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                      U.S. SECURITIES AND EXCHANGE COMMISSION
  
                               Washington, D.C. 20549
  
                                 ------------------
  
                                      FORM 8-K
  
  
                                   CURRENT REPORT
                          Pursuant to Section 13 or 15(d)
                       of the Securities Exchange Act of 1934
  
  
                        Date of Report: September 14, 1999
  
  
                   Date of earliest event reported: May 18, 1999
  
  
  
                                     eBAY INC.
               (Exact name of Registrant as specified in its charter)
  
                                      Delaware
                   (State or other jurisdiction of incorporation)
  
  
         000-24821                                    77-0430924
        (Commission                                  (IRS Employer
        File Number)                                 Identification No.)
  
  2125 Hamilton Ave., San Jose, California                95125
  (Address of principal executive offices)             (Zip Code)
  
                                   408-558-7400
               (Registrant's telephone number, including area code)
  
  
           (Former name or former address, if changed since last report)
  
  
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                                         1
  <PAGE>
  
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  Item 5: Other Events
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    Pursuant to acquisitions made in May and June of 1999 accounted for using the
  pooling of interests methodology, the Company's historical financial information
  has been restated to reflect the combined operations of the Company and each of
  the acquired entities. These restatements have been reflected for the periods
  presented in the Company's quarterly report on Form 10-Q filed August 9, 1999.
  The consolidated financial statements and management's discussion and analysis
  of financial condition and results of operations for the years ended December
  31, 1996, 1997 and 1998 as presented in the Company's annual report on Form 10-
  K405 filed on March 29, 1999, have been restated and presented herein.
  
  Forward Looking Statements
  
    This document contains certain forward looking statements that involve risks
  and uncertainties, such as statements of the Company's plans, objectives,
  expectations and intentions. When used in this document, the words "expects,"
  "anticipates," "intends," "plans" and similar expressions are intended to
  identify certain of these forward looking statements. The cautionary statements
  made in this document should be read as being applicable to all related forward
  looking statements wherever they appear in this document. The Company's actual
  results could differ materially from those discussed in this document. Factors
  that could cause or contribute to such differences include those discussed
  below, as well as those discussed in the Company's Prospectus dated April 12,
  1999 and all subsequent filings.
  
    Forward looking statements are intended to address mattes that actually
  occurred through June 30, 1999 as well as those that may happen in the future.
  
  Overview
  
    eBay pioneered online person-to-person trading by developing a Web-based
  community in which buyers and sellers are brought together in an efficient and
  entertaining auction format to buy and sell personal items such as antiques,
  coins, collectibles, computers, memorabilia, stamps and toys. The eBay service
  permits sellers to list items for sale, buyers to bid on items of interest and
  all eBay users to browse through listed items in a fully-automated, topically-
  arranged, intuitive and easy-to-use online service that is available 24-hours-a-
  day, seven-days-a-week. The Company has extended its online offerings with the
  acquisitions of alando, an international online person-to-person trading
  community, and Billpoint, a provider of online billing and payment solutions.
  Recently, eBay expanded beyond its online origins into the traditional auction
  business with its acquisitions of Butterfield & Butterfield and Kruse
  International.
  
    Substantially all of the Company's revenues come from fees and commissions
  associated with online and traditional offline auction services. Online revenue
  is derived from placement and success fees paid by sellers, eBay does not charge
  fees to buyers. Sellers pay a nominal placement fee and by paying additional
  fees, sellers can have items featured in various ways. Sellers also pay a
  success fee based on the final purchase price. To date, online advertising on
  the eBay website and online payment solutions provided by Billpoint have not
  made significant contributions to net revenues, and no significant revenue
  generation is expected in the near future.  Offline revenue is derived from a
  variety of sources including sellers' commissions, buyers premiums, bidder
  registration fees, and auction related services including appraisal and
  authentication.
  
    eBay's online business model is significantly different from many existing
  online auction and other electronic commerce businesses. Because individual
  sellers, rather than eBay, sell the items listed, the Company has no
  procurement, carrying or shipping costs and no inventory risk. The Company's
  rate of expense growth is primarily driven by increases in personnel,
  expenditures for advertising and promotion, and depreciation on site hardware
  and software. The Company intends to continue investing in site infrastructure
  and expects to increase its expenses significantly, in particular its
  advertising, promotion and personnel expenses, in an effort to maintain revenue
  growth. The Company remains committed to a long-term growth strategy which
  combines the best elements of community and e-commerce and will continue to
  invest prudently but aggressively to maintain its leadership role in online
  personal trading.
  
                                         2
  <PAGE>
  
   Butterfield & Butterfield
  
    On May 28, 1999, eBay acquired Butterfield & Butterfield Auctioneers
  Corporation, a Delaware corporation and all affiliated entities under common
  control including; Butterfield Credit Corporation Inc., 111 Potrero Partners,
  LLC and HBJ Partners, LLC (collectively "B&B" or the "B&B Companies"). The
  aggregate consideration exchanged for the merger was 1,327,370 shares of eBay
  common stock. The merger has been accounted for as a pooling of interests. In
  April 1999, B&B withdrew its registration statement for its initial public
  offering. Accordingly, in the second quarter of 1999, the Company recorded a
  charge of approximately $2.6 million related to the costs of the withdrawn
  offering. Such amounts are included in merger related costs on the consolidated
  statement of income.
  
   Kruse International
  
    On May 18, 1999, eBay acquired Kruse, Inc. (d/b/a Kruse International) and all
  affiliated entities under common control including; Auburn Cordage, Inc., ACD
  Auto Sales, Inc., Reppert School of Auctioneering, Inc. and Classic Advertising
  & Promotions, Inc., each an Indiana corporation (collectively, "Kruse" or the
  "Kruse Companies"). Kruse International was founded in 1971 and operated as a
  sole proprietorship until it was incorporated in the state of Indiana in August
  1986. The Kruse Companies conduct auctions, perform appraisal services and
  auctioneering training for classic car auctions in various locations in the
  United States, England, Germany and the Netherlands. The aggregate consideration
  exchanged for the merger was 787,312 shares of eBay common stock for all shares
  of capital stock of the Kruse Companies. The merger has been accounted for as a
  pooling of interests.
  
   Billpoint
  
    On May 25, 1999, eBay acquired Billpoint, Inc. ("Billpoint"). Billpoint has
  developed a centralized, turnkey authorization, billing and payment fulfillment
  solution that permits individuals and small merchants to accept credit cards as
  payment for Internet-based sales transactions. Billpoint's service is expected
  to derive revenues based upon a variety of fee arrangements, including
  percentage-of-transaction, fixed-fee per transaction and flat monthly rates. In
  connection with the merger, eBay issued a total of approximately 525,000 shares
  of eBay common stock to the existing shareholders of Billpoint as consideration
  for all shares of capital stock of Billpoint, and all options and warrants to
  purchase shares of common stock of Billpoint outstanding immediately prior to
  the consummation of the merger were converted into options and warrants to
  purchase shares of eBay common stock. The merger has been accounted for as a
  pooling of interests.
  
  
   alando
  
    On June 15, 1999, eBay acquired alando.de.AG. ("alando"). alando is Germany's
  leading online person-to-person trading community. The aggregate consideration
  exchanged for the merger was 316,000 shares of eBay stock. The merger has been
  accounted for as a pooling of interests.
  
  
    The following table sets forth, for the periods presented, certain data from
  eBay's consolidated statement of income as a percentage of net revenues. This
  information should be read in conjunction with the Consolidated Financial
  Statements and Notes thereto included elsewhere in this report.
  
  <TABLE>
  <CAPTION>
                                                                                            Year Ended December 31,
                                                                                   ------------------------------------------
                                                                                       1996           1997           1998
                                                                                   -------------   -----------   ------------
  <S>                                                                              <C>             <C>           <C>
  Net revenues.......................................................................     100.0%        100.0%         100.0%
  Cost of net revenues...............................................................      21.2          20.3           18.7
                                                                                         ------       -------       --------
    Gross profit.....................................................................      78.8          79.7           81.3
                                                                                         ------       -------       --------
  Operating expenses:
    Sales and marketing..............................................................      41.0          37.8           41.8
    Product development..............................................................       0.1           2.0            5.4
    General and administrative.......................................................      17.7          15.8           18.4
    Amortization of acquired intangibles.............................................        --            --            0.9
                                                                                         ------       -------       --------
       Total operating expenses......................................................      58.8          55.6           66.5
                                                                                         ------       -------       --------
  </TABLE>
  
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  <PAGE>
  
  <TABLE>
  
  <S>                                                                                      <C>          <C>           <C>
  Income from operations.............................................................      20.0          24.1           14.8
  Interest and other income (loss), net..............................................      (8.1)         (4.8)          (0.8)
                                                                                         ------       -------       --------
  Income before income taxes.........................................................      11.9          19.3           14.0
  Provision for income taxes.........................................................      (1.5)         (2.2)          (5.6)
                                                                                         ------       -------       --------
  Net income.........................................................................      10.4%         17.1%           8.4%
                                                                                         ======       =======       ========
  
  Supplemental Operating Data (1) (in thousands):
  Number of registered users at end of period........................................        41           341          2,181
  Gross merchandise sales (2)........................................................    $7,279       $95,271       $745,395
  Number of auctions listed..........................................................       289         4,394         33,668
  </TABLE>
  (1) Represents transactions associated with the eBay site.
  (2) Represents the aggregate sales prices of all goods for which an auction was
      successfully concluded on the eBay site (i.e., there was at least one bid
      above the seller's specified minimum price or reserve price, whichever is
      higher).
  
  
    It is difficult for the Company to forecast its revenues or earnings
  accurately and the operating results in one or more future quarters may fall
  below the expectations of securities analysts or investors. Although accurate
  revenue forecasts are difficult, the Company has begun to recognize the seasonal
  nature of its online business. In particular, the Company has noted strong
  sequential quarterly online revenue growth between the fourth quarter and the
  first quarter, and a lower, relatively level growth rate throughout the
  remainder of the year. Sequential revenue growth from the fourth quarter of 1997
  to the first quarter of 1998 was 128%, with the remaining quarters showing
  approximately 50% sequential growth. Within traditional auction operations, B&B
  typically experiences its strongest revenue growth in the second and fourth
  quarters, while Kruse International experiences its strongest revenue growth in
  the third quarter.
  
    Due to the inherent difficulty in forecasting net revenues, it is also
  difficult to forecast income statement expense categories as a percentage of net
  revenues. Quarterly and annual income statement expense categories as a
  percentage of net revenues may be significantly different from historical or
  projected rates. This is especially true as the Company expects to accelerate
  investment in equipment and personnel to enhance site stability and scalability
  during 1999. As a general note, the Company expects costs to increase in
  absolute dollars across all income statement categories. Further, the Company
  expects its gross margin will likely decline due primarily to the effects of
  depreciation from recently purchased site equipment and software, expected
  future purchases, increases in site operations personnel and consulting costs,
  and growth within the customer support organization, including a new facility in
  Salt Lake City.
  
    The Company's offline, traditional auction businesses tend to have results
  which are easier to forecast than their online counterparts.  Although the
  operations and results of both B&B and Kruse show seasonal trends in net
  revenues and expenses, annual results of operations are relatively stable when
  compared to the online business.  These trends may not be indicative of future
  results as the Company leverages the acquired companies' expertise and expands
  into premium online auctions and online automobile auctions.  To a large extent,
  the changes in the consolidated results of operations for the periods presented
  are due to the growth of the online auction business, thus discussions about
  year over year changes will primarily focus on the eBay online auction service.
  
   Net Revenues
  
    The Company derives revenue from a variety of sources including: listing,
  success, and featured item fees for transactions occurring online, and auction
  related fees, commissions and rental income in traditional auction operations.
  Neither Billpoint nor alando had significant operations prior to 1999, and no
  significant revenue generation is expected from either company in 1999. The
  Company's net revenues increased from $32.1 million to $41.4 million in the
  years ended December 31, 1996 and 1997, and further increased to $86.1 million
  in the year ended December 31, 1998.  The increase in the period from 1996 to
  1997 was derived from both the eBay online service and the B&B Companies.
  Increases in online net revenues were a result of the growth of the eBay site,
  both in the number of items listed and number of auctions successfully
  completed, and to a lesser extent by increases in average transaction size and
  certain increases in placement and featured item fees for listed items.
  Increases in B&B net revenues were due to the addition of several special
  auctions including two single-owner estates and a museum deaccession.  Revenue
  growth in the period from 1997 to 1998 was almost solely the result of the
  increased use of the eBay website with net revenues in the acquired Companies
  remaining comparable with prior periods.
  
