UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number 000-24821

eBay Inc.

(Exact name of registrant as specified in its charter)

(Registrant’s telephone number, including area code)

(408) 376-7400

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

None

Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:

Common Stock

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

     As of June 30, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, there were 1,321,484,422 shares (after giving retroactive effect to the registrant’s two-for-one stock split effective February 16, 2005) 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 and based upon information provided by stockholders on Schedules 13D and 13G filed with the Securities and Exchange Commission, was approximately $44,167,700,000. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the registrant’s 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 February 18, 2005, there were 1,344,806,283 shares of the registrant’s common stock outstanding.

PART I

FORWARD LOOKING STATEMENTS

      This report contains statements that involve expectations, plans or intentions (such as those relating to future business or financial results, new features or services, or management strategies). These statements are forward-looking and are subject to risks and uncertainties, so actual results may vary materially. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors That May Affect Results of Operations and Financial Condition” in Item 7, as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements.

      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.com,” we mean the online payments platform located at www.paypal.com.

Our Purpose and Our Mission

      Our purpose is to pioneer new communities around the world built on commerce, sustained by trust, and inspired by opportunity.

      We currently have two major businesses: the eBay Marketplace and PayPal. Our eBay Marketplace Mission is to create the world’s online marketplace. Our PayPal Mission is to create the new global standard for online payments.

eBay Marketplace

      Our marketplace exists as an online trading platform that enables a global community of buyers and sellers to interact and trade with one another. Our role is to create, maintain, and expand the functionality, safety, ease-of-use, and reliability of our 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 seeks to provide availability 24 hours a day, seven days a week, enabling sellers to list items for sale in either auction or fixed-price formats, buyers to bid for and 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 trade with one another more easily. Our software tools and services are designed to make our trading process easier and more efficient. These tools and services include: Turbo Lister, Seller’s Assistant, Selling Manager and Selling Manager Pro, which help automate the selling process; Picture Services, which enables sellers to include pictures in their listings; the Shipping Calculator, which makes it easier for buyers and sellers to calculate shipping costs; Shipping Labels, which allows sellers to print U.S. Postal Service postage and UPS labels; Shipment Tracking, which enables sellers to track their shipped packages; the eBay Toolbar, which helps eBay users stay connected with eBay wherever they are on the Internet; eBay Sales Reports and eBay Sales Reports Plus, which provide sales and fee information to sellers; and PayPal, which facilitates the online exchange of funds.

Whether provided by us or our commercial partners, services such as our global payments platform, trust and safety programs, user verification, buyer protection and assurance programs, postage and other shipping services, vehicle inspections, escrow, authentication and appraisal services are all intended to create a faster, easier and safer trading environment.

      Our community of users is the largest and one of the most loyal online trading communities on the Internet. 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 applying a consistent set of policies and fees to our community, we have created a level playing field that lets individuals and businesses of all types and sizes access broad markets and compete equally.

      Our success has been largely dependent upon the success of our community of confirmed registered users, which has grown from approximately two million at the end of 1998 to more than 94 million at the end of 2003 and to more than 135 million at December 31, 2004. In addition, at December 31, 2004, we had approximately 56 million active users, compared to approximately 41 million at the end of 2003. We define an active user as any user who bid on, bought, or listed an item during the prior 12-month period.

      We attract buyers and sellers to our community by offering:

      We focus on three fundamental building blocks to grow the gross merchandise volume and net revenues derived from the eBay Marketplace. These building blocks are:

      The specific areas of focus in each of our online trading marketplaces depend on the stage of local market development and other considerations.

      We believe our online marketplace makes inefficient markets more efficient.

      Traditional offline marketplaces can be inefficient because:

      We make these inefficient marketplaces more efficient because:

      In particular, large markets with broad buyer and seller bases, wide product ranges, and moderate shipping costs have been successful on our eBay Marketplace. 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 creating the world’s online marketplace by improving and expanding across three main areas: categories, formats, and geographies.

      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.

      As of December 31, 2004, listings on eBay.com were organized under the following major categories:

      We are continually seeking to improve and expand the formats in which members of our community can interact with one another. At the core of our marketplace are our traditional auction format listings, where a seller will select a minimum price for opening bids, with the option to set a reserve price for the item, which is the minimum price at which the seller is willing to sell the item. In addition, a seller with appropriate feedback ratings can also choose to use the Buy-It-Now feature at the time of the listing, which allows sellers to name a price at which they would be willing to sell the item to any buyer. The Buy-It-Now feature was introduced in 2000 and is now used on a large number of our listings. Another format in which a seller with appropriate feedback ratings can sell is a “Dutch Auction” format, which allows a seller to sell multiple identical items to the highest bidders. eBay Stores also represents another format through which sellers can offer their goods and

services. eBay Stores enables sellers to show all of their listings and to describe their respective businesses through customized pages.

      In addition to our more established eBay Marketplace formats, we are continually looking for ways to better enable members of our community to interact and transact with one another online. One new format that we are exploring with our acquisitions in 2004 of mobile.de in Germany and Marktplaats.nl in the Netherlands, as well as our investment in craigslist, is the classifieds format. These transactions will allow us to increase our knowledge of classifieds-style trading. In addition, we recently acquired Rent.com, which will allow us to expand into the online housing and apartment rental market.

      A key element of our growth strategy is to continually expand the eBay Marketplace to new communities around the world. Providing access to broad markets and reducing the barriers of global trade creates value for both buyers and sellers and greatly increases the vibrancy of our marketplace. As of December 31, 2004, eBay and its consolidated subsidiaries had marketplace websites directed toward the following markets:

•		Australia		•		India		•		South Korea
•		Austria		•		Ireland		•		Spain
•		Belgium		•		Italy		•		Sweden
•		Canada		•		Malaysia		•		Switzerland
•		China		•		the Netherlands		•		Taiwan
•		France		•		New Zealand		•		United Kingdom
•		Germany		•		the Philippines		•		United States
•		Hong Kong		•		Singapore

      In addition, through our equity investment in MercadoLibre, our geographic reach as of December 31, 2004, included the following markets:

•		Argentina		•		Columbia		•		Peru
•		Brazil		•		Ecuador		•		Uruguay
•		Chile		•		Mexico		•		Venezuela

      We have developed a number of programs on our eBay Marketplace, including our Feedback Forum, SafeHarbor^tm Program and eBay Standard Purchase Protection Program, to make eBay users more comfortable dealing with unknown trading partners and completing commerce transactions on the Internet.

      Feedback Forum: eBay’s Feedback Forum encourages each user to provide comments on other eBay users with whom he or she trades and lets every user view other users’ profiles, which include feedback ratings and comments by other users. Every registered eBay user has a feedback profile that may contain compliments, criticisms and other comments by users who have conducted business with such person. The Feedback Forum requires feedback to be related to specific transactions and provides an easy tool for users to match specific transactions with the user names of their trading partners. This information is recorded in a profile that includes a feedback rating for the person with feedback sorted according to whether it was given over the past month, six months, or twelve months. Users who develop positive reputations have color-coded star symbols displayed next to their user name 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 eBay’s user agreement prohibit actions that would undermine the integrity of the Feedback Forum, such as a user 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. 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.

      SafeHarbor Program: In addition to the Feedback Forum, we offer the SafeHarbor program, which provides guidelines for trading, provides information to resolve user disputes and responds to reports of misuse of the eBay service. eBay’s SafeHarbor staff investigates users’ complaints of possible misuse of the eBay service and takes appropriate action, including issuing warnings to users, ending and removing listings, or suspending users from bidding on or listing items for sale. Some of the complaints the SafeHarbor staff investigates include various forms of bid manipulation, malicious posting of negative feedback and posting of illegal items for sale. The SafeHarbor 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 team provides information to assist users with disputes over the quality of the goods sold or potentially fraudulent transactions. When we receive an officially filed, written claim of fraud from a user, we will generally suspend the offending user from the eBay service or take other appropriate action. The Community Watch team investigates the listing of illegal, infringing or inappropriate items on the eBay Marketplace sites and violations of certain of our policies. When we receive a valid written notice of claimed infringement of intellectual property rights by the owner of intellectual property, we remove the offending listing. Users who repeatedly infringe intellectual property rights are suspended. In addition, we have increased the number of people reviewing potentially illegal items and have developed software programs that scan new listings for keywords that may indicate illegal, infringing, or inappropriate items. Our trust and safety initiatives, including user identity verification, buyer protection, integrated escrow, authentication, and other proactive anti-fraud efforts are key elements of our effort to make the eBay Marketplace a safer place to trade.

      eBay Standard Purchase Protection Program: Disputes over items not received, or items received but where significantly not as described in the listing, can usually be resolved by direct communication between buyers and sellers. To help transaction partners reach a resolution, eBay offers an online process through which buyers and sellers can communicate with each other. If, upon completion of this process, the buyer still has not resolved the issue, the buyer has the opportunity to submit a claim. Upon submission of a claim, which is an online process, eBay’s Trust and Safety team is alerted about the transaction. If the buyer closes the dispute with this option and the transaction is eligible, then the buyer may file a claim under eBay’s Standard Purchase Protection Program, through which the buyer may be reimbursed up to $200 (minus a $25 processing cost). Additionally, if the eBay Trust and Safety team believes further action is warranted, the seller’s account may be restricted or suspended. The buyer can close the dispute at any time if the buyer’s concerns are resolved. The buyer can escalate a claim if 30 days have passed since the transaction date and either the seller has responded at least once or has not responded within 10 days of the dispute being opened. A dispute can only be open for 90 days after the transaction date. If the buyer has not closed the dispute within 90 days, it will be automatically closed. When a dispute is automatically closed, the seller is not reported to eBay’s Trust and Safety team and the buyer is not eligible to submit a claim under eBay’s Standard Purchase Protection Program.

