrendering
bank account information to a third party.

Increases in credit card processing fees could increase PayPal's costs, aÅect its proÑtability, or otherwise
limit its operations.

From time to time, Visa, MasterCard, American Express and Discover increase the interchange fees

that they charge for each transaction using their cards. MasterCard is implementing an increase to its
interchange fees eÅective April 2003. PayPal's credit card processors have the right to pass any increases
in interchange fees on to PayPal. Any such increased fees could increase PayPal's operating costs and
reduce its proÑt margins. Furthermore, PayPal's credit card processors require it to pledge cash as
collateral with respect to PayPal's acceptance of Visa, MasterCard, American Express and Discover and
the amount of cash that PayPal is required to pledge could be increased at any time.

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

PayPal's ability to manage and account accurately for customer funds requires a high level of internal

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

Customer complaints or negative publicity about our customer service could aÅect use of our services
adversely and, as a result, our business could suÅer.

Customer complaints or negative publicity about our customer service could diminish severely

consumer conÑdence in and use of our services. Breaches of our customers' privacy and our security
measures could have the same eÅect. Measures we sometimes take to combat risks of fraud and breaches
of privacy and security can damage relations with our customers. These measures heighten the need for
prompt and accurate customer service to resolve irregularities and disputes. PayPal has received negative
media coverage, as well as public criticism regarding customer disputes. EÅective customer service requires
signiÑcant personnel expense, and this expense, if not managed properly, could impact our proÑtability
signiÑcantly. Any inability by us to manage or train our customer service representatives properly could
compromise our ability to handle customer complaints eÅectively. If we do not handle customer
complaints eÅectively, our reputation may suÅer and we may lose our customers' conÑdence.

Our failure to manage growth could harm us.

We currently are experiencing a period of expansion in our headcount, facilities and infrastructure,
and we anticipate that further expansion will be required to address potential growth in our customer base
and number of listings as well as our expansion into new geographic areas, types of goods and alternative
methods of sale. This expansion has placed, and we expect it will continue to place, a signiÑcant strain on
our management, operational and Ñnancial resources. The areas that are put under strain by our growth
include the following:

‚ The Websites. We must constantly add new hardware, update software and add new engineering
personnel to accommodate the increased use of our and our subsidiaries' websites and the new
products and features we are regularly introducing. This upgrade process is expensive, and the
increased complexity of our websites increases the cost of additional enhancements. If we are
unable to increase the capacity of our systems at least as fast as the growth in demand for this
capacity, our websites may become unstable and may cease to operate for periods of time. We are

56

in the midst of a signiÑcant multiyear project to enhance our current technical architecture. If this
project is not successful, our business could be harmed. We have experienced periodic unscheduled
downtime. Continued unscheduled downtime would harm our business and also could anger users of
our websites and reduce future revenues.

‚ Customer Support. We are expanding our customer support operations to accommodate the

increased number of users and transactions on our websites and the increased level of trust and
safety activity we provide worldwide. If we are unable to provide these operations in a cost-eÅective
manner, users of our websites may have negative experiences, and current and future revenues
could suÅer, or our operating margins may decrease.

‚ Customer Accounts. Our revenues are dependent on prompt and accurate billing processes. If we
are unable to grow our transaction processing abilities to accommodate the increasing number of
transactions that must be billed, our ability to collect revenue will be harmed.

We must continue to hire, train and manage new employees at a rapid rate. If our new hires perform

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

Our business may be harmed by the listing or sale by our users of illegal items.

The law relating to the liability of providers of online services for the activities of their users on their

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

We are subject to intellectual property and other litigation.

On April 25, 2001, our European subsidiaries, eBay GmbH and eBay International AG, were sued by
Montres Rolex S.A. and certain Rolex aÇliates, or Rolex, in the regional court of Cologne, Germany. The
suit subsequently was transferred to the regional court in Dusseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolex's trademarks as a result of users selling counterfeit Rolex watches
through our German website. The suit also alleges unfair competition. Rolex sought an order forbidding
the sale of Rolex watches on the website as well as damages. In December 2002, a trial was held in the
matter and the court ruled in favor of eBay on all causes of action. Rolex has appealed the ruling, but the
appeal has not yet been briefed or heard.

57

On September 26, 2001, a complaint was Ñled by MercExchange LLC against us, our Half.com

subsidiary and ReturnBuy, Inc. in the Eastern District of Virginia (No. 2:01-CV-736) alleging
infringement of three patents (relating to online auction technology, multiple database searching and
electronic consignment systems) and seeking a permanent injunction and damages (including treble
damages for willful infringement). We answered the complaint, denying the allegations. In April 2002, we
Ñled four motions for summary judgment relating to the three patents in suit. The court denied three of
those motions and deferred ruling on the fourth motion. A ""Markman'' hearing was held in July 2002 to
deÑne certain disputed terms in the patents, and in October 2002 the court issued its claim construction
Ñndings. In October 2002, the court gave us leave to amend our answer to include a claim that
MercExchange committed fraud on the patent oÇce during the prosecution of one of the patents. On the
same date, the court granted in part our pending summary judgment motion, eÅectively invalidating the
patent related to online auction technology and rendering it unenforceable. In November 2002, we Ñled
two additional summary judgment motions regarding the patents. One motion was denied as moot; the
other was denied because the court found there were triable issues of fact. In February 2003, we Ñled an
additional summary judgment motion, which is still pending. Only two patents remain in the case at this
time. Trial is scheduled for April 22, 2003. We believe we have meritorious defenses and will defend
ourselves vigorously. However, even if successful, our defense against this action will be costly and could
divert our management's time. If the plaintiÅ were to prevail on any of its claims, we might be forced to
pay signiÑcant damages and licensing fees, modify our business practices or even be enjoined from
conducting a signiÑcant part of our U.S. business. Any such results could materially harm our business.
We are unable to determine what potential losses we may incur if this lawsuit were to have an unfavorable
outcome.

On September 6, 2002, a complaint was Ñled by First USA Bank, N.A. against PayPal in the District

of Delaware (No. 02-CV-1462) alleging infringement of two patents relating to assigning an alias to a
credit card so as to eliminate the need for the physical presence of the card in a transaction and seeking a
permanent injunction and damages. PayPal believes it has meritorious defenses and intends to defend itself
vigorously. However, even if successful, our defense against this action will be costly and could divert
management's time. If the plaintiÅ were to prevail on its claims, PayPal might be forced to pay signiÑcant
damages and licensing fees or modify its business practices. Any such result could materially harm our
business. We are unable to determine what potential losses we may incur if this suit were to have an
unfavorable outcome.

On August 16, 2002, Charles E. Hill & Associates, Inc., or Hill, Ñled a lawsuit in the U.S. District

Court for the Eastern District of Texas (No. 2:02-CV-186) alleging that we and 17 other companies,
primarily large retailers, infringed three patents owned by Hill generally relating to electronic catalog
systems and methods for transmitting and updating data at a remote computer. The suit seeks an
injunction against continuing infringement, unspeciÑed damages, including treble damages for willful
infringement, and interest, costs, expenses and fees. In January 2003, the court granted the collective
defendants' motion to transfer the case from the court where it was Ñled in Marshall, Texas to the Federal
District Court for the Southern District of Indiana. We believe that we have meritorious defenses and
intend to defend ourselves vigorously.

On February 20, 2002, PayPal was sued in California state court in a purported class action alleging

that its restriction of customer accounts and failure to promptly unrestrict legitimate accounts violates state
consumer protection law and is an unfair business practice and a breach of PayPal's User Agreement. This
action was reÑled with a diÅerent named plaintiÅ on June 6, 2002, and a related action was Ñled in the
U.S. District Court for the Northern District of California on the same day. On March 12, 2002, PayPal
was sued in the U.S. District Court for the Northern District of California in a purported class action
alleging that its restrictions of customer accounts and failure to promptly unrestrict legitimate accounts
violates federal and state consumer protection and unfair business practice law. The court has denied
PayPal's motion to compel individual arbitration as required by the PayPal User Agreement and has
invalidated that provision of the User Agreement. The two federal court actions have been consolidated
into a single case. PayPal is defending itself vigorously, but if it is unable to prevail in these lawsuits, it

58

may have to change its anti-fraud operations in a manner that will harm its business and pay substantial
damages. Even if its defense is successful, the litigation could damage PayPal's reputation, could require
signiÑcant management time, will be costly and could require changes to its customer service and
operations that could increase its costs and decrease the eÅectiveness of its anti-fraud program.

Three purported class action complaints were Ñled following announcement of the PayPal merger in

July 2002 in the court of Chancery in the State of Delaware in and for New Castle County by alleged
stockholders of PayPal. Two additional purported class action complaints were Ñled in the Superior Court
of the State of California, County of Santa Clara, by alleged PayPal stockholders. These complaints name
as defendants PayPal and each member of its board of directors as well as eBay. The complaints are
purported class actions that allege, among other things, that eBay controlled PayPal prior to the execution
of their merger agreement, the defendants breached Ñduciary duties they assertedly owed to PayPal's
stockholders in connection with PayPal entering into the merger agreement and the exchange ratio in the
merger was unfair and inadequate. The plaintiÅs seek, among other things, an award of unspeciÑed
compensatory damages. We believe that each of the lawsuits is without merit and intend to defend
ourselves vigorously.

Other third parties have from time to time claimed, and others may claim in the future, that we have

infringed their past, current or future intellectual property rights. We have in the past been forced to
litigate such claims. We may become more vulnerable to such claims as laws such as the Digital
Millennium Copyright Act and Communications Decency Act are interpreted by the courts and as we
expand into jurisdictions where the underlying laws with respect to the potential liability of online
intermediaries like ourselves is less favorable. We expect that we will increasingly be subject to copyright
and trademark infringement claims as the geographical reach of our services expands. We also expect that
we will increasingly be subject to patent infringement claims as our services expand. In particular, we
expect that patent infringement claims involving various aspects of our Payments business will continue to
be made. We have been notiÑed of several potential disputes and are subject to a suit by Tumbleweed
Communications Corporation that is currently ongoing. These claims, whether meritorious or not, could be
time-consuming, result in costly litigation, cause service upgrade delays, require expensive changes in our
methods of doing business or could require us to enter into costly royalty or licensing agreements, if
available. As a result, these claims could harm our business.

Our business may be harmed by the listing or sale by our users of pirated or counterfeit items.

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

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

Our future success will depend largely upon sellers reliably delivering and accurately representing their

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

59

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

Government inquiries may lead to charges or penalties.

On January 29, 1999, we received initial requests to produce certain records and information to the

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

PayPal completed its exit from the business of processing payments for online gambling merchants in

November 2002. Approximately 6% of PayPal's revenues in 2002 were derived from this business.
Beginning in July 2002, PayPal provided documents and information related to its services to online
gambling merchants in response to a federal grand jury subpoena issued at the request of the
U.S. Attorney for the Eastern District of Missouri. On March 28, 2003, PayPal received a letter from the
U.S. Attorney for the Eastern District of Missouri indicating its contention that PayPal's provision of
services to online gambling merchants violated 18 U.S.C. Û 1960 of the USA PATRIOT Act, which
prohibits the transmission of funds that are known to have been derived from a criminal oÅense or are
intended to be used to promote or support unlawful activity, thereby subjecting PayPal to potential civil
forfeiture of the amounts it received in connection with such activities as well as potential criminal
liability. The letter oÅered a complete settlement of all possible claims and charges from the
U.S. Attorney for the Eastern District of Missouri if PayPal paid the purported amount of its earnings
derived from online gambling merchants during the nine-month period from October 26, 2001 to July 31,
2002, plus interest. PayPal acted in the good faith belief that its conduct did not violate 18 U.S.C. Û 1960
and PayPal calculates that the amount of its earnings from online gaming activities was less than asserted
in the letter. Should this investigation lead to a civil or criminal charge against PayPal, we would be
harmed by negative publicity, the cost of litigation and the diversion of management time, even if PayPal
ultimately prevails. Any Ñnding of a civil or criminal violation by PayPal, or potentially any settlement,
could also endanger PayPal's ability to obtain, maintain or renew money transmitter licenses in
jurisdictions where it requires such licenses to operate, which would materially harm our business.

A large number of transactions occur on our websites. We believe that government regulators have
received a substantial number of consumer complaints about both eBay and PayPal, which, while small as
a percentage of our total transactions, are large in aggregate numbers. As a result, we have from time to
time been contacted by various foreign, federal, state and local regulatory agencies and been told that they
have questions with respect to the steps we take to protect our users from fraud and about our operations.
We are likely to receive additional inquiries from regulatory agencies in the future, which may lead to
action against us. We have responded to all inquiries from regulatory agencies by describing our current
and planned antifraud eÅorts, customer support procedures and operating procedures. If one or more of

60

these agencies is not satisÑed with our response to current or future inquiries, the resultant investigations
and potential Ñnes or other penalties could harm our business.

We are subject to laws relating to the use and transfer of personally identiÑable information about our
users and their transfers, especially outside of the U.S. Violation of these laws, which in many cases apply
not only to third-party transfers but also to transfers of information between ourselves and our subsidiaries,
and between ourselves, our subsidiaries and our commercial partners could subject us to signiÑcant
penalties and negative publicity and could adversely aÅect us.

Acquisitions could result in operating diÇculties, dilution and other harmful consequences.

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

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

‚ declining employee morale and retention issues resulting from changes in compensation, reporting

relationships, future prospects or the direction of the business;

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

‚ the need to implement controls, procedures and policies appropriate for a larger public company at

companies that prior to acquisition had lacked such controls, procedures and policies; and

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

Foreign acquisitions involve special risks, including those related to integration of operations across

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

Problems with third parties who provide services to our users could harm us.

A number of third parties provide services to our users that indirectly beneÑt us. Such services
include seller tools that automate and manage listings, merchant tools that manage listings and interface
with inventory management software, photo hosting, and other services. In many cases we have contractual
agreements with these companies, which may give us a direct Ñnancial interest in their success, while in
other cases we have none. In either circumstance, Ñnancial, regulatory or other problems that prevent
these companies from providing services to our users could reduce the number of listings on our websites
or make completing transactions on our websites more diÇcult, and thereby harm our business.

61

In addition, although we generally have been able to renew or extend the terms of contractual

arrangements with our third party service providers on acceptable terms, there can be no assurance that we
will continue to be able to do so in the future. Our contractual arrangement with our third-party photo
hosting service provider is scheduled to expire on September 30, 2003, subject to certain post-termination
obligations. If we are unable either to renegotiate the contract on terms acceptable to us, to build
equivalent functionality ourselves or to Ñnd an alternative supplier, our business would be adversely
aÅected.

Third parties or governmental agencies may view our behavior as anti-competitive.

Third parties, including PayPal before its acquisition by us, have in the past and may in the future

allege that actions taken by us violate the antitrust or competition laws of the U.S. or other countries, or
otherwise constitute unfair competition. Such claims typically are very expensive to defend, involve
negative publicity and diversion of management time and eÅort and could result in signiÑcant judgments
against us, all of which would adversely aÅect us.

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

Some of our businesses are subject to regulation and others may be in the future.

As our activities and the types of goods listed on our site expand, state regulatory agencies may claim

that we are subject to licensure in their jurisdiction, either with respect to our services in general, or in
order to allow the sale of certain items (e.g., real estate, boats, automobiles). We are currently subject to
potential regulation under the OÇce of Banks and Real Estate, or OBRE, in Illinois concerning the
applicability of the Illinois Auction law to our services. In August 2002, Illinois amended the Illinois
auction law to provide for a special regulatory regime for ""Internet auction listing services.'' We expect to
register as an Internet auction listing service in Illinois following the adoption of regulations under the
amended statute. Although we do not expect this registration to have a negative impact on our business,
other regulatory and licensure claims could result in costly litigation or could require us to change our
manner of doing business in ways that increase our costs or reduce our revenues or force us to prohibit
listings of certain items for some locations. We could also be subject to Ñnes or other penalties. Any of
these outcomes could harm our business.

As we have expanded internationally, we have become subject to additional regulations, including
regulations on the transmission of personal information. These laws may require costly changes to our
business practices. If we are found to have violated any of these laws, we could be subject to Ñnes or
penalties, and our business could be harmed.

Our revenues from third-party advertising and end-to-end services are subject to factors beyond our control
and are expected to decrease.

We recognize revenues from end-to-end service providers and direct advertising promotions. These

revenues may be aÅected by the Ñnancial condition of the parties with whom we have these relationships
and by the success of online promotions generally. Recently, the pricing of online advertisements has
deteriorated. Our direct advertising revenues historically have been dependent in signiÑcant part on the
performance of AOL's sales force. Our advertising sales relationship with AOL has not been extended or
renewed and is scheduled to terminate on March 31, 2003, after which time we will be dependent on the
eÅorts of our existing internal sales staÅ. Reduction in these revenues would adversely aÅect our results.

62

At this time, we expect third-party advertising and end-to-end services revenues to decrease substantially
on an absolute basis in 2003 relative to 2002.

We are subject to risks associated with information disseminated through our service.

The law relating to the liability of online services companies for information carried on or

disseminated through their services is currently unsettled. Claims could be made against online services
companies under both U.S. and foreign law for defamation, libel, invasion of privacy, negligence, copyright
or trademark infringement, or other theories based on the nature and content of the materials disseminated
through their services. Several private lawsuits seeking to impose liability upon us under a number of these
theories have been brought against us. In addition, federal, state and foreign legislation has been proposed
that imposes liability for or prohibits the transmission over the Internet of certain types of information.
Our service features a Feedback Forum, which includes information from users regarding other users.
Although all such feedback is generated by users and not by us, claims of defamation or other injury have
been made in the past and could be made in the future against us for content posted in the Feedback
Forum. Claims like these are more likely and may have a higher probability of success in jurisdictions
outside the U.S. If we become liable for information provided by our users and carried on our service in
any jurisdiction in which we operate, we could be directly harmed and we may be forced to implement
new measures to reduce our exposure to this liability. This may require us to expend substantial resources
and/or to discontinue certain service oÅerings, which would negatively aÅect our Ñnancial results. In
addition, the increased attention focused upon liability issues as a result of these lawsuits and legislative
proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred as
a result of this liability or asserted liability could harm our business.

The inability to expand our systems may limit our growth.

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

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

63

Unauthorized break-ins or other assaults on our services could harm our business.

Our servers are vulnerable to computer viruses, physical or electronic break-ins and similar

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

System failures could harm our business.

Our system has been designed around industry standard architectures to reduce downtime in the event
of outages or catastrophic occurrences. Our services provide 24 hours-a-day, seven days-a-week availability,
subject to a weekly scheduled two-hour maintenance period. Our systems and operations are vulnerable to
damage or interruption from earthquakes, Öoods, Ñres, power loss, telecommunication failures, terrorist
attacks, computer viruses, computer denial of service attacks and similar events. They are also subject to
break-ins, sabotage, intentional acts of vandalism and to potential disruption if the operators of these
facilities have Ñnancial diÇculties. Only some of our systems are fully redundant and we do not carry
business interruption insurance suÇcient to compensate us for losses that may occur. Despite any
precautions we may take, the occurrence of a natural disaster, a decision to close a facility we are using
without adequate notice for Ñnancial reasons or other unanticipated problems at our hosting facilities could
result in lengthy interruptions in our services. In addition, the failure by our hosting facilities to provide
our required data communications capacity could result in interruptions in our service. Any damage to or
failure of our systems could result in interruptions in our service. Interruptions in our service will reduce
our revenues and proÑts, and our future revenues and proÑts will be harmed if our users believe that our
system is unreliable.

We have experienced system failures from time to time. eBay's primary website has been interrupted

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

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

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

We are exposed to Öuctuations in currency exchange rates.

Net revenues outside the United States accounted for approximately 15% of our net revenues in 2001

and 26% in 2002. Because a signiÑcant and growing portion of our business is conducted outside the
United States, we face exposure to adverse movements in non-U.S. currency exchange rates. The results of
operations of our internationally focused websites are exposed to foreign exchange rate Öuctuations as the
Ñnancial results of the applicable subsidiaries are translated from the local currency into U.S. dollars upon
consolidation. In connection with its multi-currency service, PayPal Ñxes exchange rates twice per day, and

64

thus may face Ñnancial exposure if exchange rates move rapidly or if the rate is set incorrectly. As
exchange rates vary, net sales and other operating results, when translated, may diÅer materially from
expectations. In particular, to the extent the U.S. dollar strengthens against the Euro, our European
revenues and proÑts will be reduced as the result of these translation adjustments.

Our stock price has been and may continue to be extremely volatile.

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

‚ actual or anticipated variations in our quarterly operating results;

‚ unscheduled system downtime;

‚ additions or departures of key personnel;

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

‚ changes in Ñnancial estimates by securities analysts;

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

‚ changes in the market valuations of other Internet companies;

‚ developments in regulation;

‚ events aÅecting PayPal's business;

‚ announcements by us or our competitors of signiÑcant acquisitions, strategic partnerships, joint

ventures or capital commitments;

‚ unanticipated economic or political events;

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

‚ other events or factors, including these described in this ""Risk Factors That May AÅect Results of

Operations and Financial Condition'' section and others that may be beyond our control.

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

New and existing regulations could harm our business.

We are subject to the same foreign, federal, state and local laws as other companies conducting
business on and oÅ the Internet. Today there are relatively few laws speciÑcally directed towards online
services. However, due to the increasing popularity and use of the Internet and online services, many laws
relating to the Internet are being debated at the state and federal levels (both in the U.S. and abroad) and
it is possible that laws and regulations will be adopted with respect to the Internet or online services.
These laws and regulations could cover issues such as user privacy, freedom of expression, pricing, fraud,

65

content and quality of products and services, taxation, advertising, intellectual property rights and
information security. Applicability to the Internet of existing laws governing issues such as property
ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy
is uncertain. The vast majority of these laws were adopted prior to the advent of the Internet and related
technologies and, as a result, do not contemplate or address the unique issues of the Internet and related
technologies. Those laws that do reference the Internet, such as the U.S. Digital Millennium Copyright
Act and the European Union's (E.U.) Directive on Distance Selling and Electronic Commerce are only
now beginning to be interpreted by the courts and implemented by the E.U. Member States, and so their
applicability and scope remain somewhat uncertain. In addition, numerous states and foreign jurisdictions,
including the State of California, where our headquarters is located, have regulations regarding how
""auctions'' may be conducted and the liability of ""auctioneers'' in conducting such auctions. No Ñnal legal
determination has been made with respect to the applicability of the California regulations to our business
to date and little precedent exists in this area. Several states and some foreign jurisdictions have
attempted, and may attempt in the future, imposing such regulations upon us or our users, which could
harm our business. In addition, as the nature of the products listed by our users changes, we may become
subject to new regulatory restrictions, such as licensure as an auto dealer or real estate broker.

Several domestic jurisdictions have proposed, and Minnesota has recently passed, legislation that

would limit the uses of personal user information gathered online or oÉine. Many jurisdictions already
have such laws and continuously consider strengthening them, especially against online services. eBay and
PayPal in certain instances are subject to some of these current laws. PayPal may be subject to recently
enacted legislation in several states and countries imposing greater restrictions on the ability of Ñnancial
services companies to share user information with third parties without aÇrmative user consent. The U.S.
Federal Trade Commission also has settled several proceedings against companies regarding the manner in
which personal information is collected from users and provided to third parties. SpeciÑc statutes intended
to protect user privacy have been passed in many non-U.S. jurisdictions, including virtually every non-U.S.
jurisdiction where we currently have a website. Compliance with these laws, given the tight integration of
our systems across diÅerent countries and the need to move data to facilitate transactions amongst our
users (e.g., to payment companies, shipping companies, etc.), is both necessary and diÇcult. Failure to
comply could subject us to lawsuits, Ñnes, criminal penalties, statutory damages, adverse publicity and
other losses that could harm our business. Changes to existing laws or the passage of new laws intended to
address these issues could directly aÅect the way we do business or could create uncertainty on the
Internet. This could reduce demand for our services, increase the cost of doing business as a result of
litigation costs or increased service or delivery costs, or otherwise harm our business. In addition, because
our services are accessible worldwide, and we facilitate sales of goods to users worldwide, foreign
jurisdictions may claim that we are required to comply with their laws. For example, the Australian high
court has ruled that a U.S. website in certain circumstances must comply with Australian laws regarding
libel. As we have expanded our international activities, we have become obligated to comply with the laws
of the countries in which we operate. Laws regulating Internet companies outside of the U.S. may be less
favorable than those in the U.S., giving greater rights to consumers, content owners and users. Compliance
may be more costly or may require us to change our business practices or restrict our service oÅerings
relative to those in the U.S. Our failure to comply with foreign laws could subject us to penalties ranging
from criminal Ñnes to bans on our ability to oÅer our services.

We are dependent on the continued growth of online commerce.

The business of selling goods over the Internet, particularly through online trading, is new and

dynamic. Our future net revenues and proÑts will be substantially dependent upon the widespread
acceptance of the Internet and online services as a medium for commerce by consumers. Rapid growth in
the use of and interest in the Internet and online services is a recent phenomenon. This acceptance and
use may not continue. Even if the Internet is accepted, concerns about fraud, privacy and other problems
may mean that a suÇciently broad base of consumers will not adopt the Internet as a medium of
commerce. In particular, our websites require users to make publicly available personal information that
some potential users may be unwilling to provide. These concerns may increase as additional publicity over

66

privacy issues on eBay or generally over the Internet increase. Market acceptance for recently introduced
services and products over the Internet is highly uncertain, and there are few proven services and products.
In order to expand our user base, we must appeal to and acquire consumers who historically have used
traditional means of commerce to purchase goods. If these consumers prove to be less active than our
earlier users, and we are unable to gain eÇciencies in our operating costs, including our cost of acquiring
new customers, our business could be adversely impacted.

We are dependent on key personnel.

Our future performance will be substantially dependent on the continued services of our senior

management and other key personnel. Our future performance also will depend on our ability to retain and
motivate our other oÇcers and key personnel. The loss of the services of any of our executive oÇcers or
other key employees could harm our business. We do not have long-term employment agreements with
any of our key personnel, we do not maintain any ""key person'' life insurance policies, and our Chief
Executive OÇcer has fully vested the vast majority of her equity incentives. Our new businesses are all
dependent on attracting and retaining key personnel. In addition, employee turnover and other labor
problems frequently increase during the period following an acquisition as employees evaluate possible
changes in compensation, culture, reporting relationships and the direction of the business. Such increased
turnover could increase our costs and reduce our future revenues. Our future success also will depend on
our ability to attract, train, retain and motivate highly skilled technical, managerial, marketing and
customer support personnel. Competition for these personnel is intense, and we may be unable to
successfully attract, integrate or retain suÇciently qualiÑed personnel. In making employment decisions,
particularly in the Internet and high-technology industries, job candidates often consider the value of the
stock options they are to receive in connection with their employment. Fluctuations in our stock price may
make it more diÇcult to retain and motivate employees whose stock option strike prices are substantially
above current market prices.