  
                                         4
  <PAGE>
  
   Cost of Net Revenues
  
    Cost of net revenues for online operations consists primarily of costs
  associated with customer support and website operations. These costs include;
  compensation and allocated overhead for customer support and site operations
  personnel, ISP connectivity charges and depreciation on site equipment. Cost of
  net revenues in traditional auction operations primarily include; compensation
  for auction, appraisal, and customer support personnel and direct auction costs,
  such as event site rental. Cost of net revenues increased in absolute dollars
  from $6.8 million or 21.2% of net revenues in 1996 to $8.4 million or 20.3% of
  net revenues in 1997, and further increased to $16.1 million or 18.7% of net
  revenues in 1998. The increase from 1996 to 1997 was due almost equally to the
  eBay online business and B&B.  The increase in B&B cost of net revenues
  paralleled the increase in net revenues during the same period resulting from
  the additional specialty auctions held during the year.  Increases in absolute
  dollar expenditures for the eBay online service during the periods from 1996 to
  1997, and from 1997 to 1998 resulted from the continued development and
  expansion of the Company's customer support and site operations departments,
  depreciation of the equipment required for the Company's site operations and ISP
  connectivity charges. Costs of net revenues, especially those related to
  customer support and depreciation in the online business, are expected to
  continue to increase rapidly as the Company invests in its infrastructure in
  advance of demand, resulting in lower gross margins in the near term.
  
  
   Sales and Marketing
  
    The Company's sales and marketing expenses for both the online and traditional
  auction businesses are comprised primarily of compensation for the Company's
  sales and marketing personnel, advertising, tradeshow and other promotional
  costs, expenses for creative design of the Company's website and an allocation
  of overhead.  Sales and marketing expenses increased in absolute dollars from
  $13.1 million or 41.0% of net revenues in 1996 to $15.6 million or 37.8% of net
  revenues in 1997, and further increased to $36.0 million or 41.8% of net
  revenues in 1998.  During the periods from 1996 to 1997, and from 1997 to 1998,
  increases in marketing expenditures were primarily driven by the online auction
  business.  Increases from 1996 to 1997 primarily resulted from the building of
  the online marketing organization, which began late in the fourth quarter of
  1996, and the commencement of significant advertising campaigns which began in
  the third quarter of 1997.  The increase from 1997 to 1998 primarily resulted
  from substantial increases in advertising and promotional expenses, including
  costs associated with national print, broadcast and online advertising campaign
  and expenses associated with a marketing agreement with America Online Inc.,
  both of which commenced in the second half of 1998, in addition to the continued
  growth in the number of sales and marketing personnel.
  
    Online sales and marketing expenses are expected to increase in 1999, due to
  the commencement of advertising impressions delivered under a new strategic
  alliance with AOL, the expansion of international advertising and expenses
  associated with personnel additions made during 1999. Sales and marketing
  expenses in the traditional auction businesses are expected to remain comparable
  with historical levels.
  
  
   Product Development
  
    The Company's product development expenses for both eBay and Billpoint consist
  primarily of compensation for the Company's product development staff, payments
  to outside contractors, depreciation on equipment used for development and an
  allocation of overhead. The Company's product development expenses increased in
  absolute dollars from $28,000 or 0.1% of net revenues in 1996 to $831,000 or
  2.0% of net revenues in 1997, and further increased to $4.6 million or 5.4% of
  net revenues in 1998.  The year over year changes, and all expenditures
  discussed, were incurred by the eBay online business.  Neither B&B nor Kruse had
  any product development costs through December 31, 1998.  The increase in
  absolute dollars during the periods from 1996 to 1997, and from 1997 to 1998
  resulted primarily from increases in salaries, benefits and other personnel
  related costs as the Company significantly increased the size of its product
  development staff, as well as expenses related to contractors and consultants
  employed within the product development department. Product development expenses
  are expected to increase in future periods primarily from personnel additions,
  the impact of Billpoint product development costs in 1999, and additional
  depreciation costs as the Company continues to purchase equipment to improve and
  expand its operations both domestically and internationally.
  
                                         5
  <PAGE>
  
   General and Administrative
  
    The Company's general and administrative expenses consist primarily of
  compensation for personnel and, to a lesser extent, fees for external
  professional advisors, provisions for doubtful accounts and an allocation of
  overhead. The Company's general and administrative expenses increased in
  absolute dollars from $5.7 million or 17.7% of net revenues in 1996 to $6.5
  million or 15.8% of net revenues in 1997, and further increased to $15.8 million
  or 18.4% of net revenues in 1998.  During the periods from 1996 to 1997, and
  from 1997 to 1998, increases in general and administrative expenses were
  primarily driven by the online auction business.  The increase from 1996 to 1997
  primarily resulted from increases in salaries, benefits and other personnel
  related expenses, and to a lesser extent, from increases in the allowance for
  doubtful accounts, fees for professional services and overhead costs.  The
  increase in expenses from 1997 to 1998 primarily resulted from several stock
  related transactions occurring in 1998.  These include the Company's
  contribution in June 1998 of 321,750 shares of common stock with an estimated
  fair value of $1.2 million to a charitable foundation, compensation expense of
  $429,000 associated with the purchase of restricted shares of common stock by
  the Company's outside directors and compensation expense of approximately $1.7
  million associated with stock options granted to employees.  Additional year
  over year increases resulted from increases in personnel related expenses, the
  allowance for doubtful accounts, fees for professional services and overhead
  costs.  Although the Company does not expect new, significant stock compensation
  expenses in 1999 and future periods, the Company expects general and
  administrative expenses to increase in absolute dollars in order to provide
  continued support for the rapidly growing organization.
  
  
   Amortization of Acquired Intangibles
  
    During 1998, eBay recognized expenses totaling $150,000 for in-process
  technology assumed in the acquisition of Jump and charged this amount to
  operations because the technology had not reached the state of technological
  feasibility and at the acquisition date had no alternative future use.  The
  Company also recognized amortization expense of approximately $655,000 in 1998
  associated with covenants not to compete, a customer list, and goodwill assumed
  in the Jump acquisition.  See Note 2 of Notes to Consolidated Financial
  Statements.
  
  
   Interest and Other Income (Loss), Net
  
    The Company's interest and other income (loss), net, consists of interest
  earned on cash, cash equivalents, and short term investments offset by interest
  expense, minority interests in consolidated companies, and equity interests in
  the income or loss from partnership investments. Interest expense is primarily
  derived from interest payments on real estate mortgages held by B&B companies.
  The Company's interest and other (loss), net declined from $(2.6) million or
  (8.1)% of net revenues in 1996 to $(2.0) million or (4.8)% of net revenues in
  1997 and further declined to $(703,000) or (0.8)% in 1998. The change in
  absolute dollars from 1996 to 1997 was a result of additional interest earned at
  B&B due to larger cash balances on hand at the various companies. From 1997 to
  1998, eBay's online business was the primary contributor to interest income from
  interest earned on the net proceeds from the Company's initial public offering
  in September 1998 and, to a lesser extent, interest earned on proceeds from the
  exercise of warrants in May 1998. Interest expense was approximately comparable
  between 1996, 1997, and 1998. The Company expects interest and other income
  (loss), net to be positive in 1999 due primarily to interest earned on the
  proceeds from the company's follow on offering completed in April 1999.
  
   Provision for Income Taxes
  
    The Company's effective federal and state income tax rate was 10.6%, 11.2% and
  38.7% in the years ended December 31, 1996, 1997 an 1998, respectively.  During
  1996 and 1997, the majority of the Company's revenue was earned by B&B, which
  had been taxed as an S Corporation prior to the acquisition. In connection with
  its acquisition, B&B's status as an S Corporation was terminated, and B&B became
  subject to federal and state income taxes. The supplemental pro forma financial
  information presented in the financial statements includes an increase to the
  provisions for income taxes based upon a combined federal and state tax rate
  which approximates the statutory tax rates that would have applied if B&B had
  been taxed as a C Corporation during the periods prior to its acquisition by
  eBay. The rate change from 1997 to 1998 resulted from two factors, a larger
  portion of the revenue was generated by eBay, a C Corporation, and from changes
  in certain non-cash, non-deductible expenses as a percentage of pre-tax income.
  The Company expects the consolidated effective tax rate to be at or near 42%
  throughout 1999.
  
                                         6
  <PAGE>
  
   Stock-Based Compensation
  
    In connection with the grant of certain stock options and warrants from May
  1997 through June 1998, the Company recorded aggregate unearned compensation
  totaling $6.8 million, which is being amortized over the four-year vesting
  period of the options. Of the total unearned compensation, approximately $25,000
  was amortized in 1997 and $2.7 million was amortized in 1998.  These
  amortization amounts were allocated among the operational expense categories
  based upon the primary activity of the related employees.
  
  
  Liquidity and Capital Resources
  
    Since inception, the Company has financed its operations primarily from net
  cash generated from operating activities. The Company has obtained additional
  financing from the sale of preferred stock and warrants, proceeds from the
  exercise of those warrants, proceeds from the exercise of stock options,
  proceeds from its initial public offering.
  
    Net cash provided by operating activities was $11.2 million in 1996, $11.6
  million in 1997 and $6.0 million in 1998.  Net cash provided by operating
  activities resulted primarily from the Company's net income before non-cash
  charges for amortization of unearned compensation, the provision for doubtful
  accounts, depreciation and amortization, as well as increases in various
  liabilities, offset by partnership losses, changes in accounts receivable, and
  taxes payable.
  
    Net cash used in investing activities totaled $1.9 million in 1996, $3.0
  million in 1997, and $53.0 million in 1998.  Purchases of property, equipment
  and intangibles was a primary use for invested cash in all years presented,
  offset in 1996 and 1998 by the sale of property and equipment.   During 1998,
  proceeds from the initial public offering were used to purchase $40.4 million of
  short-term investments.
  
    Net cash provided by (used in) financing activities was $(8.1) million in
  1996, $560,000 in 197 and $72.2 million in 1998.  Net cash used in financing
  activities during 1996 resulted from principal payments on long-term debt and
  leases, and distributions to stockholders in the B&B companies.  During 1997,
  the Company made distributions to B&B stockholders, which were offset by
  proceeds from debt and equity financing. The Company completed its initial
  public offering in September 1998, holders exercise preferred stock warrants in
  May 1998, and B&B stockholders contributed cash to the B&B companies to create
  the net cash provided by financing activities in 1998.
  
    eBay had no material commitments for capital expenditures at December 31,
  1998, but expects such expenditures to be at least $14.0 million during 1999.
  Such expenditures will primarily be for computer equipment, furniture and
  fixtures and leasehold improvements. eBay also has total minimum lease
  obligations of $25.1 under certain noncancellable operating leases and
  notes payable obligations of $22.4 million through December 2004. In March 1999,
  eBay and AOL expanded the scope of their strategic relationship. Under this new
  agreement eBay will pay AOL $75 million for advertising over the four-year term
  of the contract. See Notes 5, 6 and 8 of Notes to Consolidated Financial
  Statements.
  
    The Company believes that its existing cash, cash equivalents and investments,
  and any cash generated from operations will be sufficient to fund its operating
  activities, capital expenditures and other obligations for the foreseeable
  future. However, if during that period or thereafter the Company is not
  successful in generating sufficient cash flow from operations or in raising
  additional capital when required in sufficient amounts and on terms acceptable
  to the Company, the Company's business could suffer.
  
  
  Year 2000 Issues
  
    Many currently installed computer systems and software products are coded to
  accept only two-digit entries in the date code field and cannot reliably
  distinguish dates beginning on January 1, 2000 from dates prior to the year
  2000. Many companies' software and computer systems may need to be upgraded or
  replaced in order to correctly process dates beginning in 2000 and to comply
  with the "Year 2000" requirements. The Company has reviewed its internal
  programs and has determined that there are no significant Year 2000 issues
  within the Company's systems or services. The Company has completed
  modifications to its internal systems to fix identified Year 2000 issues in an
  attempt to ensure Year 2000 compliance. The costs of these modifications have
  not been material and have involved a reallocation of internal resources
  
                                         7
  <PAGE>
  
  rather than incremental expenditures. Although the Company believes that its own
  software is Year 2000 compliant, the Company may be wrong. If the Company is
  wrong, it could face unexpected expenses to fix the problem or unanticipated
  website outages, either of which would harm its business. The Company uses
  third-party equipment and software that may not be Year 2000 compliant.
  Following a website outage in June 1999, the Company undertook a comprehensive
  site review including a further review of its website for year 2000 compliance.
  This review identified certain software "patches" for third party software that
  needed to be implemented for Year 2000 compliance. The process of implementing
  these patches has commenced and it is expected to be completed shortly after the
  end of the third quarter. The cost of this implementation is not expected to be
  material and is being accomplished through a reallocation of internal resources.
  The Company is also conducting a further review of third party software and
  embedded systems used in its online auction business. In connection with its
  acquisitions of each of its newly acquired businesses, the Company received
  representations and warranties that the systems and software of these businesses
  are Year 2000 compliant. While the Company has no reason to doubt these
  assurances, it is reviewing the Year 2000 status of the software and systems of
  its newly acquired businesses. The Company expects that the incremental cost of
  all of these reviews will not exceed $200,000. The cost of any necessary
  upgrades or changes cannot currently be precisely estimated. The Company may be
  harmed if necessary upgrades or changes are not identified, or if identified are
  not timely and successfully implemented at an acceptable cost. The Company also
  may be harmed by Year 2000 problems at its vendors and business partners. For
  example, the Company relies on credit card companies to collect the majority of
  its revenues from users. Due to the nature of the credit card system, some
  industry analysts have questioned the effect of the year 2000 on credit card
  processing and billing. Failure of the Company's credit card vendors or other
  third-party equipment or software vendors to properly process dates for the year
  2000 and thereafter could require the Company to incur unanticipated expenses in
  seeking alternative means of payment or hardware or software replacements. It
  also could result in loss of revenues or unanticipated eBay website outages. The
  Company's marketing efforts are also dependent on the continued operation of
  Internet portals and other Internet sites on which it advertises.
  