      In addition to these eBay Marketplace trust and safety programs, PayPal also offers a Buyer Protection Program that makes buying on the eBay Marketplace more secure. With PayPal Buyer Protection, qualified purchases are eligible for up to $1,000 coverage.

      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, online text chat and, in certain circumstances, telephone. We are focusing our resources on increasing our accessibility and capacity, expanding our category-specific support, extending our online self-help features, and improving our systems and processes to allow us to provide the most efficient and effective support possible.

      eBay users have access to a variety of “pre-trade” and “post-trade” tools and services to enhance their user experience and to make trading faster, easier and safer for them. “Pre-trade” tools and services are intended to simplify the listing process and include photo hosting, authentication services and seller productivity software. “Post-trade” tools and services, which make transactions easier and more convenient to complete, include payment processing, insurance, vehicle inspections, escrow, shipping and postage. We currently provide these services directly or through contractual arrangements with third parties.

      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 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.

PayPal

      Our global payments platform, PayPal, enables any individual or business with an email address to securely, easily and quickly send and receive payments online. Our global payments platform also makes online trading more efficient compared to traditional payment methods such as checks, money orders, and credit cards via merchant accounts. These traditional payment methods present various obstacles to the online trading experience, including lengthy processing time, inconvenience, and high costs. PayPal delivers a product well suited for small businesses, online merchants and individuals by allowing them to send and receive online payments securely, conveniently and cost-effectively. The PayPal network builds on the existing financial infrastructure of bank accounts and credit cards to create a global, real-time payment solution.

      PayPal’s account-based system is available to users in 45 countries, including the United States. As of December 31, 2004, PayPal had approximately 64 million total accounts, comprising approximately 13 million business accounts and 51 million personal accounts.

      PayPal offers three types of accounts: Personal, Business, and Premier. A new user typically opens an account to send money for an eBay purchase or a purchase on another website, a payment for services rendered, or for a payment to an individual in lieu of cash. Allowing new users to join the network when they make or receive payments encourages PayPal’s natural, user-driven growth. PayPal’s account sign-up process asks each new user to provide PayPal his or her name, street address, phone number, and email address. The user’s email address serves as the unique account identifier. PayPal also offers customers who sell on their own websites the ability to accept credit card payments from buyers without requiring the buyer to open a PayPal account.

      Senders make payments at the PayPal website, at an item listing on eBay or another online business or platform where the seller has integrated PayPal’s Instant Purchase Feature, or at the sites of merchants that have integrated PayPal’s Website Payments 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 Website Payments, a sender selects an item for purchase, confirms the payment information and enters his or her email address and password to authorize the payment. 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 transaction is held until the funds have cleared the sender’s bank, which typically takes three to five business days. In turn, the recipient can make

payments to others or withdraw his or her funds at any time via check (in the U.S.), electronic funds transfer, or via a PayPal-branded debit card (which is only available to U.S. users).

      PayPal earns revenue in five ways. First, PayPal earns transaction fees when a Business or Premier account receives a payment. Second, PayPal earns a foreign exchange fee when a user converts a balance from one currency to another. Third, PayPal may earn fees when a user withdraws money to a non-U.S. bank account, depending on the amount of the withdrawal. Fourth, PayPal earns a return on certain customer balances. Finally, PayPal may earn ancillary revenues from a suite of financial products, including the PayPal-branded debit card, the PayPal-branded credit card and the PayPal Buyer Credit offering.

      We incur funding costs on payments at varying levels based on the source of the payment, with credit card and debit card funding costs being significantly higher than bank account or balance-funded payments. U.S. users who choose to maintain PayPal balances in U.S. dollars have the ability to sweep balances into the PayPal Money Market Fund. This Money Market Fund, which is invested in a portfolio managed by Barclays Global Fund Advisors, bore a current compound annual yield of 2.03% as of December 31, 2004.

      To fund payments from their bank accounts in the United States, the United Kingdom and Canada, senders must first become verified PayPal users. The primary method for verification is our Random Deposit technique. Under this technique, PayPal makes 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 through 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 account holder in the U.S. and, as of December 31, 2004, in 23 other countries, may withdraw money from their PayPal account through an electronic fund transfer to his or her bank account or, in the U.S., by a mailed check from PayPal. Automated Clearing House, or 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 in the U.S. can receive a PayPal ATM/debit card, which provides instant liquidity to their PayPal account balances. ATM/debit cardholders 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.

      Providing more efficient and effective payment methods is essential to creating a faster, easier and safer online trading experience. Traditional payment methods such as checks, money orders and credit cards processed through merchant accounts, all present various obstacles to the online trading experience, including lengthy processing time, inconvenience and high costs. Our PayPal online payments solution allows our community of eBay users, as well as users of other online businesses, to pay for their transactions securely, easily and quickly.

      PayPal enables buyers to store their sensitive financial information online, and to pay merchants without sharing this information with them, or entering their information onto a website each time they make a purchase. To make payments, senders need to disclose only their email addresses to recipients. Similarly, to receive payments, recipients need to disclose only their email addresses to senders. Many buyers and sellers wary of disclosing financial information online find this high level of personal privacy attractive.

      PayPal offers online merchants an all-in-one payment processing solution that is cheaper than most merchant accounts, offers industry-leading fraud prevention, and enables merchants to access approximately 64 million customers in 45 countries.

      A merchant can open a PayPal account and begin accepting credit card payments within a few minutes. Merchants are approved instantly for a PayPal account, and do not need to provide a personal guaranty, acquire any specialized hardware, prepare an application, contact a payment gateway or encrypt customer data. Furthermore, PayPal charges lower transaction fees than most merchant accounts, and charges no setup fees and no recurring monthly fees.

      The account-based nature of PayPal’s network helps us to detect and prevent fraud when funds enter the PayPal network, as funds move within the network, and when they leave. Sellers can also reduce the risk of transaction losses due to unauthorized credit card use and fraudulent chargebacks entirely, if they comply with PayPal’s Seller Protection Policy.

      We seek to extend our leading position and become the online payment network of choice around the world. To establish PayPal as the global payment standard in online payments, we will focus on, among other things, increased adoption of PayPal on the eBay Marketplace and expansion of PayPal’s merchant services, which are services for merchants who sell through their own websites.

      eBay.com: In 2004, the U.S. Marketplace segment of eBay generated more than $18 billion in gross merchandise volume, which is a measure of the total value of all successfully closed listings between users on our marketplace. We intend to strengthen PayPal’s penetration into the payments area on the eBay Marketplace in the United States by continuing to integrate with eBay listings and seeking to add product features important to the eBay community. During 2004, we added features such as PayPal Buyer Credit and payment for postage and shipment insurance through PayPal, we expanded the free coverage afforded to buyers under the PayPal Buyer Protection Program from $500 to $1,000 per transaction (from £250 to £500 for British pound-denominated transactions), and we added PayPal Buyer Protection coverage for buyers from qualified U.K., Canadian and German sellers.

      International sites: Prior to 2004, PayPal was offered in a local language and currency in only three countries — the United States, Canada and the United Kingdom. As of December 31, 2004, PayPal was available in a local language and currency in five additional countries. PayPal plans to continue its expansion into new countries, while innovating on the product and adding new features to increase adoption by the eBay international community.

      As of December 31, 2004, PayPal was offered in a local language and currency in eight markets:

      As of December 31, 2004, PayPal allowed its customers with credit cards to send payments from an additional 36 markets outside of the U.S., and to receive payments in 35 of those markets. In 15 of these markets, customers can withdraw funds to local bank accounts.

      Our international expansion into an increased number of markets and currencies makes cross-border transactions easier and more efficient, which benefits both the eBay Marketplace and PayPal.

      We intend to continue to develop features and to market our global payments solution to spur our growth as a payment solution for sole proprietors and small and medium-sized businesses. During the past year, we added features that allow merchants to customize PayPal’s payment flows to their own websites, and to integrate PayPal more seamlessly into their checkouts. We also completely redesigned the PayPal home page to make it more user friendly for businesses, and rolled out a “PayPal For Business” campaign.

      We intend to continue to market the PayPal product to small and medium-sized businesses and large merchants, and enable them to add PayPal as a “payment mark” on their websites. These merchants will offer PayPal, alongside other payment methods, such as credit cards, checks and money orders.

      Finally, we will continue to identify transactions and markets not served adequately by existing payment systems and seek to develop product features that improve upon those legacy systems. For example, during the past year, we integrated PayPal with Apple iTunes and Napster.

      We have developed a number of PayPal trust and safety programs, including PayPal’s Seller Protection Policy, Buyer Protection Policy and PayPal’s Money Back Guarantee. These programs provide certain additional protection to eBay users who pay, or receive payment, for their transactions through PayPal. In addition, our Fraud Investigation Team focuses on identifying and preventing fraud before it occurs, detecting fraud in process, mitigating loss if fraud does occur and delivering information to law enforcement around the world to better combat online fraud.

      Seller Protection Policy: PayPal’s Seller Protection Policy covers sellers for up to $5,000 on certain fraudulent transactions. In order to be eligible for 100% protection, PayPal sellers must adhere to certain steps which include: having a verified Business or Premier account; shipping goods, in a timely manner, to an eligible address; retaining proof of shipping which is trackable online and, for items with a value of over $250, requiring a signature receipt; accepting entire payment in a single transaction; and, responding to all PayPal inquiries in a timely manner.