Our industry is intensely competitive.

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

We face competition from local, regional and national specialty retailers and exchanges in each of our

categories of products. For example:

Antiques: Bonhams, Christie's, eHammer, Sotheby's, Phillips (LVMH), antique dealers and sellers

Coins & Stamps: Collectors Universe, Heritage, US Mint, Bowers and Morena

Collectibles: Franklin Mint, Go Collect, Collectiblestoday.com, wizardworld.com, Russ Cochran

Comic Art Auctions, All Star Auctions

Musical Instruments: Guitar Center/Musicians Friend, Sam Ash, Gbase.com, Harmony-Central.com,

musical instrument retailers and manufacturers

Sports Memorabilia: Beckett's, Collectors Universe, Mastro, Leylands, ThePit.com, Superior

67

Toys, Hobbies, Dolls, Bears: Toys R Us, Amazon.com/Toysrus.com, KB Toys/KBToys.com, FAO

Inc. (FAO Schwarz, Zany Brainy, the Right Start), Lego, TY Inc.

Premium Collectibles: Bonhams, Christies, DuPont Registry, Greg Manning Auctions, iCollector,
Lycos/Skinner Auctions, Millionaire.com, Phillips (LVMH), Sotheby's, other premium collectibles dealers
and sellers

Automotive (used cars and parts): Advance Auto Parts, Autonation.com, AutoTrader.com, Autozone,

Barrett-Jackson, California Classics, CarMax, Cars.com, CarsDirect.com, Collectorcartraderonline.com,
Dealix, Discount Auto Parts, Dupont Registry, eClassics.com, Edmunds, General Parts (Carquest),
Genuine/NAPA, Hemmings, imotors.com, JC Whitney, TraderOnline, Trader Publishing, vehix.com, Wal-
Mart, newspaper classiÑeds, used car dealers, swap meets, car clubs

Books, Movies, Music: Amazon.com, Barnes & Noble, Barnesandnoble.com, Alibris.com, Blockbuster,

BMG, Columbia House, Best Buy, CDNow, Express.com, Emusic.com, Tower Records/Tower
Records.com

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

Computers & Consumer Electronics: Amazon.com, Best Buy, Buy.com, Circuit City, CNET,

CompUSA, Dell, Electronics Boutique, Fry's Electronics, Gamestop, Gateway, The Good Guys,
MicroWarehouse, PC Connection, Radio Shack, Ritz Camera, Tech Depot, Tiger Direct, Tweeter Home
Entertainment, uBid, Computer Discount Warehouse, computer, consumer electronics and photography
retailers

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

Jewelry: Bluenile.com, Diamond.com, Macy's

Pottery & Glass: Just Glass, Pottery Auction, Pottery Barn, Go Collect, Pier 1 Imports, Restoration

Hardware

Sporting Goods/Equipment: BassPro, Cabellas, dsports.com, Footlocker, Gear.com, Global Sports,

golfclubexchange, MVP.com, Play It Again Sports, REI, Sports Authority, Sportsline.com

Tickets: Ticketmaster, Tickets.com, ticket brokers

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

Business-to-Business: Ariba, BidFreight.com, Bid4Assets, BizBuyer.com, bLiquid.com, Buyer Zone,

CloseOutNow.com, Commerce One, Concur Technologies, DoveBid, FreeMarkets, Iron Planet, labx.com,
Oracle, Overstock.com, PurchasePro.com, RicardoBiz.com, Sabre, SurplusBin.com, Ventro, VerticalNet

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

Our international websites compete with similar online and oÉine channels in each of their vertical

categories in most countries. In addition, they compete with general online e-commerce sites, such as
Quello and Otto in Germany, Yahoo-Kimo in Taiwan, eSellpia in South Korea, El Corte Inglπes in Spain,
Kelkoo in Italy and Amazon in the U.K. and other countries. In some of these countries, there are online
sites that have much larger customer bases and greater brand recognition than we do, and in each of these

68

countries there are competitors that have a better understanding of local culture and commerce than we
do.

The principal competitive factors for eBay include the following:

‚ ability to attract buyers and sellers;

‚ volume of transactions and selection of goods;

‚ customer service; and

‚ brand recognition.

With respect to our online competition, additional competitive factors include:

‚ community cohesion and interaction;

‚ system reliability;

‚ reliability of delivery and payment;

‚ website convenience and accessibility;

‚ level of service fees; and

‚ quality of search tools.

Some current and potential competitors have longer company operating histories, larger customer

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

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

Although we have established Internet traÇc arrangements with several large online services and
search engine companies, these arrangements may not be renewed on commercially reasonable terms. Even
if these arrangements are renewed, they may not result in increased usage of our service. In addition,
companies that control access to transactions through network access, Internet browsers, or search engines,
or Internet-based applications could promote our competitors, channel users to electronic commerce sites
that compete with us, or charge us substantial fees for inclusion.

69

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

‚ Credit card merchant processors that oÅer their services to online merchants, including First Data,

Concord EFS, Paymentech, and Wells Fargo; and payment gateways, including VeriSign and
Authorize.net;

‚ MoneyZap and BidPay oÅered by Western Union, a subsidiary of First Data;

‚ Yahoo! PayDirect oÅered by Yahoo! and HSBC;

‚ c2it oÅered by Citigroup;

‚ WebPay and Valid oÅered by CheckFree; and

‚ U.S.P.S. SendMoney oÅered by the U.S. Postal Service.

Some of these competitors have longer operating histories, signiÑcantly greater Ñnancial, technical,
marketing, customer service and other resources, greater name recognition or a larger base of customers in
aÇliated businesses than PayPal. For example, Citigroup's c2it has existing arrangements with AOL Time
Warner and Microsoft. PayPal's competitors may respond to new or emerging technologies and changes in
customer requirements faster and more eÅectively than PayPal. They may devote greater resources to the
development, promotion and sale of products and services than PayPal, and they may oÅer lower prices.
Some of these competitors have oÅered, and may continue to oÅer, their services for free in order to gain
market share, and PayPal may be forced to lower its prices in response. Competing services tied to
established banks and other Ñnancial institutions may oÅer greater liquidity and engender greater consumer
conÑdence in the safety and eÇcacy of their services than PayPal. If these competitors acquired signiÑcant
market share, this could result in PayPal losing market share.

PayPal also competes with providers of traditional payment methods, particularly credit cards, checks,

money orders and ACH transactions. Associations of traditional Ñnancial institutions such as Visa,
MasterCard and NACHA generally set the features of these payment methods. The associations have
initiated programs to enhance the usability of these payment methods for online transactions and could
lower fees charged to online merchants. Either of these changes could make it more diÇcult for PayPal to
retain and attract customers.

Overseas, PayPal faces competition from similar channels and payment methods in most countries
and from regional and national online and oÉine competitors in each country including First Gate and
World Pay in the European Community, No Chex in the U.K., CertaPay and HyperWallet in Canada,
and Paymate in Australia. In addition, in certain countries, such as Germany, electronic funds transfer
(EFT) is a leading method of payment for both online and oÉine transactions. As in the U.S., established
banks and other Ñnancial institutions that do not currently oÅer online payments could quickly and easily
develop such a service.

Half.com competes directly with online and oÉine retailers in its product categories such as

Amazon.com, as well as with traditional oÉine and online sellers of new and used books, videos and CDs,
consumer electronics and other products.

Our business is dependent on the development and maintenance of the Internet infrastructure.

The success of our service will depend largely on the development and maintenance of the Internet
infrastructure. This includes maintenance of a reliable network backbone with the necessary speed, data
capacity and security, as well as timely development of complementary products, for providing reliable
Internet access and services. The Internet has experienced, and is likely to continue to experience,
signiÑcant growth in the numbers of users and amount of traÇc. If the Internet continues to experience
increased numbers of users, increased frequency of use or increased bandwidth requirements, the Internet
infrastructure may be unable to support the demands placed on it. In addition, the performance of the

70

Internet may be harmed by increased number of users or bandwidth requirements or by ""viruses,''
""worms'' and similar programs. The backbone computers of the Internet have been the targets of such
programs. The Internet has experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and it could face outages and delays in the future. These outages and delays
could reduce the level of Internet usage as well as the level of traÇc and the processing transactions on
our service.

Our business is subject to online commerce security risks.

To succeed, online commerce and communications must provide a secure transmission of conÑdential
information over public networks. Our security measures may not prevent security breaches. Our failure to
prevent security breaches could harm our business. Currently, a signiÑcant number of our users authorize
us to bill their credit card accounts directly for all transaction fees charged by us. PayPal's and Billpoint's
users routinely provide credit card and other Ñnancial information. We rely on encryption and
authentication technology licensed from third parties to provide the security and authentication technology
to eÅect secure transmission of conÑdential information, including customer credit card numbers. Advances
in computer capabilities, new discoveries in the Ñeld of cryptography or other developments may result in a
compromise or breach of the technology used by us to protect customer transaction data. A number of
websites have reported breaches of their security. Any compromise of our security could harm our
reputation and, therefore, our business. In addition, a party who is able to circumvent our security
measures could misappropriate proprietary information or cause interruptions in our operations. We may
need to expend signiÑcant resources to protect against security breaches or to address problems caused by
breaches. These issues are likely to become more diÇcult as we expand the number of places where we
operate. Our users may also be targeted by parties attempting to misappropriate passwords, credit card
numbers or other personal information by using fraudulent emails and websites appearing to be sent or
operated by us. We actively pursue the parties responsible for these attempts at misappropriation and
encourage our users to divulge sensitive information only after they have veriÑed that they are on our
legitimate websites, but we cannot entirely eliminate these types of activities.

Security breaches could damage our reputation and expose us to a risk of loss or litigation and

possible liability. Our insurance policies carry low coverage limits, which may not be adequate to
reimburse us for losses caused by security breaches.

We must keep pace with rapid technological change to remain competitive.

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

We need to develop new services, features and functions in order to expand.

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

71

We are pursuing strategic relationships with third parties to provide many of these services. Because

we use third parties to deliver these services, we may be unable to control the quality of these services,
and our ability to address problems if any of these third parties fails to perform adequately will be reduced.
Expanding our operations in this manner also will require signiÑcant additional expenses and development,
operations and other resources and will strain our management, Ñnancial and operational resources. The
lack of acceptance of any new services could harm our business.

Our growth will depend on our ability to develop our brand.

We believe that eBay's historical growth has been largely attributable to word of mouth. Both eBay
and PayPal have beneÑted from frequent and high visibility media exposure both nationally and locally.
We believe that continuing to strengthen our brand will be critical to achieving widespread acceptance of
our services. Promoting and positioning our brand will depend largely on the success of our marketing
eÅorts and our ability to provide high quality services. In order to promote our brand, we will need to
increase our marketing budget and otherwise increase our Ñnancial commitment to creating and
maintaining brand loyalty among users. Brand promotion activities may not yield increased revenues, and
even if they do, any increased revenues may not oÅset the expenses we incurred in building our brand. If
we do attract new users to our services, they may not conduct transactions over our services on a regular
basis. If we fail to promote and maintain our brand or incur substantial expenses in an unsuccessful
attempt to promote and maintain our brand, our business would be harmed.

We may be unable to protect or enforce our own intellectual property rights adequately.

We regard the protection of our trademarks, copyrights, patents, domain names, trade dress and trade

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

We are subject to the risks of owning real property.

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

‚ the possibility of environmental contamination and the costs associated with Ñxing any

environmental problems;

‚ adverse changes in the value of these properties, due to interest rate changes, changes in the

neighborhoods in which the properties are located, or other factors;

‚ the possible need for structural improvements in order to comply with zoning, seismic, disability act

or other requirements; and

72

‚ possible disputes with tenants, partners or others.

Some anti-takeover provisions may aÅect the price of our common stock.

The Board of Directors has the authority to issue up to 10,000,000 shares of preferred stock and to
determine the preferences, rights and privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of common stock may be harmed by the rights of the holders of
any preferred stock that may be issued in the future. Some provisions of our certiÑcate of incorporation
and bylaws could have the eÅect of making it more diÇcult for a third party to acquire a majority of our
outstanding voting stock. These include provisions that provide for a classiÑed board of directors, prohibit
stockholders from taking action by written consent and restrict the ability of stockholders to call special
meetings. We are also subject to provisions of Delaware law that prohibit us from engaging in any business
combination with any interested stockholder for a period of three years from the date the person became
an interested stockholder, unless certain conditions are met. This restriction could have the eÅect of
delaying or preventing a change of control.

Principal Accountant Fees and Services

During the Ñscal years ended December 31, 2001 and December 31, 2002, fees for services provided

by PricewaterhouseCoopers LLP, or PwC, were as follows (rounded to the nearest $1,000):

Year Ended December 31,

2001

2002

Audit Fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Audit-Related Fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax Fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
All Other Fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 670,000
969,000
15,000
31,000

$1,195,000
747,000
19,000
91,000

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,685,000

$2,052,000

Audit fees consisted of fees billed for services rendered for the audit of eBay's annual Ñnancial
statements, review of Ñnancial statements included in eBay's quarterly reports on Form 10-Q, and other
services normally provided in connection with statutory and regulatory Ñlings. Audit-related fees consisted
primarily of fees billed for due diligence review in connection with acquisitions and divestitures and
consultation regarding Ñnancial accounting and reporting matters. Tax fees consisted of fees billed for
consulting regarding tax compliance, tax advice and tax planning. All other fees consisted of fees billed for
services in connection with legal matters and technical accounting research.

The Audit Committee of our Board of Directors has determined that the rendering of non-audit

services by PwC was compatible with maintaining their independence.

Audit Committee Pre-Approval Policy

Our Audit Committee has adopted a policy requiring the pre-approval of any non-audit engagement

of PwC. In the event that we wish to engage PwC to perform accounting, technical, diligence or other
permitted services not related to the services performed by PwC as our independent auditor, our internal
Ñnance personnel will prepare a summary of the proposed engagement, detailing the nature of the
engagement, the reasons why PwC is the preferred provider of such services and the estimated duration
and cost of the engagement. The report will be provided to our Audit Committee or a designated
committee member, who will evaluate whether the proposed engagement will interfere with the
independence of PwC in the performance of its auditing services. In the future, we intend to disclose all
approved non-audit engagements in the appropriate quarterly report on Form 10-Q or annual report on
Form 10-K.

73

Our Audit Committee adopted the policy on pre-approval of non-audit engagements in October 2002

and approved the following non-audit engagements through December 31, 2002:

‚ the prior engagement by PayPal of PwC to perform an analysis under Statement on Accounting

Standards (SAS) No. 70 (Service Organizations) of PayPal's information technology processes and
controls;

‚ the possible engagement of PwC to provide general Ñnancial advisory services to us in connection

with our possible involvement in an arbitration proceeding related to the interpretation of a
contractual provision;

‚ the engagement by PayPal of PwC to review PayPal's internal compliance audit under the

provisions of the USA PATRIOT Act;

‚ the engagement by PayPal Asset Management, Inc. of PwC to audit the Ñnancial statements and

prepare the federal tax return of PayPal Money Market Reserve Fund; and

‚ the engagement by PayPal of PwC to prepare the personal income tax return of an expatriate

employee of PayPal working in the United Kingdom.

74

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

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

Investments in both Ñxed rate and Öoating rate interest earning instruments carry varying degrees of

interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in
interest rates. In general, securities with longer maturities are subject to greater interest rate risk than
those with shorter maturities. While Öoating rate securities generally are subject to less interest rate risk
than Ñxed rate securities, Öoating rate securities may produce less income than expected if interest rates
decrease. Due in part to these factors, our investment income may fall short of expectations or we may
suÅer losses in principal if securities are sold that have declined in market value due to changes in interest
rates. As of December 31, 2002, our Ñxed income investments had an unrealized gain of $3.6 million with
a pretax yield of approximately 2.2% and a weighted average maturity of 2 months. If interest rates were
to instantaneously increase (decrease) by 100 basis points, the fair market value of the total investment
portfolio could decrease (increase) by approximately $3.3 million. Assuming an average investment
balance of $1.8 billion, if rates were to increase (decrease) by 100 basis points, this would translate to an
increase (decrease) in interest income of approximately $18 million annually.

We entered into two interest rate swaps on June 19 and July 20, 2000, totaling $95 million to reduce

the impact of changes in interest rates on a portion of the Öoating rate operating lease for our primary
oÇce facilities. The interest rate swaps allow us to receive Öoating rate receipts based on LIBOR in
exchange for making Ñxed rate payments which eÅectively changes our interest rate exposure on our
operating lease from a Öoating rate to a Ñxed rate on $95 million of the total $126.4 million notional
amount of our operating lease commitment. Of the $126.4 million operating lease commitment for our San
Jose facility, the interest rate is Ñxed on $95 million with the balance of $31.4 million remaining at a
Öoating rate of interest based on the spread over 3-month LIBOR. See ""Item 2: Properties'' and ""Item 7:
Management's Discussion and Analysis of Financial Condition and Results of Operations.'' If the 3-month
LIBOR rates were to increase (decrease) by 100 basis points, then our lease payments would increase
(decrease) by approximately $78,000 per quarter.

Equity Price Risk

We are exposed to equity price risk on the marketable portion of equity investments we hold, typically

as the result of strategic investments in third parties that are subject to considerable market risk due to
their volatility. We typically do not attempt to reduce or eliminate our market exposure in these equity
investments. As of December 31, 2002, we did not have any unrealized gains or losses associated with our
equity investments. In accordance with our policy to assess whether an impairment loss on our investments
has occurred due to declines in fair value and other market conditions, we determined that declines in fair
value of certain of our marketable and non-marketable equity investments were other than temporary.
Accordingly, we recorded impairment charges totaling $3.8 million during the year ended December 31,
2002, relating to the other-than-temporary impairment in the fair value of certain equity investments. At
December 31, 2002, the total value of our equity investments was $44.2 million, including $3.4 million in
marketable investments.

Foreign Currency Risk

International net revenues result from transactions by our foreign operations and are typically
denominated in the local currency of each country. These operations also incur most of their expenses in

75

the local currency. Accordingly, our foreign operations use the local currency as their functional currency.
Our international operations are subject to risks typical of international operations, including, but not
limited to diÅering economic conditions, changes in political climate, diÅering tax structures, other
regulations and restrictions and foreign exchange rate volatility. Accordingly, our future results could be
materially adversely impacted by changes in these or other factors.

Foreign exchange rate Öuctuations may adversely impact our Ñnancial position as well as our results of
operations. Foreign exchange rate Öuctuations may adversely impact our Ñnancial position as the assets and
liabilities of our foreign operations are translated into U.S. dollars in preparing our consolidated balance
sheet. The eÅect of foreign exchange rate Öuctuations on eBay's Ñnancial position for the year ended
December 31, 2002, was a translation loss of approximately $48.0 million. This loss is recognized as an
adjustment to stockholders' equity through other comprehensive income. Additionally, foreign exchange
rate Öuctuations may adversely impact our results of operations as exchange rate Öuctuations on
transactions denominated in currencies other our functional currency create gains and losses which are
reÖected in our consolidated statement of income. The eÅect of foreign exchange rate Öuctuations on
eBay's results of operations for the year ended December 31, 2002, was a transaction loss of approximately
$1.1 million.

As of December 31, 2002, we had outstanding forward foreign exchange contracts with notional values

equivalent to approximately $69 million with maturity dates within 92 days. The forward contracts are
used to oÅset changes in the value of assets and liabilities denominated in foreign currencies as a result of
currency Öuctuations. Transaction gains and losses on the contracts and the assets and liabilities are
recognized each period in our statement of income and generally are oÅsetting. As we purchased the
forward contracts on December 31, 2002, the fair values of the forward contracts were immaterial as of
this date.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Annual Financial Statements: See Part IV, Item 15(a)(1) of this Annual Report on Form 10-K.

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING

AND FINANCIAL DISCLOSURE

None.

76

PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Executive oÇcers are elected annually by the Board and serve at the discretion of the Board. The
following table sets forth certain information regarding our directors and executive oÇcers as of March 31,
2003.

Name

Pierre M. Omidyar(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Margaret C. Whitman(5) ÏÏÏÏÏÏÏÏÏÏÏ
Matthew J. Bannick ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Age

35
46
38

William C. Cobb ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

46

Rajiv Dutta ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Michael R. Jacobson ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

41
48

JeÅrey D. Jordan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

44

Maynard G. Webb, Jr. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Philippe Bourguignon(2)(5) ÏÏÏÏÏÏÏÏÏ
Scott D. Cook(1)(3)(6) ÏÏÏÏÏÏÏÏÏÏÏÏ
Robert C. Kagle(1)(2)(6) ÏÏÏÏÏÏÏÏÏÏ
Dawn G. Lepore(1)(3)(4) ÏÏÏÏÏÏÏÏÏÏ
Howard D. Schultz(2)(3)(4)ÏÏÏÏÏÏÏÏ
Thomas J. Tierney(2)(3)(5) ÏÏÏÏÏÏÏÏ

47
55
50
47
49
49
49

Position

Founder, Chairman of the Board and Director
President, Chief Executive OÇcer and Director
Senior Vice President and General Manager, Global
Online Payments
Senior Vice President and General Manager, eBay
International
Senior Vice President and Chief Financial OÇcer
Senior Vice President, Legal AÅairs, General Counsel
and Secretary
Senior Vice President and General Manager, U.S.
Business
Chief Operating OÇcer
Director
Director
Director
Director
Director
Director

(1) Member of our Audit Committee

(2) Member of our Compensation Committee

(3) Member of our Corporate Governance and Nominating Committee

(4) Director continuing in oÇce until our 2003 Annual Meeting

(5) Director continuing in oÇce until our 2004 Annual Meeting

(6) Director continuing in oÇce until our 2005 Annual Meeting

Pierre M. Omidyar founded eBay as a sole proprietorship in September 1995. He has been a director
and Chairman of the Board since eBay's incorporation in May 1996 and also served as its Chief Executive
OÇcer, Chief Financial OÇcer and President from inception to February 1998, November 1997 and
August 1996, respectively. Prior to founding eBay, Mr. Omidyar was a developer services engineer at
General Magic, a mobile communication platform company from December 1994 to July 1996.
Mr. Omidyar co-founded Ink Development Corp. (later renamed eShop) in May 1991 and served as a
software engineer there from May 1991 to September 1994. Prior to co-founding Ink, Mr. Omidyar was a
developer for Claris, a subsidiary of Apple Computer, and for other Macintosh-oriented software
development companies. Mr. Omidyar also serves on the Board of Trustees of Tufts University, The Santa
Fe Institute and The Omidyar Foundation. Mr. Omidyar holds a B.S. degree in Computer Science from
Tufts University.

Margaret C. Whitman serves eBay as President and Chief Executive OÇcer. She has served in that
capacity since February 1998 and as a director since March 1998. From January 1997 to February 1998,
she was General Manager of the Preschool Division of Hasbro Inc., a toy company. From February 1995

77

to December 1996, Ms. Whitman was employed by FTD, Inc., a Öoral products company, most recently as
President, Chief Executive OÇcer and a director. From October 1992 to February 1995, Ms. Whitman
was employed by The Stride Rite Corporation in various capacities, including President, Stride Rite
Children's Group and Executive Vice President, Product Development, Marketing & Merchandising, Keds
Division. From May 1989 to October 1992, Ms. Whitman was employed by The Walt Disney Company,
an entertainment company, most recently as Senior Vice President, Marketing, Disney Consumer
Products. Before joining Disney, Ms. Whitman was at Bain & Co., a consulting Ñrm, most recently as a
Vice President. Ms. Whitman also serves on the board of directors of The Procter & Gamble Company
and is a Member of the Board of Trustees of Princeton University. Ms. Whitman holds an A.B. degree in
Economics from Princeton University and an M.B.A. degree from the Harvard Business School.

Matthew J. Bannick serves eBay as Senior Vice President and General Manager, Global Online
Payments and Chief Executive OÇcer of PayPal. He has served in those capacities since October 2002.
From December 2000 to October 2002, Mr. Bannick served as eBay's Senior Vice President and General
Manager, eBay International. From February 1999 to December 2000, Mr. Bannick served in a variety of
other executive positions at eBay. From April 1995 to January 1999, Mr. Bannick was an executive for
Navigation Technologies (NavTech), the leading provider of digital map databases for the vehicle
navigation and internet mapping industries. Mr. Bannick was President of NavTech North America for
three years and also served as Senior Vice President of Marketing and Vice President of Operations. From
June 1992 to August 1992, Mr. Bannick served as a consultant for McKinsey & Company, in Europe and
from June 1993 to April 1995 in the U.S. Mr. Bannick also served as a U.S. diplomat in Germany during
the period of German uniÑcation. Mr. Bannick holds a B.A. in Economics and International Studies from
University of Washington and an M.B.A degree from the Harvard Business School.

William C. Cobb serves eBay as Senior Vice President and General Manager, eBay International. He

has served in that capacity since September 2002. From November 2000 to September 2002, Mr. Cobb
served as eBay's Senior Vice President, Global Marketing. From February 2000 to June 2000, Mr. Cobb
served as the General Manager of Consumer Sales for Netpliance, Inc., an Internet-based content
Company. From July 1997 to February 2000, Mr. Cobb served as the Senior Vice President of
International Marketing for Tricon Global Restaurants, Inc. From August 1995 to July 1997, Mr. Cobb
served as the Senior Vice President and Chief Marketing OÇcer for Pizza Hut, Inc., a division of Tricon
Global Restaurants, Inc. From May 1994 to August 1995, Mr. Cobb served as Vice President of Colas for
the Pepsi-Cola Company, a division of PepsiCo., Inc. Mr. Cobb holds a B.S. degree in Economics from
the University of Pennsylvania and an M.B.A. degree from Northwestern University.

Rajiv Dutta serves eBay as Senior Vice President and Chief Financial OÇcer. He has served in that

capacity since January 2001. From August 1999 to January 2001, Mr. Dutta served as eBay's Vice
President of Finance and Investor Relations. From July 1998 to August 1999, Mr. Dutta served as eBay's
Finance director. From February 1998 to July 1998, Mr. Dutta served as the World Wide Sales Controller
of KLA-Tencor. Prior to KLA-Tencor, Mr. Dutta spent ten years, from January 1988 to February 1998, at
Bio-Rad Laboratories, Inc., a manufacturer and distributor of life science and diagnostic products with
operations in over 24 countries. Mr. Dutta held a variety of positions with the Company, including the
group controller of the Life Science Group. Mr. Dutta holds a B.A. degree in Economics from St.
Stephen's College, Delhi University in India and an M.B.A. degree from Drucker School of Management.