    Although the Company has developed contingency plans with respect to
  collecting payment under these circumstances, the Company is unable to make
  contingency plans if any significant number of the computers constituting the
  Internet fail to process dates properly for the year 2000 and there is a
  systemwide slowdown or breakdown. The Company's business is dependent on the
  continued successful operation of the Internet. Any interruption or significant
  degradation of Internet operations due to Year 2000 problems could harm the
  Company's business.
  
  
  Risk Factors that may Affect Results of Operations and Financial Condition
  
   Our operating results may fluctuate.
  
    Our operating results have varied on a quarterly basis during our short
  operating history. Our operating results may fluctuate significantly as a result
  of a variety of factors, many of which are outside our control. Factors that may
  affect our quarterly operating results include the following:
  
    .  our ability to retain an active user base, to attract new users who list
       items for sale and who complete transactions through our service and to
       maintain customer satisfaction;
  
    .  our ability to keep our website operational and to manage the number of
       items listed on our service;
  
    .  federal, state or local government regulation, including investigations
       prompted by items improperly listed or sold by our users;
  
    .  the introduction of new sites, services and products by us or our
       competitors;
  
    .  volume, size, timing and completion rate of trades on our website;
  
    .  seasonal effects on revenue in our online service and our land-based
       auction business;
  
    .  our ability to integrate, manage and grow our recent acquisitions;
  
    .  the success of our brand building and marketing campaigns;
  
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  <PAGE>
  
    .  the amount and timing of operating costs and capital expenditures relating
       to maintaining and expanding our business, operations and infrastructure;
  
    .  our ability to upgrade and develop our systems and infrastructure to
       accommodate growth;
  
    .  our ability to attract new personnel in a timely and effective manner;
  
    .  our ability to retain key employees in both our historical online business
       and our recent acquisitions;
  
    .  the timing, cost and availability of advertising in traditional media and
       on other websites and online services;
  
    .  the ability of our land-based auction businesses to acquire high quality
       properties;
  
    .  the timing of marketing expenses under existing contracts;
  
    .  consumer trends and popularity of some categories of collectible items;
  
    .  the level of use of the Internet and online services;
  
    .  increasing consumer acceptance of the Internet and other online services
       for commerce and, in particular, the trading of products such as those
       listed on our website;
  
    .  consumer confidence in the security of transactions on our website; and
  
    .  general economic conditions and economic conditions specific to the
       Internet and electronic commerce industries.
  
    Our limited operating history and the emerging nature of the markets in which
  we compete make it difficult for us to forecast our revenues or earnings
  accurately. We believe that period-to-period comparisons of our operating
  results may not be meaningful and you should not rely upon them as an indication
  of future performance. We do not have backlog, and almost all of our net
  revenues each quarter come from auctions that are completed during that quarter.
  Our operating results in one or more future quarters may fall below the
  expectations of securities analysts and investors. In that event, the trading
  price of our common stock would almost certainly decline.
  
  
   Our failure to manage growth could harm us.
  
    We currently are experiencing a period of significant expansion in our
  headcount, facilities and infrastructure and we anticipate that further
  expansion will be required to address potential growth in our customer base and
  market opportunities. This expansion has placed, and we expect it will continue
  to place, a significant strain on our management, operational and financial
  resources. The areas that are put under severe strain by our rate of growth
  include the following:
  
    .  The website. We must constantly add new hardware, update software and add
       new engineering personnel to accommodate the increased use of our website.
       If we are unable to increase the capacity of our systems at least as fast
       as the growth in demand for this capacity, our website may become unstable
       and may cease to operate for periods of time. We have experienced periodic
       unscheduled downtime. Continued unscheduled downtime would harm our
       business and also would discourage users of our website and reduce future
       revenues.
  
    .  Customer Support. We must expand our customer support operations to
       accommodate the increased number of users and transactions on our website.
       If we are unable to hire and successfully train sufficient employees or
       contractors in this area, users of our website may have negative
       experiences and current and future revenues could suffer.
  
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  <PAGE>
  
    .  Customer Accounts. Our revenues are dependent on prompt and accurate
       billing processes. If we are unable to grow our transaction processing
       abilities to accommodate the increasing number of transactions that must be
       billed, our ability to collect revenue will be harmed.
  
    We must continue to hire, train and manage new employees at a rapid rate. The
  majority of our employees today have been with us less than one year and we
  expect that our rate of hiring will continue at a very high pace. To manage the
  expected growth of our operations and personnel, we will need to improve our
  transaction processing, operational and financial systems, procedures and
  controls. Our current and planned personnel, systems, procedures and controls
  may not be adequate to support our future operations. We may be unable to hire,
  train, retain and manage required personnel or to identify and take advantage of
  existing and potential strategic relationships and market opportunities.
  
  
   The inability to expand our systems may limit our growth.
  
    We seek to generate a high volume of traffic and transactions on our service.
  The satisfactory performance, reliability and availability of our website,
  processing systems and network infrastructure are critical to our reputation and
  our ability to attract and retain large numbers of users. Our revenues depend on
  the number of items listed by users, the volume of user auctions that are
  successfully completed and the final prices paid for the items listed. If the
  volume of traffic on our website or the number of auctions being conducted by
  customers continues to increase, we will need to expand and upgrade our
  technology, transaction processing systems and network infrastructure. Such
  expansion will be costly and is expected to eventually require an expensive re-
  architecting of our technology. We may not be able to accurately project the
  rate or timing of increases, if any, in the use of our service or to timely
  expand and upgrade our systems and infrastructure to accommodate any increases.
  
    We use internally developed systems to operate our service and for transaction
  processing, including billing and collections processing. We must continually
  improve these systems in order to accommodate the level of use of our website.
  In addition, we may add new features and functionality to our services that
  would result in the need to develop or license additional technologies. Our
  inability to add additional software and hardware or to upgrade our technology,
  transaction processing systems or network infrastructure to accommodate
  increased traffic or transaction volume could have adverse consequences. These
  consequences include unanticipated system disruptions, slower response times,
  degradation in levels of customer support, impaired quality of the users'
  experience on our service and delays in reporting accurate financial
  information. Our failure to provide new features or functionality also could
  result in these consequences. We may be unable to effectively upgrade and expand
  our systems in a timely manner or to integrate smoothly any newly developed or
  purchased technologies with our existing systems. These difficulties could harm
  or limit our ability to expand our business.
  
   System failures could harm our business.
  
    We have experienced system failures from time to time. Our website has been
  interrupted for periods of up to 22 hours. In addition to placing increased
  burdens on our engineering staff, these outages create a flood of user questions
  and complaints that must be responded to by our customer support personnel. Any
  unscheduled interruption in our service results in an immediate loss of revenue
  that can be substantial. If we experience frequent or persistent system
  failures, our reputation and brand could be permanently harmed. We are currently
  taking steps to increase the reliability and redundancy of our system. These
  steps are expensive and may not be successful in reducing the frequency or
  duration of unscheduled downtime.
  
    Substantially all of our computer hardware for operating our service currently
  is located at the facilities of Exodus Communications, Inc. ("Exodus") in Santa
  Clara, California. These systems and operations are vulnerable to damage or
  interruption from earthquakes, floods, fires, power loss, telecommunication
  failures and similar events. They are also subject to break-ins, sabotage,
  intentional acts of vandalism and similar misconduct. We do not have fully
  redundant systems, a formal disaster recovery plan or alternative providers of
  hosting services, and we do not carry business interruption insurance to
  compensate us for losses that may occur. Despite any precautions we may take,
  the occurrence of a natural disaster or other unanticipated problems at the
  Exodus facility could result in interruptions in our services. In addition, the
  failure by Exodus to provide our required data communications capacity could
  result in interruptions in our service. Any damage to or failure of our systems
  could result in interruptions in our service. Such interruptions will reduce our
  revenues and profits, and our future revenues and profits will be harmed if our
  users believe that our system is unreliable.
  
                                         10
  <PAGE>
  
  We may not maintain profitability.
  
    We believe that our continued profitability and growth will depend in large
    part on our ability to do the following:
  
    . increase our brand name awareness;
  
    . provide our customers with superior community and trading experiences;
  
    . maintain sufficient transaction volume to attract buyers and sellers; and
  
    . manage the costs of our business, including the costs associated with
      maintaining and developing our site, customer support, and international
      expansion.
  
    We are investing heavily in marketing and promotion, customer support, further
  development of our website, including stability, redundancy and more advanced
  architecture and operating infrastructure development. We have significant
  ongoing commitments in some of these areas. As a result, we may be unable to
  adjust our spending rapidly enough to compensate for any unexpected revenue
  shortfall, which would harm our profitability. The emergence of competitors,
  many of whom are offering free auctions to users, may limit our ability to raise
  user fees in response to declines in profitability or require us to reduce our
  fees. In addition, we are spending in advance of anticipated growth, which may
  also harm our profitability. Our historic growth rates are not sustainable and
  in the near future we expect our costs, including those related to growing our
  infrastructure and our new initiatives internationally, regionally, and with
  respect to premium items, to increase. In view of the rapidly evolving nature of
  our business and our limited operating history, we believe that period-to-period
  comparisons of our operating results are not necessarily meaningful. You should
  not rely upon our historical results as indications of our future performance.
  
  
   Our business has been seasonal.
  
    Our results of operations historically have been somewhat seasonal in nature
  because many of our users reduce their activities on our website during the
  Thanksgiving and Christmas holidays and with the onset of good weather. We
  expect the growth rate of our revenue in the second and subsequent quarters will
  be significantly below our first quarter growth rate. Both B&B and Kruse have
  significant quarter to quarter variations in their results depending on the
  timing of auctions and the availability of high quality items from large
  collections and estates. B&B typically has its best operating results in the
  traditional fall and spring auction seasons and has historically incurred
  operating losses in the first and third quarters. Kruse typically sees a
  seasonal peak in operations in the third quarter. Seasonal or cyclical
  variations in our business may become more pronounced over time and may harm our
  results of operations in the future.
  
   Acquisitions could result in operating difficulties and other harmful
  consequences.
  
    If appropriate opportunities present themselves, we intend to acquire
  businesses, technologies, services or products that we believe are strategic. We
  recently completed four acquisitions. The process of integrating any acquisition
  may create unforeseen operating difficulties and expenditures and is itself
  risky. The areas where we may face difficulties include:
  
    .  diversion of management time (both ours and at the acquired companies)
       during the period of negotiation through closing and further diversion of
       such time after closing from focus on operating the businesses to issues of
       integration and future products;
  
    .  decline in employee morale and retention issues resulting from changes in
       compensation, reporting relationships, future prospects, or the direction
       of the business;
  
    .  the need to integrate each company's accounting, management information,
       human resource and other administrative systems to permit effective
       management and the lack of control if such integration is delayed or not
       implemented; and
  
                                         11
  <PAGE>
  
    .  the need to implement controls, procedures and policies appropriate for a
       larger public company at companies that prior to acquisition had been
       smaller, private companies.
  
    We have almost no experience in managing this integration process. Moreover,
  the anticipated benefits of any or all of these acquisitions may not be
  realized. Future acquisitions could result in potentially dilutive issuances of
  equity securities, the incurrence of debt, contingent liabilities or
  amortization expenses related to goodwill and other intangible assets, any of
  which could harm our business. Future acquisitions may require us to obtain
  additional equity or debt financing, which may not be available on favorable
  terms or at all. Even if available, this financing may be dilutive.
  
   Our business may be harmed by the listing or sale by our users of illegal
  items.
  
  
    The law relating to the liability of providers of online services for the
  activities of their users on their service is currently unsettled. We are aware
  that certain goods, such as firearms, other weapons, adult material, tobacco
  products, alcohol and other goods that may be subject to regulation by local,
  state or federal authorities, have been listed and traded on our service. We may
  be unable to prevent the sale of unlawful goods, or the sale of goods in an
  unlawful manner, by users of our service, and we may be subject to civil or
  criminal liability for unlawful activities carried out by users through our
  service. In order to reduce our exposure to this liability, we have prohibited
  the listing of certain items and increased the number of personnel reviewing
  questionable items. We may in the future implement other protective measures
  that could require us to spend substantial resources and/or to reduce revenues
  by prohibiting additional categories of listings. These actions could harm our
  financial results. Any costs incurred as a result of liability or asserted
  liability relating to the sale of unlawful goods or the unlawful sale of goods,
  could harm our business. In addition, we have from time to time received
  significant media attention relating to the listing or sale of unlawful goods on
  our website. A continuation of this negative publicity could damage our
  reputation and diminish the value of our brand name. It also could make users
  reluctant to continue to use our services.
  
   Our business may be harmed by the listing or sale by our users of pirated
  items.
  
    We have received in the past, and we anticipate we will receive in the future,
  communications alleging that certain items listed or sold through our service by
  our users infringe third-party copyrights, trademarks and tradenames or other
  intellectual property rights. Although we have actively sought to work with the
  content community to eliminate infringing listings on our website, some content
  owners have expressed the view that our efforts are insufficient. An allegation
  of infringement of third-party intellectual property rights may result in
  litigation against us. Any such litigation could be costly for us, could result
  in increased costs of doing business through adverse judgment or settlement,
  could require us to change our business practices in expensive ways, or could
  otherwise harm our business.
  