      Buyer Protection Policy: With PayPal Buyer Protection, qualified purchases are eligible for up to $1,000 (or for up to £500 for British pound-denominated transactions) coverage at no cost. This program covers qualified purchases that the buyer has paid for, and either has never received, or has received but where significantly different than described in the listing. When a buyer files a claim through PayPal Buyer Protection, we work with both the buyer and seller to gather the details of the transaction. We investigate the facts of the case and make an effort to come to a fair conclusion. For a purchase to be eligible for this coverage, the PayPal Buyer Protection icon must be displayed in the Seller Information box on the eBay listing, the item purchased must be a physical item, PayPal must be used to pay for the item, and the buyer must use the seller’s e-mail address associated with the listing. Claims must be filed within 45 days of PayPal payment, and buyers are limited to three PayPal Buyer Protection refunds per year.

      Money Back Guarantee: When a payment is made on the PayPal website, users are often given the option to buy a Money Back Guarantee to protect the purchase of physical goods. If a Money Back Guarantee is purchased, buyers will have the option to return the merchandise to us in exchange for a reimbursement (not including the guarantee fee), provided that they file a complete reimbursement request within 45 days of payment. This program is only offered for transactions involving tangible goods of less than $1,000 with pre-qualified sellers. In addition, we may take additional criteria into account in deciding whether to offer the Money Back Guarantee on a particular transaction.

Technology

      The eBay platform is composed of a scalable transaction processing system, consumer user interface, and externally accessible Application Programming Interface, or 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 eBay 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 at least monthly. In addition to these features, the eBay service supports a community bulletin board and chat areas where users and eBay customer support personnel can interact. Overall system volume on the eBay platform is significant, with peak usage in 2004 of approximately 890 million page views per day and 7.7 gigabits of outbound data traffic per second.

      Our eBay platform is designed around industry standard architectures to reduce downtime in the event of outages or catastrophic occurrences. eBay seeks to provide availability 24 hours a day, seven days a week. Substantially all of our system hardware is hosted at Cable & Wireless and Qwest facilities in San Jose, California, an eBay-owned data center in Denver, Colorado, and a Sprint Communications facility in Sacramento, California. Each of these facilities provides redundant communications lines and emergency power backup. Although our systems have been designed around industry-standard architecture to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption, and we do not maintain fully redundant systems. For more information regarding these risks, see the information in Item 7 under “Risk Factors That May Affect Results of Operations and Financial Condition — System failures could harm our business.”

      Our eBay 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’ load balancing systems and our own redundant servers along with select software from Veritas to provide for fault tolerance, and we use IBM’s WebSphere application server for certain platform functions. In 2004 we completed the implementation of a new billing and collections system from CSG Systems. We must continually improve our systems to accommodate the increasing levels of use of our websites. In addition, we may need to develop or license additional technology in order to add new features and functionality to our services. If we are unable to upgrade or effectively integrate our technology, transaction processing systems, security infrastructure, or network infrastructure to accommodate increased traffic or transaction volume our business could be harmed. For more information regarding these risks, see the information in Item 7 under “Risk Factors That May Affect Results of Operations and Financial Condition — Our failure to manage growth could harm 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, to 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. Also, due to the potential growth in our customer base and number of listings, we anticipate that expansion will be required. If we fail to adapt to any of these changes and to our anticipated growth, our business would be harmed. 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. In 2004, we completed our migration to a new software architecture intended to facilitate continued stability, improved scalability, and enhanced efficiency on the eBay Marketplace. The new architecture now serves nearly 100% of the site traffic of the eBay Marketplace.

      Our PayPal technology is designed to assure user access to the PayPal website. 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. Most major components of our PayPal network reside at our facilities in San Jose, California, at an eBay-owned data center in Denver, Colorado, at an Equinix data center in San Jose, California, and at our PayPal operations and customer support facility in Omaha, Nebraska.

      Due to 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 the Denver and Equinix data centers. These data centers have redundant connections to the Internet, as well as fault-tolerant power and fire suppression systems. Due to 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 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. For more information regarding these risks, see the information in Item 7 under “Risk Factors That May Affect Results of Operations and Financial Condition — System failures could harm our business.”

      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. Finally, we store all customer 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.

Competition

      We encounter vigorous competition in our business from numerous sources. Our users can find, buy, sell, and pay for similar items through a variety of competing channels. These include but are not limited to, online and offline retailers, distributors, liquidators, import and export companies, auctioneers, catalog and mail-order companies, classifieds, directories, search engines, products of search engines, 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. As our product offerings continue to broaden into new categories of items and new trading formats, 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. For our PayPal service, our users may choose to pay through a variety of alternative means, including other online payment services, offline payment methods such as cash, check or money order, and traditional online or offline credit card merchant accounts. 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 users’ online 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 consolidated net income. For more information regarding these risks, see the information in Item 7 under “Risk Factors That May Affect Results of Operations and Financial Condition — Our industry is intensely competitive.”

Seasonality

      Our results of operations historically have been seasonal because many of our users reduce their activities on our websites with the onset of good weather during the summer months, and on and around national holidays. We have historically experienced our strongest quarters of online sequential growth in our first and fourth fiscal quarters. PayPal has shown similar seasonality, especially in the fourth fiscal quarter. We expect these patterns of seasonality to continue as our websites gain acceptance by a broader base of mainstream users. In addition, as our business matures, transaction activity patterns on our websites increasingly mirror general consumer buying patterns, both online and offline.

Intellectual Property

      We regard the protection of our trademarks, copyrights, patents, domain names, trade dress and trade secrets as critical to our success. We have entered into 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 by using 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 other major countries. 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 become operational more recently. 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 intellectual property rights. We currently are involved in several such legal proceedings. Please see the information in “Item 3: Legal Proceedings” and in Item 7 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.”

Employees

      As of December 31, 2004, eBay Inc. and its consolidated subsidiaries employed approximately 8,100 people (excluding approximately 600 temporary employees), of whom approximately 5,900 were located in the United States (excluding approximately 500 temporary employees). Our future success is substantially dependent on the performance of our executive and senior management and key technical personnel, and on our continuing ability to find and retain highly qualified technical and managerial personnel.

Segments

      Reporting segments are based upon our internal organizational structure, the manner in which our operations are managed, the criteria used by our chief operating decision-maker to evaluate segment performance, the availability of separate financial information and overall materiality considerations.

      The U.S. Marketplace segment includes U.S. online marketplace trading platforms other than our PayPal subsidiary. The International Marketplace segment includes our international online marketplace trading platforms other than our PayPal subsidiary. The Payments segment includes our global payments platform consisting of our PayPal subsidiary. The Payments amounts reflect the historical operations of our former Billpoint subsidiary and PayPal’s operations for the post-acquisition period from October 4, 2002 through December 31, 2004. We completed our planned wind-down of Billpoint in the first half of 2003.

      The financial information used by our chief operating decision-maker is focused on revenues and direct costs of the particular segment. 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 currently have discretionary control, such as site operations costs, product development expenses, and certain other general and administrative costs, are monitored by management through shared cost centers and are not evaluated in the measurement of segment performance.

      For an analysis of financial information about geographic areas as well as our segments, see “Note 4 — Segments” of the notes to our consolidated financial statements incorporated herein.

Available Information

      Our Internet address is www.ebay.com. Our investor relations website is located at http://investor.ebay.com. We make available free of charge on our investor relations website under “SEC Filings” our Annual Reports on Form  10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission. Further, a copy of this annual report on Form 10-K is located at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

      We own and lease various properties in the United States and in 17 other countries around the world. We use the properties for corporate, administrative, customer support and other general business needs. Our corporate headquarters are located in San Jose, California. As of December 31, 2004, our owned and leased properties provided us with aggregate square footage of approximately 730,000 and 1.4 million, respectively, and the total square footage occupied by our U.S. Marketplace, International Marketplace and Payments segments totaled approximately 800,000, 650,000 and 450,000, respectively. As of December 31, 2004, the remaining total square footage of our owned and leased properties were either sublet or were being marketed for sublet.

      From time to time we consider 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 accommodate any future growth.

      For a discussion of the accounting treatment of our leased corporate headquarters that we will purchase on March 1, 2005, see “Note 8 — Long-Term Obligations” of the notes to our consolidated financial statements, included elsewhere in this Annual Report on Form 10-K.

      In April 2001, two of our European subsidiaries, eBay GmbH and eBay International AG, were sued by Montres Rolex S.A. and certain of its affiliates in the regional court of Cologne, Germany. The suit subsequently was transferred to the regional court in Düsseldorf, 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 alleged unfair competition. Rolex sought an order enjoining the sale of Rolex-branded 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 appealed the ruling to the Higher Regional Court of Düsseldorf, and the appeal was heard in October 2003. In February 2004, the court rejected Rolex’s appeal and ruled in our favor. Rolex has appealed the ruling to the German Federal Supreme Court. In March 2004, the German Federal Supreme Court ruled in favor of Rolex in a case involving an unrelated company, ricardo.de AG, but somewhat comparable legal theories. The court issued its written decision in that case in September 2004. Although it is not yet clear what effect the reasoning of the German Federal Supreme Court’s ricardo.de decision would have when applied to eBay, we believe the Court’s decision will likely not require any significant change in our business practices.