Michael R. Jacobson serves eBay as Senior Vice President, Legal AÅairs, General Counsel and
Secretary. He has served in that capacity or as Vice President, Legal AÅairs, General Counsel since
August 1998. From 1986 to August 1998, Mr. Jacobson was a partner with the law Ñrm of Cooley
Godward LLP, specializing in securities law, mergers and acquisitions and other transactions.
Mr. Jacobson holds an A.B. degree in Economics from Harvard College and a J.D. degree from Stanford
Law School.

JeÅrey D. Jordan serves eBay as Senior Vice President and General Manager, U.S. Business. He has

served in that capacity since April 2000. From September 1999 to April 2000, Mr. Jordan served as eBay's
Vice President, Regionals and Services. From September 1998 to September 1999, Mr. Jordan served as

78

Chief Financial OÇcer for Hollywood Entertainment and President of their subsidiary, Reel.com. From
September 1990 to September 1998, Mr. Jordan served in various capacities including most recently
Senior Vice President and Chief Financial OÇcer of The Disney Store Worldwide, a subsidiary of The
Walt Disney Company. Mr. Jordan holds a B.A. degree in Political Science and Psychology from Amherst
College and an M.B.A. degree from the Stanford Graduate School of Business.

Maynard G. Webb, Jr. serves eBay as Chief Operating OÇcer. He has served in that capacity since

June 2002. From August 1999 to June 2002, Mr. Webb served as President, eBay Technologies. From
July 1998 to August 1999, Mr. Webb was Senior Vice President and Chief Information OÇcer at
Gateway, Inc. From February 1995 to July 1998, Mr. Webb was Vice President and Chief Information
OÇcer at Bay Networks, Inc. From June 1991 to January 1995, Mr. Webb was Director, IT at Quantum
Corporation. Mr. Webb also serves on the board of directors of Gartner, Inc., a high technology research
and consulting Ñrm. Mr. Webb holds a B.A.A. degree from Florida Atlantic University.

Philippe Bourguignon has served as a director of eBay since December 1999. From April 1997 to
January 2003, Mr. Bourguignon served as Chairman of the Board of Club Mediterranee S.A. Prior to his
appointment at Club Mediterranee S.A., Mr. Bourguignon was Chief Executive OÇcer of Euro Disney
S.A., the parent company of Disneyland Paris, since 1993, and Executive Vice President of The Walt
Disney Company (Europe) S.A., since October 1996. Mr. Bourguignon was named President of Euro
Disney in 1992, a post he held through April 1993. He joined The Walt Disney Company in 1988 as head
of Real Estate development. Mr. Bourguignon holds a Masters Degree in Economics at the University of
Aix-en-Provence and holds a post-graduate diploma from the Institut d'Administration des Enterprises
(IAE) in Paris.

Scott D. Cook has served as a director of eBay since June 1998. Mr. Cook is the founder of Intuit

Inc., a Ñnancial software developer. Mr. Cook has been a director of Intuit since March 1984 and is
currently Chairman of the Executive Committee of the Board of Intuit. From March 1993 to July 1998,
Mr. Cook served as Chairman of the Board of Intuit. From March 1984 to April 1994, Mr. Cook served
as President and Chief Executive OÇcer of Intuit. Mr. Cook also serves on the board of directors of The
Procter & Gamble Company. Mr. Cook holds a B.A. degree in Economics and Mathematics from the
University of Southern California and an M.B.A. degree from the Harvard Business School.

Robert C. Kagle has served as a director of eBay since June 1997. Mr. Kagle has been a Member of

Benchmark Capital Management Co., L.L.C., the General Partner of Benchmark Capital Partners, L.P.
and Benchmark Founders' Fund, L.P., since its founding in May 1995. Mr. Kagle also has been a General
Partner of Technology Venture Investors since January 1984. Mr. Kagle also serves on the board of
directors of Ariba, Inc. and E-LOAN, Inc. Mr. Kagle holds a B.S. degree in Electrical and Mechanical
Engineering from the General Motors Institute (renamed Kettering University in January 1998) and an
M.B.A. degree from the Stanford Graduate School of Business.

Dawn G. Lepore has served as a director of eBay since December 1999. Ms. Lepore is Vice Chairman

of Technology, Operations, and Administration and a member of the Executive Management Committee
of the Charles Schwab Corporation where she has served for over 19 years in various capacities. From
October 1993 to December 2001, Ms. Lepore served as Chief Information OÇcer at Schwab. Prior to that
she served as Senior Vice President of Information Technology at Schwab from May 1993 to October
1993 where she was responsible for the development of a wide range of systems to support Schwab's
growing product oÅerings and client base. She also led a strategic initiative for redesigning Schwab's entire
technology platform. Ms. Lepore also serves on the board of directors of Wal-Mart Stores, Inc. and on the
Board of Trustees of Smith College. Ms. Lepore holds a B.A. degree from Smith College in Music.

Howard D. Schultz has served as a director of eBay since June 1998. Mr. Schultz is the founder of
Starbucks Corporation, a provider of gourmet coÅee, and has been its Chairman of the Board and Chief
Global Strategist since June 2000. From Starbucks' inception in 1985 to June 2000, he served as its
Chairman of the Board and Chief Executive OÇcer. From 1985 to June 1994, Mr. Schultz also served as
President of Starbucks. Mr. Schultz is also one of two founding members of Maveron LLC, a company
providing advisory services to consumer-based businesses, and is a member of two LLCs that serve as

79

General Partners of Maveron LLC's aÇliated venture capital funds, Maveron Equity Partners LP and
Maveron Equity Partners 2000 LP. Mr. Schultz has announced that he will step down from the board
when his current term expires at our Annual Meeting in June 2003.

Thomas J. Tierney has served as a director of eBay since March 2003. Mr. Tierney is the founder of
The Bridgespan Group, a non-proÑt business consulting Ñrm serving the non-proÑt sector, and has been its
Chairman of the Board since late 1999. Prior to founding Bridgespan, Mr. Tierney served as Chief
Executive OÇcer of Bain & Company, a consulting Ñrm, from June 1992 to January 2000. Mr. Tierney
holds a B.A. degree in Economics from the University of California at Davis and an M.B.A. degree with
distinction from the Harvard Business School. Mr. Tierney is the co-author of a book about organization
and strategy called Aligning the Stars.

Section 16(a) BeneÑcial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive oÇcers,
and persons who own more than 10% of a registered class of our equity securities, to Ñle with the SEC
initial reports of ownership and reports of changes in ownership of our Common Stock and other equity
securities of the company. OÇcers, directors and greater than 10% stockholders are required by SEC
regulation to furnish us with copies of all Section 16(a) forms they Ñle.

To our knowledge, based solely on a review of the copies of such reports furnished to us and written

representations that no other reports were required, during the Ñscal year ended December 31, 2002, all
Section 16(a) Ñling requirements applicable to our oÇcers, directors and greater than 10% beneÑcial
owners were complied with, except Mr. Bannick reported one late report on Form 4 that involved one
transaction covering 411 shares.

Code of Ethics

We have adopted a written code of ethics that applies to our senior Ñnancial oÇcers, including our

principal executive oÇcer, principal Ñnancial oÇcer and principal accounting oÇcer. We intend to satisfy
the disclosure requirement of Item 10 of Form 8-K regarding an amendment to, or a waiver from, a
provision of our code of ethics that applies to our principal executive oÇcer, principal Ñnancial oÇcer, or
principal accounting oÇcer by posting such information on our website at
www.shareholder.com/ebay/code-of-ethics.cfm.

80

ITEM 11: EXECUTIVE COMPENSATION

Summary of Compensation

The following table shows certain compensation earned during the Ñscal years ended December 31,
2000, 2001 and 2002, by our Chief Executive OÇcer and four most highly-compensated other executive
oÇcers (based on their total annual salary and bonus compensation), also referred to as the Named
Executive OÇcers, at December 31, 2002.

SUMMARY COMPENSATION TABLE

Annual Compensation

Long-Term and Other
Compensation

Name and 2002 Principal Positions

Fiscal
Year

Salary(1)

Bonus(2)

Other Annual
Compensation(3)

Chief Operating OÇcer

President and Chief Executive
OÇcer

Margaret C. Whitman ÏÏÏÏÏÏÏÏÏÏÏ 2002
2001
2000
Maynard G. Webb, Jr. ÏÏÏÏÏÏÏÏÏÏ 2002
2001
2000
JeÅrey D. Jordan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2002
2001
2000
Matthew J. Bannick ÏÏÏÏÏÏÏÏÏÏÏÏÏ 2002
2001
2000
William C. Cobb ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2002
2001
2000

Senior Vice President and
General Manager, U.S. Business

Senior Vice President,
Global Online Payments

Senior Vice President and
General Manager,
eBay International

$250,008
241,256
210,000
531,250
500,000
450,000
345,102
322,404
290,000
334,086
279,506
207,250
312,185
283,666
27,576(7)

$419,698(8)
139,332
87,914
837,154(9)
646,137(9)
503,151
739,762(10)
467,041(10)
136,254
472,540(11)
133,396
86,139
240,390(12)
202,026(12)
Ì

$133,062
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
15,987
Ì
Ì
Ì
Ì
Ì

Number of
Securities
Underlying
Options

300,000
750,000
500,000(4)
150,000
500,000
100,000(4)
135,000
400,000
300,000(5)
140,000
300,000
140,000(4)
125,000
Ì
280,000

All Other
Compensation(6)

$ 1,980
1,884
1,882
1,104
384
384
672
4,759
30,750
2,173
1,884
1,872
2,173
92,127
14,064

(1) EÅective April 1, 2002, all eligible employees of eBay, including certain of the Named Executive
OÇcers, received an annual salary increase representing: (i) in the case of Mr. Webb, a salary of
$525,000 per annum; (ii) in the case of Mr. Jordan, a salary of $350,136 per annum; (iii) in the
case of Mr. Bannick, a salary of $350,112 per annum; and (iv) in the case of Mr. Cobb, a salary of
$300,000 per annum. Mr. Cobb's salary increased to $350,112 in September 2002 in connection with
his increased responsibilities as Senior Vice President and General Manager, eBay International. Mr.
Webb's salary increased to $575,000 in October 2002 in connection with his increased responsibilities
as Chief Operating OÇcer. Ms. Whitman's salary in 2002 was $250,008 per annum.

(2) All 2002 bonuses represent amounts paid in 2002 and 2003 for services rendered in 2002, all 2001
bonuses represent amounts paid in 2001 and 2002 for services rendered in 2001, and all 2000
bonuses represent amounts paid in 2000 and 2001 for services rendered in 2000.

(3) Represents: (i) in the case of Ms. Whitman, her personal use of eBay's corporate aircraft ($58,101),
which is valued at rates prescribed under applicable IRS regulations, and of a corporate aircraft from
an unaÇliated third-party vendor, which is valued at actual invoiced amounts ($74,961); and (ii) in
the case of Mr. Bannick, costs associated with family transportation while Mr. Bannick worked out
of our European oÇces during the summer of 2002.

(4) ReÖects option grants that were subsequently rescinded and cancelled by agreement between eBay

and the applicable Named Executive OÇcer in July 2000 after it was determined that the grants
might call into question the desired accounting treatment of our acquisition of Half.com.

(5) All but 100,000 of the shares of our Common Stock underlying options granted to Mr. Jordan in

2000 were subsequently rescinded and cancelled by agreement between eBay and Mr. Jordan after it

81

was determined that the grants might call into question the described accounting treatment of our
acquisition of Half.com.

(6) Represents: (i) in the case of Mr. Jordan, a reimbursement for relocation expenses paid to him in
2000 ($28,866) and 2001 ($2,875); (ii) in the case of Mr. Cobb, a reimbursement for relocation
expenses paid to him in 2000 ($13,799) and 2001 ($90,243); and (iii) in the case of each of the
Named Executive OÇcers, insurance premiums we paid with respect to group life insurance for their
beneÑt and matching contributions under our 401(k) Plan (subject to the maximum of $1,500 per
annum).

(7) Mr. Cobb was hired by eBay in November 2000. Accordingly, the amounts shown in the table above

for Ñscal year 2000 are for a period of less than a year. Mr. Cobb's salary in 2000 was $280,000 per
annum.

(8) Represents for 2002, $329,698 paid under eBay's Management Incentive Plan and an additional

$90,000 bonus granted by the Compensation Committee after the end of the Ñscal year.

(9) Represents for 2002, $387,254 paid under eBay's Management Incentive Plan and $449,900 paid
under Mr. Webb's special retention plan and represents for 2001, $290,927 paid under eBay's
Management Incentive Plan and $355,200 under Mr. Webb's special retention plan. See ""Item 13:
Certain Relationships and Related Transactions.''

(10) Represents for 2002, $202,212 paid under eBay's Management Incentive Plan, $522,550 under

Mr. Jordan's special retention plans and $15,000 pursuant to our discretionary reward program, and
represents for 2001, $153,041 paid under eBay's Management Incentive Plan and $314,000 under
Mr. Jordan's special retention plan. See ""Item 13: Certain Relationships and Related Transactions.''

(11) Represents for 2002, $207,540 paid under eBay's Management Incentive Plan, $250,000 under

Mr. Bannick's special retention plan and $15,000 pursuant to our discretionary reward program. See
""Item 13: Certain Relationships and Related Transactions.''

(12) Represents for 2002, $170,390 paid under eBay's Management Incentive Plan and $70,000 under

Mr. Cobb's special retention plan and represents for 2001, $132,026 paid under eBay's Management
Incentive Plan and $70,000 under Mr. Cobb's special retention plan. See ""Item 13: Certain
Relationships and Related Transactions.''

The following executive oÇcers received grants of options in 2002 under eBay's 2001's Equity

Incentive Plan, which we also refer to as the 2001 Plan.

Option Grants During 2002

Name

Number of
Securities
Underlying
Options
Granted(1)

Percentage of
Total Options
Granted to
Employees

Exercise
Price

during 2002(2) Per Share(3)

Margaret C. Whitman ÏÏÏÏ 300,000
Maynard G. Webb, Jr. ÏÏÏÏ 150,000
JeÅrey D. JordanÏÏÏÏÏÏÏÏÏ 135,000
Matthew J. Bannick ÏÏÏÏÏÏ 140,000
William C. Cobb ÏÏÏÏÏÏÏÏÏ 125,000

2.1%
1.1
1.0
1.0
0.9

$58.05
58.05
58.05
58.05
58.05

Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation for
Option Term(4)

5%

10%

$10,952,200 $27,755,025
13,877,512
12,489,761
12,952,345
11,564,594

5,476,100
4,928,490
5,111,027
4,563,417

Expiration
Date

02/12/12
02/12/12
02/12/12
02/12/12
02/12/12

(1) Options granted in 2002 were granted under the 2001 Plan. All options granted in 2002 to the Named
Executive OÇcers were granted by our Board, are nonqualiÑed stock options and are subject to a
four-year vesting schedule, vesting 12.5% after six months and 1/48 per month thereafter.

(2) Based on options to purchase 14,205,236 shares of our common stock granted in 2002, exclusive of

150,000 shares granted to our directors and options to purchase an aggregate of 2,511,149 shares that
were assumed by us in connection with the PayPal acquisition in October 2002.

82

(3) Options were granted at an exercise price equal to the fair market value of our common stock, as

determined by the Board of Directors on the date of grant. The exercise prices per shares listed in the
table above are rounded to the nearest cent.

(4) ReÖects the value of the stock option on the date of grant assuming (i) for the 5% column, a 5%

annual rate of appreciation in our common stock over the ten-year term of the option and (ii) for the
10% column, a 10% annual rate of appreciation in our Common Stock over the ten-year term of the
option, in each case without discounting to net present value and before income taxes associated with
the exercise. The 5% and 10% assumed rates of appreciation are based on the rules of the SEC and
do not represent our estimate or projection of the future common stock price. The amounts in this
table may not necessarily be achieved.

The following table sets forth the number of shares acquired and the value realized upon exercise of

stock options during 2002 and the number of shares of our common stock subject to exercisable and
unexercisable stock options held as of December 31, 2002, by each of the Named Executive OÇcers. The
value at Ñscal year end is measured as the diÅerence between the exercise price and the fair market value
at close of market on December 31, 2002, which was $67.82.

Aggregate Option Exercises in 2002 and Values at December 31, 2002

Number of
Shares
Acquired on
Exercise

Value
Realized(1)

Number of Securities
Underlying Unexercised
Options at December 31,
2002
Exercisable Unexercisable

(#)

(#)

Name

Margaret C. Whitman ÏÏÏÏÏ
Maynard G. Webb ÏÏÏÏÏÏÏÏ
JeÅrey D. JordanÏÏÏÏÏÏÏÏÏÏ
Matthew J. Bannick ÏÏÏÏÏÏÏ
William C. Cobb ÏÏÏÏÏÏÏÏÏÏ

Ì
400,000
133,328
113,329
85,000

Ì 218,750
474,035
355,901
220,832
86,874

$6,922,607
2,576,137
2,106,234
1,898,718

831,250
465,965
334,648
247,497
233,126

Value of Unexercised
In-the-Money Options at
December 31, 2002(2)

Exercisable
($)

Unexercisable
($)

$ 4,947,734
11,714,025
2,253,147
1,312,179
2,057,054

$18,801,391
10,443,840
5,438,814
4,155,422
4,942,533

(1) Value realized is based on the fair market value of our common stock on date of exercise minus the

exercise price and does not necessarily reÖect proceeds actually received by the oÇcer.

(2) Calculated using the fair market value of our common stock on December 31, 2002 ($67.82) less the

exercise price of the option.

Compensation Committee Interlocks and Insider Participation

No member of the Compensation Committee is or was formerly an oÇcer or an employee of eBay.
No interlocking relationship exists between the Board of Directors or Compensation Committee and the
board of directors or compensation committee of any other company, nor has such interlocking relationship
existed in the past.

Mr. Kagle, a member of our Compensation Committee, is a member of the general partner of certain

venture capital funds that beneÑcially hold greater than 10% of the equity interests in Keen.com and
Vcommerce, Inc. We engaged in the following transactions with these companies in 2002:

In April 2000, we entered into an advertising and promotions agreement with Keen.com under which

we recognized revenues of approximately $200,000 in 2002 in exchange for our promotion of Keen. Our
agreement with Keen.com expired during 2002. In February 2001, our wholly owned subsidiary, Half.com,
entered into a certain content licensing and inventory sales agreement with Vcommerce pursuant to which
Vcommerce agreed to list its inventory on Half.com's website and to allow Half to use Vcommerce's
catalog data to supplement Half's existing catalog data. Half paid Vcommerce approximately $25,000 in
2002 under this agreement. Half has recognized approximately $17,000 of expense in 2003 under its
agreement with Vcommerce.

83

We believe that all of the transactions set forth above were made on terms no less favorable to us

than we could have obtained from unaÇliated third parties.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT

The following table sets forth certain information known to us with respect to beneÑcial ownership of
the Common Stock as of March 1, 2003, by (i) each stockholder known to us to be the beneÑcial owner
of more than 5% of our common stock, (ii) each director and nominee for director, (iii) each of the
executive oÇcers named in the Summary Compensation Table set forth under ""Item 11: Executive
Compensation Ì Summary of Compensation'' and (iv) all executive oÇcers and directors as a group.

Name of BeneÑcial Owner

Shares BeneÑcially
Owned(1)

Number

Percent

Pierre M. Omidyar(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

63,077,942

20.1%

JeÅrey S. Skoll(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

33,177,348

10.6

Janus Capital Management LLC (""Janus Capital'')(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

15,750,221

Margaret C. Whitman(5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

7,211,551

Maynard G. Webb, Jr.(6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

JeÅrey D. Jordan(7) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Matthew J. Bannick(8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

William C. Cobb(9) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Philippe Bourguignon(10) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Scott D. Cook(11) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

525,421

404,596

225,832

95,624

186,250

838,536

Robert C. Kagle(12)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2,042,293

Dawn G. Lepore(13) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Howard D. Schultz(14) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

156,250

75,042

5.0

2.3

*

*

*

*

*

*

*

*

*

All directors and executive oÇcers as a group (13 persons)(15) ÏÏÏÏÏÏÏÏÏ

75,649,236

23.8

* Less than one percent.

(1) This table is based upon information supplied by oÇcers, directors and principal stockholders and

Schedules 13D and 13G Ñled with the Securities and Exchange Commission. BeneÑcial ownership is
determined in accordance with the rules of the Securities and Exchange Commission and generally
includes voting or investment power with respect to securities. Unless otherwise indicated below, the
persons and entities named in the table have sole voting and sole investment power with respect to
all shares beneÑcially owned, subject to community property laws where applicable. Shares of our
common stock subject to options that are currently exercisable or exercisable within 60 days of
March 1, 2003 are deemed to be outstanding for the purpose of computing the percentage ownership
of the person holding those options, but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person. The percentage of beneÑcial ownership is based on
314,555,966 shares of our common stock outstanding as of March 1, 2003.

(2) Mr. Omidyar is our Founder and Chairman of the Board. Includes 383,800 shares held by his spouse
as to which he disclaims beneÑcial ownership. The address for Mr. Omidyar is 2145 Hamilton
Avenue, San Jose, California 95125.

(3) The address for Mr. Skoll is c/o Capricorn Management, LLC, 2005 Hamilton Avenue, Suite 260,

San Jose, California 95125.

(4) Janus Capital has an indirect 100% ownership stake in Bay Isle Financial LLC, or Bay Isle, and an

indirect 50.1% ownership stake in Enhanced Investment Technologies LLC, or INTECH. Due to the
above ownership structure, holdings for Janus Capital, Bay Isle and INTECH are aggregated for

84

beneÑcial ownership disclosure purposes. Janus Capital, Bay Isle and INTECH are registered
investment advisers, each furnishing investment advice to various investment companies registered
under Section 8 of the Investment Company Act of 1940 and to individual and institutional clients
(collectively, the ""Managed Portfolios''). Neither Janus Capital, Bay Isle nor INTECH has the right
to receive any dividends from, or the proceeds from the sale of, the securities held in the Managed
Portfolios and disclaims any ownership associated with such rights. Janus Capital has sole voting and
dispositive power over 15,320,121 shares of common stock and shared voting and dispositive power
over 430,100 shares of common stock. The address for Janus Capital Management LLC is
100 Fillmore Street, Denver, Colorado 80206-4923.

(5) Ms. Whitman is our President and Chief Executive OÇcer. Includes 6,425,262 shares held by the
GriÇth R. Harsh, IV & Margaret C. Whitman TTEES of Sweetwater Trust U/A/D 10/15/99. In
addition, it includes (a) 1,198 shares held by GriÇth Rutherford Harsh IV Custodian GriÇth
Rutherford Harsh V UTMA California as to which Ms. Whitman's spouse is custodian for the trust
and as to which Ms. Whitman disclaims beneÑcial ownership and (b) 1,198 shares held by GriÇth
Rutherford Harsh IV Custodian William Whitman Harsh UTMA California as to which
Ms. Whitman's spouse is custodian for the trust and as to which Ms. Whitman disclaims beneÑcial
ownership. Includes 306,250 shares Ms. Whitman has the right to acquire pursuant to outstanding
options exercisable within 60 days. The address for Ms. Whitman is 2145 Hamilton Avenue, San
Jose, California 95125.

(6) Mr. Webb is our Chief Operating OÇcer. Includes 525,421 shares Mr. Webb has the right to

acquire pursuant to outstanding options exercisable within 60 days. The address for Mr. Webb is
2145 Hamilton Avenue, San Jose, California 95125.

(7) Mr. Jordan is our Senior Vice President and General Manager, U.S. Business. Includes

404,596 shares Mr. Jordan has the right to acquire pursuant to outstanding options exercisable within
60 days. The address for Mr. Jordan is 2145 Hamilton Avenue, San Jose, California 95125.

(8) Mr. Bannick is our Senior Vice President, Global Online Payments. Includes 225,832 shares

Mr. Bannick has the right to acquire pursuant to outstanding options exercisable within 60 days. The
address for Mr. Bannick is 2145 Hamilton Avenue, San Jose, California 95125.

(9) Mr. Cobb is our Senior Vice President and General Manager, eBay International. Includes

95,624 shares Mr. Cobb has the right to acquire pursuant to outstanding options exercisable within
60 days. The address for Mr. Cobb is 2145 Hamilton Avenue, San Jose, California 95125.

(10) Includes 186,250 shares Mr. Bourguignon has the right to acquire pursuant to outstanding options

exercisable within 60 days. The address for Mr. Bourguignon is 33 rue Censier, 75019 Paris, France.

(11) Includes 716,250 shares Mr. Cook has the right to acquire pursuant to outstanding options

exercisable within 60 days. The address for Mr. Cook is c/o Intuit, Inc., 2535 Garcia Avenue,
Mountain View, California 94043.

(12) The shares are held by Robert & Joanne Kagle Trust UAD 4/4/96, Robert Kagle and Joanne

Kagle, TTEES. Includes 36,250 shares Mr. Kagle has the right to acquire pursuant to outstanding
options exercisable within 60 days. The address for Mr. Kagle is c/o Benchmark Capital
Management Co., L.L.C., 2480 Sand Hill Road, Suite 200, Menlo Park, California 94025.

(13) Includes 156,250 shares Ms. Lepore has the right to acquire pursuant to outstanding options

exercisable within 60 days. The address for Ms. Lepore is c/o The Charles Schwab Corporation,
101 Montgomery Street, M.S., 120-30-305, San Francisco, California 94104.

(14) Includes 36,250 shares Mr. Schultz has the right to acquire pursuant to outstanding options

exercisable within 60 days. The address for Mr. Schultz is c/o Starbucks Corporation, 2401 Utah
Ave. South, 8th Floor, Seattle, Washington 98134.

(15) Includes 3,335,005 shares subject to options exercisable within 60 days.

85

Equity Compensation Plan Information

The following table gives information about our shares of common stock that may be issued upon the

exercise of options, warrants and rights under all of our existing equity compensation plans as of
December 31, 2002, including our 1996 Stock Option Plan, 1997 Stock Option Plan, 1998 Equity
Incentive Plan, 1998 Directors Stock Option Plan, the 1999 Plan, the 2001 Plan as well as shares of our
common stock that may be issued under individual compensation arrangements that were not approved by
our stockholders, also referred to as our Non-Plan Grants. No warrants or rights are outstanding under any
of the foregoing plans.

(a)
Number of Securities
to Be Issued upon
Exercise
of Outstanding Options,
Warrants and Rights

(b)
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights

(c)
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation Plans
(Excluding Securities
ReÖected in Column(a))

34,722,006

$56.27

22,238,406(1)

Plan Category

Equity compensation plans

approved by
securityholders ÏÏÏÏÏÏÏÏÏ

Equity compensation plans

not approved by
securityholders ÏÏÏÏÏÏÏÏÏ

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

35,502,006

780,000(2)(3)(4)(5)(6)

$ 1.56

$55.07

Ì

22,238,406

(1) Includes 1,623,993 shares of our common stock remaining available for future issuance under our

1998 Employee Stock Purchase Plan, as amended, or the ESPP, as of December 31, 2002. Our ESPP
contains an ""evergreen'' provision that automatically increases, on each January 1, the number of
securities available for issuance under the ESPP by the number of shares purchased under the ESPP
in the preceding calendar year. An aggregate amount of 176,007 shares was purchased under the
ESPP in 2002. None of our other plans has an ""evergreen'' provision.