   Our business may be harmed by fraudulent activities on our website.
  
    Our future success will depend largely upon sellers reliably delivering and
  accurately representing their listed goods and buyers paying the agreed purchase
  price. We do not take responsibility for delivery of payment or goods to any
  user of our service. We have received in the past, and anticipate that we will
  receive in the future, communications from users who did not receive the
  purchase price or the goods that were to have been exchanged. While we can
  suspend the accounts of users who fail to fulfill their delivery obligations to
  other users, we do not have the ability to require users to make payments or
  deliver goods or otherwise make users whole, other than through our limited
  insurance program. Other than through this program, we do not compensate users
  who believe they have been defrauded by other users. We also periodically
  receive complaints from buyers as to the quality of the goods purchased. Any
  negative publicity generated as a result of fraudulent or deceptive conduct by
  users of our service could damage our reputation and diminish the value of our
  brand name. We may in the future receive additional requests from users
  requesting reimbursement or threatening legal action against us if no
  reimbursement is made. Any resulting litigation could be costly for us, divert
  management attention, result in increased costs of doing business, lead to
  adverse judgments or could otherwise harm our business.
  
   Government inquiries may lead to charges or penalties.
  
    On January 29, 1999, we received requests to produce certain records and
  information to the federal government relating to an investigation of possible
  illegal transactions in connection with our website. We have been informed that
  the inquiry includes an examination of our practices with respect to these
  transactions. We are fully cooperating with the inquiry. In
  
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  <PAGE>
  
  order to protect the investigation, the court has ordered that no further public
  disclosures be made with respect to the matter at this time. Should this or any
  other investigation lead to civil or criminal charges against us, we would
  likely be harmed by negative publicity, the costs of litigation, the diversion
  of management time and other negative effects, even if we ultimately prevail.
  Our business would certainly suffer if we were not to prevail in any action like
  this. Even the process of providing records and information could be expensive,
  time consuming and result in the diversion of management attention.
  
    A large number of transactions occur on our website. As a result, we believe
  that government regulators have received a substantial number of consumer
  complaints about us which, while small as a percentage of our total
  transactions, are large in aggregate numbers. We have from time to time been
  contacted by various federal, state and local regulatory agencies and been told
  that they have questions with respect to the adequacy of the steps we take to
  protect our users from fraud. For example, the City of New York--Department of
  Consumer Affairs received complaints from users about transactions on our
  website. In investigating these complaints, the Department of Consumer Affairs
  requested information about us and these transactions. We have provided the
  requested information. We are likely to receive additional inquiries from
  regulatory agencies in the future, which may lead to action against us. We have
  responded to all inquiries from regulatory agencies by describing our current
  and planned antifraud efforts. If one or more of these agencies is not satisfied
  with our response to current or future inquiries, the resultant investigations
  and potential fines, changes in business practices, or other penalties could
  harm our business.
  
   Some of our businesses are subject to regulation; others may be.
  
  
    Both B&B and Kruse are subject to regulation in some jurisdictions governing
  the manner in which auctions are conducted. Both are required to obtain
  licensure in certain jurisdictions with respect to their business or to permit
  the sale of certain properties (e.g. wine, automobiles, real estate). Such
  licenses must generally be regularly renewed and are subject to revocation for
  violation of law, violation of the regulations governing auctions in general or
  the sale of the particular item and other events. If either company was unable
  to renew a license or had a license revoked it would be harmed. In addition,
  changes to the regulations or the licensure requirements could increase the
  complexity and the cost of doing auctions, thereby harming us.
  
    As our activities and the types of goods listed on our site expand, state
  regulatory agencies may claim that we are subject to licensure in their
  jurisdiction. Such claims could result in costly litigation or may require us to
  change our manner of doing business in ways that increase our costs or reduce
  our revenues or force us to prohibit listings of certain items. We could also be
  subject to fines or other penalties. Any of the above outcomes could harm us.
  Furthermore, businesses that handle consumers' funds are potentially subject to
  numerous regulations, including those related to banking, credit cards, escrow,
  fair credit reporting and others. Billpoint is a new business with a relatively
  novel approach to facilitating payments. It is not yet known how regulatory
  agencies will treat Billpoint. The cost and complexity of Billpoint's business
  may increase if certain regulations are deemed to apply to its business.
  
  
   We are subject to risks associated with information disseminated through our
  service.
  
    The law relating to the liability of online services companies for information
  carried on or disseminated through their services is currently unsettled. Claims
  could be made against online services companies under both United States and
  foreign law for defamation, libel, invasion of privacy, negligence, copyright or
  trademark infringement, or other theories based on the nature and content of the
  materials disseminated through their services. A number of private lawsuits
  seeking to impose liability upon other online services companies currently are
  pending. In addition, federal, state and foreign legislation have been proposed
  that impose liability for or prohibit the transmission over the Internet of
  certain types of information. Our service features a Feedback Forum, which
  includes information from users regarding other users. Although all such
  feedback is generated by users and not by us, it is possible that a claim of
  defamation or other injury could be made against us for content posted in the
  Feedback Forum. Such claims are more likely and have a greater probability of
  success as we expand internationally. If we become liable for information
  provided by our users and carried on our service, we could be directly harmed
  and we may be forced to implement new measures to reduce our exposure to this
  liability. This may require us to expend substantial resources and/or to
  discontinue certain service offerings. In addition, the increased attention
  focused upon liability issues as a result of these lawsuits and legislative
  proposals could harm our reputation or otherwise impact the growth of our
  business. We carry liability insurance, but it may not be adequate to fully
  compensate us if we become liable
  
                                         13
  <PAGE>
  
  for information carried on or through our service. Any costs incurred as a
  result of this liability or asserted liability could harm our business.
  
  
   We are subject to intellectual property litigation.
  
    On March 23, 1999 we were sued by Network Engineering Software, Inc. in the
  U.S. District Court for the Northern District of California for our alleged
  willful and deliberate violation of a patent. The suit seeks unspecified
  monetary damages as well as an injunction against our operations. It also seeks
  treble damages and attorneys' fees and costs. We have answered, denying these
  allegations and alleging that the patent is invalid. Discovery has commenced and
  we have filed a summary judgement motion seeking to invalidate certain claims in
  the patent. We believe that we have meritorious defenses against this suit and
  intend to vigorously defend ourselves. We could be forced to incur material
  expenses during this defense and in the event we were to lose this suit, our
  business would be harmed.
  
    Other third parties have from time to time claimed and may claim in the future
  that we have infringed their past, current or future technologies. We expect
  that participants in our markets increasingly will be subject to infringement
  claims as the number of services and competitors in our industry segment grows.
  Any claim like this, whether meritorious or not, could be time-consuming, result
  in costly litigation, cause service upgrade delays or require us to enter into
  royalty or licensing agreements. These royalty or licensing agreements might not
  be available on acceptable terms or at all. As a result, any claim like this
  could harm our business.
  
  
   Unauthorized break-ins to our service could harm our business.
  
    Our servers are vulnerable to computer viruses, physical or electronic break-
  ins and similar disruptions, which could lead to interruptions, delays, loss of
  data or the inability to complete customer auctions. In addition, unauthorized
  persons may improperly access our data. We have experienced an unauthorized
  break-in by a "hacker" who stated that he can in the future damage or change our
  system or take confidential information. Any such actions by this or any other
  individual could harm us. Such actions may be very expensive to remedy and could
  damage our reputation and discourage new and existing users from using our
  service.
  
   Our stock price has been and may continue to be extremely volatile.
  
    The trading price of our common stock has been and is likely to be extremely
  volatile. Our stock price could be subject to wide fluctuations in response to a
  variety of factors, including the following:
  
    . actual or anticipated variations in our quarterly operating results;
  
    . unscheduled system downtime;
  
    . additions or departures of key personnel;
  
    . announcements of technological innovations or new services by us or our
      competitors;
  
    . changes in financial estimates by securities analysts;
  
    . conditions or trends in the Internet and online commerce industries;
  
    . the emergence of online securities trading;
  
    . changes in the market valuations of other Internet or online service
      companies;
  
    . developments in Internet regulation;
  
    . announcements by us or our competitors of significant acquisitions,
  
                                         14
  <PAGE>
  
    . strategic partnerships, joint ventures or capital commitments;
  
    . sales of our common stock or other securities in the open market; and
  
    . other events or factors that may be beyond our control.
  
    In addition, the trading price of Internet stocks in general, and ours in
  particular, have experienced extreme price and volume fluctuations in recent
  months. These fluctuations often have been unrelated or disproportionate to the
  operating performance of these companies. The valuations of many Internet
  stocks, including ours, are extraordinarily high based on conventional valuation
  standards such as price to earnings and price to sales ratios. The trading price
  of our common stock has increased enormously from the initial public offering
  price. These trading prices and valuations may not be sustained. Any negative
  change in the public's perception of the prospects of Internet or e-commerce
  companies could depress our stock price regardless of our results. Other broad
  market and industry factors may decrease the market price of our common stock,
  regardless of our operating performance. Market fluctuations, as well as general
  political and economic conditions such as recession or interest rate or currency
  rate fluctuations, also may decrease the market price of our common stock. In
  the past, following declines in the market price of a company's securities,
  securities class-action litigation often has been instituted against the
  company. Litigation of this type, if instituted, could result in substantial
  costs and a diversion of management's attention and resources.
  
  
   New and existing regulations could harm our business.
  
    We are subject to the same federal, state and local laws as other companies
  conducting business on the Internet. Today there are relatively few laws
  specifically directed towards online services. However, due to the increasing
  popularity and use of the Internet and online services, it is possible that laws
  and regulations will be adopted with respect to the Internet or online services.
  These laws and regulations could cover issues such as online contracts, user
  privacy, freedom of expression, pricing, fraud, content and quality of products
  and services, taxation, advertising, intellectual property rights and
  information security. Applicability to the Internet of existing laws governing
  issues such as property ownership, copyrights and other intellectual property
  issues, taxation, libel, obscenity and personal privacy is uncertain. The vast
  majority of these laws were adopted prior to the advent of the Internet and
  related technologies and, as a result, do not contemplate or address the unique
  issues of the Internet and related technologies. Those laws that do reference
  the Internet, such as the recently passed Digital Millennium Copyright Act, have
  not yet been interpreted by the courts and their applicability and reach are
  therefore uncertain. In addition, numerous states, including the State of
  California, where our headquarters are located, have regulations regarding how
  "auctions" may be conducted and the liability of "auctioneers" in conducting
  such auctions. No legal determination has been made with respect to the
  applicability of the California regulations to our business to date and little
  precedent exists in this area. One or more states may attempt to impose these
  regulations upon us in the future, which could harm our business. In addition,
  as the nature of the products listed by our users change, we may become subject
  to new regulatory restrictions. See "Some of our businesses are subject to
  regulation; others may be."
  
    Several states and Congress have proposed legislation that would limit the
  uses of personal user information gathered online or require online services to
  establish privacy policies. The Federal Trade Commission also has settled a
  proceeding with one online service regarding the manner in which personal
  information is collected from users and provided to third parties. Changes to
  existing laws or the passage of new laws intended to address these issues could
  directly affect the way we do business or could create uncertainty in the
  marketplace. This could reduce demand for our services, increase the cost of
  doing business as a result of litigation costs or increased service delivery
  costs, or otherwise harm our business. In addition, because our services are
  accessible worldwide, and we facilitate sales of goods to users worldwide,
  foreign jurisdictions may claim that we are required to comply with their laws.
  As we expand our international activities, we will be obligated to comply with
  such laws. Our failure to comply with foreign laws could subject us to penalties
  ranging from fines to bans on our ability to offer our services.
  
    In the United States, companies are required to qualify as foreign
  corporations in states where they are conducting business. As an Internet
  company, it is unclear in which states we are actually conducting business. Our
  failure to qualify as a foreign corporation in a jurisdiction where we are
  required to do so could subject us to taxes and penalties for the failure to
  qualify and could result in our inability to enforce contracts in those
  jurisdictions. Any new legislation or regulation, or the application of laws or
  regulations from jurisdictions whose laws do not currently apply to our
  business, could harm our business.
  
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  <PAGE>
  
   We are dependent on the continued growth of the online person-to-person
   commerce market.
  
    The market for the sale of goods over the Internet, particularly through
  person-to-person trading, is a new and emerging market. Our future revenues and
  profits will be substantially dependent upon the widespread acceptance of the
  Internet and online services as a medium for commerce by consumers. Rapid growth
  in the use of and interest in the Web, the Internet and online services is a
  recent phenomenon. This acceptance and use may not continue. Even if the
  Internet is accepted, concerns about fraud, privacy and other problems may mean
  that a sufficiently broad base of consumers will not adopt the Internet as a
  medium of commerce. In particular, our website requires users to make publicly
  available their e-mail addresses and other personal information that some
  potential users may be unwilling to provide. These concerns may increase as
  additional publicity over privacy issues on eBay or generally over the Internet
  increase. Market acceptance for recently introduced services and products over
  the Internet is highly uncertain, and there are few proven services and
  products. In order to expand our user base, we must appeal to and acquire
  consumers who historically have used traditional means of commerce to purchase
  goods.
  
  
   There are many risks associated with international operations.
  