      In September 2001, a complaint was filed by MercExchange LLC against us, our Half.com subsidiary and ReturnBuy, Inc. in the U.S. District Court for 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). In October 2002, the court granted in part our summary judgment motion, effectively

invalidating the patent related to online auction technology and rendering it unenforceable. This ruling left only two patents in the case. Trial of the matter began in April 2003. In May 2003, the jury returned a verdict finding that eBay had willfully infringed one and Half.com had willfully infringed both of the patents in the suit, awarding $35.0 million in compensatory damages. Both parties filed post-trial motions, and in August 2003, the court entered judgment for MercExchange in the amount of $29.5 million, plus pre-judgment interest and post-judgment interest in an amount to be determined, while denying MercExchange’s request for an injunction and attorneys’ fees. We appealed the verdict and judgment in favor of MercExchange and MercExchange filed a cross-appeal of the granting in part of our summary judgment motion and the denial of its request for an injunction and attorneys’ fees. Oral arguments for the appeals were heard on October 5, 2004. The U.S. Patent and Trademark Office recently granted our request that it reexamine the three patents at suit, and on January 26, 2005, the Patent and Trademark Office issued a ruling rejecting all of MercExchange’s claims under the patent that related to online auctions. We continue to believe that the verdict against us in the trial was incorrect and intend to continue to pursue our appeal and defend ourselves vigorously. However, even if successful, our appeal of and defense against this action will continue to be costly. In addition, as a precautionary measure, we have modified certain functionality of our websites and business practices in a manner which we believe makes them not infringe the two patents that we were found to have infringed. Nonetheless, if we are not successful in appealing the court’s ruling, we might be forced to pay significant additional damages and licensing fees or modify our business practices in an adverse manner. We recorded an operating charge in the amount of $30.0 million, reflecting the $29.5 million judgment, together with our estimate for pre-judgment interest of $0.5 million. The charge and the related estimated tax benefit of $12.1 million were reflected in our consolidated statement of income as patent litigation expense in the year ended December 31, 2003.

      In August 2002, Charles E. Hill & Associates, Inc. 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 case was transferred to the U.S. District Court for the Southern District of Indiana. After pending in Indiana for almost a year, the case was transferred back to the U.S. District Court for the Eastern District of Texas in December 2003. A scheduling conference was held in November 2004 and a preliminary trial date has been set for February 2006. The case is currently in fact discovery and claim construction discovery. We believe that we have meritorious defenses and intend to defend ourselves vigorously.

      In February 2002, PayPal was sued in California state court (No. CV-805433) in a purported class action alleging that its restriction of customer accounts and failure to promptly unrestrict legitimate accounts violates California state consumer protection laws and is an unfair business practice and a breach of PayPal’s User Agreement. This action was re-filed with a different named plaintiff in June 2002 (No. CV-808441), and a similar action was also filed in the U.S. District Court for the Northern District of California in June 2002 (No. C-02-2777). In March 2002, PayPal was sued in the U.S. District Court for the Northern District of California (No. C-02-1227) 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 laws. The two federal court actions were consolidated into a single case, and the state court action was stayed pending developments in the federal case. In June 2004, the parties announced that they had reached a proposed settlement. The settlement received approval from the federal court on November 2, 2004, but the court’s approval could be appealed. In the settlement, PayPal does not acknowledge that any of the allegations in the case are true. Under the terms of the settlement, certain PayPal account holders will be eligible to receive payment from a settlement fund of $9.25 million, less administrative costs and the amount awarded to plaintiffs’ counsel by the court. That sum will be distributed to class members who have submitted timely claims in accordance with the settlement’s plan of allocation, which still must be approved by the court. The parties expect that a plan of allocation will be submitted to the court in the first quarter of 2005. The amount of the settlement was fully accrued in our consolidated statement of income for the year ended December 31, 2003.

      In July 2004, a purported class action lawsuit was filed by two eBay users in Superior Court of the State of California, County of Santa Clara (No. 104CV022708) alleging that eBay engaged in improper billing practices as the result of problems with the rollout of a new billing software system in the second and third quarters of 2004. The lawsuit sought damages and injunctive relief. An amended complaint was filed in January 2005, dropping one plaintiff, changing the capacity of the other plaintiff to that of representative plaintiff, and adding seven additional eBay users as plaintiffs. The amended complaint expanded its claim to include numerous alleged improper billing practices from September 2003 until the present. In February 2005, eBay filed a motion to strike and a demurrer seeking to dismiss the complaint. We believe that we have meritorious defenses and intend to defend ourselves vigorously.

      In February 2005, eBay was sued in Superior Court of the State of California, County of Santa Clara (No. 105CV035930) in a purported class action alleging that certain bidding features of our site constitute “shill bidding” for the purpose of artificially inflating bids placed by buyers on the site. The complaint alleges violations of California’s Auction Act, California’s Consumer Remedies Act, and unfair competition. The complaint seeks injunctive relief, damages, and a constructive trust. The plaintiffs have not yet served eBay with the complaint. We believe that we have meritorious defenses 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 intellectual property rights. We have been notified of several potential patent disputes, and expect that we will increasingly be subject to patent infringement claims as our services expand in scope and complexity. In particular, we expect to face additional patent infringement claims involving services we provide, including various aspects of our Payments business. We have in the past been forced to litigate such claims. We may also become more vulnerable to third-party claims as laws such as the Digital Millennium Copyright Act, the Lanham Act and the Communications Decency Act are interpreted by the courts and as we expand geographically into jurisdictions where the underlying laws with respect to the potential liability of online intermediaries like ourselves are either unclear or less favorable. These claims, whether meritorious or not, could be time consuming and costly to resolve, 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.

      From time to time, we are involved in other disputes that arise in the ordinary course of business. The number and significance of these disputes is increasing as our business expands and our company grows larger. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, and result in the diversion of significant operational resources.

      There were no submissions of matters to a vote of security holders during the quarter ended December 31, 2004.

PART II

Price Range of Common Stock

      Our common stock has been traded on The Nasdaq Stock Market^sm under the symbol “EBAY” since September 24, 1998. The following table sets forth the intra-day high and low per share bid prices of our common stock (after giving retroactive effect to all previous stock splits, including the recent two-for-one stock split effective February 16, 2005) for the periods indicated, as reported by The Nasdaq Stock Market.

      As of February 18, 2005, there were approximately 2,800 holders of record of our common stock, although we believe that there is a significantly larger number of beneficial owners of our common stock.

Dividend Policy

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

Equity Compensation Plans

      For information on securities authorized for issuance under our equity compensation plans, refer to “Equity Compensation Plan Information” under Item 12, which is included elsewhere in this Annual Report on Form 10-K.

Issuer Purchases of Equity Securities

      We did not repurchase any of our equity securities during the quarter ended December 31, 2004.

      The following selected consolidated financial and supplemental operating data should be read in conjunction with 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, and as of, December 31, 2000, 2001, 2002, 2003 and 2004 are derived from our audited consolidated financial statements. All share and per share amounts included in the following consolidated financial data have been retroactively adjusted to reflect all previous stock splits, including our recent two-for-one stock split, effective February 16, 2005.

FORWARD LOOKING STATEMENTS

      This report contains statements that involve expectations, plans or intentions (such as those relating to future business or financial results, new features or services, or management strategies). These statements are forward-looking and are subject to risks and uncertainties, so actual results may vary materially. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors That May Affect Results of Operations and Financial Condition” below, as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements.

      You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document.

Overview

      We pioneered online trading by developing an Internet-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 electronic payments securely, conveniently and cost-effectively.

      Members of our senior management team regularly review key operating metrics such as new users, active users, listings and gross merchandise volume as well as new user accounts and total payment volume processed by our wholly owned PayPal subsidiary. Members of our senior management also regularly review key financial information including net revenues, operating income margins, earnings per share, cash flows from operations and free cash flows, which we define as operating cash flows less purchases of property and equipment, net. These operating and financial measures allow us to monitor the health and vibrancy of our

marketplace and our global payments platform, and the profitability of our business and to evaluate the effectiveness of investments that we have made and continue to make in the areas of international expansion, customer support, product development, marketing and site operations. We believe that an understanding of these key operating and financial measures and how they change over time is important to investors, analysts and other parties analyzing our business results and future market opportunities.

      We expect that our growth in net revenues during 2005 will result primarily from increased net transaction revenues across our U.S. Marketplace, International Marketplace and Payments segments. We continue to make investments in our business and infrastructure to help us achieve our long-term growth objectives. We expect to continue our investments in the areas of international expansion for both our eBay Marketplace and our PayPal businesses, customer support, site operations, marketing and various corporate infrastructure areas. We believe these investments are necessary to support the long-term demands of our growing business as well as to build the infrastructure necessary to support long-term growth. In addition, to the extent that the U.S. dollar strengthens against foreign currencies, and, in particular, the Euro and the British pound, the remeasurement of these foreign currency denominated transactions into U.S. dollars will negatively impact our consolidated net revenues and, to the extent that they are not hedged, our net income.

      The detailed discussion of our consolidated financial results contained herein is intended to provide information to assist investors, analysts and other parties reading this report in understanding the key operating and financial measures summarized above as well as the changes in our consolidated results of operations from year to year, and the primary factors that accounted for those changes.

      The following table sets forth, for the periods presented, our total net revenues and the sequential quarterly growth of these net revenues.

      As our business matures, transaction activity patterns on our websites increasingly mirror general consumer buying patterns, both online and offline. We have historically experienced our strongest quarters of sequential growth in the first and fourth fiscal quarters. We expect this pattern of seasonality to continue.