(2) Does not include 13,772 shares of our common stock, with a weighted average exercise price of $1.10

per share, to be issued upon exercise of outstanding options assumed by us under the Billpoint, Inc.
1999 Stock Option Plan, or the Billpoint Plan, in connection with our acquisition of Billpoint in 1999,
as we cannot make subsequent grants or awards of our equity securities under the Billpoint Plan. Prior
to our acquisition of Billpoint, the stockholders of Billpoint approved the Billpoint Plan. Our
stockholders, however, did not approve the Billpoint Plan in connection with our acquisition of
Billpoint.

(3) Does not include 95,363 shares of our common stock, with a weighted average exercise price of
$13.83 per share, to be issued upon exercise of outstanding options assumed by us under the
Half.com, Inc. 1999 Equity Compensation Plan, or the Half.com Plan, in connection with our
acquisition of Half.com in 2000, as we cannot make subsequent grants or awards of our equity
securities under the Half.com Plan. Prior to our acquisition of Half, the stockholders of Half approved
the Half.com Plan. Our stockholders, however, did not approve the Half.com Plan in connection with
our acquisition of Half.

(4) Does not include 59,159 shares of our common stock, with a weighted average exercise price of $0.43

per share, to be issued upon exercise of outstanding options assumed by us under the ConÑnity, Inc.
1999 Stock Plan, or the ConÑnity Plan, in connection with our acquisition of PayPal in October 2002,
as we cannot make subsequent grants or awards of our equity securities under the ConÑnity Plan. The
ConÑnity Plan was assumed by PayPal in connection with its merger with ConÑnity in 2000. Prior to
our acquisition of PayPal and PayPal's merger with ConÑnity, the stockholders of ConÑnity approved
the ConÑnity Plan. Our stockholders, however, did not approve the ConÑnity Plan in connection with
our acquisition of PayPal.

86

(5) Does not include 323,313 shares of our common stock, with a weighted average exercise price of

$3.00 per share, to be issued upon exercise of outstanding options assumed by us under the X.com
Corporation 1999 Stock Plan, or the X.com Plan, in connection with our acquisition of PayPal in
October 2002, as we cannot make subsequent grants or awards of our equity securities under the
X.com Plan. Prior to our acquisition of PayPal, the stockholders of PayPal approved the X.com Plan.
Our stockholders, however, did not approve the X.com Plan in connection with our acquisition of
PayPal.

(6) Does not include 1,182,373 shares of our common stock, with a weighted average exercise price of

$33.73 per share, to be issued upon exercise of outstanding options assumed by us under the PayPal,
Inc. 2001 Equity Incentive Plan, or the PayPal Plan, in connection with our acquisition of PayPal in
October 2002, as we cannot make subsequent grants or awards of our equity securities under the
PayPal Plan. Prior to our acquisition of PayPal, the stockholders of PayPal approved the PayPal Plan.
Our stockholders, however, did not approve the PayPal Plan in connection with our acquisition of
PayPal.

The only outstanding Non-Plan Grant as of December 31, 2002 relates to an individual compensation
arrangement that was made prior to the initial public oÅering of our Common Stock in 1998. At the time
of this Non-Plan Grant, members of our Board and their aÇliates beneÑcially owned in excess of 90% of
our then outstanding equity and voting interests. This Non-Plan Grant has been previously disclosed in our
initial public oÅering Prospectus Ñled with the SEC on September 25, 1998 under the headings
""Management Ì Director Compensation'' and ""Ì Compensation Arrangements.'' Except as set forth
below, the terms and conditions of this Non-Plan Grant are identical to the terms of our 1997 Stock
Option Plan, a copy of which was Ñled as an exhibit to our S-1 Registration Statement (No. 33-59097)
Ñled in connection with our initial public oÅering.

The outstanding Non-Plan Grant involved the Board's grant of an option to purchase 900,000 shares
of our Common Stock at an exercise price of $1.56 to Mr. Cook upon his joining our Board in June 1998
as an independent director. These options granted to Mr. Cook were non-qualiÑed options and were
immediately exercisable, with a term of 10 years. These options vested as to 25% of the underlying shares
in June 1999 and as to 2.08% of the shares each month thereafter until they fully vested in June 2002.
Mr. Cook exercised 120,000 of these options in May 2002 and exercised an additional 100,000 of these
options in February 2003.

A second Non-Plan Grant involved the Board's grant of an option to purchase 3,600,000 shares of our

Common Stock at an exercise price of $2.50 to Brian Swette upon his joining eBay in August 1998 as
Senior Vice President of Marketing and International. These options granted to Mr. Swette were non-
qualiÑed options with a term of ten years. During 2002, Mr. Swette exercised all options available to him
in connection with his departure from eBay. No options were outstanding under this grant as of
December 31, 2002.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We have entered into indemniÑcation agreements with each of our directors and executive oÇcers.
These agreements require us to indemnify such individuals, to the fullest extent permitted by Delaware
law, for certain liabilities to which they may become subject as a result of their aÇliation with eBay.

In August 2000, Mr. Webb, our Chief Operating OÇcer, entered into a four-year term loan with us at

an interest rate of 6.37% per annum, with 10%, 15%, 25% and 50% of principal on the loan being due on
each of the Ñrst, second, third and fourth anniversary of the loan's issue date, respectively. The principal
amount on the loan was approximately $2,169,800, which amount represented the principal and accrued
interest due at the end of a one-year term loan entered into in August 1999 between Mr. Webb and us
shortly after his relocation to San Jose as a result of his joining eBay in 1999, and was secured by
Mr. Webb's principal place of residence. In January 2001, we entered into a special retention bonus plan
with Mr. Webb, under which Mr. Webb received bonus payments in August of 2001 and 2002 and
remains eligible to receive bonus payments in August 2003 and 2004 if he is then employed by us.

87

Payment amounts under Mr. Webb's bonus plan are $355,200 for 2001, $449,900 for 2002, $646,100 for
2003 and $1,154,000 for 2004, and may be used to pay principal and interest payments owing to us under
the terms of his loan. In August 2001 and August 2002, in accordance with the terms of his loan,
Mr. Webb paid down $355,200 and $449,900, respectively, of principal and accrued interest on the loan.
The maximum indebtedness of Mr. Webb to us during 2002 was $2,077,211. In January 2003, Mr. Webb
prepaid in full the principal and accrued interest on his loan in the amount of approximately $1,670,800.

In May 2000, Mr. Jordan, our Senior Vice President and General Manager, U.S. Business, entered
into two four-year term loans with us at an interest rate of 6.40% per annum, with principal and accrued
interest payable on each loan in equal installments on each anniversary. The principal amounts on the
loans were $1,000,000 and $900,000, respectively, with the loan amounts secured by Mr. Jordan's principal
place of residence. In May 2000, we entered into a special retention bonus plan with Mr. Jordan under
which Mr. Jordan received bonus payments in May of 2001 and 2002 and remains eligible to receive
bonus payments in May 2003 and 2004 if he is then employed by us. Payment amounts under this bonus
plan with Mr. Jordan are $314,000 for 2001, $298,000 for 2002, $282,000 for 2003, and $266,000 for 2004,
and may be used to pay principal and interest payments Mr. Jordan will then owe to us under the loans
described in this paragraph. In July 2000, Mr. Jordan repaid in full the principal and accrued interest on
the $900,000 term loan. In addition, in April 2001, Mr. Jordan entered into a four-year term loan with us
at an interest rate of 4.94% per annum, with principal and accrued interest payable in equal installments
on each anniversary of this loan. The principal amount on this loan was $750,000, with the loan amount
secured by Mr. Jordan's principal place of residence. In April 2001, we entered into a second special
retention bonus plan with Mr. Jordan under which Mr. Jordan received bonus payments in April of 2002
and remains eligible to receive bonus payments in April 2003, 2004 and 2005 if he is then employed by us.
Payment amounts under this bonus plan with Mr. Jordan are $224,550 for 2002, $215,288 for 2003,
$206,025 for 2004, and $196,763 for 2005, and may be used to pay principal and interest payments
Mr. Jordan will then owe to us under the loans described in this paragraph. In May 2001 and May 2002,
Mr. Jordan paid down $314,000 and $298,000, respectively, of principal and accrued interest on his May
2000 loan. In April 2002, Mr. Jordan paid down $224,550 of principal and accrued interest on his April
2001 loan. The maximum indebtedness of Mr. Jordan to us during 2002 was $1,579,050.

In March 2001, in connection with his relocation to San Jose as a result of his joining eBay in late
2000, Mr. Cobb, our Senior Vice President and General Manager, eBay International, entered into a four-
year, non-interest bearing term loan with us in the amount of $840,000. The loan to Mr. Cobb is secured
by his principal place of residence. Principal payments of $70,000 are due on the Ñrst, second and third
anniversaries of the date Mr. Cobb joined eBay (November 27, 2000), with a balloon payment of the
remaining principal due on November 27, 2004. In November 2000, we entered into a special retention
bonus plan with Mr. Cobb under which Mr. Cobb received a $70,000 bonus payment in November of
2001 and 2002 and remains eligible to receive bonus payments in November 2003 and 2004 if he is then
employed by us. In April 2002, we entered into a second special retention bonus plan with Mr. Cobb
under which Mr. Cobb will receive a $280,000 bonus payment on November 27, 2004 if he is then
employed by us. Mr. Cobb may use these bonus payments to pay principal payments due under his loan.
In November 2001 and 2002, Mr. Cobb paid down $70,000 and $70,000, respectively, of principal on his
loan. The maximum indebtedness of Mr. Cobb to us during 2002 was $770,000.

In September 2002, we entered into a special retention bonus plan with Mr. Bannick. Under the

terms of this bonus plan, Mr. Bannick received a $250,000 bonus payment after the closing of our
acquisition of PayPal in October 2002 and upon his acceptance of the new position as our Senior Vice
President and General Manager, Global Online Payments. Mr. Bannick remains eligible to receive
performance-based bonus payments related primarily to the integration and performance of our PayPal
subsidiary of up to $250,000 on each of the nine-month, 18-month, and 24-month anniversaries of the
October 2002 closing of the PayPal acquisition.

Mr. Omidyar, our Founder and the Chairman of our Board of Directors, and Mr. Skoll, a beneÑcial
owner of more than 5% of our common stock, from time to time make their personal aircraft available to

88

our oÇcers for business purposes at no cost to us. The imputed cost of the aircraft use was not material to
our Consolidated Financial Statements.

Mr. Cook, a member of our Board of Directors, is a director and Chairman of the Executive

Committee of the Board of Directors of Intuit. In September 2000, prior to eBay's acquisition of PayPal,
PayPal entered into a strategic marketing agreement with Intuit. PayPal paid Intuit approximately
$672,000 in 2002 under this agreement. The agreement was terminated in December 2002, and PayPal
paid Intuit an early termination fee of $1,349,000 in January 2003 in accordance with the terms of the
agreement.

Certain other transactions are described under the caption ""Compensation Committee Interlocks and

Insider Participation'' in Item 12, which is incorporated by reference herein.

ITEM 14. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Under the supervision and with the

participation of our management, including our Chief Executive OÇcer and our Chief Financial OÇcer,
we conducted an evaluation of our disclosure controls and procedures (as deÑned in the Securities
Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date, also referred to as the Evaluation
Date, within 90 days before the Ñling date of this annual report. Based upon that evaluation, our Chief
Executive OÇcer and our Chief Financial OÇcer have concluded that as of the Evaluation Date, the
design and operation of our disclosure controls and procedures were eÅective.

(b) Changes in internal controls. There were no signiÑcant changes in our internal controls or in

other factors that could signiÑcantly aÅect these controls subsequent to the Evaluation Date.

89

PART IV

ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are Ñled as part of this report:

1. Consolidated Financial Statements:

Report of Independent Accountants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Consolidated Balance Sheet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Consolidated Statement of IncomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Consolidated Statement of Comprehensive Income ÏÏÏÏÏÏÏÏ

Consolidated Statement of Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏ

Consolidated Statement of Cash Flows ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2. Financial Statement Schedules.

Page
Number

93

94

95

96

97

98
99

Page
Number

Schedule II Ì Valuation and Qualifying Accounts ÏÏÏÏÏÏÏÏ

140

All other schedules have been omitted because the information required to be set forth therein is not

applicable or is shown in the Ñnancial statements or notes thereto.

3. Exhibits

Filed
with
this
10-K

No.

2.01

3.01

3.02

3.03

Exhibit Description

Agreement and Plan of Merger, dated as of July 7,
2002, among PayPal, Inc., the Registrant and
Vaquita Acquisition Corp.

Registrant's Amended and Restated CertiÑcate of
Incorporation.

Registrant's CertiÑcate of Amendment of
CertiÑcate of Incorporation.

Registrant's Corrected CertiÑcate of CertiÑcate of
Amendment of CertiÑcate of Incorporation.

3.04

Registrant's Amended and Restated Bylaws.

4.01

4.02

Form of Specimen CertiÑcate for Registrant's
Common Stock.

Investor Rights Agreement, dated June 20, 1997,
between the Registrant and certain stockholders
named therein.

90

Incorporated by Reference
Date
Filed

File No.

Form

8-K

07/08/02

10-Q

10-K

10-K

10-Q

11/13/98

03/28/01

03/28/01

11/13/98

S-1

333-59097

08/19/98

S-1

333-59097

07/15/98

No.

Exhibit Description

Filed
with
this
10-K

Incorporated by Reference
Date
Filed

File No.

Form

10.01° Form of Indemnity Agreement entered into by

S-1

333-59097

07/15/98

Registrant with each of its directors and executive
oÇcers.

10.02° Registrant's 1996 Stock Option Plan.

S-1

333-59097

07/15/98

10.03° Registrant's 1997 Stock Option Plan.

S-1

333-59097

07/15/98

10.04° Registrant's 1998 Equity Incentive Plan, as

S-1

333-59097

07/15/98

amended.

10.05° Registrant's 2001 Equity Incentive Plan.

S-8

333-97729

08/06/02

10.06° Registrant's 1998 Directors Stock Option Plan.

S-1

333-59097

07/15/98

10.07° Amendment No. 1 to Registrant's 1998 Directors

Stock Option Plan.

10.08° Registrant's Amended and Restated 1998
Employee Stock Purchase Plan.

10-K

10-K

03/29/99

03/25/02

10.09° Registrant's 1999 Global Equity Incentive Plan, as

S-8

333-97729

08/06/02

amended.

10.10° Employment Letter Agreement dated January 16,
1998, between Margaret C. Whitman and
Registrant.

10.11° Employment Letter Agreement dated August 20,
1998, between Michael R. Jacobson and
Registrant.

S-1

333-59097

08/19/98

S-1

333-59097

09/01/98

10.12° OÅer Letter to Maynard G. Webb, Jr. dated

S-3

333-88205

09/30/99

July 17, 1999.

10.13° Retention Bonus Plan dated January 10, 2001,
between Registrant and Maynard G. Webb, Jr.
(Corrected).

10.14° Stock Option Agreement dated June 9, 1998

X

between Registrant and Scott D. Cook.

10-Q

08/14/01

10.15° OÅer Letter to JeÅrey D. Jordan dated July 30,

S-3

333-88205

09/30/99

1999.

10.16° Retention Bonus Plan dated May 16, 2000,
between Registrant and JeÅrey D. Jordan.

10.17° Retention Bonus Plan dated April 3, 2001,
between Registrant and JeÅrey D. Jordan.

10.18° OÅer Letter to William C. Cobb dated

November 22, 2000.

91

10-K

10-Q

10-K

03/28/01

08/14/01

03/25/02

No.

Exhibit Description

Filed
with
this
10-K

Incorporated by Reference
Date
Filed

File No.

Form

10.19° Supplemental Retention Bonus Plan dated

10-Q

08/06/02

April 14, 2002, between Registrant and William C.
Cobb.

10.20° Employment Letter Agreement between Registrant

10-Q

11/14/02

and Christopher T. Hjelm, dated as of March 11,
2002.

10.21° Special Bonus Plan between Registrant and

10-Q

11/14/02

10.22

10.23

Matthew J. Bannick, dated as of September 6,
2002.

Lease dated March 1, 2000, between eBay Realty
Trust and Registrant.

Cash Collateral Agreement between Registrant
and Chase Manhattan Bank as Agent, dated
March 1, 2000.

21.01

List of Subsidiaries.

23.01

PricewaterhouseCoopers LLP consent.

24.01

Power of Attorney (see signature page)

X

X

X

° Indicates a management contract or compensatory plan or arrangement

(b) Reports on Form 8-K during the fourth quarter of Ñscal 2002:

10-K

10-K

03/30/00

03/30/00

1. On October 3, 2002, eBay Ñled a report on Form 8-K to report under Item 5 that it had

obtained all approvals required under applicable state money transmitter laws to complete its
previously announced merger with PayPal, Inc. No Ñnancial statements were Ñled with the report.

2. On October 4, 2002, eBay Ñled a report on Form 8-K to report under Item 2 that it had
obtained the approval of the holders of a majority of common stock of PayPal, Inc. of the merger of
Vacquita Acquisition Corp., a wholly-owned subsidiary of eBay, with and into PayPal, as well as the
completion of the merger. No Ñnancial statements were Ñled with the report because the required
Ñnancial statements were Ñled with Amendment No. 1 to the Company's Registration Statement on
Form S-4 (File No. 333-97727), which was Ñled with the Securities and Exchange Commission on
August 28, 2002.

3. On November 14, 2002, eBay furnished a report on Form 8-K to report under Item 9 that it

had Ñled its Quarterly Report on Form 10-Q, and that accompanying such report were the
certiÑcations of eBay's Chief Executive OÇcer and Chief Financial OÇcer, as required by
Section 906 of the Sarbanes-Oxley Act of 2002. No Ñnancial statements were Ñled with the report.

(c) See the Exhibits listed under Item 15(a)(3) above.

(d) The Ñnancial statement schedules required by this item are listed under Item 15(a)(2) above.

92

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of eBay Inc.:

In our opinion, the Consolidated Financial Statements listed in the index appearing under

Item 15(a)(1) on page 90 present fairly, in all material respects, the Ñnancial position of eBay Inc. and its
subsidiaries (the ""Company'') at December 31, 2001 and December 31, 2002, and the results of their
operations and their cash Öows for the three years then ended in conformity with accounting principles
generally accepted in the United States of America. These Ñnancial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these Ñnancial statements based on
our audits. We conducted our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform the audit to obtain
reasonable assurance about whether the Ñnancial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the Ñnancial
statements, assessing the accounting principles used and signiÑcant estimates made by management, and
evaluating the overall Ñnancial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

As discussed in Note 3 to the Consolidated Financial Statements, eÅective January 1, 2002, the
Company changed its method of accounting for goodwill in accordance with Statement of Financial
Accounting Standards No. 142, ""Goodwill and Other Intangible Assets.''

PricewaterhouseCoopers LLP

San Jose, California
January 17, 2003, except for Note 17,
which is as of March 28, 2003

93

eBay Inc.

CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)

December 31,

2001

2002

Current assets:

ASSETS

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts receivable, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Funds receivableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 523,969
199,450
101,703
Ì
58,683

Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restricted cash and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Property and equipment, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangible assets, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

883,805
286,998
129,614
142,349
187,829
10,810
21,540
15,584

$1,109,313
89,690
131,453
41,014
96,988

1,468,458
470,227
134,644
218,028
1,456,024
279,465
84,218
13,380

$1,678,529

$4,124,444

Current liabilities:

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Funds payable and amounts due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expenses and other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenue and customer advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$

Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

33,235
Ì
94,593
15,583
16,111
20,617

180,139
12,008
3,629
15,864
37,751

249,391

$

47,424
50,396
199,323
18,846
2,970
67,265

386,224
13,798
111,843
22,874
33,232

567,971

Commitments and contingencies (Notes 9 and 11)
Stockholders' equity:

Convertible Preferred Stock, $0.001 par value; 10,000 shares authorized; no
shares issued or outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Common Stock, $0.001 par value; 900,000 shares authorized; 277,259 and

311,277 shares issued and outstandingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unearned stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ì

Ì

277
1,275,240

(2,367)

164,633

(8,645)

311
3,108,443
(5,253)
414,474
38,498

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

1,429,138

3,556,473

$1,678,529

$4,124,444

The accompanying notes are an integral part of these Consolidated Financial Statements.

94

eBay Inc.

CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)

Year Ended December 31,
2001

2002

2000

Net revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cost of net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$431,424
95,453

$748,821
134,816

$1,214,100
213,876

Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

335,971

614,005

1,000,224

Operating expenses:

Sales and marketing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Product development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payroll taxes on stock option gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Merger related costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

166,767
55,863
73,027
2,337
1,433
1,550

253,474
75,288
105,784
2,442
36,591
Ì

Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

300,977

473,579

Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment of certain equity investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income before income taxes and minority interests ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests in consolidated companies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

34,994
46,337
(3,374)
Ì

77,957
(32,725)
3,062

140,426
41,613
(2,851)
(16,245)

162,943
(80,009)
7,514

349,650
104,636
171,785
4,015
15,941
Ì

646,027

354,197
49,209
(1,492)
(3,781)

398,133
(145,946)
(2,296)

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 48,294

$ 90,448

$ 249,891

Net income per share:

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$

$

0.19

0.17

$

$

0.34

0.32

$

$

0.87

0.85

Weighted average shares:

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

251,776

268,971

287,496

Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

280,346

280,595

292,820

The accompanying notes are an integral part of these Consolidated Financial Statements.

95

eBay Inc.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in thousands)

Year Ended December 31,
2001

2002

2000

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 48,294

$90,448

$249,891

Other comprehensive income (loss):

Foreign currency translation adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

803

(5,835)

48,000

Unrealized gains (losses) on investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(11,583)

Investment gain included in net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Unrealized losses on cash Öow hedges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ì

Ì

1,215

3,799

774

558

(3,865)

(2,637)

Estimated tax beneÑt (provision) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

4,811

(458)

448

Net change in other comprehensive income (loss) before cumulative

eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(5,969)

(5,144)

47,143

Cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ì

(2,626)

Ì

Comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 42,325

$82,678

$297,034

The accompanying notes are an integral part of these Consolidated Financial Statements.

96

eBay Inc.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)

Year Ended December 31,
2001

2002

2000

Convertible preferred stock:

Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$

Ì $
Ì

Ì $
Ì

Common stock:

Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

262
7
269

269
8
277

Ì
Ì

277
34
311

Additional paid-in-capital:

Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock repurchased ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Contributions from partners and minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unearned stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock option income tax beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

831,121
49,043
(365)
23,816
187
37,483
941,285

941,285
252,395
(145)
Ì
Ì
81,705
1,275,240

1,275,240
1,740,488
(132)
Ì
298
92,549
3,108,443

Notes receivable from stockholders:

Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Note repayments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Unearned stock-based compensation:

Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unearned stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Amortization of unearned stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cancellation or repurchase of shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Retained earnings:

Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Partnership distributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(11)
11
Ì

(8,704)
(187)
7,141
327
(1,423)

26,367
(157)
48,294
74,504

Accumulated other comprehensive income (loss):

Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized gain (loss) on investments, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized gain (loss) on cash Öow hedges, net of tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign currency translation adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

5,094
(6,772)

Ì
803
(875)
$1,013,760

Ì
Ì
Ì

(1,423)
(4,117)
3,091
82

(2,367)

74,504
(319)
90,448
164,633

(875)
3,010
(4,945)
(5,835)
(8,645)

$1,429,138

Ì
Ì
Ì

(2,367)
(9,943)
5,953
1,104
(5,253)

164,633
(50)
249,891
414,474

(8,645)
724
(1,581)
48,000
38,498
$3,556,473

Common stock:
Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of common stock for cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of common stock for acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

262,087
4,593
2,570
269,250

269,250
5,831
2,178
277,259

277,259
10,028
23,990
311,277

Number of shares

The accompanying notes are an integral part of these Consolidated Financial Statements.

97

eBay Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)

Cash Öows from operating activities:

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile to net cash provided by operating activities:

Provision for doubtful accounts and authorized credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for transaction losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax beneÑt on the exercise of stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment of certain equity investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interests and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gain on sale of assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in assets and liabilities, net of acquired businesses:

Accounts receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Funds receivableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other non-current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Funds payable and amounts due to customers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expenses and other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred revenue and customer advances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Year Ended December 31,
2001

2002

2000

$

48,294

$

90,448

$ 249,891

18,237
Ì
38,050
7,141
37,483
Ì

(1,475)

Ì

(48,862)

Ì

(20,530)
(11,992)
(8,253)
(408)
Ì
31,167
6,659
4,637

25,243
Ì
86,641
3,091
81,705
16,245
(10,170)

Ì

(50,221)

Ì
11,607
(4,787)
(11,408)
(4,087)

Ì
6,790
1,516
9,499

25,455
7,832
76,576
5,953
91,237
3,781
1,324
(21,378)

(54,583)
(11,819)
10,716
(1,195)
8,134
14,631
(6,027)
35,481
2,780
41,114

479,903

Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

100,148

252,112

Cash Öows from investing activities:

Purchases of property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Maturities and sales of investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from sale of assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisitions, net of cash acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of other non-current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(49,753)
(398,998)
248,547
Ì
Ì

(5,850)

(57,420)
(602,485)
738,989
4,560
(111,730)
(1,733)

(138,670)
(723,307)
727,455
35,777
(59,411)
397

Net cash used in investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(206,054)

(29,819)

(157,759)

Cash Öows from Ñnancing activities:

Proceeds from issuance of common stock, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from issuance of common stock by subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from (principal payments on) long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Partnership distributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Net cash provided by Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

EÅect of exchange rate changes on cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

45,530
37,736
2,869
(157)

85,978

Ì

Net increase (decrease) in cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(19,928)
221,801

123,710
Ì

(21,886)
(319)

101,505

(1,702)

322,096
201,873

252,181
Ì
(64)
(50)

252,067

11,133

585,344
523,969

Cash and cash equivalents at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 201,873

$ 523,969

$1,109,313

Supplemental cash Öow disclosures:

Cash paid for interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash paid for income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Non-cash investing and Ñnancing activities:

Common stock issued for acquisitionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Preferred stock issued for notes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$
$

$
$

1,915

$
Ì $

2,195

$
Ì $

1,492
2,382

17,341
3,494

$ 128,540
$

Ì $

$1,476,504
Ì

The accompanying notes are an integral part of these Consolidated Financial Statements.

98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

eBay Inc.