    We are expanding internationally. We recently acquired alando, a leading
  German person-to-person trading company. Expansion into international markets
  will require management attention and resources. We have limited experience in
  localizing our service to conform to local cultures, standards and policies. We
  may have to compete with local companies who understand the local market better
  than we do. We may not be successful in expanding into international markets or
  in generating revenues from foreign operations. As we continue to expand
  internationally, we are subject to risks of doing business internationally,
  including the following:
  
    . regulatory requirements that may limit or prevent the offering of our
      services in local jurisdictions;
  
    . legal uncertainty regarding liability for the listings of our users,
      including less Internet-friendly basic law and unique local laws;
  
    . government-imposed limitations on the public's access to the Internet;
  
    . difficulties in staffing and managing foreign operations;
  
    . longer payment cycles, different accounting practices and problems in
      collecting accounts receivable;
  
    . cultural nonacceptance of online auctions;
  
    . political instability;
  
    . seasonal reductions in business activity;
  
    . potentially adverse tax consequences; and
  
    . administrative burdens in collecting local taxes, including value-added
      taxes.
  
    Some of these factors may cause our international costs to exceed our domestic
  costs of doing business. To the extent we expand our international operations
  and have additional portions of our international revenues denominated in
  foreign currencies, we also could become subject to increased difficulties in
  collecting accounts receivable and risks relating to foreign currency exchange
  rate fluctuations.
  
   Our business may be subject to sales and other taxes.
  
                                         16
  <PAGE>
  
    We do not collect sales or other similar taxes on goods sold by users through
  our service. One or more states may seek to impose sales tax collection
  obligations on companies such as ours that engage in or facilitate online
  commerce. Several proposals have been made at the state and local level that
  would impose additional taxes on the sale of goods and services through the
  Internet. These proposals, if adopted, could substantially impair the growth of
  electronic commerce, and could diminish our opportunity to derive financial
  benefit from our activities. The U.S. federal government recently enacted
  legislation prohibiting states or other local authorities from imposing new
  taxes on Internet commerce for a period of three years. This tax moratorium will
  last only for a limited period and does not prohibit states or the Internal
  Revenue Service from collecting taxes on our income, if any, or from collecting
  taxes that are due under existing tax rules. A successful assertion by one or
  more states or any foreign country that we should collect sales or other taxes
  on the exchange of merchandise on our system could harm our business.
  
  
   We are dependent on key personnel.
  
    Our future performance will be substantially dependent on the continued
  services of our senior management and other key personnel. Our future
  performance also will depend on our ability to retain and motivate our other
  officers and key employees. The loss of the services of any of our executive
  officers or other key employees could harm our business. We do not have long-
  term employment agreements with any of our key personnel and we do not maintain
  any "key person" life insurance policies. Our new businesses are all dependent
  on attracting and retaining key employees. The land-based auction businesses are
  particularly dependent on specialists and senior management because of the
  relationships these individuals have established with sellers who consign
  property for sale at auction. Dean Kruse is particularly important to Kruse. The
  loss of any of these individuals could result in the loss of significant future
  business and would harm us. Such personnel are in great demand by other auction
  companies. In addition, employee turnover frequently increases during the period
  following an acquisition as employees evaluate possible changes in compensation,
  culture, reporting relationships, and the direction of the business. Such
  increased turnover could increase our costs and reduce our future revenues. Our
  future success also will depend on our ability to attract, train, retain and
  motivate highly skilled technical, managerial, marketing and customer support
  personnel. Competition for these personnel is intense, especially for engineers
  and especially in the San Francisco Bay Area, and we may be unable to
  successfully attract, integrate or retain sufficiently qualified personnel. In
  making employment decisions, particularly in the Internet and high-technology
  industries, job candidates often consider the value of the stock options they
  are to receive in connection with their employment. The recent decrease in our
  stock price may make it more difficult to retain and motivate employees whose
  stock option strike prices are now substantially above current market prices.
  
  
   Our new land-based auction businesses need to continue to acquire properties.
  
    The businesses of B&B and Kruse are both dependent on the continued
  acquisition of high quality auction properties from sellers. Their future
  success will depend in part on their ability to maintain an adequate supply of
  high quality auction property, particularly fine and decorative arts and
  collectibles and collectible automobiles, respectively. There is intense
  competition for these pieces with other auction companies and dealers. In
  addition, a small number of key senior management and specialists maintain the
  relationships with the primary sources of auction property and the loss of any
  of these individuals could adversely affect the business of B&B and Kruse. See
  "We are dependent on key personnel."
  
  
   Our new land-based auction businesses could suffer losses from price
    guarantees, advances or rescissions of sales.
  
    In order to secure high quality auction properties from sellers, B&B and Kruse
  may give a guaranteed minimum price or a cash advance to a seller, based on the
  estimated value of the property. If the auction proceeds are less than the
  amount guaranteed, or less than the amount advanced and the seller does not
  repay the difference, the company involved will suffer a loss. In addition,
  under certain circumstances a buyer who believes that an item purchased at
  auction does not have good title, provenance or authenticity may rescind the
  purchase. Under such circumstances, the company involved will lose its
  commissions and fees on the sale even if the seller, in accordance with the
  terms and conditions of sale, in turn accepts back the item and returns the
  funds he or she received from the sale.
  
   We acquired real property with some of our new businesses.
  
                                         17
  <PAGE>
  
    In connection with the acquisition of Kruse and B&B we acquired real property
  including land, buildings and interests in partnerships holding land and
  buildings. We have no experience in managing real property. Ownership of this
  property subjects us to new risks, including:
  
    . the possibility of environmental contamination and the costs associated with
      fixing any environmental problems;
  
    . the possible need for structural improvements in order to comply with
      zoning, seismic, disability act or other requirements; and
  
    . possible disputes with tenants, partners or others.
  
  
   Our market is intensely competitive.
  
    The market for person-to-person trading over the Internet is new, rapidly
  evolving and intensely competitive, and we expect competition to intensify in
  the future. Barriers to entry are relatively low, and current and new
  competitors can launch new sites at a relatively low cost using commercially
  available software. We currently or potentially compete with a number of other
  companies. Our direct competitors include various online person-to-person
  auction services, including Yahoo! Auctions, Amazon.com, Excite, Inc., Auction
  Universe and a number of other small services, including those that serve
  specialty or regional markets such as CityAuction. We also compete indirectly
  with business-to-consumer online auction services such as Onsale, First Auction,
  Surplus Auction and uBid. Lycos, Inc. Dell Computers and Priceline, Inc. have
  all recently announced plans to enter the person-to-person trading arena.
  Traditional auction companies such as Sotheby's are offering or have announced
  plans to create Internet auction sites. We potentially face competition from a
  number of large online communities and services that have expertise in
  developing online commerce and in facilitating online person-to-person
  interaction. Some of these potential competitors, including AOL and Microsoft
  Corporation, currently offer business-to-consumer trading services and
  classified ad services. Some of these companies also may introduce person-to-
  person trading to their large user populations. Other large companies with
  strong brand recognition and experience in online commerce, such as Cendant
  Corporation, QVC, USA Network and large newspaper or media companies, also may
  seek to compete in the online auction market. Internationally, most countries
  have competitors in the person to person trading business including some
  companies that are larger and have more resources than eBay.  The principal
  competitive factors in our market include the following:
  
    . volume of transactions and selection of goods;
  
    . community cohesion and interaction;
  
    . system reliability;
  
    . customer service;
  
    . reliability of delivery and payment by users;
  
    . brand recognition;
  
    . website convenience and accessibility;
  
    . level of service fees; and
  
    . quality of search tools.
  
    Some current and many potential competitors have longer company operating
  histories, larger customer bases and greater brand recognition in other business
  and Internet markets than we do. Some of these competitors also have
  significantly greater financial, marketing, technical and other resources. Other
  online trading services may be acquired by, receive investments from or enter
  into other commercial relationships with larger, well established and well
  financed
  
                                         18
  <PAGE>
  
  companies. As a result, some of our competitors with other revenue sources may
  be able to devote more resources to marketing and promotional campaigns, adopt
  more aggressive pricing policies and devote substantially more resources to
  website and systems development than we are able to. Increased competition may
  result in reduced operating margins, loss of market share and diminished value
  of our brand. Some of our competitors have offered services for free and others
  may do this as well. We may be unable to compete successfully against current
  and future competitors.
  
    In order to respond to changes in the competitive environment, we may, from
  time to time, make pricing, service or marketing decisions or acquisitions that
  could harm our business. For example, we implemented an insurance program that
  generally insures items up to a value of $200, with a $25 deductible, for users
  with a non-negative feedback rating at no cost to the user. The financial impact
  of this insurance program is not yet known. New technologies may increase the
  competitive pressures by enabling our competitors to offer a lower cost service.
  Some Web-based applications that direct Internet traffic to certain websites may
  channel users to trading services that compete with us.
  
    Although we have established Internet traffic arrangements with several large
  online services and search engine companies, these arrangements may not be
  renewed on commercially reasonable terms. Even if these arrangements are
  renewed, they may not result in increased usage of our service. In addition,
  companies that control access to transactions through network access or Web
  browsers could promote our competitors or charge us substantial fees for
  inclusion.
  
    The land-based auction business is intensely competitive. B&B competes with
  two larger and better known auction companies, Sotheby's Holdings, Inc. and
  Christie's International plc, as well as numerous regional auction companies. To
  the extent that these companies increase their focus on the middle market
  properties that form the core of B&B's business, its business may suffer. Kruse
  is subject to competition from numerous regional competitors. In addition,
  competition with Internet based auctions may harm the land-based auction
  business. Although Billpoint's business is new, several companies are beginning
  to enter this market and large competitors, including banks and credit card
  companies, may become competitors.
  
   Our business is dependent on the development and maintenance of the Web
  infrastructure.
  
    The success of our service will depend largely on the development and
  maintenance of the Web infrastructure. This includes maintenance of a reliable
  network backbone with the necessary speed, data capacity and security, as well
  as timely development of complementary products such as high speed modems, for
  providing reliable Web access and services. Because global commerce and the
  online exchange of information is new and evolving, we cannot predict whether
  the Web will prove to be a viable commercial marketplace in the long term. The
  Web has experienced, and is likely to continue to experience, significant growth
  in the numbers of users and amount of traffic. If the Web continues to
  experience increased numbers of users, increased frequency of use or increased
  bandwidth requirements, the Web infrastructure may be unable to support the
  demands placed on it. In addition, the performance of the Web may be harmed by
  increased users or bandwidth requirements.
  
    The Web has experienced a variety of outages and other delays as a result of
  damage to portions of its infrastructure, and it could face outages and delays
  in the future. This might include outages and delays resulting from the "Year
  2000" problem. See "Management's Discussion and Analysis, Year 2000." These
  outages and delays could reduce the level of Web usage as well as the level of
  traffic and the processing of auctions on our service. In addition, the Web
  could lose its viability due to delays in the development or adoption of new
  standards and protocols to handle increased levels of activity or due to
  increased governmental regulation. The infrastructure and complementary products
  or services necessary to make the Web a viable commercial marketplace for the
  long term may not be developed successfully or in a timely manner. Even if these
  products or services are developed, the Web may not become a viable commercial
  marketplace for services such as those that we offer.
  
  
   Our business is subject to online commerce security risks.
  
    A significant barrier to online commerce and communications is the secure
  transmission of confidential information over public networks. Our security
  measures may not prevent security breaches. Our failure to prevent security
  breaches could harm our business. Currently, a significant number of our users
  authorize us to bill their credit card accounts directly for all transaction
  fees charged by us. We rely on encryption and authentication technology licensed
  from third parties to provide the security and authentication technology to
  effect secure transmission of confidential information, including
  
                                         19
  <PAGE>
  
  customer credit card numbers. Advances in computer capabilities, new discoveries
  in the field of cryptography, or other developments may result in a compromise
  or breach of the technology used by us to protect customer transaction data. Any
  such compromise of our security could harm our reputation and, therefore, our
  business. In addition, a party who is able to circumvent our security measures
  could misappropriate proprietary information or cause interruptions in our
  operations. An individual has claimed to have misappropriated some of our
  confidential information by breaking into our computer system. We may need to
  expend significant resources to protect against security breaches or to address
  problems caused by breaches. Security breaches like the recent one could damage
  our reputation and expose us to a risk of loss or litigation and possible
  liability. Our insurance policies carry low coverage limits, which may not be
  adequate to reimburse us for losses caused by security breaches.
  
  
   We must keep pace with rapid technological change to remain competitive.
  
    The market in which we compete is characterized by rapidly changing
  technology, evolving industry standards, frequent new service and product
  introductions and enhancements and changing customer demands. These market
  characteristics are worsened by the emerging nature of the Internet and the
  apparent need of companies from a multitude of industries to offer Web-based
  products and services. Our future success therefore will depend on our ability
  to adapt to rapidly changing technologies, to adapt our services to evolving
  industry standards and to continually improve the performance, features and
  reliability of our service. Our failure to adapt to such changes would harm our
  business. In addition, the widespread adoption of new Internet, networking or
  telecommunications technologies or other technological changes could require
  substantial expenditures to modify or adapt our services or infrastructure.
  
   We need to develop new services, features and functions in order to expand.
  
