eBay Inc. Form 10-K for period ended 12/31/2002


x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2002.


o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the Transition Period from to .

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

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

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

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

As of June 28, 2002, the last business day of the registrant’s most recently completed second fiscal 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-affiliates, 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 officer 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 affiliates. This determination of affiliate 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.

Certain exhibits filed 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.

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 differ materially from those anticipated in these forward-looking statements as a result of the factors described in the “Risk Factors That May Affect Results of Operations and Financial Condition” section 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.

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 offering of our common stock. Our principal executive offices 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 is to build the world’s most efficient 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-effectively.

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 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 fixed-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

Our community of users is the largest and one of the most loyal online trading communities on the Web. We have aggregated a significant 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 offering 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-specific information exchanges. By ensuring that all users are subject to the same rules and fees, we have created a level playing field enabling individuals and businesses of all types and sizes to access broad markets and compete equally.


	•	They are fragmented and regional in nature making it difficult and expensive for buyers and sellers to meet, exchange information and complete transactions;

	•	They offer a limited variety and breadth of goods;

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

	•	They are information inefficient, as buyers and sellers lack a reliable and convenient means of setting prices.


	•	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 efficient 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 effective, relative to available alternatives, at addressing markets of new and scarce goods, end-of-life products, and used and vintage items.

We intend to achieve our mission of becoming the world’s most efficient 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.

Our success has been largely dependent upon the success of our community of individual users. This success is reflected in the growth of confirmed, 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 define 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 offering:

Sellers


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

Providing more efficient and more effective 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-effectively. PayPal’s network builds on the existing financial 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-effective payment solution. PayPal currently offers 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.

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 affiliates, increased its geographic reach to 27 countries including websites


•	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 affiliates, 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 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 significant investments to grow existing categories and to expand the number of categories in the eBay marketplace. By focusing development and marketing efforts 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 first 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:


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

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 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 specific item category, go to a specialty site such as eBay Motors, eBay Stores, or Half.com or begin listing an item for sale.

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 first register with eBay by completing a short online form and confirmation process.

Users can search for specific 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 specific 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 identifier so that users can easily search for and track specific 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 specific 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 offer 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 confirmation 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.

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

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, five, 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

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 offer 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 first 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 specified 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 sufficiently 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 specified 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 notification, we generally charge the seller a final 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 notifies us, we have the right to credit the seller the amount of the final value fee.

Invoices for listing, feature and final 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 file. 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.

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 find someone to sell items on their behalf. The Trading Assistants and their clients negotiate the terms and conditions of these services.

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-effectively. PayPal’s email-driven system builds on the legacy financial infrastructure of bank accounts and credit cards to create an online payment network available to users in 38 countries.

To send or receive a payment, a user first 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 identifier.

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, confirms 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.


	•	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 offer 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 (offered 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 reflected in our statement of financial 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.

In order for senders to fund payments from their bank accounts, they first must become verified 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, verification also removes some spending limits on users’ accounts and gives them reputational advantages when transacting with other members of the PayPal community.

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 five 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.

We devote significant 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 specific support, extending our online self-help features, and improving our systems and processes to enable us to provide the most efficient and effective support possible.

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.

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.

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’ profiles that include feedback ratings and incorporate user experiences. Every registered eBay user has a feedback profile 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 specific 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 profile 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 profile 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 affect 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 sufficiently 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.

In addition to the Feedback Forum, we offer the SafeHarbor^TM program, which provides guidelines for trading, provides information to resolve user disputes and responds to reports of misuses of the eBay service. eBay’s SafeHarbor^TM staff investigates users’ complaints of possible misuse of the eBay service and

takes appropriate action, including issuing warnings to users or suspending users from bidding on or listing items for sale. Some of the complaints the SafeHarbor^TM staff investigates include various forms of bid manipulation, malicious posting of negative feedback and posting of illegal items for sale. The SafeHarbor^TM 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 officially filed, written claim of fraud from a user, will generally suspend the offending 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 offending 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 verification, insurance, integrated escrow and authentication, are key elements of our programs designed to make eBay a safe place to trade.

We offer 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 offer 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.

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.

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 notifications for sellers and buyers, including daily status updates, bid and outbid notices, registration confirmations, 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-specified 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 significant, with

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, floods, fires, 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 financial difficulties.