Note 1 Ì The Company and Summary of SigniÑcant Accounting Policies:

The Company

eBay Inc. (""eBay'') was incorporated in California in May 1996, and reincorporated in Delaware in

April 1998. As of December 31, 2002, through our wholly-owned and majority-owned subsidiaries and
aÇliates, we had websites directed towards the United States, Australia, Austria, Belgium, Canada,
France, Germany, Ireland, Italy, the Netherlands, New Zealand, Singapore, South Korea, Spain, Sweden,
Switzerland, Taiwan and the United Kingdom. We pioneered online trading by developing a Web-based
community in which buyers and sellers are brought together to buy and sell almost anything. The eBay
online service permits sellers to list items for sale, buyers to bid on items of interest, and all eBay users to
browse through listed items in a fully-automated, topically-arranged service that is available online seven
days a week.

On October 3, 2002, we completed our acquisition of PayPal, Inc. in a tax-free, stock-for-stock
transaction. PayPal provides an online global payments platform and is headquartered in Mountain View,
California. The PayPal Ñnancial statements are included in our Consolidated Financial Statements for the
post-acquisition period from October 4, 2002 through December 31, 2002.

Stock splits

In April 2000, our Board of Directors approved a two-for-one common stock split. Stockholders of
record on May 9, 2000 received one additional share for each share owned on May 24, 2000. All share and
per share amounts in these Consolidated Financial Statements and related notes reÖect the stock splits in
all periods presented.

Use of estimates

The preparation of Consolidated Financial Statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that aÅect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
Consolidated Financial Statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could diÅer from those estimates.

Principles of consolidation and basis of presentation

The accompanying Ñnancial statements are consolidated and include the Ñnancial statements of eBay

and our majority-owned subsidiaries. All signiÑcant intercompany balances and transactions have been
eliminated in consolidation.

The consolidated accounts include 100 percent of the assets and liabilities of these majority-owned

subsidiaries and the ownership interests of minority investors are recorded as minority interests.
Investments in entities where we hold more than a 20 percent but less than a 50 percent ownership
interest and have the ability to signiÑcantly inÖuence the operations of the investee are accounted for using
the equity method of accounting and the investment balance is included in long term investments, while
our share of the investees' operations is included in other income.

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

Fair value of Ñnancial instruments

Cash and cash equivalents are short-term, highly liquid investments with original maturities of three

months or less when purchased. Our Ñnancial instruments, including cash, cash equivalents, accounts

99

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

receivable, and accounts payable are carried at cost, which approximates their fair value because of the
short-term maturity of these instruments.

Short and long-term investments, which include marketable equity securities, municipal, government

and corporate bonds, are classiÑed as available-for-sale and reported at fair value using the speciÑc
identiÑcation method. Realized gains and losses are included in earnings and were immaterial in all periods
presented. Unrealized gains and losses are excluded from earnings and reported as a component of other
comprehensive income (loss), net of related estimated tax provisions or beneÑts. Additionally, we assess
whether an other-than-temporary impairment loss on our investments has occurred due to declines in fair
value or other market conditions. Declines in fair value that are considered other than temporary are
recorded as an impairment of certain equity investments in the statement of income.

Derivative instruments

We recognize all derivative instruments on the balance sheet at fair value. Changes in the fair value

(i.e., gains or losses) of the derivatives are recorded each period in the statement of income or other
comprehensive income (loss). For a derivative designated as a cash Öow hedge, the gain or loss on the
derivative is initially reported as a component of other comprehensive income (loss) and subsequently
reclassiÑed into the statement of income when the hedged transaction aÅects earnings. For derivatives
recognized as a fair value hedge, the gain or loss on the derivative in the period of change and the
oÅsetting loss or gain of the hedged item attributed to the hedged risk, are recognized in the statement of
income. For derivatives not recognized as hedges, the gain or loss on the derivative in the period of
changes is recognized as other income.

Concentrations of credit risk

Our cash, cash equivalents, investments and accounts receivable are potentially subject to

concentration of credit risk. Cash, cash equivalents and investments are deposited with Ñnancial institutions
that management believes are of high credit quality. Our accounts receivable are derived from revenue
earned from customers located in the U.S. and internationally. The revenues earned from the U.S. site are
denominated in U.S. dollars and revenue earned from our international sites are denominated in the
country's functional currency. Accounts receivable balances are typically settled through customer credit
cards and, as a result, the majority of accounts receivable are collected upon processing of credit card
transactions. We maintain an allowance for doubtful accounts receivable and authorized credits based upon
our historical experience. Historically, such losses have been within our expectations. However, unexpected
or signiÑcant future changes in trends could result in a material impact to future statements of income or
cash Öows. Generally, due to the relatively small dollar amount of individual accounts receivable, we do
not require collateral on these balances. The provision for doubtful accounts is recorded as a charge to
operating expense, while the provision for authorized credits is recognized as a reduction of revenues.

We also entered into two interest rate swaps with two separate Ñnancial institutions to reduce our
interest rate exposure on our lease payments. If either of these Ñnancial institutions should fail to deliver
under these contracts, we may be subject to variable interest rate payments.

During the years ended and as of December 31, 2000 and 2002, no customers accounted for more
than 10% of net revenues or net accounts receivable. During the year and as of December 31, 2001, no
customers accounted for more than 10% of net revenues and one customer represented approximately 20%
of net accounts receivable.

100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

Allowances for transaction losses

Our Payments segment is exposed to transaction losses due to fraud, as well as non-performance of
third parties and customers. We establish allowances for estimated losses arising from processing customer
transactions, such as charge-backs for unauthorized credit card use and merchant related charge-backs due
to non-delivery of goods or services, Automated Clearing House, or ACH, returns, and debit card
overdrafts. These allowances represent an accumulation of the estimated amounts, using an actuarial
technique, necessary to provide for transaction losses incurred as of the reporting date, including those to
which we have not yet been notiÑed. The allowances are monitored monthly and are updated based on
actual claims data reported by our claims processors. Customers typically have up to 180 days to Ñle
transaction disputes. Consequently, the time between estimating the loss provisions and realization of the
actual amount is short. The allowances are based on known facts and circumstances, internal factors
including our experience with similar cases, historical trends involving loss payment patterns and the mix
of transaction and loss types. Additions to the allowance, in the form of provisions, are reÖected as a
general and administrative expense in our results of operations, while write-oÅs to the allowance are made
when a loss is determined to have occurred. Recoveries, when collected, are recorded as an increase to the
allowance for transaction losses. As of December 31, 2002, the allowance for transaction losses totaled
$10.1 million and was included in other current liabilities in our consolidated balance sheet.

Funds receivable and funds payable

Funds receivable and payable relate to our Payments segment and arise due to the time taken to clear

transactions through external payment networks. When customers fund their account using their bank
account or credit card, or withdraw money to their bank account or through a debit card transaction, there
is a clearing period before the cash is received or sent by PayPal, usually two or three days. Hence, these
funds are treated as a receivable or payable until the cash is settled.

Foreign currency

All of our foreign subsidiaries use the local currency of their respective countries as their functional

currency. Assets and liabilities are translated at exchange rates prevailing at the balance sheet dates.
Revenues, costs and expenses are translated into United States dollars at average exchange rates for the
period. Gains and losses resulting from translation are accumulated as a component of other
comprehensive income (loss).

Realized gains and losses from foreign currency transactions are recognized as other income and are

insigniÑcant for all periods presented.

Property and equipment

Property and equipment are stated at historical cost less accumulated depreciation. Depreciation and

amortization are computed using the straight-line method over the estimated useful lives of the assets,
generally Ñve years or less for equipment and furniture, and up to thirty years for buildings and building
improvements.

Intangible assets

Intangible assets resulting from the acquisitions of entities accounted for using the purchase method

of accounting are estimated by management based on the fair value of assets received. IdentiÑable
intangible assets are comprised of purchased customer lists, developed technologies, trade names, and other
intangible assets. IdentiÑable intangible assets are being amortized using the straight-line method over
estimated useful lives ranging from two to seven years.

101

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and

identiÑable intangible assets acquired in a business combination. In accordance with Statement of
Financial Accounting Standards No. 142 or SFAS No. 142, ""Goodwill and Other Intangible Assets,''
goodwill is no longer subject to amortization. Rather, goodwill is subject to at least an annual assessment
for impairment, applying a fair-value based test.

Impairment of long-lived assets

We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate

that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144,
""Accounting for the Impairment or Disposal of Long-Lived Assets.'' An asset is considered impaired if its
carrying amount exceeds the future net cash Öow the asset is expected to generate. If such asset is
considered to be impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds its fair market value. We assess the recoverability of our long-lived
and intangible assets by determining whether the unamortized balances can be recovered through
undiscounted future net cash Öows of the related assets. The amount of impairment, if any, is measured
based on projected discounted future net cash Öows using a discount rate reÖecting our average cost of
capital.

We evaluate goodwill, at a minimum, on an annual basis and whenever events and changes in
circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested
at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the
fair value of the reporting unit. The fair values of the reporting units are estimated using a combination of
the income, or discounted cash Öows, approach and the market approach, which utilizes comparable
companies' data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered
impaired and a second step is performed to measure the amount of impairment loss, if any.

Due to customers

Customers utilize our payment services to transfer money via the Internet. Any stored value

remaining from transactions in a customer's account represents a liability to the customer. Customers can
elect to sweep their account balances into the PayPal Money Market fund to earn a rate of return;
otherwise, no interest is paid on customer account balances.

Custodial accounts

We deposit all U.S.-based customer funds not transferred to PayPal's Money Market Fund into
Federal Deposit Insurance Corporation insured bank accounts. FDIC insurance is available to PayPal
customers if we (1) place pooled customer funds in bank accounts denominated ""PayPal as Agent for the
BeneÑt of its Customers'' or similar caption, (2) maintain records suÇcient to identify the claim of each
customer in the FDIC-insured account, (3) comply with applicable FDIC recordkeeping requirements,
and (4) truly operate as an agent of our customers. We receive a custodial credit from our service provider
in the form of a reduction in transaction processing fees based upon balances held with each institution.
This credit is recognized as a reduction in processing costs.

Environmental expenditures

As a result of our 1999 merger with ButterÑelds, we own real estate properties that are either used in
our business or leased to unrelated parties for various commercial uses. We have remediation responsibility
for certain environmental and structural deÑciencies. Liabilities are recorded when environmental
assessments are made, remediation obligations are probable, and the costs can be reasonably estimated.
Estimated liabilities of approximately $5.8 million at December 31, 2001 and $404,000 at December 31,

102

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

2002 are included within other liabilities. Due to uncertainties inherent in the estimation process, the
amounts accrued for these matters may be revised in future periods as additional information is obtained.

Comprehensive income

Comprehensive income includes all changes in equity (net assets) during a period from non-owner

sources. The change in comprehensive income for all periods presented resulted from foreign currency
translation gains and losses, unrealized and realized gains and losses on investments, and unrealized losses
on cash Öow hedges.

Revenue recognition

Our net revenues result from fees associated with our transaction, third-party advertising, end-to-end

services, and oÉine services in our U.S., International and Payments segments. Transaction revenue is
derived primarily from listing, feature and Ñnal value fees paid by sellers and fees from payment processing
services. Revenue from third-party advertising is derived principally from the sale of online banner and
sponsorship advertisements for cash and through barter arrangements. End-to-end services revenue is
derived principally from contractual arrangements with third parties that provide transaction services to
eBay users. OÉine services revenue is derived from a variety of sources including seller commissions,
buyer premiums, bidder registration fees and auction-related services including appraisal and authentica-
tion, primarily related to our ButterÑelds and Kruse subsidiaries.

Listing and feature fee revenues are recognized ratably over the estimated period of the auction while

revenues related to Ñnal value fees are recognized at the time that the transaction is successfully
concluded. A transaction is considered successfully concluded when at least one buyer has bid above the
seller's speciÑed minimum price or reserve price, whichever is higher, at the end of the transaction term.
We earn transaction fees, allocated to our Payments segment, from processing transactions for certain
customers. Revenue resulting from a payment processing transaction is recognized once the transaction is
complete. Provisions for doubtful accounts, authorized credits and transaction losses are made at the time
of revenue recognition based upon our historical experience. The provision for doubtful accounts is
recorded as a charge to operating expense, while the provisions for authorized credits and transaction losses
are recognized as reductions of net revenues.

Our third-party advertising revenue is derived principally from the sale of online banner and

sponsorship advertisements for cash and through barter arrangements. To date, the duration of our banner
and sponsorship advertising contracts has ranged from one week to three years, but is generally one week
to three months. Advertising revenues on both banner and sponsorship contracts are recognized as
""impressions'' (i.e., the number of times that an advertisement appears in pages viewed by users of our
websites) are delivered or ratably over the term of the agreement where such agreements provide for
minimum monthly or quarterly advertising commitments or where such commitments are Ñxed throughout
the term. Barter transactions are valued based on amounts realized in similar cash transactions occurring
within six months prior to the date of the barter transaction. To the extent that signiÑcant delivery
obligations remain at the end of a period or collection of the resulting account receivable is not considered
probable, revenues are deferred until the obligation is satisÑed or the uncertainty is resolved. These
amounts are included in deferred revenue in our balance sheet. Third-party advertising revenues, including
barter transactions, totaled 3%, 11% and 5% of our consolidated net revenues for the years ended
December 31, 2000, 2001 and 2002, respectively. Revenue from barter arrangements totaled $2.5 million,
$10.4 million and $10.1 million for the years ended December 31, 2000, 2001 and 2002, respectively.

Third-party advertising revenues may be aÅected by the Ñnancial condition of our customers and by

the success of online promotions in general. Recently, the industry pricing of online advertisements has
deteriorated. Our third-party advertising revenue historically has been dependent on the performance of the

103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

sales force of AOL Time Warner, or AOL. Reduction in third-party advertising, whether due to softening
of the demand for online advertising in general or particular problems facing parties with whom we have
contractual arrangements, would adversely aÅect our operating results. Unlike our auction transaction
revenues, third-party advertising revenues are derived from a highly concentrated customer base. During
the years ended December 31, 2000 and 2001, third-party advertising revenues were attributable to
approximately 20 customers each year. During the year ended December 31, 2002, third-party advertising
revenues were derived from approximately 30 customers. Additionally, our advertising sales representative
agreement with AOL has not been extended or renewed and is scheduled to terminate on March 31, 2003,
with AOL to continue its electronic delivery of our online advertisements for a speciÑed wind-down period.
After March 31, 2003, we will be dependent on the eÅorts of our existing internal sales staÅ.

Our end-to-end services revenues are derived principally from contractual arrangements with third
parties that provide transaction services to eBay users. To date, the duration of our end-to-end services
contracts has ranged from one to three years. End-to-end services revenues are recognized as the
contracted services are delivered to end users. To the extent that signiÑcant obligations remain at the end
of a period or collection of the resulting receivable is not considered probable, revenues are deferred until
the obligation is satisÑed or the uncertainty is resolved. End-to-end services revenues were 7%, 4% and 2%
of our consolidated net revenues for the years ended December 31, 2000, 2001 and 2002, respectively.

Similar to our third-party advertising revenues, our end-to-end services revenues may be aÅected by
the Ñnancial condition of the parties with whom we have these relationships and by the success of online
services and promotions in general. Additionally, end-to-end services revenues are also concentrated among
a small customer base. End-to-end services revenues were derived from approximately 10 customers in
2000 and from approximately 20 customers in each of 2001 and 2002.

OÉine revenue represents seller commissions, buyer premiums, bidder registration fees, and auction-

related services including appraisal and authentication derived from the traditional auction services
provided by ButterÑelds and Kruse International. ButterÑelds auction revenues are derived primarily from
auction commissions and fees from the sale of property through the auction process. Revenues from seller
commissions and buyer premiums are recognized at the date the related auction is concluded. Service
revenues are derived from Ñnancial, appraisal and other related services and are recognized as such
services are rendered. During 2002, we sold our ButterÑelds and Kruse subsidiaries.

Website development costs

We expense costs related to the planning and post implementation phases of our website development

eÅorts. Direct costs incurred in the development phase are capitalized and amortized over the product's
estimated useful life of one to three years as charges to cost of net revenues. Costs associated with minor
enhancements and maintenance for the website are included in cost of net revenues in the accompanying
consolidated statement of income.

Advertising expense

We expense the costs of producing advertisements at the time production occurs, and expense the cost

of communicating advertising in the period during which the advertising space or airtime is used. Internet
advertising expenses are recognized based on the terms of the individual agreements, which is generally
over the greater of the ratio of the number of impressions delivered over the total number of contracted
impressions, or on a straight-line basis over the term of the contract. Advertising expenses totaled
$85.4 million, $127.1 million, and $181.8 million during the years ended December 31, 2000, 2001, and
2002, respectively.

104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

Stock-based compensation

Generally accepted accounting principles provide companies with the option of either recognizing the

fair value of option grants as an operating expense or disclosing the impact of fair value accounting in a
note to the Ñnancial statements. Consistent with predominant industry practice, we account for stock-based
employee compensation arrangements using the intrinsic value method, which calculates compensation
expense based on the diÅerence, if any, on the date of the grant, between the fair value of our stock and
the exercise price and have elected to disclose the impact of fair value accounting for option grants. Had
we elected to recognize the fair value of option grants as an operating expense, our reported net income
would have been substantially reduced, as follows (in thousands, except per share amounts):

Year Ended December 31,

2000

2001

2002

Net income, as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$

48,294

$

90,448

$ 249,891

Add: Amortization of stock-based compensation expense

determined under the intrinsic value method ÏÏÏÏÏÏÏÏÏÏÏÏÏ

7,141

3,091

5,953

Deduct: Total stock-based compensation expense determined

under fair value based method for all awards, net of tax ÏÏÏÏ

(169,656)

(211,526)

(192,902)

Pro forma net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$(114,221)

$(117,987)

$

62,942

Earnings (loss) per share:

Basic Ì as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Diluted Ì as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$

$

$

$

0.19

(0.45)

0.17

(0.45)

$

$

$

$

0.34

(0.44)

0.32

(0.44)

$

$

$

$

0.87

0.22

0.85

0.21

The 2000 and 2001 pro forma amounts have been adjusted to reÖect the correction of previously

calculated pro forma option pricing and amortization amounts. These adjustments are limited to the
footnote disclosure of non-cash SFAS No. 123, ""Accounting for Stock-Based Compensation'' pro forma
expense and do not result in any changes or impact to our historically reported statements of income or
cash Öows. The previously reported diluted pro forma net loss per share was $(0.36) and $(0.05) for the
years ended December 31, 2000 and 2001, respectively.

We account for stock-based arrangements issued to non-employees using the fair value based method,

which calculates compensation expense based on the fair value of the stock granted using the Black-
Scholes option pricing model at the date of grant.

Income taxes

We account for income taxes using an asset and liability approach, which requires the recognition of

taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in our Ñnancial statements or tax returns. The
measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws;
the eÅects of future changes in tax laws or rates are not anticipated. If necessary, the measurement of
deferred tax assets is reduced by the amount of any tax beneÑts that are not expected to be realized based
on available evidence.

105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

Recent accounting pronouncements

Accounting for Costs Associated with Exit or Disposal Activities

In June 2002, the Financial Accounting Standards Board or FASB issued Statement of Financial
Accounting Standards No. 146 or SFAS No. 146, ""Accounting for Costs Associated with Exit or Disposal
Activities,'' which nulliÑes Emerging Issues Task Force, or EITF Issue No. 94-3, ""Liability Recognition
for Certain Employee Termination BeneÑts and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring).'' SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred and states that an entity's commitment to an
exit plan, by itself, does not create a present obligation that meets the deÑnition of a liability. SFAS
No. 146 also establishes that fair value is the objective for initial measurement of the liability. The
provisions of SFAS No. 146 are eÅective for exit or disposal activities initiated after December 31, 2002.
We do not expect the adoption of SFAS No. 146 to have a material impact upon our Ñnancial position,
cash Öows or results of operations.

Guarantor's Accounting and Disclosure Requirements for Guarantees

In November 2002, the FASB issued FASB Interpretation No. 45 or FIN 45, ""Guarantor's

Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others.'' FIN 45 requires a guarantor to recognize a liability for obligations it has undertaken in relation
to the issuance of a guarantee. It requires that the liability be recorded at fair value on the date that the
guarantee is issued. It also requires a guarantor to provide additional disclosures regarding guarantees,
including the nature of the guarantee, the maximum potential amount of future payments under the
guarantee, the carrying amount of the liability, if any, for the guarantor's obligations under the guarantee,
and the nature and extent of any recourse provisions or available collateral that would enable the guarantor
to recover the amounts paid under the guarantee. The disclosure requirements under FIN 45 are eÅective
for the interim and annual periods ending after December 15, 2002. The recognition and measurement
provisions under FIN 45 are eÅective for guarantees issued or modiÑed after December 31, 2002. We do
not expect the adoption of FIN 45 to have a material impact upon our Ñnancial position, cash Öows or
results of operations. See ""Note 11 Ì Commitments and Contingencies.''

Accounting for Stock Based Compensation

In December 2002, the FASB issued SFAS No. 148, ""Accounting for Stock Based Compensation Ì

Transition and Disclosure.'' SFAS 148 provides two additional transition methods for entities that
voluntarily adopt the fair value method of recording expenses when accounting for stock based
compensation. Further, the statement requires disclosure of comparable information for all companies
regardless of whether, when, or how an entity adopts the preferable, fair value based method of accounting.
These disclosures are now required for interim periods in addition to the traditional annual disclosure. The
amendments to SFAS No. 123, which provides for additional transition methods, are eÅective for periods
beginning after December 15, 2002. The disclosure provisions are eÅective for Ñscal years ending after
December 15, 2002 and have been incorporated into the notes to the accompanying Ñnancial statements.
We have chosen not to voluntarily adopt the fair value method of accounting for employee stock option
grants at this time.

Consolidation of Variable Interest Entities

In January 2003, the FASB issued FIN 46, ""Consolidation of Variable Interest Entities.'' This
interpretation of Accounting Research Bulletin No. 51, ""Consolidated Financial Statements,'' addresses
consolidation by business enterprises of certain variable interest entities where there is a controlling
Ñnancial interest in a variable interest entity or where the variable interest entity does not have suÇcient

106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

equity at risk to Ñnance its activities without additional subordinated Ñnancial support from other parties.
This interpretation applies immediately to variable interest entities created after January 31, 2003 and
applies in the Ñrst year or interim period beginning after June 15, 2003 to variable interest entities in
which an enterprise holds a variable interest that it acquired before February 1, 2003. We expect that the
adoption of FIN 46 will require us to include our San Jose facilities lease arrangement and potentially
certain investments in our Consolidated Financial Statements eÅective July 1, 2003. In connection with
our San Jose facilities lease arrangement, our balance sheet following the July 1, 2003 adoption of FIN 46
will reÖect changes to record assets of $126.4 million, liabilities of $122.5 million and non-controlling
interests of $3.9 million. In addition, our post-adoption income statement will reÖect the reclassiÑcation of
rent expense payments from operating expenses to interest expense as well as the recognition of
depreciation expense, within operating expenses, for our use of the buildings. We estimate that the income
statement impact of consolidating our San Jose facilities lease will consist of a charge against earnings, net
of taxes, of $5.6 million upon the adoption of FIN 46 on July 1, 2003. This charge will reÖect the
accumulated depreciation charges that would have been recorded in previous periods had consolidation of
the San Jose facilities been required. Additionally, we have not decided whether we will keep the existing
Ñnancing arrangement or purchase the San Jose facilities. Whether or not we keep the existing Ñnancing
arrangement, we anticipate recording additional annual operating expenses of $1.7 million, net of taxes, for
the recognition of depreciation expense on the buildings. In the event we purchase the San Jose facilities,
we will also pay $126.4 million, eliminate Ñnancing payments and settle our two interest rate swaps we
used to establish a Ñxed rate of interest for $95 million of our Ñnancing arrangement. During the year
ended December 31, 2002, our Ñnancing payments related to the San Jose facilities totaled $7.9 million.
At December 31, 2002, settlement of our two interest rate swaps would have resulted in a loss of
$10.9 million.

Note 2 Ì Net Income Per Share:

Basic net income per share is computed by dividing the net income for the period by the weighted

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

107

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

The following table sets forth the computation of basic and diluted net income per share for the

periods indicated (in thousands, except per share amounts):

Year Ended December 31,

2000

2001

2002

Numerator:

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 48,294

$ 90,448

$249,891

Denominator:

Weighted average common sharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

266,826

272,567

287,680

Weighted average restricted common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(15,050)

(3,596)

(184)

Denominator for basic calculation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average eÅect of dilutive securities:

251,776

268,971

287,496

WarrantsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Weighted average restricted common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Employee stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

93

15,050

13,427

Ì

3,596

8,028

Ì

184

5,140

Denominator for diluted calculation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

280,346

280,595

292,820

Net income per share:

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$

$

0.19

0.17

$

$

0.34

0.32

$

$

0.87

0.85

Note 3 Ì Business Combinations, Goodwill and Intangible Assets

During 2001 and 2002, we completed a number of purchase acquisitions that are summarized as

follows (in thousands):

Company Name

Acquisition
Date

Post
Acquisition
Ownership

Net
Tangible
Assets

IdentiÑable Deferred
Intangible
Assets

Tax

Unearned

Liabilities Compensation

Minority
Interest

Aggregate
Purchase
Price

$(33,834) $ 121,927
125,586
Ì
43,541
Ì
30,000
Ì
Ì
11,305
Ì 1,492,504

Goodwill

$

82,691
119,606
35,848
19,253
9,760
1,135,554

Internet Auction ÏÏ February 2001
iBazar ÏÏÏÏÏÏÏÏÏÏ May 2001
January 2002
Billpoint ÏÏÏÏÏÏÏÏ
EachNet ÏÏÏÏÏÏÏÏ March 2002
NeoComÏÏÏÏÏÏÏÏ April 2002
PayPal ÏÏÏÏÏÏÏÏÏ October 2002
eBay Australia
and New
Zealand ÏÏÏÏÏÏ October 2002

50.1% $ 67,670
4,696
100%
6,643
100%
9,379
38%
1,446
100%
104,965
100%

$

9,000
2,140
1,750
2,280
165
277,000

$ (3,600)
(856)
(700)
(912)
(66)
(34,958)

$ Ì
Ì
Ì
Ì
Ì
9,943

100%

444

4,650

(1,860)

Ì

62,266

Ì

65,500

Total ÏÏÏÏÏÏÏÏÏÏÏ

$195,243

$296,985

$(42,952)

$9,943

$1,464,978

$(33,834) $1,890,363

Tangible net assets were valued at their respective carrying amounts as we believe that these amounts

approximated their current fair values at the respective acquisition dates. The valuation of identiÑable
intangible assets acquired was based on management's estimates using a valuation report prepared by an
independent third-party valuation consultant. Such assets consist of developed technologies, customer lists,
trade names and other acquired intangible assets including contractual agreements. IdentiÑable intangible
assets are amortized using the straight-line method over the estimated useful lives of three years to seven
years. We believe the straight-line method of amortization best represents the distribution of the economic

108

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

value of the identiÑable intangible assets. Goodwill represents the excess of the purchase price over the fair
value of the net tangible and identiÑable intangible assets acquired in each business combination. In
accordance with SFAS No. 142, goodwill is no longer subject to amortization. Rather, goodwill is subject
to at least an annual assessment for impairment, applying a fair-value based test. See ""Note 1 Ì The
Company and Summary of SigniÑcant Accounting Policies.''