    We plan to expand our operations by developing new or complementary services,
  products or transaction formats or expanding the breadth and depth of services.
  We may be unable to expand our operations in a cost-effective or timely manner.
  Even if we do expand, we may not maintain or increase our overall market
  acceptance. If we launch a new business or service that is not favorably
  received by consumers, it could damage our reputation and diminish the value of
  our brand. We anticipate that future services may include pre- and post-trade
  services, including the following:
  
    . the scanning and uploading of photographs of listed items;
  
    . authentication and appraisal; and
  
    . arrangements to facilitate shipment of products.
  
    We may pursue strategic relationships with third parties to provide many of
  these services. By using third parties to deliver these services, we may be
  unable to control the quality of these services and our ability to address
  problems if any of these third parties fails to perform adequately will be
  reduced. Expanding our operations in this manner also will require significant
  additional expenses and development, operations and other resources and will
  strain our management, financial and operational resources. The lack of market
  acceptance of any new services could harm our business.
  
  
   Our growth will depend on our ability to develop our brand.
  
    We believe that our historical growth has been largely attributable to word of
  mouth. We have benefited from frequent and high visibility media exposure both
  nationally and locally. We do not expect the frequency or quality of this media
  exposure to continue. However, we believe that continuing to strengthen our
  brand will be critical to achieving widespread acceptance of our service.
  Promoting and positioning our brand will depend largely on the success of our
  marketing efforts and our ability to provide high quality services. In order to
  promote our brand, we will need to increase our marketing budget and otherwise
  increase our financial commitment to creating and maintaining brand loyalty
  among users. Brand promotion activities may not yield increased revenues, and
  even if they do, any increased revenues may not offset the expenses we incurred
  in building our brand. If we do attract new users to our service, they may not
  conduct transactions over our service on a regular basis. If we fail to promote
  and maintain our brand or incur substantial expenses in an unsuccessful attempt
  to promote and maintain our brand, our business would be harmed.
  
                                         20
  <PAGE>
  
   We may be unable to adequately protect or enforce our intellectual property
  rights.
  
    We regard the protection of our copyrights, service marks, trademarks, trade
  dress and trade secrets as critical to our success. We rely on a combination of
  patent, copyright, trademark, service mark and trade secret laws and contractual
  restrictions to protect our proprietary rights in products and services. We have
  entered into confidentiality and invention assignment agreements with our
  employees and contractors, and nondisclosure agreements with parties with which
  we conduct business in order to limit access to and disclosure of our
  proprietary information. These contractual arrangements and the other steps
  taken by us to protect our intellectual property may not prevent
  misappropriation of our technology or deter independent third-party development
  of similar technologies. We pursue the registration of our trademarks and
  service marks in the U.S. and internationally. Effective trademark, service
  mark, copyright and trade secret protection may not be available in every
  country in which our services are made available online. We have licensed in the
  past, and expect to license in the future, certain of our proprietary rights,
  such as trademarks or copyrighted material, to third parties. These licensees
  may take actions that might diminish the value of our proprietary rights or harm
  our reputation. We also rely on certain technologies that we license from third
  parties, such as Oracle Corporation, Microsoft and Sun Microsystems Inc., the
  suppliers of key database technology, the operating system and specific hardware
  components for our service. These third-party technology licenses may not
  continue to be available to us on commercially reasonable terms. The loss of
  this technology could require us to obtain substitute technology of lower
  quality or performance standards or at greater cost.
  
  
   Our business is subject to consumer trends and discretionary consumer spending.
  
    We derive most of our revenues from fees received from sellers for listing
  products for sale on our service and fees received from successfully completed
  auctions. Our future revenues will depend upon continued demand for the types of
  goods that are listed by users of our service. The popularity of certain
  categories of items, such as toys, dolls and memorabilia, among consumers may
  vary over time due to perceived scarcity, subjective value, and societal and
  consumer trends in general. A decline in the popularity of, or demand for,
  certain collectibles or other items sold through our service could reduce the
  overall volume of transactions on our service, resulting in reduced revenues. In
  addition, consumer "fads" may temporarily inflate the volume of certain types of
  items listed on our service, placing a significant strain upon our
  infrastructure and transaction capacity. These trends also may cause significant
  fluctuations in our operating results from one quarter to the next. Any decline
  in demand for the goods offered through our service as a result of changes in
  consumer trends could harm our business. A decline in consumer spending would
  harm our new land-based auction businesses. Sales of fine and decorative art,
  collectable cars and other collectibles would be adversely affected by a decline
  in discretionary consumer spending, especially for luxury items. Changes in
  buyer's tastes, economic conditions or consumer trends could cause declines in
  the number or dollar volume of items auctioned and thereby harm the business of
  these companies.
  
                                         21
  <PAGE>
  
                         REPORT OF INDEPENDENT ACCOUNTANTS
  
  To the Board of Directors and Stockholders of
  eBay Inc.
  
    In our opinion, the accompanying consolidated balance sheet and the related
  consolidated statements of income, of stockholders' equity and of cash flows
  present fairly, in all material respects, the financial position of eBay Inc.
  and its subsidiary at December 31, 1997 and 1998, and the results of their
  operations and their cash flows for each of the three years in the period ended
  December 31, 1998, in conformity with generally accepted accounting principles.
  These financial statements are the responsibility of the Company's management;
  our responsibility is to express an opinion on these financial statements based
  on our audits. We conducted our audits of these statements in accordance with
  generally accepted auditing standards which require that we plan and perform the
  audit to obtain reasonable assurance about whether the financial statements are
  free of material misstatement. An audit includes examining, on a test basis,
  evidence supporting the amounts and disclosures in the financial statements,
  assessing the accounting principles used and significant estimates made by
  management, and evaluating the overall financial statement presentation. We
  believe that our audits provide a reasonable basis for the opinion expressed
  above.
  
  
  PRICEWATERHOUSECOOPERS LLP
  
  San Jose, California
  January 22, 1999,
  except as to the pooling of
  interests transactions described
  in Note 2, and as to Note 14,
  which are as of September 9, 1999.
  
                                         22
  <PAGE>
  
                                     eBAY INC.
  
                             CONSOLIDATED BALANCE SHEET
                      (in thousands, except per share amounts)
  
  <TABLE>
  <CAPTION>
                                                                                                          December 31,
                                                                                                  ----------------------------
                                                                                                      1997            1998
                                                                                                  -------------   ------------
  <S>                                                                                           <C>             <C>
                                                ASSETS
  Current assets:
    Cash and cash equivalents................................................................        $12,109       $ 37,285
    Short-term investments...................................................................             --         40,401
    Accounts receivable, net.................................................................          7,433         12,425
    Other current assets.....................................................................          3,563          7,479
                                                                                                     -------       --------
       Total current assets..................................................................         23,105         97,590
  Property and equipment, net................................................................         34,063         44,062
  Intangible assets, net.....................................................................            878          3,728
  Note receivable............................................................................          2,806          1,946
  Other assets...............................................................................          1,498          2,210
                                                                                                     -------       --------
                                                                                                     $62,350       $149,536
                                                                                                     =======       ========
                               LIABILITIES, MANDATORILY REDEEMABLE
                                 CONVERTIBLE PREFERRED STOCK AND
                                      STOCKHOLDERS' EQUITY
  
  Current liabilities:
    Notes payable, current...................................................................        $ 6,680       $  4,047
    Accounts payable.........................................................................         13,109          9,997
    Accrued expenses.........................................................................          3,421          6,577
    Customer advances and deferred revenue...................................................            361            973
    Income taxes payable.....................................................................          1,415          1,380
    Deferred tax liabilities, current........................................................             --          1,682
                                                                                                     -------       --------
       Total current liabilities.............................................................         24,986         24,656
  Notes payable, long term...................................................................         16,307         18,361
  Environmental accruals.....................................................................          5,700          5,900
  Minority interest and other liabilities....................................................          2,617             81
                                                                                                     -------       --------
                                                                                                      49,610         48,998
                                                                                                     -------       --------
  
  Series B Mandatorily Redeemable Convertible Preferred Stock and Series B warrants..........          3,018             --
                                                                                                     -------       --------
  
  Commitments and Contingencies (Notes 5, 6 and 8)
  
  Stockholders' equity:
    Series A Convertible Preferred Stock, $0.001 par value; 1,676 and no shares
       authorized, 1,676 and no shares issued and outstanding................................              4             --
    Common Stock, $0.001 par value; 180,000 and 195,000 shares authorized, 63,315
       and 123,225 shares issued and outstanding.............................................             63            123
    Additional paid-in capital...............................................................          2,539         87,779
    Notes receivable from stockholders.......................................................            (68)        (1,130)
    Unearned compensation....................................................................         (1,399)        (4,139)
    Partnership equity.......................................................................         10,297         15,620
    Retained earnings........................................................................         (1,714)         2,285
                                                                                                     -------       --------
       Total stockholders' equity............................................................          9,722        100,538
                                                                                                     -------       --------
                                                                                                     $62,350       $149,536
                                                                                                     =======       ========
  </TABLE>
  
    The accompanying notes are an integral part of these consolidated financial
                                    statements.
  
                                         23
  <PAGE>
  
                                     eBAY INC.
  
                          CONSOLIDATED STATEMENT OF INCOME
                      (in thousands, except per share amounts)
  
  <TABLE>
  <CAPTION>
                                                                                              Year Ended December 31,
                                                                                         1996           1997          1998
                                                                                     -------------   -----------   -----------
  <S>                                                                              <C>             <C>           <C>
  Net revenues:
   Fees and services............................................................        $28,159       $37,070      $ 81,643
   Real estate rentals..........................................................          3,892         4,300         4,486
                                                                                        -------       -------      --------
    Total net revenues..........................................................         32,051        41,370        86,129
                                                                                        -------       -------      --------
  Cost of net revenues:
   Fees and services............................................................          5,181         6,631        13,948
   Real estate rentals..........................................................          1,622         1,773         2,146
                                                                                        -------       -------      --------
    Total cost of net revenues..................................................          6,803         8,404        16,094
                                                                                        -------       -------      --------
      Gross profit..............................................................         25,248        32,966        70,035
                                                                                        -------       -------      --------
  Operating expenses:
   Sales and marketing..........................................................         13,139        15,618        35,976
   Product development..........................................................             28           831         4,640
   General and administrative...................................................          5,661         6,534        15,849
   Amortization of acquired intangibles.........................................             --            --           805
                                                                                        -------       -------      --------
      Total operating expenses..................................................         18,828        22,983        57,270
                                                                                        -------       -------      --------
  Income from operations........................................................          6,420         9,983        12,765
  Interest and other income, net................................................            377         1,054         1,799
  Interest expense..............................................................         (2,322)       (2,371)       (2,191)
                                                                                        -------       -------      --------
  Income before income taxes, minority interest
     and equity interest in partnership income (loss)...........................          4,475         8,666        12,373
  Provision for income taxes....................................................           (475)         (971)       (4,789)
  Equity interest in partnership income (loss)..................................           (576)         (314)           70
  Minority interest in consolidated company.....................................            (86)         (320)         (381)
                                                                                        -------       -------      --------
  Net income....................................................................        $ 3,338       $ 7,061      $  7,273
                                                                                        =======       =======      ========
  Net income per share:
     Basic......................................................................          $0.39         $0.29         $0.14
                                                                                        =======       =======      ========
     Diluted....................................................................          $0.07         $0.08         $0.06
                                                                                        =======       =======      ========
  Weighted average shares:
     Basic......................................................................          8,490        24,428        52,064
                                                                                        =======       =======      ========
     Diluted....................................................................         45,060        84,775       116,759
                                                                                        =======       =======      ========
  
  Supplemental pro forma information:
   Income before income taxes, minority interest and equity interest                    $ 4,475       $ 8,666      $ 12,373
    in partnership income (loss)................................................
   Provision for income taxes as reported.......................................           (475)         (971)       (4,789)
   Pro forma adjustment to provision for income taxes (Note 9)..................         (1,362)       (2,576)       (2,071)
   Minority interest in combined company as reported............................            (86)         (320)         (381)
   Equity interest in partnership income (loss) as reported.....................           (576)         (314)           70
                                                                                        -------       -------      --------
  Pro forma net income..........................................................        $ 1,976       $ 4,485      $  5,202
                                                                                        =======       =======      ========
  Pro forma net income per share:
     Basic......................................................................          $0.23         $0.18         $0.10
                                                                                        =======       =======      ========
     Diluted....................................................................          $0.04         $0.05         $0.04
                                                                                        =======       =======      ========
  </TABLE>
  
    The accompanying notes are an integral part of these consolidated financial
                                    statements.
  
                                         24
  <PAGE>
  
                                     eBAY INC.
  