      Through both domestic and international acquisitions, we have continued to expand eBay’s global online marketplace. The financial results of entities acquired in purchase transactions are reflected in our consolidated results from the effective dates of each acquisition. The aggregate purchase price for completed acquisitions totaled $1.0 billion in 2004, $246 million in 2003, and $1.6 billion in 2002. We accounted for each acquisition as a purchase transaction and, accordingly, each purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on

the acquisition date. Acquired intangible assets related to these purchases totaled $131 million in 2004, $29 million in 2003, and $286 million in 2002. See “Note 1 — The Company and Summary of Significant Accounting Policies” and “Note 3 — Business Combinations, Goodwill and Intangible Assets” to our consolidated financial statements, included elsewhere in this Annual Report on Form 10-K.

Results of Operations

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

      Our net revenues are derived primarily from listing, feature and final value fees paid by sellers on our eBay Marketplace and fees from payment processing services on our PayPal platform. Our net revenues have continued to grow each year, primarily as a result of increased auction and fixed-price transaction activity, reflected in the growth in the number of our confirmed registered users, user activity, listings, user gross merchandise volume on our eBay Marketplace platforms and payment transactions processed by PayPal. We believe these increases are largely the result of our promotional efforts and our emphasis on enhancing the online trading experience of our user community, both domestically and internationally, through the introduction of new site features and functionality and expanded trust and safety programs.

     Net Revenues Summary

      Net revenues are attributed to U.S. and International geographies based upon the country in which the seller, payment recipient, advertiser or service provider is located. Our Payments segment net revenues include amounts earned internationally.

     The U.S. Marketplace segment includes our U.S. marketplace trading platforms, other than our PayPal subsidiary. The International Marketplace segment includes our international marketplace trading platforms excluding our PayPal subsidiary. The Payments segment includes our global payments platform consisting of our PayPal subsidiary. The Payments segment reflects the historical operations of our former Billpoint subsidiary and of PayPal’s operations for the periods subsequent to our acquisition of PayPal on October 3, 2002. We completed our planned wind-down of Billpoint in the first half of 2003.

      Our net revenues result from fees associated with our transaction, advertising and other services in our U.S. Marketplace, International Marketplace and Payments segments. Net transaction revenues are derived primarily from listing, feature and final value fees paid by sellers and fees from payment processing services. Net revenues from advertising are derived principally from the sale of banner and sponsorship advertisements for cash and through barter arrangements. Other non-transaction net revenues are derived principally from contractual arrangements with third parties that provide transaction services to eBay and PayPal users and also from offline services provided by our former Butterfields and Kruse subsidiaries, which were divested in the second half of 2002.

      The successive year-over-year growth in net revenues from 2002 through 2004 was primarily the result of increased auction and fixed-price transaction activity, reflected in the growth in the number of our confirmed registered users, user activity, listings, gross merchandise volume and payment transactions processed by PayPal. Our net revenue growth during the year ended December 31, 2003 also reflects a full year of payment transactions processed by PayPal, which we acquired in October 2002.

      Total net transaction revenues from the U.S. and International Marketplace segments in aggregate increased 48% in 2004, 66% in 2003, and 73% in 2002, compared to the respective prior year. The growth in both U.S. Marketplace and International Marketplace segment net transaction revenues was primarily the result of increased auction transaction activity, reflected in the growth of the number of registered users, active users, listings and gross merchandise volume. Gross merchandise volume from the U.S. and International Marketplace segments together increased 44% in 2004 and 60% in both 2003 and 2002, compared to the respective prior year. U.S. and International Marketplace segment net transaction revenues as a percentage of user gross merchandise volume was 7.3% for 2004, 7.1% for 2003, and 6.8% for 2002. The increases in 2004 and 2003 reflected increased feature adoption and the impact of our fee increases implemented in those years. In addition, there was gross merchandise volume growth across all major categories, with the motors, clothing & accessories, consumer electronics, home & garden, books/movies/music, sports, and computer categories having the most significant dollar impact.

      The number of active users on the eBay platform increased 36% during 2004 to 56.1 million at December 31, 2004. Active users increased 49% during 2003 to 41.2 million at December 31, 2003, from 27.7 million at December 31, 2002. We believe that increases in user activity are largely the result of our promotional efforts and our emphasis on helping our user community be successful through the introduction of new site features and functionality and expanded trust and safety programs, in addition to our international expansion.

      The number of items listed on eBay’s trading platforms increased 45% to 1.4 billion in 2004, from 971.0 million in 2003, and increased 52% in 2003 from 638.3 million in 2002. This percentage growth in listings was experienced across our U.S. and, more significantly, our international platforms.

      U.S. Marketplace segment net transaction revenues increased 31% in 2004, 43% in 2003, and 51% in 2002, compared to the respective prior year. Gross merchandise volume from the U.S. Marketplace segment increased 27% in 2004, and 41% in 2003 and 2002, respectively. The U.S. Marketplace is our largest and most developed business. Net transaction revenues derived from the U.S. Marketplace segment represented 42% of the total net transaction revenues in 2004. We expect net transaction revenues from our U.S. Marketplace segment to increase in 2005, but to decrease as a percentage of total eBay Marketplace net transaction revenues as the International Marketplace segment grows in significance. In addition, even as the U.S. Marketplace segment continues to grow in absolute terms, we expect its growth rate in 2005 to be lower than that of 2004.

      International Marketplace segment net transaction revenues increased 76% in 2004, 121% in 2003, and 168% in 2002, compared to the respective prior year. International Marketplace segment net transaction revenues as a percentage of total net transaction revenues was 36% in 2004, 31% in 2003 and 27% in 2002. Gross merchandise volume from the International Marketplace segment increased 70% in 2004, 102% in 2003, and 126% in 2002, compared to the respective prior year. For 2004, the growth in our International Marketplace segment net transaction revenues, both in absolute terms and as a percentage of total net transaction revenues, was primarily the result of strong performances in the United Kingdom and South Korea and a solid performance in Germany. The relative strength of foreign currencies against the U.S. dollar resulted in increased net revenues of approximately $117.0 million during 2004, when compared to the results if the weighted-average foreign currency exchange rates used in the preparation of our 2003 consolidated financial statements were used. Changes in foreign currency rates will impact our operating results and, to the extent that the U.S. dollar strengthens, our foreign currency denominated net revenues will be negatively impacted. We expect that the growth rates of our International Marketplace segment transaction net revenues will continue to decline in 2005, although we expect such revenues to grow in significance relative to our total eBay Marketplace as we continue to develop and deploy our global online trading platform during 2005.

      Payments segment net transaction revenues increased 59% in 2004, 360% in 2003 and 452% in 2002, compared to the respective prior year. Payments segment net transaction revenues as a percentage of total net transaction revenues was 21% in 2004, 20% in 2003, and 8% in 2002. The growth in our Payments segment net transaction revenues, both in absolute terms and as a percentage of total net transaction revenues is primarily the result of increases in PayPal transaction volume driven primarily by the growth in the eBay Marketplace and, for 2003 and 2002, our acquisition of PayPal in October 2002.

      During 2004, over $18.9 billion in total payment volume was transacted on the PayPal platform as compared to $12.2 billion during 2003. As of December 31, 2004, PayPal had 63.8 million accounts, compared to 40.3 million accounts at December 31, 2003. Our Payments segment net transaction revenues as a percentage of total payment volume was 3.6% in 2004 and 3.5% in 2003. The growth in Payments net transaction revenues was positively affected by PayPal’s continued penetration of eBay Marketplace transactions in all countries, particularly in the United States and the United Kingdom. Further, Payments net transaction revenues have grown in connection with the increase in our eBay Marketplace gross merchandise volume during 2003 and 2004. The relative strength of foreign currencies, primarily the Euro, against the U.S. dollar and the British pound, resulted in increased net revenues of approximately $12.9 million during 2004 when compared to the results if the weighted-average foreign currency exchange rates used in the preparation of our 2003 consolidated financial statements were used.

      Net transaction revenues from the Payments segment earned internationally totaled $207.6 million in 2004 and $93.9 million in 2003, representing 30.5% and 21.9% of total Payments segment net transaction revenue, respectively. Changes in foreign currency rates will impact our operating results and, to the extent that the U.S. dollar strengthens, our foreign currency denominated net revenues will be negatively impacted. We expect the Payments segment net transaction revenues to increase in total during 2005 and for net transaction revenues earned internationally to increase in total and as a percentage of Payments net transaction revenues. We also expect that the Payments segment net transaction revenues will increase as a percentage of total net transaction revenues in 2005.

      Advertising and other non-transaction net revenues increased in total and as a percentage of total net revenues in 2004 as compared to 2003. Advertising and other net revenues totaled $94.3 million in 2004, $52.9 million in 2003 and $105.1 million in 2002. These amounts as a percentage of total net revenues represented 3% in 2004, 2% in 2003 and 9% in 2002. We continue to view our business as primarily transaction driven and we expect advertising and other net revenues to continue to represent a relatively small proportion of total net revenues during 2005.

      Cost of net revenues consists primarily of costs associated with payment processing, site operations, and certain types of customer support. Significant cost components include bank charges, credit card interchange, other payment processing costs, employee compensation and facilities costs for our customer support and site operations, depreciation of equipment and amortization of required capitalization of major site and product development costs.