We do not maintain fully redundant systems or alternative providers of hosting services, and we do not carry business interruption insurance sufficient 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 financial 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 profits, and our future net revenues and profits 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 traffic 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 efforts, 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 reflected 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 traffic or transaction

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 financial 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 effective manner or to integrate smoothly any newly developed or purchased technologies with our existing systems. These difficulties 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 offerings 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 efficiency. As of the fourth quarter of 2002, the new architecture is serving 70% of overall traffic 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 technology assures user access to the PayPal website, both to acquire new customers and to allow existing ones to conduct financial transactions. We focus much of PayPal’s development efforts 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 traffic 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 financial nature of the PayPal product, we seek to offer a high level of data security in order to build customer confidence 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 fire 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, floods, fires, 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 financial difficulties. PayPal does not maintain fully redundant systems or alternative providers of hosting services, and does not carry business interruption insurance sufficient 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 profits, and our future net revenues and profits 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 staff members

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 fulfilling a decryption request.

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 offline retailers, distributors, liquidators, import and export companies, auctioneers, catalog and mail-order companies, virtually all online and offline commerce participants (consumer-to-consumer, business-to-consumer and business-to-business) and online and offline 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 offline merchant accounts. As our product offering continues to broaden into new categories of items, we expect our competition to continue to broaden to include other online and offline channels for those new offerings. 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 effectively, we may need to expend significant resources in technology and marketing. These efforts may be expensive and could reduce our margins and have a material adverse effect on our business, financial position, operating results, cash flows and reduce the value of our stock. We believe that we will be able to maintain profitability 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 Affect Results of Operations and Financial Condition — Our industry is intensely competitive.”

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 first and fourth fiscal quarters. PayPal has shown similar seasonality, except that its strongest quarter of online growth has historically been the fourth quarter.

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 confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure agreements with parties with whom we conduct business in order to limit access to and disclosure of our proprietary information.

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 filed 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 affect us in any jurisdiction in which we are not able to register.

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 Affect Results of Operations and Financial Condition — We are subject to intellectual property and other litigation” and “— We may be unable to protect or enforce our own intellectual property rights adequately” and “Item 3: Legal Proceedings.”

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 find and retain highly qualified technical and managerial personnel.

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 financial 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 financial performance and evaluating resource allocations, and therefore our reportable segments. We changed our business segments from Online and Offline services to U.S., International, and Payments operations. This new segment structure reflects 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 profitability.

Direct contribution consists of net revenues less direct costs. Direct costs include specific costs of net revenues, sales and marketing expenses, and general and administrative expenses over which segment managers have direct discretionary control 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 reflect 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 first half of 2003. Billpoint’s operations will continue to be reflected 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 — Segment Information” of the notes to our Consolidated Financial Statements, which is incorporated by reference herein.

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

On March 1, 2000, we entered into a five-year lease for general office facilities located in San Jose, California. This five-year lease is commonly referred to as a synthetic lease because it represents a form of off-balance sheet financing 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 office space. As of December 31, 2002, we occupied approximately 314,000 square feet of this total office 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 Offered Rate, or LIBOR, fluctuates. 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 final 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 financial 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 effect on our financial condition, results of operations or cash flows. See “Note 9 — Operating Lease Arrangements” and “Note 6 — 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 financial interest in a variable interest entity or where the variable interest entity does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. This interpretation applies immediately to variable interest entities created after January 31, 2003 and applies in the first 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 effective 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 reflect 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 reflect the reclassification 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 reflect 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 financing arrangement or purchase the San Jose facilities. Whether or not we keep the existing financing 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 financing payments and settle our two interest rate swaps we used to establish a fixed rate of interest for $95 million of our financing arrangement. During the year ended December 31, 2002, our financing

Our U.S. segment occupies approximately 434,000 square feet of commercial office space in the United States. We occupy 314,000 square feet of commercial office 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 office space in Salt Lake City, Utah for our domestic customer support center. We lease and occupy an additional 48,000 square feet of commercial office space in various domestic locations for the operations of certain U.S. subsidiaries.

Our International segment leases approximately 210,000 square feet of commercial office 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 office 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 Butterfields 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 office space (offset 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 — Subsequent Events — 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.