                  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                  (in thousands)
  
  <TABLE>
  <CAPTION>
                                                                                                                     Notes
                                                           Convertible                              Additional    Receivable
                                                         Preferred Stock         Common Stock        Paid-in         from
                                                       Shares    Par Value    Shares    Par Value    Capital     Shareholders
                                                       -------   ----------   -------   ---------   ----------   -------------
  <S>                                                  <C>       <C>          <C>       <C>         <C>          <C>
  Balance at December 31, 1995....................         --       $   --      2,115      $    2      $   948        $    --
  Issuance of Common Stock for
      cash and notes..............................         --           --     61,200          61           17            (68)
  Issuance of Preferred Stock.....................      1,676            4         --          --           --             --
  Contributions from partners.....................         --           --         --          --           --             --
  Distributions to partners.......................         --           --         --          --           --             --
  Net income......................................         --           --         --          --           --             --
                                                       ------       ------    -------      ------      -------        -------
  Balance at December 31, 1996....................      1,676            4     63,315          63          965            (68)
  Accretion of Mandatorily
   Redeemable Convertible Preferred
   Stock to redemption value......................         --           --         --          --           --             --
  Unearned compensation...........................         --           --         --          --        1,424             --
  Amortization of unearned
   compensation...................................         --           --         --          --           --             --
  Contributions from partners.....................         --           --         --          --          150             --
  Distributions to partners.......................         --           --         --          --           --             --
  Net income......................................         --           --         --          --           --             --
                                                       ------       ------    -------      ------      -------        -------
  Balance at December 31, 1997....................      1,676            4     63,315          63        2,539            (68)
  Accretion of Mandatorily
   Redeemable Convertible Preferred
   Stock to redemption value......................         --           --         --          --           --             --
  Unearned compensation...........................         --           --         --          --        5,831             --
  Amortization of unearned
   compensation...................................         --           --         --          --           --             --
  Issuance of Common Stock for
   cash and notes.................................         --           --     19,290          20        4,685         (1,378)
  Issuance of Common Stock for
   acquisition of Jump Incorporated...............         --           --        428          --        2,000             --
  Contribution of Common Stock to
   charitable foundation..........................         --           --        322          --        1,215             --
  Issuance of Common Stock for cash in
   initial public offering, net of offering
   expenses of $6,168.............................         --           --     12,043          12       66,076             --
  Conversion of Preferred Stock to
   Common Stock in conjunction
   with initial public offering...................     (1,676)          (4)    27,827          28        5,133             --
  Note repayments.................................         --           --         --          --           --            316
  Contributions from partners.....................         --           --         --          --          300             --
  Distributions to partners.......................         --           --         --          --           --             --
  Net income......................................         --           --         --          --           --             --
                                                       ------       ------    -------      ------      -------        -------
  Balance at December 31, 1998....................         --       $   --    123,225      $  123      $87,779        $(1,130)
                                                       ======       ======    =======      ======      =======        =======
  </TABLE>
  
  
  <TABLE>
  <CAPTION>
  
                                                                                                                   Total
                                                                       Unearned      Partnership   Retained    Stockholders'
                                                                     Compensation      Equity      Earnings        Equity
                                                                     ------------    -----------   --------    ------------
  <S>                                                                <C>             <C>           <C>         <C>
  Balance at December 31, 1995...................................       $    --        $ 9,342    $(5,404)        $  4,888
  Issuance of Common Stock for
      cash and notes.............................................            --             --         --               10
  Issuance of Preferred Stock....................................            --             --         --                4
  Contributions from partners....................................            --            467         --              467
  Distributions to partners......................................            --             --     (2,107)          (2,107)
  Net income.....................................................            --             --      3,338            3,338
                                                                        -------        -------    -------         --------
  Balance at December 31, 1996...................................            --          9,809     (4,173)           6,600
  Accretion of Mandatorily
   Redeemable Convertible Preferred
   Stock to redemption value.....................................            --             --        (46)             (46)
  Unearned compensation..........................................        (1,424)            --         --               --
  Amortization of unearned
   compensation..................................................            25             --         --               25
  Contributions from partners....................................            --            488         --              638
  Distributions to partners......................................            --             --     (4,556)          (4,556)
  Net income.....................................................            --             --      7,061            7,061
                                                                        -------        -------    -------         --------
  Balance at December 31, 1997...................................        (1,399)        10,297     (1,714)           9,722
  Accretion of Mandatorily
   Redeemable Convertible Preferred
   Stock to redemption value.....................................            --             --        (46)             (46)
  Unearned compensation..........................................        (5,831)            --         --               --
  Amortization of unearned
   compensation..................................................         3,091             --         --            3,091
  Issuance of Common Stock for
   cash and notes................................................            --             --         --            3,327
  Issuance of Common Stock for
   acquisition of Jump Incorporated..............................            --             --         --            2,000
  Contribution of Common Stock to
   charitable foundation.........................................            --             --         --            1,215
  Issuance of Common Stock for cash in
   initial public offering, net of offering
   expenses of $6,168............................................            --             --         --           66,088
  Conversion of Preferred Stock to
   Common Stock in conjunction
   with initial public offering..................................            --             --         --            5,157
  Note repayments................................................            --             --         --              316
  Contributions from partners....................................            --          5,323         --            5,623
  Distributions to partners......................................            --             --     (3,228)          (3,228)
  Net income.....................................................            --             --      7,273            7,273
                                                                        -------        -------    -------         --------
  Balance at December 31, 1998...................................       $(4,139)       $15,620    $ 2,285         $100,538
                                                                        =======        =======    =======         ========
  
                   The accompanying notes are an integral part of these consolidated financial statements.
  </TABLE>
  
                                         25
  <PAGE>
  
                                     eBAY INC.
  
                       CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (in thousands)
  
  <TABLE>
  <CAPTION>
                                                                                      Year Ended December 31,
                                                                                    1996       1997        1998
                                                                                  --------   ---------   ---------
  <S>                                                                             <C>        <C>         <C>
  Cash flows from operating activities:
      Net income...............................................................   $ 3,338     $ 7,061    $  7,273
    Adjustments to reconcile net income to net cash provided
      by operating activities:
       Provision for doubtful accounts and authorized credits..................        18         373       3,377
       Depreciation and amortization...........................................     1,357       1,519       4,526
       Amortization of unearned compensation...................................        --          25       2,661
       Compensation expense associated with purchases of
        Common Stock by outside directors......................................        --          --         429
       Charitable contribution of Common Stock.................................        --          --       1,215
       Series B Preferred stock issued for services............................        --          --          93
       Minority interest in deficit of consolidated companies..................        86          24         764
       Loss on impairment of asset held for sale...............................        --          --         200
       Acquired research and development.......................................        --          --         150
       Equity in partnership net (income) loss.................................       576        (146)     (4,025)
       (Gain) loss on sale of property.........................................       190          --        (333)
       Changes in assets and liabilities:
          Accounts receivable..................................................     3,801      (1,302)     (8,369)
          Other assets.........................................................       163        (742)     (3,702)
          Accounts payable.....................................................       451       3,104      (3,112)
          Accrued expenses.....................................................       (18)        769       3,164
          Customer advances and deferred revenue...............................        38         184         612
          Income taxes payable.................................................       354         363         (35)
          Deferred tax liabilities, current....................................        55         102       1,682
          Environmental accruals...............................................       750          --         200
          Other liabilities....................................................        17         293        (729)
                                                                                  -------     -------    --------
  Net cash provided by operating activities....................................    11,176      11,627       6,041
                                                                                  -------     -------    --------
  Cash flows from investing activities:
    Purchases of property and equipment........................................    (1,598)     (2,990)    (12,758)
    Purchases of short-term investments........................................        --          --     (40,401)
    Proceeds from sale of property and equipment...............................     1,051          --       1,274
    Purchases of intangible assets.............................................       (36)       (141)     (1,248)
    Payments (advances) on notes receivable....................................    (1,337)        145         109
                                                                                  -------     -------    --------
  Net cash used in investing activities........................................    (1,920)     (2,986)    (53,024)
                                                                                  -------     -------    --------
  Cash flows from financing activities:
    Proceeds from issuance of Preferred Stock, net.............................         4       2,972       2,110
    Proceeds from issuance of Common Stock, net................................        10          --      69,305
    Repayments of Stockholder loans............................................        --          --         316
    Proceeds (principal payments) on long-term debt and leases.................    (6,452)      1,506      (1,967)
    Contributions from Stockholders............................................       467         638       5,623
    Distributions to Stockholders..............................................    (2,107)     (4,556)     (3,228)
                                                                                  -------     -------    --------
  Net cash provided by (used in) financing activities..........................    (8,078)        560      72,159
                                                                                  -------     -------    --------
  Net increase in cash and cash equivalents....................................     1,178       9,201      25,176
  Cash and cash equivalents at beginning of year...............................     1,730       2,908      12,109
                                                                                  -------     -------    --------
  Cash and cash equivalents at end of year.....................................   $ 2,908     $12,109    $ 37,285
                                                                                  =======     =======    ========
  Supplemental cash flow disclosures:
    Cash paid for interest.....................................................   $ 2,238     $ 1,893    $  1,710
    Cash paid for income taxes.................................................   $    26     $   540    $  4,932
  Non-cash investing and financing activities:
    Property and equipment leases..............................................   $    --     $    23    $     --
    Common stock issued for note receivable....................................   $    68     $    --    $  1,378
    Common stock issued for acquisition........................................   $    --     $    --    $  2,000
    Issuance of note payable for non-compete agreement.........................   $    --     $   240    $     --
    Building and inventory obtained in connection with foreclosure.............   $    --     $ 1,510    $    751
    Notes and accounts payable assumed in connection with foreclosure..........   $    --     $   695    $     --
    Receivables canceled in connection with foreclosure........................   $    --     $   815    $    500
    Land and building transferred in exchange for assumption of debt...........   $    --     $    --    $    835
  
               The accompanying notes are an integral part of these consolidated financial statements.
  </TABLE>
  
                                         26
  <PAGE>
  
                                     eBAY INC.
  
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
  Note 1--The Company and Summary of Significant Accounting Policies:
  
  The Company
  
    eBay Inc. ("eBay" or the "Company") was incorporated in California in May
  1996, and reincorporated in Delaware in April 1998. eBay pioneered online
  person-to-person trading by developing a Web-based community in which buyers and
  sellers are brought together in an auction format to trade personal items such
  as antiques, coins, collectibles, computers, memorabilia, stamps and toys. The
  eBay online service permits sellers to list items for sale, buyers to bid on
  items of interest and all eBay users to browse through listed items in a fully-
  automated, topically-arranged service that is available online 24-hours-a-day,
  seven-days-a-week. eBay also engages in the traditional auction business through
  its subsidiaries, Butterfield & Butterfield ("B&B") and Kruse International
  ("Kruse") and in online payment processing through its Billpoint, Inc.
  ("Billpoint") subsidiary.
  
  
  Initial public offering
  
    On September 24, 1998, the Company completed its initial public offering of
  4,025,000 shares of its Common Stock, the net proceeds of which aggregated
  approximately $66.1 million. At the closing of the offering, all issued and
  outstanding shares of the Company's Convertible Preferred Stock and Mandatorily
  Redeemable Convertible Preferred Stock were converted into an aggregate of
  27,827,019 shares of Common Stock.
  
  
  Use of estimates
  
    The preparation of consolidated financial statements in conformity with
  generally accepted accounting principles requires management to make estimates
  and assumptions that affect the reported amounts of assets and liabilities and
  disclosure of contingent assets and liabilities at the date of the consolidated
  financial statements and the reported amounts of revenues and expenses during
  the reporting period. Actual results could differ from those estimates.
  
  
  Principles of consolidation and basis of presentation
  
    The financial statements as of December 31, 1996, 1997, and 1998, and for the
  years then ended are consolidated and include the Company and its subsidiaries.
  All significant intercompany balances and transactions have been eliminated in
  consolidation.
  
    In May and June of 1999, the Company acquired four businesses, each of which
  were accounted for as pooling of interests (see Note 2--"Acquisitions").
  Accordingly, all financial information included herein has been restated to
  reflect the combined operations of eBay and the acquired companies. Certain
  prior period balances have been reclassified to conform to the current period
  presentation.
  
                                         27
  <PAGE>
  
                                     eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  
  Fair value of financial instruments
  
    The Company's financial instruments, including cash, cash equivalents,
  accounts receivable, and accounts payable are carried at cost, which
  approximates their fair value because of the short-term maturity of these
  instruments. Capital lease obligations are carried at cost, which approximates
  fair value due to the proximity of the implicit rates of these financial
  instruments and the prevailing market rates for similar instruments.
  
    Short and long-term investments, which include marketable equity securities,
  municipal, government and corporate bonds are classified as available-for-sale
  and reported at fair value. Unrealized gains and losses are excluded from
  earnings and reported as a component of Stockholders' equity.  The following
  schedule summarizes the estimated fair value of the Company's cash, cash
  equivalents and short-term investments, (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                           December 31,
                                                                         1997         1998
                                                                      -----------  -----------
  <S>                                                                 <C>           <C>
     Cash and cash equivalents:
        Cash.....................................................     $     2,611  $     7,828
        Money market funds.......................................           9,498        6,892
        Municipal bonds and notes................................              --       19,555
        Corporate securities.....................................              --        3,010
                                                                      -----------  -----------
                                                                      $    12,109  $    37,285
                                                                      ===========  ===========
     Short-term investments:
        Municipal bonds and notes................................     $        --  $    40,401
                                                                      ===========  ===========
  </TABLE>
  
  The estimated fair value of short-term investments classified by date of
  contractual maturity is as follows, (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                           December 31,
                                                                         1997         1998
                                                                      -----------  -----------
  <S>                                                                 <C>           <C>
     Due within one year or less.................................     $        --  $    12,287
     Due after one year through two years........................              --       28,114
                                                                      -----------  -----------
                                                                      $        --  $    40,401
                                                                      ===========  ===========
  </TABLE>
  
  
  Concentration of credit risk
  
    Financial instruments that potentially subject the Company to a concentration
  of credit risk consist of cash, cash equivalents, short-term investments and
  accounts receivable. Cash, cash equivalents and short-term investments are
  deposited with high credit, quality financial institutions. The Company's
  accounts receivable are derived from revenue earned from customers located in
  the U.S. and throughout the world and are denominated in U.S. dollars. Accounts
  receivable balances are typically settled through customer credit cards and, as
  a result, the majority of accounts receivable are collected upon processing of
  credit card transactions. The Company maintains an allowance for doubtful
  accounts receivable based upon the expected collectibility of accounts
  receivable. During the years ended December 31, 1996, 1997 and 1998, no
  customers accounted for more than 10% of net revenues or net accounts
  receivable.
  