      The increase in cost of net revenues during 2004 was primarily due to an increase in the volume of transactions on the PayPal and eBay websites and continued development and expansion of our customer support and site operations infrastructure. The decrease in cost of net revenues as a percentage of net revenues was primarily due to eBay’s Marketplace’s site operations costs growing at a slower rate than net revenues. Payment processing costs increased to $305.1 million in 2004 from $215.7 million in 2003, due to the increase in PayPal’s total payment volume and increased payment processing costs related to the growth of our eBay Marketplace activity. Aggregate customer support and site operations costs increased $105.3 million during 2004, compared to the prior year, and resulted primarily from an increase in headcount and related employee costs and consultant costs of approximately $37.1 million and increased facilities costs of approximately $16.2 million. In addition, aggregate depreciation of site equipment and amortization of capitalized software development costs increased $36.0 million as compared to 2003. Costs of net revenues are expected to increase in total and to decrease slightly as a percentage of net revenues during 2005.

      Cost of net revenues increased in total and slightly as a percentage of net revenues in 2003 as compared to 2002. The increase in absolute dollars was due to a full year of payment processing costs resulting from our acquisition of PayPal in October 2002, an increase in the volume of transactions on the eBay websites, and continued development and expansion of our customer support and site operations infrastructure. The increase in cost of net revenues as a percentage of net revenues was primarily due to the impact of PayPal’s higher structural costs relating to payment processing offset, in part, by eBay’s site operations costs growing at a slower rate than net revenues. Payment processing costs, which consist of credit card interchange fees, bank charges and other processing charges increased by approximately $94.9 million in 2003, reflecting the full year of PayPal activity in 2003, the substantial increase in PayPal’s total payment volume and increased payment processing costs related to our eBay fees. Aggregate customer support and site operations costs increased

$80.0 million during 2003, compared to the prior year, and resulted primarily from an increase in headcount and related employee costs of approximately $26.5 million. In addition, aggregate depreciation of site equipment and amortization of capitalized software development costs increased $21.5 million as compared to 2002.

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

      Sales and marketing expenses increased in 2004, but remained consistent as a percentage of total net revenues due to our continued investment in growing our user base and our development of new media campaigns. Growth in advertising and marketing costs as well as employee-related costs comprised the majority of the increases. Combined advertising and marketing costs increased $169.8 million in 2004, compared to the prior year. This increase was primarily the result of our internet marketing and domestic and international television and radio advertising campaigns as well as several category-focused print campaigns. Employee-related costs increased by $68.4 million in 2004 as we continued to expand our domestic and international operations. Sales and marketing expenses are expected to increase in total and as a percentage of net revenues during 2005. In addition, our 2005 online marketing expenses will likely increase both in total and slightly as a percentage of revenues because of increases in the volume of online advertising that we expect to purchase in order to attract new customers and increase the activity on our websites including growth initiatives in sales and marketing activities in our U.S. and International Marketplaces, including China.

      Sales and marketing expenses increased in 2003, but decreased as a percentage of total net revenues due to cost efficiencies in our business and the acquisition of PayPal, which has a significantly lower sales and marketing requirement as PayPal benefits from eBay customer acquisitions. Growth in advertising and marketing costs as well as employee-related costs comprised the majority of the dollar increases. Combined advertising and marketing costs increased $155.2 million in 2003, as compared to the prior year. This increase was primarily the result of our marketing programs directed towards our internet marketing and national television advertising campaigns as well as several category-focused print campaigns. Employee-related costs increased by $34.0 million in 2003 as we continued to expand our international operations.

      Product development expenses consist primarily of employee compensation, consultant costs, facilities costs and depreciation on equipment used for development. Product development expenses are net of required capitalization of major site and other product development efforts, including the development of our “V3” platform architecture, migration of certain platforms, global billing, seller tools and payment gateway projects. These capitalized costs totaled $41.3 million in 2004, $38.5 million in 2003 and $15.5 million in 2002, and are reflected as a cost of net revenues when amortized in future periods. 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 product development expenses in 2004, as compared to the prior year, was primarily the result of increased headcount and consultant costs. The headcount growth was focused on hiring new employees for various platform development initiatives at eBay and PayPal in addition to our international expansion of both platforms. Our development staff increased approximately 48% from approximately 1,000 at December 31, 2003 to approximately 1,500 at December 31, 2004. In addition, our consultant costs increased by approximately $13.4 million. Product development expenses are expected to increase in total and may increase slightly as a percentage of net revenues in 2005, as we develop new site features and functionality and continue to improve and expand operations across all our segments including the U.S. Marketplace, China, and PayPal Merchant Services.

      The increase in product development expenses in 2003, as compared to the prior year, was primarily the result of increased headcount and computer equipment depreciation. These increases were partially offset by the amounts capitalized in connection with major site and other product development efforts in 2003. The headcount growth was focused on hiring new employees for various platform development initiatives at eBay and PayPal. Our product development employees increased approximately 59% from approximately 600 at December 31, 2002 to approximately 1,000 at December 31, 2003.

      General and administrative expenses consist primarily of employee compensation, provisions for transaction losses associated with our Payments segment, depreciation of equipment, provision for doubtful accounts, insurance and professional fees.

      General and administrative expenses increased in total, but decreased as a percentage of net revenues in 2004, as compared to the prior year. The dollar increase was due primarily to employee related costs, fees for external professional advisors, including Sarbanes-Oxley compliance costs, and payment transaction loss expenses. The increases in employee related costs resulted from growth in the finance, human resource and legal departments to meet the demands of our expanding business, including growing international operations, increased regulatory demands, and the integration of acquired businesses. We increased our general and administrative employees from approximately 1,900 at December 31, 2003 to approximately 2,700 at December 31, 2004. This increase related primarily to the addition of employees in our eBay trust and safety functions. Consultant and employee related costs increased by approximately $53.8 million during 2004 as compared to the prior year. PayPal’s payment transaction loss increased by approximately $14.1 million, to $50.5 million at December 31, 2004, reflecting the increase in activity in the Payments segment in addition to the expansion of our PayPal Buyer Protection Program. PayPal’s payment transaction loss rate, which is the transaction loss expense as a percentage of PayPal’s total payment volume, was 0.27% in 2004 compared to 0.30% in 2003. The decrease in this percentage from 2003 to 2004 was offset in part by the increase in coverage for our PayPal Buyer Protection Program. With our continued investment, primarily in the expansion in our Marketplace and Payments segments, and related corporate functions, we expect general and administrative expenses to increase during 2005.

      The increase in general and administrative expenses in 2003 was due primarily to employee and facilities related costs, fees for external professional advisors, payment transaction loss expenses resulting from our acquisition of PayPal and charges associated with various legal matters. The increases in employee and facilities related costs resulted from the addition of PayPal employees in various trust and safety functions as well as continued headcount growth in the finance, human resource and legal departments to meet the demands of our expanding business, including growing international operations and the integration of acquired businesses. We increased our general and administrative staff from approximately 1,300 at December 31, 2002 to approximately 1,900 at December 31, 2003. Fees for external professional advisors increased by $10.4 mil-

lion. Charges associated with various legal matters recorded in general and administrative expense totaled $8.6 million. PayPal’s payment transaction loss increased $28.6 million in 2003, reflecting a full year of consolidated operations.

      In February 2004, we began migrating eBay users from our legacy billing system to a newly implemented billing system. As we managed this migration, we delayed billing cycles to facilitate the migration process and to allow additional time for quality assurance reviews. The delay in billing cycles continued for the remainder of the year and resulted in an increase in the average days our customer account balances were outstanding. Although we believe this change in account balance aging is a temporary condition, our historical experience indicates an increased risk of collection for aged accounts receivable balances. Accordingly, our provision for doubtful accounts during the year ended December 31, 2004 increased to a total of $85.4 million, or 2.6% of net revenues, compared to $44.3 million, or 2.0% of net revenues, during the year ended December 31, 2003. The allowance for doubtful accounts receivable at December 31, 2004 was $67.9 million.

      Patent litigation expense during 2003 relates to the accrual of an August  6, 2003 court judgment resulting from the MercExchange patent infringement lawsuit. See “Note 10 — Commitments and Contingencies” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

      We are subject to employer payroll taxes on employee gains from the exercise 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. The increases in 2004 and 2003 as compared to the respective prior years were primarily a result of larger individual gains recognized on stock option exercises by our employees during periods in which our stock price was high relative to historic levels. Our 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. In general, we expect payroll taxes on employee stock option gains to increase during periods in which our stock price is high relative to historic levels.

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

      Intangible assets include purchased customer lists and user base, trademarks and trade names, developed technologies, and other intangible assets. We amortize intangible assets, excluding goodwill, using the straight-line method over estimated useful lives ranging from one to eight years.

      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. Goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test. We evaluate goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using a combination of the income, or discounted cash 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. Our annual impairment test was carried out as of August 31, 2004 and we determined that there was no impairment. There were no events or circumstances from that date through December 31, 2004 that would impact this assessment.

      We expect amortization of acquired intangible assets will increase in 2005 as a result of the intangible assets associated with our acquisitions of mobile.de and Marktplaats.nl, as well as our additional investment in Internet Auction during 2004 and our recent acquisition of Rent.com. Amortization of acquired intangible assets will also increase should we make additional acquisitions in the future.

      Interest and other income, net consists primarily of interest earned on cash, cash equivalents and investments as well as foreign exchange transaction gains and losses and other non-operating transactions.

      Our interest and other income, net increased in total and as a percentage of net revenues during 2004 as compared to the prior year, primarily as a result of gains from the sale of an equity investment and amendments to certain sublease agreements. In addition, we recorded increased interest income primarily due to higher investment balances, and increased cash and cash equivalents balances. The weighted-average interest rate of our portfolio increased to 1.7% in 2004 from 1.6% in 2003. We expect that interest and other income, net, will remain generally comparable in total to 2004 during 2005.