On April 25, 2001, our European subsidiaries, eBay GmbH and eBay International AG, were sued by Montres Rolex S.A. and certain Rolex affiliates, or Rolex, in the regional court of Cologne, Germany. The suit subsequently was transferred to the regional court in Dusseldorf, Germany. Rolex alleged that our subsidiaries were infringing Rolex’s trademarks as a result of users selling counterfeit Rolex watches through our German website. The suit also 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 filed by MercExchange LLC against us, our Half.com subsidiary and ReturnBuy, Inc. in the Eastern District of Virginia (No. 2:01-CV-736) alleging infringement of three patents (relating to online auction technology, multiple database searching and electronic consignment systems) and seeking a permanent injunction and damages (including treble damages for willful infringement). We answered the complaint, denying the allegations. In April 2002, we filed 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 define certain disputed terms in the patents, and in October 2002 the court issued its claim construction findings. In October 2002, the court gave us leave to amend our answer to include a claim that MercExchange committed fraud on the patent office during the prosecution of one of the patents. On the same date, the court granted in part our pending summary judgment motion, effectively invalidating the

patent related to online auction technology and rendering it unenforceable. In November 2002, we filed 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 filed 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 plaintiff were to prevail on any of its claims, we might be forced to pay significant damages and licensing fees, modify our business practices or even be enjoined from conducting a significant 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 filed 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 plaintiff were to prevail on its claims, PayPal might be forced to pay significant 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, filed a lawsuit in the U.S. District Court for the Eastern District of Texas (No. 2:02-CV-186) alleging that we and 17 other companies, primarily large retailers, infringed three patents owned by Hill generally relating to electronic catalog systems and methods for transmitting and updating data at a remote computer. The suit seeks an injunction against continuing infringement, unspecified damages, including treble damages for willful infringement, and interest, costs, expenses and fees. In January 2003, the court granted the collective defendants’ motion to transfer the case from the court where it was filed in Marshall, Texas to the Federal District Court for the Southern District of Indiana. We 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 refiled with a different named plaintiff on June 6, 2002, and a related action was filed 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 significant management time, will be costly and could require changes to its customer service and operations that could increase its costs and decrease the effectiveness of its anti-fraud program.

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

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

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 notified 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.

There were no submissions of matters to a vote of security holders during the fourth quarter ended December 31, 2002.

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 Market^SM.

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 significantly larger number of beneficial owners of our common stock.

We have never paid cash dividends on our stock, and currently anticipate that we will continue to retain any future earnings to finance the growth of our business.

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.

The following selected consolidated financial data should be read in conjunction with, and is qualified 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 qualified 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 financial statements are included in our Consolidated Financial Statements for the post-acquisition period from October 4, 2002 through December 31, 2002.


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

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 differ materially from those anticipated in these forward-looking statements as a result of the factors described in the “Risk Factors That May Affect Results of Operations and Financial Condition” section below and elsewhere in this report. We undertake no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

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

Historically, we have completed several business combinations accounted for using the pooling-of-interests and purchase methods of accounting. The historical financial 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, identifiable 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 — Business Combinations, Goodwill and Intangible Assets” to our Consolidated Financial Statements, which is incorporated by reference herein.

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.

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.


(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 offline services in our U.S., International and Payments segments. Transaction revenue is derived primarily from listing, feature and final 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. Offline 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, reflected 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.

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, reflected 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 significant 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 significance 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 affect our international transaction net revenues.

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 efforts 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 specified wind-down period. After March 31, 2003, our third-party advertising revenues will be dependent on the efforts of our existing internal sales staff.

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 fluctuate from period to period, however, in general, we expect these revenues to decrease as a percentage of total net revenues and in absolute dollars.

Offline 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, offline 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 offline auction and high-end art markets. During the year ended December 31, 2002, offline 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 Butterfields and Kruse subsidiaries. Accordingly, we do not expect to earn offline net revenue in the foreseeable future.

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 — Business Combinations, Goodwill and Intangible Assets” to the consolidated notes to the financial statements for pro forma results of operations.

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

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 consists primarily of costs associated with customer support, site operations, and payment processing. Significant 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 effect 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 reflects cost efficiencies in both customer support and site operations offset by the addition of PayPal’s lower margin payments processing business. The combined effect 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.