We account for our investment in EachNet using the equity method of accounting and the total
investment, including identiÑable intangible assets, deferred tax liabilities and goodwill, is classiÑed on our
balance sheet as a long-term investment.

The following table presents details of the purchased intangible assets acquired during 2002 (in

thousands, except number of years):

Company Name

Acquisition
Date

Developed
Technologies

Estimated
Useful Life
(in years)

Billpoint ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
January 2002
EachNet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March 2002
NeoCom ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ April 2002
PayPal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ October 2002
eBay Australia and New Zealand ÏÏÏÏ October 2002

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 1,750
228
78
16,500
Ì

$18,556

3
2
2
3
Ì

Customer
Lists

$

Ì
266
87
196,900
4,650

$201,903

Estimated
Useful Life
(in years)

Ì
4
4
7
4

Trade
Names

$ Ì
1,786
Ì
63,600
Ì

$65,386

Estimated
Useful Life
(in years)

Ì
4
Ì
7
Ì

Billpoint

On May 25, 1999, eBay acquired a 100% interest in Billpoint, Inc. a leading provider of billing and

payment fulÑllment services. On February 24, 2000, Billpoint reincorporated in Delaware and sold 350
shares of common stock and 1,399,965 shares of Series A preferred stock to Wells Fargo Bank, which
represented an approximately 35% ownership interest in Billpoint. Simultaneously, we exchanged
25,999,350 of Billpoint's common shares for 2,599,935 shares of Series A preferred stock. The merger was
accounted for as a pooling of interests.

In January 2002, we acquired the 35% minority interest in Billpoint held by Wells Fargo Bank in a

purchase acquisition for approximately $43.5 million in cash.

In October 2002, we acquired PayPal, Inc. The combined operations of PayPal and Billpoint form our
Payments segment. We will be phasing out Billpoint operations during the Ñrst half of 2003 and we expect
the goodwill and identiÑable intangible assets related to the acquisition of the 35% minority interest to
continue to beneÑt the ongoing operations.

eBay Japan

On February 17, 2000, eBay Japan Inc., a wholly owned subsidiary of eBay, entered into a

shareholder and marketing services agreement with NEC Corporation. In accordance with the shareholder
agreement, NEC acquired 30% of eBay Japan and provided marketing services to eBay Japan in an eÅort
to deliver a minimum level of conÑrmed registered users. As compensation for the marketing and other
services performed by NEC, eBay Japan paid NEC an annual up-front fee of approximately $1.5 million.
On July 18, 2001, eBay purchased the outstanding 30% interest in eBay Japan held by NEC for
approximately $1.7 million. In March 2002, eBay Japan ceased business operations.

Half.com

On July 11, 2000, we acquired a 100% interest in Half.com, Inc. Half.com was incorporated in
Pennsylvania in June 1999 and provides a Ñxed-price, online e-commerce site that allows people to buy

109

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

and sell new and previously owned goods at discounted prices. In connection with the merger, we issued,
or reserved for issuance, a total of approximately 5,484,000 shares of eBay common stock to Half.com's
existing shareholders, option holders and warrant holders as consideration for all shares of capital stock,
options and warrants of Half.com held immediately prior to consummation of the merger. The merger was
accounted for as a pooling of interests.

Internet Auction Co., Ltd.

On February 15, 2001, we acquired an approximately 51% majority interest in Internet Auction Co.,

Ltd., a South Korean company in a purchase acquisition for $120.8 million in cash and incurred
$1.1 million of direct acquisition costs. Internet Auction introduced online trading in South Korea when it
launched in April 1998. Shares of Internet Auction are listed on the KOSDAQ. The transaction was
accounted for using the purchase method of accounting and accordingly, the results of operations of
Internet Auction have been included in our Consolidated Financial Statements since February 15, 2001.

iBazar S.A.

On May 18, 2001, we acquired a 100% interest in iBazar S.A.

iBazar is a French-based corporation

that introduced online trading in France and at the time of the acquisition had websites in Belgium, Brazil,
France, Italy, the Netherlands, Portugal, Spain and Sweden. As consideration for the acquisition, we
issued shares in a Belgian subsidiary exchangeable for 2,045,054 shares of eBay common stock valued at
$120.4 million, paid $2.3 million in cash to certain shareholders and incurred acquisition-related costs of
approximately $2.9 million. The shares issued in the acquisition were valued on May 18, 2001, the Ñrst
date on which the number of eBay's shares and the amount of other consideration became Ñxed, using the
average closing price of eBay shares for the Ñve days prior to and including the closing date of May 18,
2001. The transaction was accounted for using the purchase method of accounting and accordingly, the
results of operations of iBazar have been included in our Consolidated Financial Statements since May 18,
2001.

We have established plans to exit certain activities of iBazar and to involuntarily terminate certain
iBazar employees. In accordance with this exit plan included in our purchase accounting, approximately
$2.0 million has been accrued for the estimated costs associated with severance, contract terminations and
Ñnancial advisory and legal fees and has been included in net tangible assets. As of December 31, 2002,
we have utilized all of the $2.0 million liability. In addition, we are in the process of resolving various
income tax related contingencies that could result in an increase in goodwill to the extent that an
unfavorable outcome is reached.

In September 2001, we entered into a strategic business relationship with MercadoLibre, a leading

online auction site serving Latin America. In exchange for our equity interest in iBazar Com Ltda, a
Brazilian subsidiary of iBazar, we received a 19.5% ownership interest in MercadoLibre. We accounted for
this investment in MercadoLibre using the cost method, and no gain or loss was recognized on the
exchange.

NeoCom Technology Co., Ltd. Acquisition

In April 2002, we acquired a 100% interest in NeoCom Technology Co., Ltd. in a purchase

acquisition for $11.1 million cash and incurred direct acquisition costs of $198,000. NeoCom provides an
online Chinese language marketplace for the trading of goods and services in Taiwan. The results of
operations of NeoCom have been included in our Consolidated Financial Statements since April 2002.

110

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

EachNet, Inc. Equity Investment

On March 17, 2002, we acquired a 38% interest in the outstanding common stock of EachNet, Inc.,

which is a 33% interest on a fully diluted basis, in a purchase acquisition for $30.0 million in cash.
EachNet provides an online marketplace for the trading of goods and services for both individual and
business customers in the People's Republic of China.

We account for our investment in EachNet using the equity method of accounting and the total
investment, including identiÑable intangible assets, deferred tax liabilities and goodwill, is classiÑed on our
balance sheet as a long-term investment. In periods subsequent to the acquisition, our consolidated
Ñnancial results include 38% of the net income or loss of EachNet together with amortization expense
relating to acquired intangible assets.

PayPal, Inc. Merger

On October 3, 2002, we acquired a 100% interest in PayPal, Inc. in a tax-free, stock-for-stock

transaction. PayPal provides a global payments platform and is headquartered in Mountain View,
California. We acquired PayPal to provide a signiÑcantly improved customer experience to eBay's users by
making their trading experience easier, safer, and faster. The PayPal Ñnancial statements are included in
our Consolidated Financial Statements for the post-acquisition period from October 4, 2002 through
December 31, 2002.

The purchase price reÖects the issuance of approximately 23,825,000 shares of our common stock to

PayPal stockholders using a Ñxed exchange ratio of 0.39 shares of our common stock for each PayPal
share of common stock outstanding on October 3, 2002. In addition, we assumed PayPal's outstanding
stock options. The fair value of the shares of our common stock issued and PayPal options assumed is
based on a per share value of $57.92, which is equal to our weighted average closing share price for the
Ñve trading days surrounding the July 8, 2002 acquisition announcement date. Total purchase price is
comprised of the following (in thousands):

Fair value of eBay common stock issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fair value of PayPal stock options assumed by eBay ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Estimated acquisition related costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,379,944
96,560
16,000

Aggregate purchase price ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,492,504

The acquisition related costs consist primarily of investment banking fees, legal and accounting fees,

printing costs, and other direct costs of the acquisition.

The intrinsic value of PayPal's unvested common stock options and restricted stock subject to
repurchase assumed in the merger totaled $9.9 million as of October 3, 2002 and was recorded as
unearned stock-based compensation. For purposes of purchase price allocation, PayPal's outstanding
options that vested solely as a result of the proposed merger were deemed to be vested as of the
October 3, 2002 acquisition date. The unearned stock-based compensation relating to the unvested options
and the restricted stock subject to repurchase will be amortized on an accelerated basis over the remaining
vesting period of less than one year to three years, consistent with the graded vesting approach described in
FASB Interpretation No. 28.

In connection with the acquisition of PayPal, management is in the process of formalizing an

integration plan to exit certain activities of both eBay and PayPal. Preliminary plans include the
elimination of redundant contracts, phase-out of eBay Payments by BillPoint, discontinuance of PayPal's
online gambling payment processing and other eÅorts aimed at achieving operational synergies. We expect
to Ñnalize the adoption of a formal integration plan after our assessment is complete, likely in the second

111

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

quarter of 2003. During the fourth quarter of 2002, we discontinued PayPal's online gaming payment
processing. During the year ended December 31, 2002, revenues generated from PayPal's online gambling
payment processing, including revenues generated prior to our acquisition of PayPal on October 3, 2002,
represented 6% of PayPal's total revenues for 2002. Included in the PayPal purchase price allocation as of
December 31, 2002 is $38.5 million of acquisition related accrued expenses related primarily to the
elimination of redundant contracts. Additional costs related to the integration plan will be accounted for as
charges to our income statement or adjustment to the purchase price allocation in accordance with
SFAS No. 146, ""Accounting for Costs Associated with Exit or Disposal Activities'' and EITF Issue
Number 95-3, ""Recognition of Liabilities in Connection with a Business Combination.''

Acquisition of Remaining Equity Interest in eBay Australia & New Zealand Pty Ltd.

In October 2002, we acquired the remaining 50% interest in our eBay Australia & New Zealand joint

venture held by ecorp Limited in a purchase acquisition for approximately $65.5 million in cash. This
acquisition increased our ownership of this entity to 100%. The results of operations of eBay Australia and
New Zealand have been included in our Consolidated Financial Statements since October 2002.

Sale of ButterÑelds, Kruse and Certain Real Estate Properties

During 2002 we sold our ButterÑelds and Kruse subsidiaries as well as several real estate properties

we acquired as a result of our 1999 acquisition of ButterÑelds. During the year ended December 31, 2002,
we recognized an aggregate gain of $17.1 million, which is reported in other income.

Pro forma Ñnancial information

The following unaudited pro forma Ñnancial information presents the combined results of eBay,
Internet Auction, iBazar, and PayPal as if the acquisitions had occurred as of the beginning of 2001 and
2002, respectively, after applying certain adjustments, including amortization of goodwill and other
acquisition related transactions (in thousands except per share amounts):

Year ended
December 31,

2001

2002

(unaudited)

Net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$857,290

$1,377,771

Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$(62,007)

$ 231,316

Net income (loss) per share:

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$

(0.21)

Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ (0.21)

$

$

0.76

0.74

The pro forma Ñnancial information does not necessarily reÖect the results of operations that would

have occurred had eBay, Internet Auction, iBazar, and PayPal constituted a consolidated entity during
such periods. See ""Note 1 Ì The Company and Summary of SigniÑcant Accounting Policies, Recent
Accounting Pronouncements.''

112

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

Goodwill and Intangible Assets

Goodwill information for each reportable segment is as follows (in thousands):

December 31,
2001

Goodwill
Acquired

Goodwill
Disposed of

Adjustments

December 31,
2002

Segments:

U.S. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 14,915

$ 107,810

$(3,241)

$ (835)

$ 118,649

InternationalÏÏÏÏÏÏÏÏÏÏÏÏ

172,914

93,005

Payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ì

1,061,867

Ì

Ì

28,842

294,761

Ì

1,061,867

$187,829

$1,262,682

$(3,241)

$28,007

$1,475,277

The increase in goodwill during the year ended December 31, 2002, resulted from business

acquisitions and from foreign currency translation adjustments relating to goodwill associated with prior
period acquisitions, partially oÅset by the disposal of goodwill in connection with the sale of our
ButterÑelds and Kruse subsidiaries. Goodwill of $1.1 billion resulted from our acquisition of PayPal,
$62.3 million resulted from our acquisition of the remaining 50% interest in eBay Australia and New
Zealand, $35.8 million resulted from our acquisition of the remaining 35% minority interest in Billpoint,
$19.3 million resulted from our acquisition of a 38% interest in EachNet, and $9.8 million resulted from
our acquisition of NeoCom. Foreign currency translation adjustments are included in the adjustments
column.

We account for our investment in EachNet using the equity method of accounting and the total
investment, including identiÑable intangible assets, deferred tax liabilities and goodwill, is classiÑed on our
balance sheet as a long-term investment. As of December 31, 2002, the goodwill related to our acquisition
of EachNet totaled $19.3 million.

The following table summarizes the pro forma impact of excluding goodwill amortization from our

operating results (in thousands, except per share amounts):

Year Ended

Year Ended

December 31, 2000 December 31, 2001

Net income as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Add: Goodwill amortization expense ÏÏÏÏÏÏÏÏÏÏÏÏ

Net income, pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Basic net income per share:

As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Diluted net income per share:

As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$48,294

620

$48,914

$

$

$

$

0.19

0.19

0.17

0.17

$ 90,448

32,586

$123,034

$

$

$

$

0.34

0.46

0.32

0.44

113

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

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

eBay Inc.

December 31, 2001

December 31, 2002

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Intangible assets:

Developed

technologies ÏÏÏÏÏ

$ 9,076

$(3,643)

$ 5,433

$ 27,825

$ (8,353)

$ 19,472

Customer listsÏÏÏÏÏÏ

Trademarks ÏÏÏÏÏÏÏÏ

All other ÏÏÏÏÏÏÏÏÏÏ

6,525

1,390

973

(2,306)

(350)

(855)

4,219

1,040

118

208,811

65,140

733

(10,723)

198,088

(3,235)

61,905

(733)

Ì

$17,964

$(7,154)

$10,810

$302,509

$(23,044)

$279,465

All of our acquired identiÑable intangible assets are subject to amortization. Acquired identiÑable
intangible assets are comprised of developed technologies, customer lists, trademarks, and other acquired
intangible assets including contractual agreements. Developed technologies are being amortized over a
weighted average period of approximately three years. Customer lists are being amortized over a weighted
average period of approximately seven years. Trademarks are being amortized over a weighted average
period of approximately seven years. No signiÑcant residual value is estimated for the intangible assets.
Aggregate amortization expense for intangible assets totaled $4.0 million and $16.3 million for the years
ended December 31, 2001 and 2002, respectively.

As of December 31, 2002, expected future intangible asset amortization expense is as follows (in

thousands):

Fiscal Years:

2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 47,555

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

47,052

43,844

38,297

37,212

65,505

$279,465

Note 4 Ì Segment Information:

Segment selection is based upon our internal organization structure, the manner in which our

operations are managed, the measurement of the performance of our operations evaluated by management
in the chief operating decision-maker capacity, the availability of separate Ñnancial information, and overall
materiality considerations.

During the fourth quarter of 2002, the growth of our international operations and our acquisition of
PayPal prompted us to change the basis for measuring our Ñnancial performance and evaluating resource
allocations, and therefore our reportable segments. We changed our business segments from Online and
OÉine services to U.S., International, and Payments operations. This new segment structure reÖects the
new composition of our business. Additionally, we changed the internal measurement basis of segment
performance from operating income before certain items to a direct contribution measure of proÑtability.

114

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

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

The U.S. segment comprises U.S. online trading platforms other than PayPal and Billpoint. The

International segment comprises our international online trading platforms. The Payments segment
comprises our global payments platform consisting of our PayPal and Billpoint subsidiaries. The Payments
amounts reÖect Billpoint's historical operations and PayPal's operations for the post-acquisition period from
October 4, 2002 through December 31, 2002. We have previously announced that we intend to discontinue
Billpoint's operations in the Ñrst half of 2003. Billpoint's operations will continue to be reÖected in the
Payments segment results until the wind-down of Billpoint's operations.

The following tables illustrate the Ñnancial performance of our new reporting segments. Additionally,

we have presented our current period Ñnancial performance on a reporting segment basis consistent with
our old reporting segments for purposes of comparison during this transition period (in thousands):

Year Ended December 31, 2000

U.S.

International

Payments

Consolidated

Net revenues from external customersÏÏÏÏÏ

$397,407

Direct costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

179,635

Direct contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

217,772

$28,978

21,747

7,231

$5,039

4,044

995

Operating expenses and indirect costs of

sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Interest and other income and expense, net

Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Impairment of certain equity investments ÏÏ

Income before income taxes and minority

interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$431,424

205,426

225,998

191,004

34,994

46,337

(3,374)

Ì

$ 77,957

Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,122,014

$22,762

$37,627

$1,182,403

December 31, 2000

U.S.

International

Payments

Consolidated

115

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

Year Ended December 31, 2001

U.S.

International

Payments

Consolidated

Net revenues from external customersÏÏÏÏÏ

$617,011

$114,162

Direct costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

246,664

Direct contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

370,347

63,964

50,198

$17,648

18,640

$748,821

329,268

(992)

419,553

Operating expenses and indirect costs of

sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Interest and other income and expense, net

Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Impairment of certain equity investments ÏÏ

Income before income taxes and minority

interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

279,127

140,426

41,613

(2,851)

(16,245)

$162,943

December 31, 2001

U.S.

International

Payments

Consolidated

Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,321,347

$322,561

$34,621

$1,678,529

Net revenues from external customers

$ 816,596

$302,136

$

95,368

$1,214,100

Year Ended December 31, 2002

U.S.

International Payments Consolidated

Direct costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

300,659

123,784

Direct contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

515,937

178,352

68,107

27,261

Operating expenses and indirect costs

of salesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income from operationsÏÏÏÏÏÏÏÏÏÏÏ

Interest and other income and expense,
net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Impairment of certain equity

investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income before income taxes and

minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

492,550

721,550

367,353

354,197

49,209

(1,492)

(3,781)

$ 398,133

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,858,235

$583,252

$1,682,957

$4,124,444

December 31, 2002

U.S.

International Payments Consolidated

116

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

Three Months Ended March 31,

2001

2002

U.S.

International Payments Consolidated

U.S.

International Payments Consolidated

(Unaudited)

Net revenues from

external customers
Direct costsÏÏÏÏÏÏÏÏÏ

$ 133,636
55,479

$ 17,904
11,774

$ 2,550
3,003

$ 154,090
70,256

$ 187,768
69,153

$ 52,551
23,954

$ 4,787
5,413

$ 245,106
98,520

Direct contribution

78,157

6,130

(453)

83,834

118,615

28,597

(626)

146,586

Operating expenses
and indirect costs
of sales ÏÏÏÏÏÏÏÏÏÏ

Income from

operations ÏÏÏÏÏÏ

Interest and other
income and
expense, net ÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏ
Impairment of certain
equity investments

Income before income
taxes and minority
interest ÏÏÏÏÏÏÏÏÏÏ

53,124

30,705

14,978

(712)

(9,921)

75,870

70,716

7,387
(685)

(1,181)

$

35,050

$

76,237

March 31, 2001

March 31, 2002

U.S.

International Payments Consolidated

U.S.

International Payments Consolidated

Total assets ÏÏÏÏÏÏÏÏÏ

$1,021,298

$198,426

$37,305

$1,257,029

$1,391,311

$361,956

$35,747

$1,789,014

Three Months Ended June 30,

2001

2002

U.S.

International Payments Consolidated

U.S.

International Payments Consolidated

(Unaudited)

Net revenues from

external customers
Direct costsÏÏÏÏÏÏÏÏÏ

$ 150,761
59,938

$ 25,936
13,706

$ 4,208
4,450

$ 180,905
78,094

$ 197,260
68,697

$ 64,309
29,632

$ 4,718
6,149

$ 266,287
104,478

Direct contribution

90,823

12,230

(242)

102,811

128,563

34,677

(1,431)

161,809

Operating expenses
and indirect costs
of sales ÏÏÏÏÏÏÏÏÏÏ

Income from

operations ÏÏÏÏÏÏ

Interest and other
income and
expense, net ÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏ
Impairment of certain
equity investments

Income before income
taxes and minority
interest ÏÏÏÏÏÏÏÏÏÏ

67,357

35,454

10,147
(959)

Ì

82,368

79,441

9,001
(698)

Ì

$

44,642

$

87,744

June 30, 2001

June 30, 2002

U.S.

International Payments Consolidated

U.S.

International Payments Consolidated

Total assets ÏÏÏÏÏÏÏÏÏ

$1,116,561

$323,222

$35,874

$1,475,657

$1,500,313

$436,709

$33,001

$1,970,023

117

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

Three Months Ended September 30,

2001

2002

U.S.

International Payments Consolidated

U.S.

International Payments Consolidated

(Unaudited)

$ 159,014
63,832
95,182

$ 30,231
16,662
13,569

$ 5,180
5,198
(18)

$ 194,425
85,692
108,733

$ 206,491
76,284
130,207

$ 76,194
31,754
44,440

$ 6,094
7,222
(1,128)

$ 288,779
115,260
173,519

76,084

32,649

9,302
(458)

(6,324)

83,402

90,117

8,729

(50)

(2,600)

$

35,169

$

96,196

Net revenues from

external customers
Direct costsÏÏÏÏÏÏÏÏÏ
Direct contribution

Operating expenses
and indirect costs
of sales ÏÏÏÏÏÏÏÏÏÏ
Income from

operations ÏÏÏÏÏÏ

Interest and other
income and
expense, net ÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏ
Impairment of certain
equity investments
Income before income
taxes and minority
interest ÏÏÏÏÏÏÏÏÏÏ

September 30, 2001

September 30, 2002

U.S.

International Payments Consolidated

U.S.

International Payments Consolidated

Total assets ÏÏÏÏÏÏÏÏÏ

$1,184,883

$327,321

$36,403

$1,548,607

$1,581,387

$467,782

$31,396

$2,080,565

Three Months Ended December 31,

2001

2002

U.S.

International Payments Consolidated

U.S.

International Payments Consolidated

(Unaudited)

Net revenues from

external customers
Direct costs ÏÏÏÏÏÏÏÏ

$ 173,600
67,415

$ 40,091
21,822

$ 5,710
5,990

$ 219,401
95,227

$ 225,078
86,526

$109,082
38,444

$

Direct contribution

106,185

18,269

(280)

124,174

138,552

70,638

79,768
49,323

30,445

$ 413,928
174,293

239,635

Operating expenses
and indirect costs
of salesÏÏÏÏÏÏÏÏÏÏ

Income from

operations ÏÏÏÏÏ

Interest and other
income and
expense, netÏÏÏÏÏÏ
Interest expense ÏÏÏÏ
Impairment of

certain equity
investments ÏÏÏÏÏÏ

Income before

income taxes and
minority interest ÏÏ

82,556

41,618

7,186
(722)

Ì

125,712

113,923

24,092

(59)

Ì

$

48,082

$ 137,956

December 31, 2001

December 31, 2002

U.S.

International Payments Consolidated

U.S.

International Payments Consolidated

Total assets ÏÏÏÏÏÏÏÏ

$1,321,347

$322,561

$34,621

$1,678,529

$1,858,235

$583,252

$1,682,957

$4,124,444

118

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

The following tables illustrate the Ñnancial performance of our old reporting segments for purposes of

comparison during this transition period (in thousands):

Year Ended December 31, 2000
Online

OÉine Consolidated

Net revenues from external customers ÏÏÏÏÏÏÏÏÏÏÏ

$ 391,952

$39,472

$431,424

Operating income (loss), as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income and expense, net ÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment of certain equity investmentsÏÏÏÏÏÏÏÏÏ
Amortization of certain non-cash items ÏÏÏÏÏÏÏÏÏÏ
Income before income taxes and minority interest

$

$

49,767
45,642
(1,071)

Ì
(11,464)
82,874

$(2,312)
695
(2,303)

Ì
(997)
$(4,917)

$ 47,455
46,337
(3,374)

Ì
(12,461)
$ 77,957

December 31, 2000

Online

OÉine Consolidated

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,084,909

$97,494

$1,182,403

Year Ended December 31, 2001
Online

OÉine Consolidated

Net revenues from external customers ÏÏÏÏÏÏÏÏÏÏÏ

$ 714,405

$34,416

$ 748,821

Operating income (loss), as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income and expense, net ÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment of certain equity investmentsÏÏÏÏÏÏÏÏÏ
Amortization of certain non-cash items ÏÏÏÏÏÏÏÏÏÏ
Income before income taxes and minority interest

$ 185,298
42,208
(1,686)
(16,245)
(41,772)

$ 167,803

$(2,759)
(595)
(1,165)

Ì
(341)
$(4,860)

$ 182,539
41,613
(2,851)
(16,245)
(42,113)
$ 162,943

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,588,913

$89,616

$1,678,529

December 31, 2001

Online

OÉine Consolidated

Year Ended December 31, 2002
Online

Consolidated

OÉine

Net revenues from external customers ÏÏÏÏÏÏÏÏÏÏ

$1,192,296

$ 21,804

$1,214,100

Operating income (loss), as adjusted ÏÏÏÏÏÏÏÏÏÏÏ
Interest and other income and expense, net ÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment of certain equity investmentsÏÏÏÏÏÏÏÏ
Amortization of certain non-cash items ÏÏÏÏÏÏÏÏÏ
Income before income taxes and minority interest

$ 384,065
38,977
(18)
(3,781)
(25,670)
$ 393,573

$ (4,158)
10,232
(1,474)
Ì
(40)
4,560

$

$ 379,907
49,209
(1,492)
(3,781)
(25,710)
$ 398,133

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$4,079,992

$44,452

$4,124,444

December 31, 2002

Online

OÉine Consolidated

119

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

United States net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$402,446
28,978

$634,659
114,162

$ 897,701
316,399

Net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$431,424

$748,821

$1,214,100

Year Ended December 31,

2000

2001

2002

United States long-lived assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International long-lived assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total long-lived assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Note 5 Ì Investments:

December 31,

2001

2002

$149,131
191,857

$340,988

$1,648,753
304,765

$1,953,518

At December 31, 2001 and 2002, short and long-term investments were classiÑed as available-for-sale

securities, except for restricted cash and investments, and are reported at fair value as follows (in
thousands):

Gross

December 31, 2001
Gross
Gross
Amortized Unrealized Unrealized
Gains

Losses

Cost

Estimated
Fair
Value

Short-term investments:

Municipal bonds and notes ÏÏÏÏÏÏÏÏÏÏÏ

$149,446

$ 724

$

Government securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Time deposits and other ÏÏÏÏÏÏÏÏÏÏÏÏÏ

10,700

38,584

Ì

Ì

(2)

(2)

Ì

$150,168

10,698

38,584

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$198,730

$ 724

$

(4)

$199,450

Long-term investments:

Restricted cash and investments ÏÏÏÏÏÏ

$129,181

$ 433

$ Ì

$129,614

Municipal bonds and notes ÏÏÏÏÏÏÏÏÏÏÏ

8,148

Government securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

251,132

Equity instrumentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

26,557

25

1,258

148

(2)

(268)

Ì

8,171

252,122

26,705

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$415,018

$1,864

$(270)

$416,612

120

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

Gross

December 31, 2002
Gross
Gross
Amortized Unrealized Unrealized
Gains

Losses

Cost

Estimated
Fair
Value

Short-term investments:

Municipal bonds and notes ÏÏÏÏÏÏÏÏÏÏÏ

$ 46,158

$ 157

$ Ì

$ 46,315

Government securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ì

Time deposits and other ÏÏÏÏÏÏÏÏÏÏÏÏÏ

43,299

Ì

152

Ì

(76)

Ì

43,375

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 89,457

$ 309

$ (76)

$ 89,690

Long-term investments:

Restricted cash and investments ÏÏÏÏÏÏ
Municipal bonds and notes ÏÏÏÏÏÏÏÏÏÏÏ

$133,541
388,535

Government securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Equity instrumentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

35,232

44,150

$1,103
2,320

281

Ì

$ Ì
Ì

(291)

Ì

$134,644
390,855

35,222

44,150

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$601,458

$3,704

$(291)

$604,871

The estimated fair value of short and long-term investments classiÑed by date of contractual maturity

at December 31, 2002 are as follows (in thousands):

December 31,
2002

Due within one year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 89,690

Due after one year through two years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Due after two years through three years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Due after three years through four years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Restricted cash and investments expiring in less than Ñve years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Equity investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

221,683

179,272

25,412

134,644

43,860

$694,561

During the year ended December 31, 2001, we recorded impairment charges totaling $16.2 million
relating primarily to the impairment in the fair value of certain private equity investments. We recorded
impairment charges for these investments based upon the deterioration of the Ñnancial condition of certain
investees and based upon Ñnancing obtained by certain other investees at a valuation below which we
made our investment.