      Our interest and other income, net decreased in total and as a percentage of net revenues during 2003, primarily as a result of one-time gains recognized in 2002 from the sale of certain subsidiaries, real estate properties and an equity investment that totaled $20.3 million. This decrease was offset, in part, by increased investment income on a larger aggregate balance of cash, cash equivalents and investments even though the weighted-average interest rate of our portfolio declined to 1.6% in 2003 from 2.8% in 2002.

      Interest expense consists of interest charges on our consolidated lease arrangement related to our San Jose headquarters office facilities, capital leases, and mortgage notes.

      In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” In accordance with the provisions of this standard, we have included our San Jose headquarters lease arrangement in our consolidated financial statements effective July 1, 2003. Beginning July 1, 2003, our consolidated statement of income reflects the reclassification of lease payments on our San Jose headquarters office facilities from operating expense to interest expense. The increase in interest expense during 2003, compared to the prior year, was primarily the result of the inclusion of interest payments on our San Jose headquarters office facilities. The increase in interest expense during 2004 is primarily the result of the inclusion of these interest payments for a full year in 2004. We expect our interest expense will decrease both in total and as a percentage of net revenue during 2005 due to the acquisition of the San Jose headquarters office facilities at the expiration of the lease arrangement on March 1, 2005.

      During 2003 and 2002, we recorded impairment charges totaling $1.2 million and $3.8 million, respectively, as a result of the deterioration of the financial condition of certain of our private and public equity investees. We identified these impairment losses as part of our normal process of assessing the quality of our investment portfolio. The impairment loss reflects a decline in fair value and other market conditions that we believe are other than temporary. 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. We did not record any impairment of our equity investments during 2004.

      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 factors that increase the effective tax rate. These expenses are partially offset by decreases resulting from foreign income with lower effective tax rates, tax credits, and tax-exempt interest income.

      The lower effective tax rates in 2004 and 2003 as compared to the respective prior years reflect the increasing profit contribution from our international operations that are subject to lower tax rates.

      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 evaluated our deferred tax assets relating to these stock option deductions along with our other deferred tax assets and concluded that a valuation allowance is required for that portion of the total deferred tax assets that is not considered more likely than not to be realized in future periods. To the extent that the deferred tax assets with a full valuation allowance become realizable in future periods, we will have the ability, subject to carryforward limitations, to use up to $158.6 million of deferred tax assets to reduce future income tax liabilities. Should a valuation allowance no longer be required, the reversal of the valuation allowance will be reflected as an increase in additional paid-in capital rather than a reduction of the income tax provision.

      Minority interests represents the minority investors’ 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 various of our subsidiaries during 2004, 2003 and 2002.

      The change in minority interests in 2004 is due primarily to our acquisition of an additional 37.9% ownership interest in Internet Auction.

      The change in minority interests in 2003 primarily resulted from the minority interests’ portion of the net income generated by Internet Auction.

      In accordance with the provisions of FIN 46, “Consolidation of Variable Interest Entities,” we have included our San Jose headquarters lease arrangement in our consolidated financial statements effective July 1, 2003. Our consolidated statement of income for the year ended December 31, 2003 reflects the reclassification of lease payments on our San Jose headquarters from operating expense to interest expense, beginning with the quarters following our adoption of FIN 46 on July 1, 2003, a $5.4 million after-tax charge for cumulative depreciation for periods from lease inception through June 30, 2003, and incremental depreciation expense of approximately $400,000, net of tax, per quarter for periods after June 30, 2003. We have adopted the provisions of FIN 46 prospectively from July 1, 2003, and as a result, have not restated prior periods. The cumulative effect of the change in accounting principle arising from the adoption of FIN 46 has been reflected in net income in 2003.

      During 2004, our international net revenues, based upon the country in which the seller, payment recipient, advertiser or other service provider is located, accounted for approximately 42% of our consolidated net revenues, as compared to 35% of our net revenues in 2003 and 26% of our net revenues in 2002. The growth in our international operations has increased our exposure to foreign currency fluctuations. Net revenues and related expenses generated from international locations are denominated in the functional currencies of the local countries, and include Euros, British pounds, Korean won, Canadian dollars, Taiwanese dollars, and Australian dollars. The results of operations and certain of our inter-company balances associated with our international locations are exposed to foreign exchange rate fluctuations. The statements of income of our international operations 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 consolidated net revenues, operating expenses and net income. Similarly, our consolidated net revenues, operating expenses and net income will decrease when the U.S. dollar strengthens against foreign currencies.

      During 2004, the U.S. dollar weakened against the foreign currencies listed above. Using the weighted-average foreign currency exchange rates from 2003, our net revenues for 2004 would have been lower than we reported using the actual exchange rates for 2004 by approximately $129.9 million, of which $117.0 million and $12.9 million relate to our International Marketplace and Payments segments, respectively. In addition, if the weighted-average foreign currency exchange rates from 2003 were applied to our cost of revenues and operating expenses for 2004, these costs of revenues and operating expenses would have been lower in total than we reported using the actual exchange rates for 2004 by approximately $58.4 million. The majority of this impact relates to the relative strength of the Euro against the U.S. dollar.

      We expect our international operations will continue to grow in significance as we develop and deploy our global marketplace and global payments platform. As a result, the impact of foreign currency fluctuations in future periods could become more significant and may have a negative impact on our consolidated net revenues and net income. See the information in Item 7A under “Foreign Currency Risk” for additional discussion of the impact of foreign currency translation and related hedging activities.

      We are a rapidly growing company, with an increasing proportion of our operations outside the United States. Accordingly, our foreign currency exposures have increased substantially and are expected to continue to grow. The objective of our foreign exchange exposure management program is to identify material foreign currency exposures and to manage these exposures to minimize the potential effects of currency fluctuations on our reported consolidated cash flows, and results of operations.

      Our primary foreign currency exposures are transaction, economic and translation:

      Transaction Exposure: Around the world, we have certain assets and liabilities, primarily receivables, investments and accounts payable (including inter-company transactions) that are denominated in currencies other than the relevant entity’s functional currency. In certain circumstances, changes in the functional currency value of these assets and liabilities create fluctuations in our reported consolidated financial position, results of operations and cash flows. We may enter into foreign exchange forward contracts or other instruments to minimize the short-term foreign currency fluctuations on such assets and liabilities. The gains and losses on the foreign exchange forward contracts offset the transaction gains and losses on certain foreign currency receivables, investments and payables recognized in earnings.

      Economic Exposure: We also have anticipated and unrecognized future cash flows, including revenues and expenses, denominated in currencies other than the relevant entity’s functional currency. Our primary economic exposures include future royalty receivables, customer collections, and vendor payments. Changes in the relevant entity’s functional currency value will cause fluctuations in the cash flows we expect to receive when these cash flows are realized or settled. We may enter into foreign exchange forward contracts or other derivatives to hedge the value of a portion of these cash flows. We account for these foreign exchange contracts as cash flow hedges. The effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the transaction is settled.

      Earnings Translation Exposure: As our international operations grow, fluctuations in the foreign currencies create volatility in our reported results of operations because we are required to consolidate the results of operations of our foreign denominated subsidiaries. We may decide to purchase forward exchange contracts or other instruments to offset the earnings impact of currency fluctuations. Such contracts will be marked-to-market on a monthly basis and any unrealized gain or loss recorded in interest and other income, net.

      We continue to believe that employee stock options represent an appropriate and essential component of our overall compensation program. We grant options to substantially all employees and believe that this broad-based program helps us to attract, motivate, and retain high quality employees, to the ultimate benefit of our stockholders. Stock options granted during the year ended December 31, 2004 and 2003, net of cancellations, represented approximately 3% of our total outstanding common stock at December 31, 2004 and 2003, a substantial portion of which was granted to new employees. We expect that our stock option grants, net of cancellations, for 2005 will represent approximately 2% of our total outstanding common stock at December 31, 2005.

      In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (FAS 123R) that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for share-based compensation transactions using the intrinsic value method as prescribed by Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally requires that such transactions be accounted for using a fair-value-based method and recognized as expenses in our consolidated statement of income. The statement requires companies to assess the most appropriate model to calculate the value of the options. We currently use the Black-Scholes option pricing model to value options and are currently assessing which model we may use in the future under the statement and may deem an alternative model to be the most appropriate. The use of a different model to value options may result in a different fair value than the use of the Black-Scholes option pricing model. In addition, there are a number of other requirements under the new standard that will result in differing accounting treatment than currently required. These differences include, but are not limited to, the accounting for the tax benefit on employee stock options and for stock issued under our employee stock purchase plan. In addition to the appropriate fair value model to be used for valuing share-based payments, we will also be required to determine the transition method to be used at date of adoption. The allowed transition methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of FAS 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The effective date of the new standard for our consolidated financial statements is our third fiscal quarter in 2005.

      Upon adoption, this statement will have a significant impact on our consolidated financial statements as we will be required to expense the fair value of our stock option grants and stock purchases under our employee stock purchase plan rather than disclose the impact on our consolidated net income within our footnotes as is our current practice (see Note 1 of the notes of the consolidated financial statements contained herein). The amounts disclosed within our footnotes are not necessarily indicative of the amounts that will be expensed upon the adoption of FAS 123R. Compensation expense calculated under FAS 123R may differ from amounts currently disclosed within our footnotes based on changes in the fair value of our common stock, changes in the number of options granted or the terms of such options, the treatment of tax benefits and changes in interest rates or other factors. In addition, upon adoption of FAS 123R we may choose to use a different valuation model to value the compensation expense associated with employee stock options.