Sales and marketing expenses primarily consist of employee compensation for our category development and marketing staff, 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 offline 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 specific 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 efforts 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 — Commitments and Contingencies — Advertising” to our Consolidated Financial Statements, which is incorporated by reference herein.

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 reflect required capitalization of major site and product development efforts, 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 reflected as a cost of revenue when amortized. We anticipate that we will continue to devote significant resources to product development in the future as we add new features and functionality to the eBay and PayPal platforms.

The increase in absolute dollars from 2000 to 2001 was primarily the result of increases in employee compensation costs, reflected by the growth in our development staff, 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, reflected by the growth in our development staff, which increased from 320 at December 31, 2001 to 635 at December 31, 2002, and a $7.3 million increase in

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 fixed 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 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, reflected by the growth in our general and administrative staff, 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 reflected 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 staff 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 finance, 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.

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

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 identified intangible assets.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. In accordance with SFAS No. 142, goodwill 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.

Identifiable 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 — seven years; trade name — seven years; and developed technologies — 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 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 filing 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.

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 financing cash flows, 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 Butterfields 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 offset 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 significant gains from the sale of assets or subsidiaries in 2003.

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 financial interest in a variable interest entity or where the variable interest entity does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. This interpretation applies immediately to variable interest entities created after January 31, 2003 and applies in the first 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 effective 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 reflect 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 reflect the reclassification 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 $5.7 million upon the adoption of FIN 46 on July 1, 2003. This charge will reflect 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 financing arrangement or purchase the San Jose facilities. Whether or not we keep the existing financing 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 financing payments and settle our two interest rate swaps we used to establish a fixed rate of interest for $95 million of our financing arrangement. During the year ended December 31, 2002, our financing 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.

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 financial condition of certain investees and based upon financing 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 significant 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 financial condition of certain investees and as a result of financing 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 fluctuate from time to time and future impairment assessments may result in additional charges to our operating results.

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

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

Minority interests 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 financial 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 first 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 fluctuate in future periods. If Internet Auction, our majority-owned South Korean subsidiary, continues to be profitable, 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.

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

A significant portion of our international net revenues, operating expenses and net income are denominated in Euros. During the 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 significance as we develop and deploy our global marketplace. As a result, foreign currency fluctuations in future periods could become more significant or even have a negative impact on our net revenues and net income.

Since inception, we have financed operations primarily from net cash generated from operating activities. In addition, we have obtained additional financing from the sale of preferred stock and warrants, proceeds from the exercise of those warrants, proceeds from the exercise of stock options and proceeds from our initial and follow-on public offerings. During 2002, we were primarily financed 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 benefits 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 financing activities was $86.0 million in 2000, $101.5 million in 2001, and $252.1 million in 2002. Net cash provided by financing activities was primarily due to the issuance of common stock associated with stock option exercises.

We expect capital expenditures to approximate $200 million during 2003, without taking into account any acquisitions or costs associated with the potential purchase of additional office facilities, and consists primarily of hardware and software for our platform architecture, site operations and corporate information systems. In the event we purchase additional office 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.

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 Offered Rate, or LIBOR, fluctuates. 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 final 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 financial 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 effect on our financial condition, results of operations or cash flows.

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 financial covenants. The cash and investment securities are restricted as to their withdrawal from a third-party trustee and are classified 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 financial 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 reflect 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 floating rate operating lease for our facilities. See “Item 7A: Quantitative and Qualitative Disclosures About Market Risk” and “Note 6 — 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 financial interest in a variable interest entity or where the variable interest entity does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. This interpretation applies immediately to variable interest entities created after January 31, 2003 and applies in the first 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 effective 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 reflect 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 reflect the reclassification 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 reflect 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 financing arrangement or purchase the San Jose facilities. Whether or not we keep the existing financing 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 financing payments and settle our two interest rate swaps we used to establish a fixed rate of interest for $95 million of our financing arrangement. During the year ended December 31, 2002, our financing 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.

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 office facilities located in San Jose, California, at December 31, 2002 are as follows (in thousands):

Minimum annual repayments on notes payable and capital leases at December 31, 2002 are as follows (in thousands):

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

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 specified performance goals, AOL has the right to extend the term of the amended agreement through March 23, 2005. Our financial 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.

In February 2000, we entered a four-year marketing agreement with The Walt Disney Company, or Disney, to provide us with online and offline 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 offline 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.