During the year ended December 31, 2002, we recorded impairment charges totaling $3.8 million
relating to the impairment in the fair value of certain equity investments. We recorded an approximately
$640,000 impairment charge for an equity investment in a public company based upon a signiÑcant decline
in the market value of our investment during 2002, which we determined to be other than temporary. We
recorded $3.2 million in impairment charges for certain private equity investments based upon the
deterioration of the Ñnancial condition of certain investees and as a result of Ñnancing obtained by certain
other investees at a valuation below which we made our investment.

121

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

Note 6 Ì Derivative Instruments:

We entered into two interest rate swaps on June 19, 2000 and July 20, 2000, with notional amounts of
$45 million and $50 million respectively, that allow eBay to receive Öoating rate receipts based on London
Interbank OÅered Rate, or LIBOR, in exchange for making Ñxed rate payments of approximately 7% of
the notional amount. These interest rate swaps eÅectively change the interest rate exposure on a portion of
the operating lease payments relating to eBay's corporate oÇce facilities from a Öoating rate to a Ñxed
rate. The fair value of the interest rate swaps as of December 31, 2002 was an unrealized loss of
$10.9 million and is recorded in accumulated other comprehensive loss on the balance sheet.

On January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133, as amended,

and the cumulative eÅect of this change in accounting method relating to the interest rate swaps was an
immaterial gain on net income and an unrealized loss, net of tax, of approximately $2.6 million on other
comprehensive income. During the year ended December 31, 2002, the derivative losses reclassiÑed into
rent expense were oÅset by decreases in rent expense relating to the operating lease. At December 31,
2002, we expect to reclassify $3.5 million of losses, net of tax, on the interest rate swaps from accumulated
other comprehensive income to rent expense during the next twelve months.

As of December 31, 2002, we had outstanding forward foreign exchange contracts with notional values

equivalent to approximately $69 million with maturity dates within 92 days. The forward contracts are
used as to oÅset changes in the value of assets and liabilities denominated in foreign currencies as a result
of currency Öuctuations. Transaction gains and losses on the contracts and the assets and liabilities are
recognized each period in our statement of income and generally are oÅsetting. As of December 31, 2002,
the fair values of the forward contracts were immaterial.

Note 7 Ì Balance Sheet Components:

December 31,

2001

2002

(in thousands)

Accounts receivable, net:

Accounts receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowance for authorized credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$130,727
(26,451)
(2,573)

$162,155
(27,731)
(2,971)

$101,703

$131,453

Write-oÅs against the allowance for doubtful accounts and authorized credits were $12.5 million,
$10.3 million, and $23.8 million in the years ended December 31, 2000, 2001 and 2002, respectively.

December 31,
2002
2001

(in thousands)

Other current assets:

Prepaid expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$27,735

$32,315

Restricted cash and investments, current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Deferred tax asset, current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

5,739

13,615

11,594

21,448

16,030

27,195

$58,683

$96,988

122

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

December 31,

2001

2002

(in thousands)

Property and equipment, net:

Computer equipment and software ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 163,137

$ 266,589

Land and buildings, including building improvementsÏÏÏÏÏÏÏÏÏÏ

60,725

Aviation equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Leasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Furniture and Ñxtures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Vehicles and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ì

12,348

15,891

11,930

31,926

30,473

18,916

19,345

12,540

Accumulated depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(121,682)

(161,761)

264,031

379,789

$ 142,349

$ 218,028

During the years ended December 31, 2000, 2001 and 2002, we capitalized $9.4 million, $6.7 million
and $15.5 million, respectively, for site-related software and development costs. Total depreciation expense
was $36.7 million in 2000, $41.8 million in 2001, and $60.7 million in 2002.

December 31,
2002

2001

(in thousands)

Accrued expenses:

Acquisition related accrued expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ Ì $ 40,475

Compensation and related beneÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Advertising ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Contractors and consultants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Professional fees ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

17,867

14,028

9,570

7,732

Other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

45,396

27,687

32,420

12,617

10,242

75,882

$94,593

$199,323

123

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

Note 8 Ì Debt:

Notes and capital leases payable

Notes and capital leases payable are as follows:

December 31,
2001

2002

(in thousands)

Mortgage notes, prime plus 1%, due September 30, 2002 ÏÏÏÏÏÏÏ

$

1,581

$ Ì

Mortgage notes, LIBOR plus 1.75%, due January 15, 2002 ÏÏÏÏÏÏ

Mortgage notes, 8.175%, due February 15, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Mortgage notes, 8.175% variable, due August 1, 2023 ÏÏÏÏÏÏÏÏÏÏ

Loan on foreclosed property, prime plus 2%, due August 9, 2015

Capital leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

3,271

11,731

9,300

489

1,747

Ì

Ì

9,300

Ì

8,644

SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

28,119

17,944

Less: Current portionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(16,111)

(4,145)

Long-term portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 12,008

$13,799

Notes payable consists of a $9.3 million mortgage note payable to a Ñnancial institution collateralized
by commercial real estate property. The mortgage note payable carries a variable interest rate, which was
8.175% at December 31, 2002 and is due in 2023. Capital leases consist of various leases that totaled
$8.6 million at December 31, 2002. During 2002, we reduced our notes payable obligations in connection
with the sale of several properties underlying the notes payable.

Minimum annual repayments on the note and capital leases at December 31, 2002, are as follows (in

thousands):

Year ending
December 31,

Total

2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 4,145

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2,513

1,478

616

Ì

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

9,192

$17,944

We also maintain a credit facility with $14.4 million available for equipment purchases and

$23.2 million available for standby letters of credit with a Ñnancial institution. The credit facility is due
August 6, 2005. No amounts were outstanding at December 31, 2002.

Note 9 Ì Operating Lease Arrangements:

On March 1, 2000, we entered into a Ñve-year lease for general oÇce facilities located in San Jose,
California. This Ñve-year lease is commonly referred to as a synthetic lease because it represents a form of
oÅ-balance sheet Ñnancing under which an unrelated third-party funds 100% of the costs of the acquisition
of the property and leases the asset to us as lessee. Under our lease structure, upon termination or

124

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

expiration, at our option, we must either purchase the property from the lessor for a predetermined amount
or sell the real property to a third-party. Our San Jose lease consists of approximately 460,000 square feet
of oÇce space. As of December 31, 2002, we occupied approximately 314,000 square feet of this total
oÇce space for our online businesses and subleased additional space in the facility to third parties.

Payments under our lease are based on the $126.4 million cost of the property funded by the third-
party and are adjusted as the London Interbank OÅered Rate, or LIBOR, Öuctuates. Under the terms of
the lease agreement, the lease terminates on March 1, 2005, unless extended to September 1, 2006. At any
time prior to the Ñnal 12 months of the lease term, we may, at our option, purchase the property for
approximately $126.4 million. If we elect not to purchase the property, we will undertake to sell the
facility to one or more third parties and have guaranteed to the lessor a residual value equal to
approximately 88% of the $126.4 million cost of this property. Our maximum exposure to loss is the entire
amount of $126.4 million if we default on any of certain lease obligations and Ñnancial covenants. If this
payment is made, we would then receive title to the property. At December 31, 2002, we had not made a
decision with respect to the option we will pursue at the end of the lease term. Management believes that
the contingent liability relating to the residual value guarantee will not have a material adverse eÅect on
our Ñnancial condition or results of operations.

In addition, we are required to place $126.4 million of cash and investment securities as collateral for

the term of the lease and to maintain certain Ñnancial covenants. The cash and investment securities are
restricted as to their withdrawal from a third-party trustee and are classiÑed as long-term restricted cash
and investments on our balance sheet. In the event of a default under the lease, the collateral could be
used to pay the purchase price of the property and the lease would be terminated. At December 31, 2002,
we were in compliance with our Ñnancial covenants under the lease.

If our lease were terminated, and we became obligated to pay the purchase price of the land and

buildings, we would show the cost as an asset on our balance sheet and our restricted cash and
investments position would be reduced by the amount of the purchase price. Currently, we reÖect rent
payments as operating expenses on our statement of income. In the event we were required to purchase
the land and buildings, our rent expense would cease and we would subsequently record depreciation
expense for the buildings over their estimated useful lives as operating expenses.

We entered into two interest rate swaps on June 19, 2000 and July 20, 2000 to reduce the impact of
changes in interest rates on a portion of the Öoating rate operating lease for our facilities. See ""Note 6 Ì
Derivative Instruments.''

In January 2003, the FASB issued FIN 46, ""Consolidation of Variable Interest Entities.'' This
interpretation of Accounting Research Bulletin No. 51, ""Consolidated Financial Statements,'' addresses
consolidation by business enterprises of certain variable interest entities where there is a controlling
Ñnancial interest in a variable interest entity or where the variable interest entity does not have suÇcient
equity at risk to Ñnance its activities without additional subordinated Ñnancial support from other parties.
This interpretation applies immediately to variable interest entities created after January 31, 2003 and
applies in the Ñrst year or interim period beginning after June 15, 2003 to variable interest entities in
which an enterprise holds a variable interest that it acquired before February 1, 2003. We expect that the
adoption of FIN 46 will require us to include our San Jose facilities lease arrangement and potentially
certain investments in our Consolidated Financial Statements eÅective July 1, 2003. In connection with
our San Jose facilities lease arrangement, our balance sheet following the July 1, 2003 adoption of FIN 46
will reÖect changes to record assets of $126.4 million, liabilities of $122.5 million and non-controlling
interests of $3.9 million. In addition, our post-adoption income statement will reÖect the reclassiÑcation of
rent expense payments from operating expenses to interest expense as well as the recognition of
depreciation expense, within operating expenses, for our use of the buildings. We estimate that the income
statement impact of consolidating our San Jose facilities lease will consist of a charge against earnings, net

125

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

of taxes, of $5.6 million upon the adoption of FIN 46 on July 1, 2003. This charge will reÖect the
accumulated depreciation charges that would have been recorded in previous periods had consolidation of
the San Jose facilities been required. We also expect the accounting change to result in a one-cent
decrease in net income per basic share in 2001 and 2002 and have no impact on diluted earnings per
share.

Our U.S. segment occupies approximately 434,000 square feet of commercial oÇce space in the
United States. We occupy 314,000 square feet of commercial oÇce space in San Jose, California under
the terms of our synthetic lease for our corporate headquarters. We own and occupy approximately 72,000
square feet of commercial oÇce space in Salt Lake City, Utah for our domestic customer support center.
We lease and occupy an additional 48,000 square feet of commercial oÇce space in various domestic
locations for the operations of certain U.S. subsidiaries.

Our International segment leases approximately 210,000 square feet of commercial oÇce space in 12

countries for our international operations, including the operations of our South Korean majority-owned
subsidiary.

Our Payments segment leases approximately 126,000 square feet of commercial oÇce space in the

United States and the United Kingdom. In addition, our Payments segment owns approximately 22 acres
of land near Omaha, Nebraska, on which a 115,000 square foot facility is under construction. Upon
completion, this facility will house the primary customer service operations center for our Payments
segment.

We also have lease obligations under certain other non-cancelable operating leases. Future minimum
rental payments under all non-cancelable operating leases, exclusive of the residual value guarantee on our
general oÇce facilities located in San Jose, California, at December 31, 2002, are as follows (in
thousands):

Year ending
December 31,

Operating
Leases

2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$16,410

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

17,056

2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

9,630

7,568

6,108

Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

19,909

Total minimum lease payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$76,681

Lease obligations related to our general oÇce facilities in San Jose, California are estimated based on
market interest rates (LIBOR) at December 31, 2002, adjusted to reÖect the two interest rate swaps and
certain collateral assumptions. Rent expense in the years ended December 31, 2000, 2001 and 2002,
totaled $4.8 million, $5.7 million, and $3.6 million, respectively.

Note 10 Ì Purchase and Sale of Properties or Property Interests:

From time to time and in the ordinary course of business, we elect to sell properties previously held

for lease, or purchase properties or property interests for future rental. In March 2001, our ButterÑelds
subsidiary sold its Chicago property for approximately $4.5 million in cash and recognized a gain of
$189,000. During 2002, we sold nine properties related to our ButterÑelds subsidiary for approximately
$21.8 million in cash and recognized gains of $10.6 million.

126

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

Note 11 Ì Commitments and Contingencies:

Litigation

On April 25, 2001, our European subsidiaries, eBay GmbH and eBay International AG, were sued by
Montres Rolex S.A. and certain Rolex aÇliates, or Rolex, in the regional court of Cologne, Germany. The
suit subsequently was transferred to the regional court in Dusseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolex's trademarks as a result of users selling counterfeit Rolex watches
through our German website. The suit also alleges unfair competition. Rolex sought an order forbidding
the sale of Rolex watches on the website as well as damages. In December 2002, a trial was held in the
matter and the court ruled in favor of eBay on all causes of action. Rolex has appealed the ruling, but the
appeal has not yet been briefed or heard.

On September 26, 2001, a complaint was Ñled by MercExchange LLC against us, our Half.com

subsidiary and ReturnBuy, Inc. in the Eastern District of Virginia (No. 2:01-CV-736) alleging
infringement of three patents (relating to online auction technology, multiple database searching and
electronic consignment systems) and seeking a permanent injunction and damages (including treble
damages for willful infringement). We answered the complaint, denying the allegations. In April 2002, we
Ñled four motions for summary judgment relating to the three patents in suit. The court denied three of
those motions and deferred ruling on the fourth motion. A ""Markman'' hearing was held in July 2002 to
deÑne certain disputed terms in the patents, and in October 2002 the court issued its claim construction
Ñndings. In October 2002, the court gave us leave to amend our answer to include a claim that
MercExchange committed fraud on the patent oÇce during the prosecution of one of the patents. On the
same date, the court granted in part our pending summary judgment motion, eÅectively invalidating the
patent related to online auction technology and rendering it unenforceable. In November 2002, we Ñled
two additional summary judgment motions regarding the patents. One motion was denied as moot; the
other was denied because the court found there were triable issues of fact. In February 2003, we Ñled an
additional summary judgment motion, which is still pending. Only two patents remain in the case at this
time. Trial is scheduled for April 22, 2003. We believe we have meritorious defenses and will defend
ourselves vigorously. However, even if successful, our defense against this action will be costly and could
divert our management's time. If the plaintiÅ were to prevail on any of its claims, we might be forced to
pay signiÑcant damages and licensing fees, modify our business practices or even be enjoined from
conducting a signiÑcant part of our U.S. business. Any such results could materially harm our business.
We are unable to determine what potential losses we may incur if this lawsuit were to have an unfavorable
outcome.

On September 6, 2002, a complaint was Ñled by First USA Bank, N.A. against PayPal in the District

of Delaware (No. 02-CV-1462) alleging infringement of two patents relating to assigning an alias to a
credit card so as to eliminate the need for the physical presence of the card in a transaction and seeking a
permanent injunction and damages. PayPal believes it has meritorious defenses and intends to defend itself
vigorously. However, even if successful, our defense against this action will be costly and could divert
management's time. If the plaintiÅ were to prevail on its claims, PayPal might be forced to pay signiÑcant
damages and licensing fees or modify its business practices. Any such result could materially harm our
business. We are unable to determine what potential losses we may incur if this suit were to have an
unfavorable outcome.

On August 16, 2002, Charles E. Hill & Associates, Inc., or Hill, Ñled a lawsuit in the U.S. District

Court for the Eastern District of Texas (No. 2:02-CV-186) alleging that we and 17 other companies,
primarily large retailers, infringed three patents owned by Hill generally relating to electronic catalog
systems and methods for transmitting and updating data at a remote computer. The suit seeks an
injunction against continuing infringement, unspeciÑed damages, including treble damages for willful
infringement, and interest, costs, expenses and fees. In January 2003, the court granted the collective

127

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

defendants' motion to transfer the case from the court where it was Ñled in Marshall, Texas to the Federal
District Court for the Southern District of Indiana. We believe that we have meritorious defenses and
intend to defend ourselves vigorously.

On February 20, 2002, PayPal was sued in California state court in a purported class action alleging

that its restriction of customer accounts and failure to promptly unrestrict legitimate accounts violates state
consumer protection law and is an unfair business practice and a breach of PayPal's User Agreement. This
action was reÑled with a diÅerent named plaintiÅ on June 6, 2002, and a related action was Ñled in the
U.S. District Court for the Northern District of California on the same day. On March 12, 2002, PayPal
was sued in the U.S. District Court for the Northern District of California in a purported class action
alleging that its restrictions of customer accounts and failure to promptly unrestrict legitimate accounts
violates federal and state consumer protection and unfair business practice law. The court has denied
PayPal's motion to compel individual arbitration as required by the PayPal User Agreement and has
invalidated that provision of the User Agreement. The two federal court actions have been consolidated
into a single case. PayPal is defending itself vigorously, but if it is unable to prevail in these lawsuits, it
may have to change its anti-fraud operations in a manner that will harm its business and pay substantial
damages. Even if its defense is successful, the litigation could damage PayPal's reputation, could require
signiÑcant management time, will be costly and could require changes to its customer service and
operations that could increase its costs and decrease the eÅectiveness of its anti-fraud program.

Three purported class action complaints were Ñled following announcement of the PayPal merger in

July 2002 in the court of Chancery in the State of Delaware in and for New Castle County by alleged
stockholders of PayPal. Two additional purported class action complaints were Ñled in the Superior Court
of the State of California, County of Santa Clara, by alleged PayPal stockholders. These complaints name
as defendants PayPal and each member of its board of directors as well as eBay. The complaints are
purported class actions that allege, among other things, that eBay controlled PayPal prior to the execution
of their merger agreement, the defendants breached Ñduciary duties they assertedly owed to PayPal's
stockholders in connection with PayPal entering into the merger agreement and the exchange ratio in the
merger is unfair and inadequate. The plaintiÅs seek, among other things, an award of unspeciÑed
compensatory damages. We believe that each of the lawsuits was without merit and intend to defend
ourselves vigorously.

Other third parties have from time to time claimed, and others may claim in the future that we have

infringed their past, current or future intellectual property rights. We have in the past been forced to
litigate such claims. We may become more vulnerable to such claims as laws such as the Digital
Millennium Copyright Act and Communications Decency Act are interpreted by the courts and as we
expand into jurisdictions where the underlying laws with respect to the potential liability of online
intermediaries like ourselves is less favorable. We expect that we will increasingly be subject to copyright
and trademark infringement claims as the geographical reach of our services expands. We also expect that
we will increasingly be subject to patent infringement claims as our services expand. In particular, we
expect that patent infringement claims involving various aspects of our Payments business will continue to
be made. We have been notiÑed of several potential disputes and are subject to a suit by Tumbleweed
Communications Corporation that is currently ongoing. These claims, whether meritorious or not, could be
time-consuming, result in costly litigation, cause service upgrade delays, require expensive changes in our
methods of doing business or could require us to enter into costly royalty or licensing agreements, if
available. As a result, these claims could harm our business.

Capital Expenditures

In June 2002, we entered into an agreement to purchase computer equipment, software and related

services to expand our data warehousing capabilities. Under the agreement we are obligated to pay a

128

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

minimum of $16.0 million to a third-party vendor during a 30-month period ending in December 2004.
Minimum purchases under the commitment total $7.2 million during 2002, $4.5 million in 2003, and
$4.3 million in 2004. During the year ended December 31, 2002, we purchased $8.6 million under this
contract.

In December 2002, we entered into an agreement to purchase computer equipment, software and

related services to further expand our data warehousing capabilities. Under the agreement, we are
obligated to pay a minimum of $20.0 million to a third-party vendor during 2003. The commitment may
be comprised of a maximum of $5.4 million in services purchases and the remainder must consist of
equipment and software purchases. The agreement automatically renews for additional one-year periods
through 2005, if we do not cancel the agreement at the conclusion of each year. In addition, this vendor
amended an existing promotions agreement and has agreed to pay us $5.0 million in quarterly payments
for promotion of their auctions on eBay.com in 2003 and to spend an additional $666,000 in joint
promotions during the year. The promotions agreement, as amended, can be renewed with the mutual
agreement of both parties for additional one-year terms through 2005. Equipment, software and services
purchases will be expensed or capitalized in accordance with our capitalization policy. Promotions will be
recognized as transaction revenue over the period of delivery.

Advertising

AOL interactive marketing agreement

In April 2002, we amended our Interactive Marketing Agreement with AOL Time Warner, Inc., or

AOL. AOL attained certain performance goals in the contract year ending March 23, 2003, and extended
the amended agreement for an additional year, through March 23, 2004. Under the terms of the amended
agreement, we will pay AOL for its advertising services on a new user performance basis, up to a
maximum of $15 million. We are recognizing these fees as sales and marketing expense as such services
are provided. From time to time, we have also entered into incremental, discretionary purchases of
advertising from AOL. Discretionary purchases totaled $1.4 million during 2000, $8.5 million during 2001,
and $7.6 million during 2002.

In the event that AOL's advertising services during the year achieve certain speciÑed performance
goals, AOL has the right to extend the term of the amended agreement through March 23, 2005. Our
Ñnancial obligation for this renewal year, if any, will also be determined on a new user performance basis
and will amount to a maximum of $10.0 million.

Disney marketing agreement

In February 2000, we entered a four-year marketing agreement with The Walt Disney Company, or

Disney, to provide us with online and oÉine advertising and promotions and develop a co-branded version
of our online service. Subject to certain Disney performance obligations, we were obligated to pay a
minimum of $30 million to Disney over the four-year term of the agreement. In August 2001, we
amended the terms of the initial agreement and agreed to purchase a minimum of $23.0 million in online
and oÉine promotions through September 2004. We also committed to provide Disney with online
advertising on the eBay.com website valued at $3.5 million. Through December 31, 2002, we have
recognized $16.9 million in sales and marketing expense associated with the amended agreement.

Microsoft marketing and services agreements

During 2001, we entered into a series of marketing and services agreements with Microsoft that

obligate us to purchase online advertising promotions, software and related services through September
2003, totaling $8 million. In addition, Microsoft has agreed to purchase online advertising and other

129

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

services from us totaling $7 million over a three-year period ending June 2004. Through December 31,
2002, we have recognized $4.3 million in sales and marketing expenses for advertising services received,
incurred $3.0 million for Microsoft software products used to support our operations and recognized
$5.4 million in revenues for advertising services delivered to Microsoft.

Note 12 Ì Related Party Transactions:

We have entered into indemniÑcation agreements with each of our directors, executive oÇcers and

certain other oÇcers. These agreements require us to indemnify such individuals, to the fullest extent
permitted by Delaware law, for certain liabilities to which they may become subject as a result of their
aÇliation with us.

Commercial agreements

A member of our Board of Directors and the Audit and Compensation Committees of our Board of

Directors, is a general partner of certain venture capital funds that beneÑcially hold in the aggregate a
greater than 10% equity interest in several public and private companies. We engaged in the following
transactions with such companies:

In December 1999, we entered into an Internet marketing agreement with a privately held company
that facilitates buying decisions for consumers. Under this agreement, we paid fees approximating $4,000
in 2000, $503,000 in 2001, and none in 2002 for the promotion of eBay.

In April 2000, we entered into an advertising and promotions agreement with a privately held
company that provides a marketplace for live advice. Under this agreement, we recognized revenues of
approximately $4.1 million in 2000, $1.0 million in 2001, and $200,000 in 2002. In 1999, we invested
$2.0 million in capital stock of such company and received a warrant to purchase additional shares, which
if exercised would bring our total ownership to less than 5% of its capital stock.

In July 2000, we entered into an advertising and promotions agreement, which we subsequently

amended in December 1999 and April 2000, with a privately held company that provides a real estate
solution to home buyers and sellers. Under the terms of this agreement, we recognized revenues of
approximately $1.3 million in 2000, $441,000 in 2001, and none in 2002. The member of our Board of
Directors mentioned above is also a member of such company's Board of Directors. In 2000, we invested
$3.0 million in capital stock of such company and received a warrant to purchase additional shares, which
if exercised would bring our total ownership to less than 5% of its capital stock.

In February 2001, our wholly owned subsidiary Half.com, entered into a content licensing and

inventory sales agreement with a company that provides order management and fulÑllment solutions.
Under this agreement, such company agreed to list its inventory on Half.com's website and to allow
Half.com to use such company's catalog data to supplement Half.com's existing catalog data. Half.com
paid such company approximately $100,000 in 2001 and $25,000 in 2002 under this agreement.