      In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (SFAS 153). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This standard is effective for fiscal periods beginning after June 15, 2005. We are currently evaluating the effect that the adoption of SFAS 153 will have on our consolidated statement of income and financial condition.

Liquidity and Capital Resources

      We have generated annual cash provided by operating activities in amounts greater than net income in 2004, 2003 and 2002. This result was driven mainly by non-cash charges to earnings. Non-cash charges to earnings included depreciation and amortization on our long-term assets, tax benefits on the exercise of employee stock options resulting from our increasing stock price and the related increases in the personal gains recognized by our employees, provision for doubtful accounts and authorized credits resulting from increasing revenues and the provision for transaction losses resulting from increased total payment volumes processed by our PayPal subsidiary. In 2003 and 2002, operating cash flows were also positively impacted by the net cash amounts provided by year-over-year changes in working capital assets and liabilities.

      The net cash used in investing activities in 2004, 2003 and 2002 reflected primarily the movement of cash and cash equivalents between cash and cash equivalents and investments, the purchase of property and equipment, and acquisitions. Purchases of property and equipment, net totaled $292.8 million in 2004, $365.4 million in 2003, and $138.7 million in 2002. Purchases of property and equipment in 2004 and 2002 related mainly to purchases of computer equipment and software to support our site operations, customer support and international expansion. In 2003, purchases of property and equipment included the $125.1 million purchase of additional office space in San Jose, California. Purchases of property and equipment in 2003 also included amounts for improvements to various facilities in the U.S. and around the world as well as computer equipment and software to support our site operations, customer support and international expansion. Cash expended for acquisitions, net of cash acquired, totaled approximately $1.0 billion in 2004, $216.4 million in 2003 and $59.4 million in 2002. In 2004, our cash acquisitions included the acquisition of mobile.de, Baazee.com, and Marktplaats.nl, as well as an additional ownership interest in Internet Auction Co. Our cash acquisitions in 2003 included acquiring the remaining ownership interest in EachNet and an additional ownership interest in Internet Auction Co. Our cash acquisitions in 2002 included acquiring the remaining ownership interest in our Billpoint subsidiary and a 38% interest in EachNet, located in China. We completed our acquisition of PayPal during 2002 through the exchange of our common stock for PayPal’s then outstanding common stock.

      The net cash flows provided by financing activities in 2004, 2003 and 2002 were due primarily to proceeds from stock option exercises. Proceeds from stock option exercises totaled $650.6 million in 2004, $700.8 million in 2003, and $252.2 million in 2002. Our future cash flows from stock options are difficult to project as such amounts are a function of our stock price, the number of options outstanding and the decisions by employees to exercise stock options. In general, we expect proceeds from stock option exercises to increase during periods in which our stock price has increased relative to historical levels.

      The positive effect of exchange rates on cash and cash equivalents during 2004, 2003, and 2002 was due to the weakening of the U.S. dollar against other foreign currencies, primarily the Euro.

      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 obligations for the

foreseeable future. However, if during that period or thereafter we are not successful in generating sufficient cash flows from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, our business could suffer.

      We expect capital expenditures to amount to between $340 million and $400 million during 2005, without taking into account any acquisitions or the $126 million associated with the purchase of our San Jose headquarters facility. On February 23, 2005, we paid $415 million, net of Rent.com’s cash on hand, to acquire all of the outstanding securities of Rent.com. See “Subsequent Events” within this section for further details.

      We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows. The following table summarizes our fixed contractual obligations and commitments (in thousands):

      Capital lease amounts primarily comprises the assumed purchase of the corporate headquarters in San Jose, California, in March 2005, when the lease is scheduled to expire, and includes the $3.9 million in relation to the non-controlling minority interest. See “Note 8 — Long-Term Obligations” in the notes to the consolidated financial statements, included elsewhere in this Annual Report on Form 10-K.

      Operating lease amounts include minimum rental payments under our non-cancelable operating leases for office facilities, as well as limited computer and office equipment that we utilize under lease arrangements. The amounts presented are consistent with contractual terms and are not expected to differ significantly, unless a substantial change in our headcount needs requires us to exit an office facility early or expand our occupied space.

      Other purchase obligation amounts include minimum purchase commitments for advertising, computer equipment, software applications, a corporate airplane, engineering development services and other goods and services that were entered into through our ordinary course of business. For those contractual arrangements in which there are significant performance requirements, we have developed estimates to project expected payment obligations. These estimates have been developed based upon historical trends, when available, and our anticipated future obligations. Given the significance of such performance requirements within our advertising and other arrangements, actual payments could differ significantly from these estimates.

      As of December 31, 2004, we had no off-balance sheet arrangements that are reasonably likely to have, a future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.

      In the ordinary course of business we have included limited indemnification provisions in certain of our agreements with parties with whom we have commercial relations, including our standard marketing, promotions and application-programming-interface license agreements. Under these contracts, we generally indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with claims by any third party with respect to our domain names, trademarks, logos and other branding elements to the extent that such marks are applicable to our performance under the subject agreement. In a limited number of agreements, including agreements under which we have developed technology for certain commercial parties, we have provided an indemnity for other types of third-party claims, substantially all of which are indemnities related to our copyrights, trademarks, and patents. To date, no significant costs have been incurred, either individually or collectively, in connection with our indemnification provisions.

      On February 23, 2005, we acquired all outstanding securities of Rent.com for approximately $415 million plus our acquisition costs, net of Rent.com’s cash on hand. Rent.com is a leading Internet listing website in the apartment and rental housing industry.

      In January 2005, our Board of Directors approved a two-for-one split of our shares of common stock to be issued in the form of a stock dividend. As a result of the stock split, our stockholders received one additional share of our common stock for each share of common stock held of record on January 31, 2005. The additional shares of our common stock were distributed on February 16, 2005. All share and per share amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations have been retroactively adjusted to reflect the stock split for all periods presented.

Critical Accounting Policies, Judgments and Estimates

      The preparation of our consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results may differ from these estimates under different assumptions or conditions.

      An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this report.

      Our U.S. Marketplace and International Marketplace 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 authorized credits are recorded as a reduction of revenues. The following table illustrates the provision related to doubtful accounts and authorized credits as a percentage of net revenues for 2002, 2003, and 2004 (in thousands, except percentages).

      Historically, our actual losses and credits have been consistent with these provisions. However, future changes in trends could result in a material impact to future consolidated statements of income and cash flows. Based on our results for the year ended December 31, 2004, a 25 basis point deviation from our estimates would have resulted in an increase or decrease in operating income of approximately $6.4 million. The following analysis demonstrates, for illustrative purposes only, the potential effect a 25 basis point deviation from our estimates would have upon our consolidated 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 credit card and other payment misuse, as well as non-performance of sellers who accept payment through PayPal. 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 of 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. 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. The provision for transaction loss expense is reflected as a general and administrative expense in our consolidated statement of income. As of December 31, 2004, the transaction loss reserve totaled $11.0 million and was included in accrued expenses and other current liabilities in our consolidated balance sheet.

      The following table illustrates the provision for transaction loss expense as a percentage of total payment volume from PayPal operations for the period from October 3, 2002 (date of acquisition of PayPal) through December 31, 2002 and for the years ended December 31, 2003 and 2004 (in thousands, except percentages).

      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 we deem appropriate to adequately provide for losses incurred at the balance sheet date. Based on our results for the year ended December 31, 2004, a five basis point deviation from our estimates would have resulted in an increase or decrease in our operating expenses of approximately $9.5 million. The following analysis demonstrates, for illustrative purposes only, the potential effect a five basis point deviation from our estimates would have upon our consolidated financial statements for the year ended December 31, 2004, 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 consolidated statement of income. 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 10 — Commitments and Contingencies — Litigation and Other Legal Matters” to our consolidated financial statements, which we incorporate 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 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 all or any 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, 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 consolidated statement of income. 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 our stock price, it is extremely difficult to predict the amount of deductions that will be generated from future option exercises and, therefore, for us to ascertain the amount of deferred tax assets related to employee stock option exercises that may be realized in future periods. At December 31, 2004, we have maintained an allowance on certain net operating losses generated from deductions for employee stock option expenses based on our assessment that it is more likely than not that the deferred tax assets related to these net operating losses will not be realized. The deferred tax asset, net of a valuation allowance of $158.6 million, totaled $58.1 million at December 31, 2004 and was offset by deferred tax liabilities of $183.7 million resulting in a net deferred tax liability of $125.5 million. In addition, due to our significant anticipated international expansion, we have not provided for U.S. federal income and foreign withholding taxes on non-U.S. subsidiaries’ undistributed earnings as of December 31, 2004, because such earnings are intended to be reinvested indefinitely. In the event that our future international expansion plans change and such amounts are not reinvested indefinitely, we would be subject to U.S. income taxes partially offset by foreign tax credits. The following table illustrates the effective tax rates for 2002, 2003, and 2004 (in thousands, except percentages):

      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 consolidated statements of income and cash flows. Based on our results for the year ended December 31, 2004, 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 the provision of approximately $11.3 million. The following analysis demonstrates, for illustrative purposes only, the potential effect such a one-percentage point deviation change would have upon our consolidated financial statements and is not intended to provide a range of exposure or expected deviation (in thousands, except per share data):