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,

In February 2003, we entered into an operating sublease for approximately 110,000 square feet of commercial office 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 figures above are in U.S. dollars, converted from Canadian dollars at the exchange rate as of December 31, 2002.

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 office 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 finalize 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 office facility, the amount of lease termination costs, excluding any possible sublease income, and fixed asset write-offs 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 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. § 1960 of the USA PATRIOT Act, which prohibits the transmission of funds that are known to have been derived from a criminal offense 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 offered 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. § 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 financial position, results of operations or cash flows.

We believe that existing cash, cash equivalents and investments, together with any cash generated from operations, will be sufficient to fund our operating activities, capital expenditures and other

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.

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).

Historically, our actual losses and credits have been consistent with these provisions. However, unexpected or significant future changes in trends could result in a material impact to future statements of income and cash flows. 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 effect a 25 basis point deviation from our estimates would have upon our financial statements and is not intended to provide a range of exposure or expected deviation (in thousands, except per share data):

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

transaction losses incurred as of the reporting date, including those to which we have not yet been notified. 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 file 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 reflected as a general and administrative expense in our results of operations, while write-offs 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).

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 reflected 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 five 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 effect a five basis point deviation from our estimates would have upon our financial 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):

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.

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 — Commitments and Contingencies — 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 plaintiffs were to prevail on certain claims, we might be forced to pay significant damages and licensing fees, modify our business practices or even be prohibited from conducting a significant part of our U.S. business. Any such results could materially harm our business and could result in a material adverse impact on the financial position, results of operations or cash flows of each of our three segments.

We are required to recognize a provision for income taxes based upon the taxable income and temporary differences 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 differences between the book and tax bases of our assets and liabilities, including various accruals, allowances, depreciation and amortization. The tax effect of these temporary differences and the estimated tax benefit 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 reflect 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 reflected 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 difficult to predict the amount of deductions that will be generated from future option exercises and, therefore, it is difficult 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):

Historically, these provisions have adequately provided for our actual income tax liabilities. However, unexpected or significant future changes in trends could result in a material impact to future statements of income and cash flows. 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 effect such a one-percentage point deviation change would have upon our financial statements

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 fixed 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 significant 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 satisfied 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 affected by the financial 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 significant 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 affect 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 specified wind-down period. After March 31, 2003, our third-party advertising revenues will be dependent on the efforts of our existing internal sales staff.

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 significant obligations remain at the end of a period or collection of the resulting receivable is not considered probable, revenues are deferred until

Similar to our third-party advertising revenues, our end-to-end services revenues may be affected by the financial 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.

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 flow 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 flows of the related assets. The amount of impairment, if any, is measured based on projected discounted future net cash flows using a discount rate reflecting 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 flows 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 financial 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.

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 nullifies Emerging

Issues Task Force, or EITF, Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits 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 definition 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 effective 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 financial position, cash flows or results of operations.

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 effective for the interim and annual periods ending after December 15, 2002. The recognition and measurement provisions under FIN 45 are effective for guarantees issued or modified after December 31, 2002. We do not expect the adoption of FIN 45 to have a material impact upon our financial position, cash flows or results of operations. See “Note 11 — Commitments and Contingencies” to our Consolidated Financial Statements, which is incorporated by reference herein.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation — 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 effective for periods beginning after December 15, 2002. The disclosure provisions are effective for fiscal years ending after December 15, 2002 and have been incorporated into the notes to the accompanying financial statements. We have chosen not to voluntarily adopt the fair value method of accounting for employee stock option grants at this time.

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 financial interest in a variable interest entity or where the variable interest entity does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. This interpretation applies immediately to variable interest entities created after January 31, 2003 and applies in the first 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 effective 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 reflect 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 reflect the reclassification 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 reflect 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 financing arrangement or purchase the San Jose facilities. Whether or not we keep the existing financing 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 financing payments and settle our two interest rate swaps we used to establish a fixed rate of interest for $95 million of our financing arrangement. During the year ended December 31, 2002, our financing 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.