Separately, a member of our Board of Directors is a director and Chairman of the Executive

Committee of the Board of Directors of a company with whom PayPal, in September 2000, prior to eBay's
acquisition of PayPal, entered into a strategic marketing agreement. PayPal paid the company
approximately $670,000 in 2002 under this agreement. The agreement was terminated in December 2002,
and PayPal paid the company an early termination fee of $1,348,000 in January 2003 in accordance with
the terms of the agreement.

All contracts with related parties are at rates and terms that we believe are comparable with those

entered into with independent third parties.

130

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

Notes receivable from eBay executive oÇcers

At December 31, 2001 and 2002, we held notes receivable from certain executive oÇcers totaling
$4.3 million and $3.5 million, respectively. One note is a non-interest bearing note issued in connection
with the relocation of one executive oÇcer to San Jose, California, while the remaining notes bear interest
at rates of 4.94%, 6.37%, and 6.40% per year. Each note is collateralized by Deeds of Trust, which we
hold. The outstanding principal and interest are due and payable by 2005.

Note 13 Ì Preferred Stock:

We are authorized, subject to limitations prescribed by Delaware law, to issue Preferred Stock in one
or more series; to establish the number of shares included within each series; to Ñx the rights, preferences
and privileges of the shares of each wholly unissued series and any related qualiÑcations, limitations or
restrictions; and to increase or decrease the number of shares of any series (but not below the number of
shares of a series then outstanding) without any further vote or action by the stockholders. At
December 31, 2001 and 2002, there were 10 million shares of Preferred Stock authorized for issuance, and
no shares issued or outstanding.

Note 14 Ì Common Stock:

Our CertiÑcate of Incorporation, as amended, authorizes us to issue 900 million shares of common

stock. A portion of the shares outstanding are subject to repurchase over a four-year period from the
earlier of the issuance date or employee hire date, as applicable. At December 31, 2001, there were
772,000 shares subject to repurchase rights at an average price of $0.36. At December 31, 2002, there
were 184,000 shares subject to repurchase at an average price of $0.89.

At December 31, 2002, we had reserved 22.2 million shares of common stock available for future
issuance under our stock option plans and approximately 1.6 million shares of common stock available for
future issuance under the employee stock purchase plan.

In connection with certain stock option grants, we recorded unearned stock-based compensation

totaling $187,000 during the year ended December 31, 2000, $4.1 million in 2001, and $9.9 million in
2002. The unearned compensation for 2000 is related to the acquisition of Half.com and was amortized
fully over the vesting period in 2000. The unearned compensation for 2001 is related to the acquisition of
Internet Auction and is being amortized over the 3-year vesting period of the options, which ends in 2002.
The unearned compensation for 2002 is related to the acquisition of PayPal and is being amortized over
the 3-year vesting period of the options, which ends in 2005. Amortization expense totaled approximately
$7.1 million during the year ended December 31, 2000, $3.1 million in 2001, $6.0 million in and 2002. The
unearned stock compensation balance at December 31, 2002 was $5.3 million and will be amortized over
the remaining vesting period through 2005.

Note 15 Ì Employee BeneÑt Plans:

Employee Stock Purchase Plan

We have an employee stock purchase plan for all eligible employees. Under the plan, shares of our
common stock may be purchased over an oÅering period with a maximum duration of two years at 85% of
the lower of the fair market value on the Ñrst day of the applicable oÅering period or on the last day of
the six-month purchase period. Employees may purchase shares having a value not exceeding 10% of their
gross compensation during an oÅering period. During the years ended December 31, 2000, 2001 and 2002,
employees purchased 438,000, 124,000 and 176,000 shares at average prices of $8.43, $43.72 and $45.25
per share, respectively. At December 31, 2002, approximately 1.6 million shares were reserved for future
issuance. On each January 1, the aggregate number of shares reserved for issuance under the employee

131

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

stock purchase plan will be increased automatically by the number of shares purchased under this plan in
the preceding calendar year.

401(k) Savings Plan

We have a savings plan, which qualiÑes under Section 401(k) of the Internal Revenue Code.
Participating employees may contribute up to 25% of their annual salary, but not more than statutory
limits. We contribute one dollar for each dollar a participant contributes, with a maximum contribution of
$1,500 per employee. Our matching contributions were $1.8 million in 2000, $1.7 million in 2001, and
$2.3 million in 2002.

Stock option plans

We have stock option plans for directors, oÇcers and employees, under which we have made to date
only nonqualiÑed and incentive stock option grants. These stock options generally vest 25% one year from
the date of grant and the remainder vests at a rate of 2.08% per month and expire 10 years from the date
of grant. Stock options issued prior to June 1998, were exercisable immediately, subject to repurchase
rights held by us, which lapse over the vesting period. At December 31, 2002, stock options for
22.2 million shares were available for future grant.

The following table summarizes activity under our stock option plans for the years ended

December 31, 2000, 2001 and 2002 (shares in thousands):

Year Ended December 31,

2000

2001

2002

Weighted
Average
Exercise
Price

Shares

Outstanding at beginning of period ÏÏÏÏÏÏÏÏ

26,236

$29.73

Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

9,037

Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(4,499)

Cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(4,525)

62.69

6.23

65.41

Weighted
Average
Exercise
Price

$38.99

46.87

17.26

51.20

Shares

26,249

19,621

(6,813)

(3,955)

Shares

35,102

16,866

(9,769)

(5,023)

Outstanding at end of period ÏÏÏÏÏÏÏÏÏÏÏÏÏ

26,249

38.99

35,102

46.24

37,176

Options exercisable at end of period ÏÏÏÏÏÏÏ

7,006

27.73

10,465

41.67

13,124

Weighted
Average
Exercise
Price

$46.24

53.42

26.16

53.98

53.73

52.58

Weighted average grant date fair value of

options granted during period ÏÏÏÏÏÏÏÏÏÏÏ

$42.44

$23.67

$22.42

132

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

The following table summarizes information about Ñxed stock options outstanding at December 31,

2002 (shares in thousands):

Options Outstanding at
December 31, 2002

Options Exercisable at
December 31, 2002

Range of
Exercise Prices

$0.02 - $40.06 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$41.63 - $55.23 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$55.56 - $58.05 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$58.06 - $65.24 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$65.80 - $84.81 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$85.50 - $116.31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Number of
Shares
Outstanding

Weighted
Average
Remaining
Contractual Life

Weighted
Average
Exercise
Price

Number of
Shares
Exercisable

7.7 years

$29.48

Weighted
Average
Exercise
Price

$19.03

47.96

57.93

61.77

73.49

95.06

51.67

57.52

61.57

72.25

95.52

4,119

1,300

890

2,017

3,761

986

$53.73

13,073

$52.56

9,606

6,458

6,992

6,587

6,306

1,227

37,176

8.7

9.3

8.5

7.6

6.8

8.3

Exercisable

Unexercisable

Total

In-the-Money ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Out-of-the-Money ÏÏÏÏÏÏÏÏÏÏÏÏ

Shares

8,755

4,318

Total options outstanding ÏÏÏÏÏÏ

13,073

Weighted
Average
Exercise Price

$39.48

79.05

$52.56

Weighted
Average
Exercise Price

$52.34

74.22

$54.36

Shares

21,871

2,232

24,103

Weighted
Average
Exercise Price

$48.67

77.40

$53.73

Shares

30,626

6,550

37,176

In-the-money options are options with an exercise price lower than the $67.92 closing price of our
common stock on December 31, 2002. Out-of-the-money options are options with an exercise price greater
than the $67.92 closing price of our common stock on December 31, 2002.

2000

2001

2002

Grants during period as percent of outstanding shares ÏÏÏÏÏÏÏÏ

3%

7%

5%

Total outstanding grants ""in-the-money'' as a percent of

outstanding sharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

4%

Total outstanding grants as a percent of outstanding shares ÏÏÏ

10%

10%

13%

10%

12%

Grants to named oÇcers during the period as a percent of

total grants during the period* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

1%

10%

Grants to named oÇcers during the period as a percent of

total outstanding shares* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

0%

1%

Total outstanding grants to named oÇcers as a percent of total
outstanding grants* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

10%

10%

Total outstanding grants to named oÇcers as a percent of total
outstanding shares*ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

1%

1%

5%

0%

9%

1%

* Named oÇcers are the chief executive oÇcer and the other four most highly-compensated executive

oÇcers during the applicable year.

133

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

Fair value disclosures

We calculated the fair value of each option grant on the date of grant using the Black-Scholes option

pricing model. The following are the assumptions used for each respective period:

Year Ended December 31
2002
2001
2000

Risk-free interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected lives (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected volatilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

6.3%
3.0

0%
115%

4.4%
3.0

0%
81%

3.0%
3.0

0%
68%

For options granted prior to our initial public oÅering, the fair value of option grants was determined

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

Non-stockholder approved stock option grants

Prior to our initial public oÅering in 1998, our Board of Directors approved three stock option grants
outside of formally approved stockholder plans to two independent directors upon their joining our Board
of Directors and to an executive oÇcer upon his hiring. All of such option grants vested over 25% one year
from the date of grant, with the remainder vesting at a rate of 2.08% per month thereafter and expire
10 years from the date of grant. The options granted to the independent directors were immediately
exercisable, subject to repurchase rights held by us, which lapse over the vesting period. The terms and
conditions of such grants are otherwise identical to nonqualiÑed option grants made under the stock option
plan in eÅect at that time. At the time of such grants, members of our Board of Directors (and their
aÇliates) beneÑcially owned in excess of 90% of our then outstanding voting interests. We have previously
disclosed such option grants in our Prospectus Ñled with the Securities and Exchange Commission on
September 25, 1998 in connection with our initial public oÅering under the headings ""Management Ì
Director Compensation'' and ""Management Ì Compensation Arrangements.'' Prior to 2002, one director
had exercised all options under such grant. During 2002, the executive oÇcer exercised all options
available to him in connection with his departure from the Company. At December 31, 2002, one grant
remained outstanding to one independent director, with 780,000 shares to be issued upon exercise of the
outstanding options at an average exercise price of $1.56. There were no shares remaining available under
these non-stockholder approved plans for future issuance as of December 31, 2002.

Note 16 Ì Income Taxes:

The components of income including minority interest in consolidated companies and equity interest
in partnership income before income taxes, for the years ended December 31, 2000, 2001 and 2002 are as
follows (in thousands):

Year Ended December 31,
2001

2002

2000

United StatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$80,872

$177,084

$266,152

International ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

147

(6,627)

129,685

$81,019

$170,457

$395,837

134

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

The provision for income taxes is composed of the following (in thousands):

Year Ended December 31,
2001

2002

2000

Current:

Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$31,420

$ 70,552

$103,606

State and localÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

8,498

280

17,357

3,540

18,992

10,062

40,198

91,449

132,660

Deferred:

Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(5,887)

(10,187)

State and localÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(1,586)

(1,253)

8,091

5,195

(7,473)

(11,440)

13,286

$32,725

$ 80,009

$145,946

The following is a reconciliation of the diÅerence between the actual provision for income taxes and
the provision computed by applying the federal statutory rate of 35% for 2000, 2001, and 2002 to income
before income taxes (in thousands):

Year Ended December 31,
2001

2002

2000

Provision at statutory rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$28,357

$59,660

$138,543

Permanent diÅerences:

Foreign income taxed at diÅerent rates ÏÏÏÏÏÏÏÏÏÏÏ

2,876

(4,212)

(5,406)

Acquisition related expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Subsidiary loss not beneÑted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

175

125

665

11,834

Ì

5,807

Ì

Ì

1,052

Tax-exempt interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(4,241)

(3,737)

(2,378)

State taxes, net of federal beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

4,493

10,468

Tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ì

275

Ì

189

15,722

(2,021)

434

$32,725

$80,009

$145,946

Deferred tax assets and liabilities are recognized for the future tax consequences of diÅerences

between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates

135

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

in eÅect for the year in which the diÅerences are expected to reverse. SigniÑcant deferred tax assets and
liabilities consist of the following (in thousands):

December 31,

2001

2002

Deferred tax assets:

Net operating loss and credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 129,211

$ 207,276

Accruals and allowances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Net unrealized losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

21,405

11,381

2,372

40,941

(5,708)

2,921

Net deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

164,369

245,430

Valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(129,212)

(145,182)

Deferred tax liabilities:

Acquisition-related intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(3,629)

(111,843)

35,157

100,248

$

31,528

$ (11,595)

As of December 31, 2002, our federal and state net operating loss carryforwards for income tax
purposes were approximately $559.4 million and $133.1 million, respectively. If not utilized, the federal net
operating loss carryforwards will begin to expire in 2019, and the state net operating loss carryforwards will
begin to expire in 2006. The Company's federal and state research tax credit carryforwards for income tax
purposes are approximately $2.1 million and $2.3 million, respectively. If not utilized, the federal tax credit
carryforwards will begin to expire in 2021. Deferred tax assets of approximately $202.9 million at
December 31, 2002 pertain primarily to certain net operating loss carryforwards resulting from the exercise
of employee stock options of $145.2 million and the remainder relates to losses at certain subsidiaries. We
have a full valuation allowance against the amounts relating to the exercise of employee stock options due
to the impact that uncertainties associated with our future stock price and timing of employee stock option
exercises have on the likelihood that we will realize future beneÑts from these amounts. To the extent that
we generate taxable income in future years, we will have the ability, subject to carryforward limitations, to
beneÑt from these amounts. When recognized, the tax beneÑt related to stock options will be accounted
for as a credit to additional paid-in-capital rather than a reduction of the income tax provision.

Note 17 Ì Subsequent Events:

Vancouver Lease

In February 2003, we entered into an operating sublease for approximately 110,000 square feet of

commercial oÇce space in Vancouver, British Columbia for a customer support center. The sublease
commences on July 1, 2003 and ends on October 30, 2011. Rental commitments under the sublease total
$11.8 million, including operating costs and taxes. In addition, we are subleasing approximately 37,000
square feet of the leased space back to the prime lessee for substantially the same lease term. The prime
lessee's rental commitments to eBay under the sublease total $5.2 million, including operating costs and
taxes. The prime lessee has provided an irrevocable letter of credit for $7.8 million as security for their
obligations under this sublease arrangement. The commitment under our sublease, as well as the prime
lessee's sublease and letter of credit, are denominated in Canadian dollars. The dollar Ñgures above are in
U.S. dollars converted from Canadian dollars at the exchange rate as of December 31, 2002.

136

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)

eBay Inc.

Integration of Half.com Platform

In March 2003, we announced our intention to fully integrate the platform of Half.com, a wholly
owned subsidiary acquired in July 2000, with the eBay.com platform by the end of 2004. Half.com's oÇce
in Pennsylvania, where 65 of its employees work, will be shut down once this process is complete.
Management is in the process of formalizing an exit and integration plan and expects to Ñnalize the plan
by the end of 2003. Based on our preliminary estimates, we anticipate costs related to employee retention
and severance will total approximately $3 million. If we decide to exit Half's leased oÇce facility, the
amount of lease termination costs, excluding any possible sublease income, and Ñxed asset write-oÅs will
total approximately $2 million. Costs related to our exit plan will be recorded as charges on our income
statement over the exit and integration period in accordance with SFAS No. 146, ""Accounting for Costs
Associated with Exit or Disposal Activities.''

PayPal's Prior Services to Online Gambling Merchants

PayPal completed its exit from the business of processing payments for online gambling merchants in

November 2002. Approximately 6% of PayPal's revenues in 2002 were derived from this business.
Beginning in July 2002, PayPal provided documents and information related to its services to online
gambling merchants in response to a federal grand jury subpoena issued at the request of the U.S.
Attorney for the Eastern District of Missouri. On March 28, 2003, PayPal received a letter from the U.S.
Attorney for the Eastern District of Missouri indicating its contention that PayPal's provision of services to
online gambling merchants violated 18 U.S.C. Û 1960 of the USA PATRIOT Act, which prohibits the
transmission of funds that are known to have been derived from a criminal oÅense or are intended to be
used to promote or support unlawful activity, thereby subjecting PayPal to potential civil forfeiture of the
amounts it received in connection with such activities as well as potential criminal liability. The letter
oÅered a complete settlement of all possible claims and charges from the U.S. Attorney for the Eastern
District of Missouri if Paypal paid the purported amount of its earnings derived from online gambling
merchants during the nine-month period from October 26, 2001 to July 31, 2002, plus interest. PayPal
acted in the good faith belief that its conduct did not violate 18 U.S.C. Û 1960 and PayPal calculates that
the amount of its earnings from online gaming activities was less than asserted in the letter. Although the
outcome of this matter is not yet determinable, the monetary amounts associated with this matter are not
expected to have a material impact on our Ñnancial position, results of operations or cash Öows.

137

Supplementary Data Ì Quarterly Financial Data-Unaudited:

The following tables present certain unaudited consolidated quarterly Ñnancial information for each of
the 12 quarters ended December 31, 2002. This quarterly information has been prepared on the same basis
as the Consolidated Financial Statements and includes all adjustments necessary to present fairly the
information for the periods presented. The results of operations for any quarter are not necessarily
indicative of results for the full year or for any future period. The quarterly Ñnancial data for the quarters
presented below have been restated to reÖect our acquisition Half.com in July 2000, which was accounted
for as a pooling of interests.

Quarterly Financial Data
(unaudited, in thousands, except per share amounts)

March 31

June 30

September 30

December 31

Quarter Ended

2000
Net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 85,887

$ 98,152

$113,377

Gross proÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 62,504

$ 73,948

$ 89,465

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Net income per share-basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Net income per share-diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$

$

$

1,758

0.01

0.01

$

$

$

7,459

$ 15,211

0.03

0.03

$

$

0.06

0.05

$134,008

$110,054

$ 23,865

$

$

0.09

0.09

Weighted-average shares:

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

242,658
281,344

249,828
280,483

255,741
280,297

259,789
279,822

March 31

June 30

September 30

December 31

Quarter Ended

2001
Net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$154,090

$180,905

$194,425

Gross proÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$127,088

$148,033

$159,472

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 21,067

$ 24,608

$ 18,838

Net income per share-basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Net income per share-diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$

$

0.08

0.08

$

$

0.09

0.09

$

$

0.07

0.07

$219,401

$179,412

$ 25,935

$

$

0.09

0.09

Weighted-average shares:

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

264,279
278,732

267,075
283,582

271,236
282,317

274,599
283,564

March 31

June 30

September 30

December 31

Quarter Ended

2002
Net revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$245,106

$266,287

$288,779

Gross proÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$203,829

$221,726

$243,405

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 47,584

$ 54,308

$ 61,003

Net income per share-basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Net income per share-diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$

$

0.17

0.17

$

$

0.19

0.19

$

$

0.22

0.21

$413,928

$331,264

$ 86,996

$

$

0.28

0.28

Weighted-average shares:

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

278,332
284,891

280,707
285,416

282,267
286,591

308,644
314,395

138

2001 Pro Forma fair value stock option expense disclosure
Net income, as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Add: Amortization of stock-based compensation expense

Quarter Ended

March 31

June 30

September 30 December 31

$ 21,067 $ 24,608 $ 18,838

$ 25,935

determined under the intrinsic value methodÏÏÏÏÏÏÏÏÏÏÏÏÏ

761

747

676

907

Deduct: Total stock-based compensation expense determined

under fair value based method for all awards, net of tax ÏÏÏ

(59,996) (49,589) (54,467)

(47,474)

Pro forma net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$(38,168)$(24,234) $(34,953) $(20,632)

Earnings (loss) per share:

Basic Ì as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted Ì as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$
$
$
$

0.08 $
(0.14)$
0.08 $
(0.14)$

0.09 $
(0.09) $
0.09 $
(0.09) $

0.07

$
(0.13) $
$
(0.13) $

0.07

0.09
(0.08)
0.09
(0.08)

2002 Pro Forma fair value stock option expense disclosure
Net income, as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Add: Amortization of stock-based compensation expense

Quarter Ended
March 31 June 30 September 30 December 31

$47,584 $54,308

$61,003

$86,996

determined under the intrinsic value method ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

913

(776)

590

5,226

Deduct: Total stock-based compensation expense determined

under fair value based method for all awards, net of tax ÏÏÏÏÏ

(47,314)(43,813) (24,821)

(76,954)

Pro forma net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 1,183 $ 9,719

$36,772

$15,268

Earnings (loss) per share:

Basic Ì as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted Ì as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$
$
$
$

0.17 $
0.00 $
0.17 $
0.00 $

0.19
0.03
0.19
0.03

$
$
$
$

0.22
0.13
0.21
0.13

$
$
$
$

0.28
0.05
0.28
0.05

The 2001 and 2002 quarterly pro forma amounts have been adjusted to reÖect the correction of
previously calculated pro forma option pricing and amortization amounts. These adjustments are limited to
the footnote disclosure of non-cash SFAS No. 123, ""Accounting for Stock-Based Compensation'' pro
forma expense and do not result in any changes or impact to our historically reported statements of income
or cash Öows. The previously reported diluted pro forma net income (loss) per share was $0.00 in the
three-months ended March 31, 2001, $0.01 in the three-months June 30, 2001, $(0.03) in the three-
months September 30, 2001, and $(0.03) in the three-months December 31, 2001. The previously reported
diluted pro forma net income per share was $0.04 in the three-months ended March 31, 2002, $0.05 in the
three-months June 30, 2002 and $0.06 in the three-months September 30, 2002.

139

eBay Inc.

FINANCIAL STATEMENT SCHEDULE

The Ñnancial statement Schedule II Ì VALUATION AND QUALIFYING ACCOUNTS is Ñled

as part of this Form 10-K.

Balance at
Beginning
of Period

Charged
to
Expense

Charged to
Other
Account
(in thousands)

Charges
Utilized/
Write-oÅs

Balance at
End of
Period

Allowance for Doubtful Accounts and

Authorized Credits

Year ended December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏ

$

8,402

$18,237

$ Ì

$(12,509)

$ 14,130

Year ended December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏ

Year ended December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏ

14,130

29,024

25,243

25,455

Allowance for Transaction Losses

Year ended December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏ
Year ended December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏ

Year ended December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏ

Ì
Ì

Ì

Tax Valuation Allowance

Ì
Ì

Ì

Ì

Ì
Ì

(10,349)

(23,777)

29,024

30,702

Ì
Ì

Ì
Ì

7,832

8,848*

(6,573)

10,107

Year ended December 31, 2000 ÏÏÏÏÏÏÏÏÏÏÏ

83,894

Year ended December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏ

101,586

Year ended December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏ

129,212

17,692

27,626

15,970

Ì

Ì

Ì

Ì

Ì

Ì

101,586

129,212

145,182

* Assumed liability in connection with PayPal acquisition on October 3, 2002.

140

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as

amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Jose, State of California, on the 31st day of March, 2003.

SIGNATURES

eBay Inc.

/s/ MARGARET C. WHITMAN

Margaret C. Whitman
President, Chief Executive OÇcer
and Director

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below

constitutes and appoints Margaret C. Whitman, Rajiv Dutta and Michael R. Jacobson, and each or any
one of them, each with the power of substitution, his or her attorney-in-fact, to sign any amendments to
this report, with exhibits thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and conÑrming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has
been signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.

Date: March 31, 2003

Principal Executive OÇcer:

Principal Financial OÇcer:

By : /s/ MARGARET C. WHITMAN
Margaret C. Whitman
President, Chief Executive OÇcer and Director

By : /s/ RAJIV DUTTA

Rajiv Dutta
Senior Vice President and Chief Financial OÇcer

Principal Accounting OÇcer:

By : /s/ MARK J. RUBASH

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

Additional Directors

By : /s/ PIERRE M. OMIDYAR
Pierre M. Omidyar
Founder, Chairman of the Board and Director

By : /s/ PHILIPPE BOURGUIGNON

Philippe Bourguignon
Director

By : /s/ SCOTT D. COOK

By : /s/ ROBERT C. KAGLE

Scott D. Cook
Director

Robert C. Kagle
Director

By : /s/ DAWN G. LEPORE

By : /s/ HOWARD D. SCHULTZ

Dawn G. Lepore
Director

Howard D. Schultz
Director

141

I, Margaret C. Whitman, certify that:

1.

I have reviewed this annual report on Form 10-K of eBay Inc.;

CERTIFICATIONS

2. Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in

this annual report, fairly present in all material respects the Ñnancial condition, results of operations
and cash Öows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying oÇcers and I are responsible for establishing and maintaining

disclosure controls and procedures (as deÑned in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:

a) designed such disclosure controls and procedures to ensure that material information

relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the eÅectiveness of the registrant's disclosure controls and procedures as of a

date within 90 days prior to the Ñling date of this annual report (the ""Evaluation Date''); and

c) presented in this annual report our conclusions about the eÅectiveness of the disclosure

controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying oÇcers and I have disclosed, based on our most recent
evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):

a) all signiÑcant deÑciencies in the design or operation of internal controls which could
adversely aÅect the registrant's ability to record, process, summarize and report Ñnancial data and
have identiÑed for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who

have a signiÑcant role in the registrant's internal controls; and

6. The registrant's other certifying oÇcers and I have indicated in this annual report whether

there were signiÑcant changes in internal controls or in other factors that could signiÑcantly aÅect
internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to signiÑcant deÑciencies and material weaknesses.

Date: March 31, 2003

/s/ MARGARET C. WHITMAN
Margaret C. Whitman
President and Chief Executive OÇcer
(Principal Executive OÇcer)

142

I, Rajiv Dutta, certify that:

CERTIFICATIONS

1.

I have reviewed this annual report on Form 10-K of eBay Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in

this annual report, fairly present in all material respects the Ñnancial condition, results of operations
and cash Öows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying oÇcers and I are responsible for establishing and maintaining

disclosure controls and procedures (as deÑned in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:

a) designed such disclosure controls and procedures to ensure that material information

relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the eÅectiveness of the registrant's disclosure controls and procedures as of a

date within 90 days prior to the Ñling date of this annual report (the ""Evaluation Date''); and

c) presented in this annual report our conclusions about the eÅectiveness of the disclosure

controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying oÇcers and I have disclosed, based on our most recent
evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):

a) all signiÑcant deÑciencies in the design or operation of internal controls which could
adversely aÅect the registrant's ability to record, process, summarize and report Ñnancial data and
have identiÑed for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who

have a signiÑcant role in the registrant's internal controls; and

6. The registrant's other certifying oÇcers and I have indicated in this annual report whether

there were signiÑcant changes in internal controls or in other factors that could signiÑcantly aÅect
internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to signiÑcant deÑciencies and material weaknesses.

/s/ RAJIV DUTTA
Rajiv Dutta
Senior Vice President and Chief Financial OÇcer
(Principal Financial OÇcer)

Date: March 31, 2003

143