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

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


	•	our ability to retain an active user base, to attract new users 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 confidence 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 effectively 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 difficulties 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 effective manner;

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

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

	•	the costs and results of litigation that involves us;

	•	the results of regulatory decisions that affect us;

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


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

	•	the success of our brand building and marketing campaigns;

	•	the continued financial strength of our 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 specific to the Internet and e-commerce industries; and

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

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

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


	•	maintain sufficient 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 significant into the future. In addition, many of our acquisitions require continuing investments in these areas and we have significant ongoing contractual commitments in some of these areas. As a result, we may be unable to adjust our spending rapidly enough to compensate for any unexpected revenue shortfall, which may harm our profitability. 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., fixed-price, reverse auction, group buying) may limit our ability to raise user fees in response to declines in profitability. In addition, we are spending in advance of anticipated growth, which may also harm our profitability. In view of the rapidly evolving nature of our business and our limited operating history, we believe that period-to-period comparisons of our operating results are not necessarily meaningful. You should not rely upon our historical results as indications of our future performance.

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

the eBay platform, and pursuing opportunities for PayPal’s growth outside of the eBay platform, will be relatively difficult and will require significant 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, efficient 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 Officer left the company at the time the merger was consummated and the pre-merger Chief Technical Officer, Chief Operating Officer and Chief Financial Officer left the company shortly thereafter. Accordingly, PayPal’s new Chief Executive Officer 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 efficient manner or that any of the anticipated benefits of the merger will be realized. If these benefits are not realized, our business and operating results will be harmed.

Anything that diverts our users from their customary level of usage of our websites could adversely affect our business. We would therefore be adversely affected by geopolitical events such as war, the threat of war or terrorist activity. Similarly, our results of operations historically have been seasonal in nature because many of our users reduce their activities on our websites 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 first and fourth fiscal quarters. PayPal has shown similar seasonality, except that its strongest quarter of online growth has historically been the fourth fiscal quarter.

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 profits. 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 offering 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;

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

	•	difficulties in staffing and managing foreign operations;

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

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


	•	higher telecommunications and Internet service provider costs;

	•	strong local competitors;

	•	more stringent consumer and data protection laws;

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

	•	seasonal reductions in business activity;

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

	•	laws and business practices that favor local competitors;

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

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

	•	differing intellectual property laws.

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

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 profitability. Any limitation on our ability to expand PayPal internationally could harm our business.

We do not collect sales or other similar taxes on goods or services sold by users through our services. One or more states or any foreign country may seek to impose value-added taxes, or VAT, or sales or use tax collection or record-keeping obligations on companies such as ours that engage in or facilitate online commerce. Such taxes could be imposed if, for example, we were ever deemed to be an auctioneer or the agent of our sellers. Several proposals have been made at the state and local level that would impose additional taxes on the sale of goods and services through the Internet. These proposals, if adopted, could substantially impair the growth of e-commerce, and could diminish our opportunity to derive financial benefit from our activities. In 1998, the U.S. federal government enacted legislation prohibiting states or other local authorities from imposing new taxes on Internet commerce for a period of three years, 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 effects could adversely affect 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.

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

PayPal faces significant 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 unverified 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 insufficient funds, and its liability from these items could have a material adverse effect 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 suffer.

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 insufficient funds in them to satisfy payments. PayPal’s liability for such items could have a material adverse effect 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 suffer. PayPal has been assessed substantial fines in the past, and excessive chargebacks may arise in the future. PayPal has taken measures to detect and reduce the risk of fraud, but these measures may not be effective. If these measures do not succeed, our business will suffer.

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 suffer.

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

PayPal’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 plaintiffs 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 identified 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 fines. 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 effectiveness of its anti-fraud program.

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

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 effect on its profitability. A security or privacy breach could:


	•	expose PayPal to additional liability;

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

	•	deter customers from using PayPal’s product.

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

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

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.

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 trafficking, prohibited sales of alcoholic beverages and tobacco products and online securities fraud. Despite measures PayPal has taken to detect and lessen the risk of this kind of conduct, 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 suffer if customers use its system for illegal or improper purposes, or if usage of its system is reduced because of increased verification requirements.

PayPal’s discontinuance of its processing of payments for online gambling merchants will reduce its revenue and profits; 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 profits will adversely affect PayPal’s financial 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 profits 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. § 1960 of the USA PATRIOT Act, which prohibits the transmission of funds that are known to have been derived from a criminal offense 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 offered 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. § 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 finding 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 affect PayPal’s service and, if it does not comply with the rules, could result in a termination of PayPal’s ability to accept credit cards. If PayPal is unable to accept credit cards, our business would suffer.


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

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


PART I
	ITEM 1: BUSINESS
	ITEM 2: PROPERTIES
	ITEM 3: LEGAL PROCEEDINGS
	ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
	ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
	ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
	ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
	ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	ITEM 11: EXECUTIVE COMPENSATION
	ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
	ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	ITEM 14. CONTROLS AND PROCEDURES
PART IV
	ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
REPORT OF INDEPENDENT ACCOUNTANTS
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF INCOME
CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNATURES
POWER OF ATTORNEY
CERTIFICATIONS
EXHIBIT INDEX
EXHIBIT 10.14
EXHIBIT 21.01
EXHIBIT 23.01


Minimum Bid, Opening
Value or Reserve Price		Listing Fee


$0.01 - $9.99		$0.30
$10.00 - $24.99		$0.55
$25.00 - $49.99		$1.10
$50.00 - $199.99		$2.20
$200.00 and up		$3.30



Special Categories		Listing Fee


Passenger Vehicles or Other Vehicles		$40.00
Motorcycles		$25.00
Real Estate		$50.00 - $300.00


Reserve Price		Reserve Price Fee*


$0.01 - $24.99		$0.50
$25.00 - $99.99		$1.00
$100.00 and up		1% of reserve price (up to a maximum fee of $100.00)


•	Clothing and Accessories
•	Coins
•	Collectibles
•	Dolls & Bears
•	Electronics and Computers


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


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


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


Seller Feature	Description	Feature Fee


Home Page Featured	Item is listed in a Special Featured section and is also rotated on the eBay home page.	$99.95
Featured Plus!	Item appears in the category’s Featured Item section and in bidder’s search results.	$19.95
Highlight	Item listing is emphasized with a colored band.	$5.00
Bold	Item title is listed in bold.	$1.00
Buy-It-Now	Allows the seller to close an auction instantly for a specified price.	$0.05


Sale Price		Final Value Fee


Up to $25		5.25% of sale price
$25.01 to $1,000		Above plus 2.75% of amount over $25
Over $1,000		Above plus 1.5% of the amount over $1,000


Special Categories		Final Value Fee


Passenger Vehicles or Other Vehicles		$40.00
Motorcycles		$25.00


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


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


		High		Low

Year Ended December 31, 2001
	First Quarter	$	55.13	$	28.44
	Second Quarter		71.30		29.25
	Third Quarter		70.20		40.48
	Fourth Quarter		72.74		44.00
Year Ended December 31, 2002
	First Quarter		69.50		48.85
	Second Quarter		64.10		49.25
	Third Quarter		62.47		51.05
	Fourth Quarter		70.85		50.22


ITEM 1:	BUSINESS


	Listing Fees


	Feature Fees


	Final Value Fees



			Year Ended December 31,

			1998			1999			2000			2001			2002


			(in thousands, except per share data)
Consolidated Statement of Income Data:
Net revenues			$	86,129		$	224,724		$	431,424		$	748,821		$	1,214,100
Cost of net revenues				16,094			57,588			95,453			134,816			213,876

		Gross profit		70,035			167,136			335,971			614,005			1,000,224

Operating expenses:
	Sales and marketing			35,976			96,239			166,767			253,474			349,650
	Product development			4,640			24,847			55,863			75,288			104,636
	General and administrative			15,849			43,919			73,027			105,784			171,785
	Payroll taxes on stock option gains			—			—			2,337			2,442			4,015
	Amortization of acquired intangible assets			805			1,145			1,433			36,591			15,941
	Merger related costs			—			4,359			1,550			—			—

		Total operating expenses		57,270			170,509			300,977			473,579			646,027

Income (loss) from operations				12,765			(3,373	)		34,994			140,426			354,197
Interest and other income (expense), net				1,799			23,833			46,337			41,613			49,209
Interest expense				(2,191	)		(2,319	)		(3,374	)		(2,851	)		(1,492	)
Impairment of certain equity investments				—			—			—			(16,245	)		(3,781	)

Income before income taxes and minority interests				12,373			18,141			77,957			162,943			398,133
Provision for income taxes				(4,789	)		(8,472	)		(32,725	)		(80,009	)		(145,946	)
Minority interests in consolidated companies				(311	)		(102	)		3,062			7,514			(2,296	)

Net income			$	7,273		$	9,567		$	48,294		$	90,448		$	249,891

Net income per share:
	Basic		$	0.07		$	0.04		$	0.19		$	0.34		$	0.87

	Diluted		$	0.03		$	0.04		$	0.17		$	0.32		$	0.85

Weighted average shares:
	Basic			104,128			217,674			251,776			268,971			287,496

	Diluted			233,519			273,033			280,346			280,595			292,820



	December 31,

	1998		1999		2000		2001		2002


	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	37,285	$	221,801	$	201,873	$	523,969	$	1,109,313
Short-term investments		40,401		181,086		354,166		199,450		89,690
Long-term investments		—		373,988		218,197		286,998		470,227
Long-term restricted cash and investments		—		—		126,390		129,614		134,644
Working capital		72,934		372,266		538,022		703,666		1,082,234
Total assets		149,536		969,825		1,182,403		1,678,529		4,124,444
Long-term debt		18,361		15,018		11,404		12,008		13,798
Total stockholders’ equity		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


					Percent					Percent
			2000		Change			2001		Change			2002


			(in thousands, except percent changes)
Transaction net revenues
	U.S.		$	315,193		51	%	$	474,970		51	%	$	718,239
	International			27,942		297	%		110,802		168	%		297,485
	Payments			5,039		235	%		16,899		452	%		93,303

		Total transaction net revenues		348,174		73	%		602,671		84	%		1,109,027

3rd party advertising net revenues
	U.S.			11,986		572	%		80,493		(32	)%		54,906
	International			1,036		224	%		3,360		38	%		4,651
	Payments			—		—			—		—			1,478

		Total 3rd party advertising net revenues		13,022		544	%		83,853		(27	)%		61,035

End-to-end services net revenues
	U.S.			30,756		(12	)%		27,132		(20	)%		21,647
	Payments			—		—			749		(22	)%		587

		Total end-to-end services net revenues		30,756		(9	)%		27,881		(20	)%		22,234

Offline net revenues				39,472		(13	)%		34,416		(37	)%		21,804

		Total net revenues	$	431,424		74	%	$	748,821		62	%	$	1,214,100

U.S. segment net revenues			$	397,407		55	%	$	617,011		32	%	$	816,596
International segment net revenues				28,978		294	%		114,162		165	%		302,136
Payments segment net revenues				5,039		250	%		17,648		440	%		95,368

			$	431,424		74	%	$	748,821		62	%	$	1,214,100


Year Ending	Operating
December 31,	Leases

2003	$	16,410
2004		17,056
2005		9,630
2006		7,568
2007		6,108
Thereafter		19,909

Total minimum lease payments	$	76,681


Year ending
December 31,	Total

2003	$	4,145
2004		2,513
2005		1,478
2006		616
2007		—
Thereafter		9,192

	$	17,944


			Management’s
	-25 Basis		2002		+25 Basis
	Points		Estimate		Points

Provision for doubtful accounts and authorized credits	$	22,934	$	25,455	$	28,528
Income from operations		356,718		354,197		351,124
Net income		251,482		249,891		247,951
Diluted earnings per share		0.86		0.85		0.85


	2002

Total Payment Volume from the PayPal operations	$	2,138,093
Provision for transaction losses		7,832
Provision for transaction losses as a % of total payment volume from PayPal operations		0.37%


			Management’s
	-5 Basis		2002		+5 Basis
	Points		Estimate		Points

Provision for transaction losses	$	6,842	$	7,832	$	8,980
Income from operations		355,187		354,197		353,049
Net income		250,516		249,891		249,166
Diluted earnings per share		0.86		0.85		0.85


			Management’s
			2002
	-1%		Estimate		+1%

Provision for income taxes	$	142,105	$	145,946	$	150,022
Income before income taxes		395,837		395,837		395,837
Net income		253,732		249,891		245,815
Diluted earnings per share		0.87		0.85		0.84


	*Impairment of Long-Lived Assets, Goodwill and Investments*


	*Accounting for Costs Associated with Exit or Disposal Activities*


	*Guarantor’s Accounting and Disclosure Requirements for Guarantees*


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


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