  
  Property and equipment
  
    Property and equipment are stated at historical cost. Depreciation and
  amortization are computed using the straight-line method over the estimated
  useful lives of the assets, generally five years or less for equipment and
  furniture, and up to 31.5 years for buildings and building improvements. Leased
  capital assets are depreciated using the straight-line method over the shorter
  of the lease term or the estimated useful lives of the assets.
  
                                         28
  <PAGE>
  
                                     eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  
  
  Intangible assets
  
    Goodwill and other intangible assets resulting from the acquisition of Jump
  Incorporated ("Jump") were estimated by management to be primarily associated
  with the acquired customer list, workforce and technological know how. As a
  result of the rapid technological changes occurring in the Internet industry and
  the intense competition for qualified Internet professionals, goodwill and other
  intangible assets are amortized on a straight-line basis over the estimated
  periods of benefit, which range from eight to 24 months.  See Note 2--
  Acquisitions.
  
    Goodwill and other intangible assets resulting from the acquisition of
  Dunnings Auctions Services, Inc. ("Dunnings") by B&B were estimated by
  management to be primarily associated with a covenant not to compete and
  goodwill and are being amortized over their estimated useful lives of five and
  fifteen years, respectively.
  
  Environmental expenditures
  
    The Company owns or controls real estate properties that are either used in
  the auction business or leased to unrelated parties for various commercial
  applications. Certain environmental and structural deficiencies have been
  identified in the past for which the Company has remediation responsibility. The
  amounts accrued to correct these matters are based upon estimates developed in
  preliminary studies by external consultants. Due to uncertainties inherent in
  the estimation process, the amounts accrued for these matters may be revised in
  future periods as additional information is obtained.
  
    Environmental expenditures that relate to current operations are charged to
  expense or capitalized as appropriate. Expenditures that relate to an existing
  condition caused by past operations, and that do not contribute to current or
  future revenue generation, are charged to expense. Liabilities are recorded when
  environmental assessments are made, remediation obligations are probable and the
  costs can be reasonably estimated. The timing of these accruals is generally
  upon the completion of feasibility studies.
  
   Investment in general partnerships
  
    Interests in general partnerships in which the Company holds more than 50
  percent ownership and exerts control are consolidated. The consolidated accounts
  include 100 percent of the assets and liabilities of these general partnerships
  and the ownership interests of minority investors are recorded as minority
  interests and are included within other liabilities. Investments in general
  partnerships in which the Company holds more than 20 percent ownership and does
  not exert control are accounted for using the equity method of accounting and
  are recorded as investment in partnerships. The recognized losses in excess of
  the Company's investments are included within other liabilities.
  
  Impairment of long-lived assets
  
    The Company evaluates the recoverability of long-lived assets in accordance
  with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
  for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
  of". SFAS No. 121 requires recognition of impairment of long-lived assets in the
  event the net book value of such assets exceeds the future undiscounted cash
  flows attributable to such assets.
  
  
  Revenue recognition
  
    Online auction revenues are derived primarily from placement fees charged for
  the listing of items for auction and success fees calculated as a percentage of
  the final sales transaction value. Revenues related to
  
                                         29
  <PAGE>
  
                                     eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  
  
  placement fees are recognized at the time the item is listed, while those
  related to success fees are recognized at the time that the auction is
  successfully concluded. An auction is considered successfully concluded when
  there is at least one bid above the seller's specified minimum price or reserve
  price, whichever is higher, at the end of the auction term. Provisions for
  doubtful accounts and authorized credits to sellers are provided at the time of
  revenue recognition based upon the Company's historical experience.
  
    Kruse auction revenues are derived primarily from entry fees on auction items,
  bidder registration fees and commission fees calculated as a percentage of the
  final auction sales transaction value. Revenues related to these fees are
  recognized upon the completion of an auction. Revenues are also derived from
  sponsorship fees paid by various corporations. Sponsorship fee revenues are
  recognized over the term of the sponsorship agreement. Advertising revenues and
  auctioneer tuition fees do not represent a significant source of revenues and
  are recognized as advertising and auctioneer training services are provided.
  
    B&B auction revenues are derived primarily from auction commissions and fees
  from the sale of property through the traditional auction process. Revenues from
  these sources are recognized at the date the related auction is concluded.
  Service revenues are derived from financial, appraisal and other related
  services and are recognized as such services are rendered. Rental revenues are
  derived from property rentals to third parties.
  
  
  Product development costs
  
    Product development costs include expenses incurred by the Company to develop,
  enhance, manage, monitor and operate the Company's website. Product development
  costs are expensed as incurred.
  
  
  Advertising expense
  
    The Company recognizes advertising expenses in accordance with Statement of
  Position ("SOP") 93-7 "Reporting on Advertising Costs." As such, the Company
  expenses the costs of producing advertisements at the time production occurs,
  and expenses the cost of communicating advertising in the period in which the
  advertising space or airtime is used. Internet advertising expenses are
  recognized based on the terms of the individual agreements, but generally over
  the greater of the ratio of the number of impressions delivered over the total
  number of contracted impressions, or a straight-line basis over the term of the
  contract. Advertising expenses totaled $2.6 million, $2.8 million, and $15.4
  million during the years ended December 31, 1996, 1997 and 1998, respectively.
  
  
  Stock-based compensation
  
    The Company accounts for stock-based employee compensation arrangements in
  accordance with provisions of Accounting Principles Board ("APB") Opinion No.
  25, "Accounting for Stock Issued to Employees," and complies with the disclosure
  provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB
  No. 25, compensation expense is based on the difference, if any, on the date of
  the grant, between the fair value of the Company's stock and the exercise price.
  The Company accounts for stock issued to non-employees in accordance with the
  provisions of SFAS No. 123 and the Emerging Issues Task Force Consensus on Issue
  No. 96-18.
  
  
  Income taxes
  
    Income taxes are accounted for using an asset and liability approach which
  requires the recognition of taxes payable or refundable for the current year and
  deferred tax liabilities and assets for the future tax consequences of events
  that have been recognized in the Company's financial statements or tax returns.
  The measurement of current and deferred tax liabilities and assets are based on
  provisions of the enacted tax
  
                                         30
  <PAGE>
  
                                     eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  
  
  law; the effects of future changes in tax laws or rates are not anticipated. The
  measurement of deferred tax assets is reduced, if necessary, by the amount of
  any tax benefits that, based on available evidence, are not expected to be
  realized.
  
  
  Net income per share
  
    The Company computes net income per share in accordance with SFAS No. 128,
  "Earnings per Share."  Under the provisions of SFAS No. 128, basic net income
  per share is computed by dividing the net income available to common
  stockholders for the period by the weighted average number of common shares
  outstanding during the period. Diluted net income per share is computed by
  dividing the net income for the period by the weighted average number of common
  and common equivalent shares outstanding during the period. Common equivalent
  shares, composed of unvested, restricted Common Stock and incremental common
  shares issuable upon the exercise of stock options and warrants and upon
  conversion of Series A and Series B Convertible Preferred Stock, are included in
  diluted net income per share to the extent such shares are dilutive.
  
    The following table sets forth the computation of basic and diluted net income
  per share for the periods indicated, (in thousands, except per share amounts):
  
  <TABLE>
  <CAPTION>
                                                                                             Year Ended December 31,
                                                                                    ------------------------------------------
                                                                                        1996           1997           1998
                                                                                    ------------   ------------   ------------
  <S>                                                                               <C>            <C>            <C>
  Numerator:
    Net income...................................................................      $  3,338       $  7,061       $  7,273
    Accretion of Series B Mandatorily Redeemable Convertible Preferred
      Stock to redemption value..................................................            --            (46)           (46)
                                                                                       --------       --------       --------
    Net income available to common stockholders..................................      $  3,338       $  7,015       $  7,227
                                                                                       ========       ========       ========
  Denominator:
    Weighted average shares......................................................        32,715         63,315         91,642
    Weighted average unvested common shares subject to repurchase
      agreements.................................................................       (24,225)       (38,887)       (39,578)
                                                                                       --------       --------       --------
    Denominator for basic calculation............................................         8,490         24,428         52,064
    Weighted average effect of dilutive securities:
       Series A Preferred Stock..................................................        12,345         15,088         11,037
       Series B Preferred Stock..................................................            --          6,372          8,054
       Series B Preferred Stock warrants.........................................            --             --          1,098
       Unvested common shares subject to
          repurchase agreements..................................................        24,225         38,887         39,578
       Employee stock options....................................................            --             --          4,928
                                                                                       --------       --------       --------
    Denominator for diluted calculation..........................................        45,060         84,775        116,759
                                                                                       ========       ========       ========
  Net income per share:
    Basic........................................................................      $   0.39       $   0.29          $0.14
                                                                                       ========       ========       ========
    Diluted......................................................................      $   0.07       $   0.08          $0.06
                                                                                       ========       ========       ========
  </TABLE>
  
  Comprehensive income
  
    Effective January 1, 1998 the Company adopted the provisions of SFAS No. 130,
  "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
  reporting comprehensive income and its components in financial statements.
  Comprehensive income, as defined, includes all changes in equity (net assets)
  during a period from non-owner sources. During the years ended December 31,
  1996, 1997 and 1998, the Company has not had any material transactions that are
  required to be reported in comprehensive income.
  
  
  Recent accounting pronouncements
  
                                         31
  <PAGE>
  
                                     eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  
    In March 1998, the American Institute of Certified Public Accountants issued
  SOP No. 98-1, "Software for Internal Use," which provides guidance on accounting
  for the cost of computer software developed or obtained for internal use. SOP
  No. 98-1 is effective for financial statements for fiscal years beginning after
  December 15, 1998. The Company does not expect that the adoption of SOP No. 98-1
  will have a material impact on its consolidated financial statements.
  
    In June 1998, the Financial Accounting Standards Board issued SFAS
  No. 133, "Accounting for Derivatives and Hedging Activities."  SFAS 133 is
  effective for all fiscal quarters beginning with the quarter ending June 30,
  1999.  SFAS 133 establishes accounting and reporting standards of derivative
  instruments, including certain derivative instruments imbedded in other
  contracts, and for hedging activities.  In July 1999, the FASB issued SFAS No.
  137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
  the Effective Date of FASB Statement No. 133," "(SFAS 137").  SFAS 137 deferred
  the effective date until the first fiscal quarter ended on or following June 30,
  2000.  The Company will adopt SFAS 133 in its quarter ending June 30, 2000 and
  does not expect such adoption to have a material impact on the Company's results
  of operations, financial position or cash flows.
  
  
  Note 2--Acquisitions:
  
  Jump Incorporated
  
    Effective June 30, 1998, the Company acquired all the outstanding shares of
  Jump, which provides a forum where Internet users can buy and sell items in an
  online auction format. The acquisition has been accounted for using the purchase
  method of accounting and accordingly, the purchase price has been allocated to
  the tangible and intangible assets acquired and liabilities assumed on the basis
  of their respective fair values on the acquisition date. The fair value of
  intangible assets was determined using a combination of methods, including
  replacement cost estimates for acquired research and development and completed
  technology, a risk-adjusted income approach for the acquired customer list and
  the amounts paid for covenants not to compete.
  
    The total purchase price of approximately $2.3 million consisted of 428,544
  shares of the Company's Common Stock with an estimated fair value of
  approximately $2.0 million and other acquisition related expenses of
  approximately $335,000, consisting primarily of payments for non-compete
  agreements totaling approximately $208,000 and legal and other professional
  fees. Of the total purchase price, approximately $150,000 was allocated to in-
  process technology and was immediately charged to operations because such in-
  process technology had not reached the stage of technological feasibility at the
  acquisition date and had no alternative future use. The remainder of the
  purchase price was allocated to net tangible liabilities assumed ($31,000) and
  intangible assets, including completed technology ($500,000), customer list
  ($1.5 million), covenants not to compete ($208,000) and goodwill ($24,000). The
  intangible assets are being amortized over their estimated useful lives of eight
  to 24 months.
  
    The acquisition has been structured as a tax free exchange of stock,
  therefore, the differences between the recognized fair values of the acquired
  assets, including tangible assets, and their historical tax bases are not
  deductible for tax purposes.
  
    The following unaudited pro forma consolidated financial information reflects
  the results of operations for the years ended December 31, 1997 and 1998, as if
  the acquisition had occurred on January 1, 1997 and 1998, respectively, and
  after giving effect to purchase accounting adjustments. These pro forma results
  have been prepared for comparative purposes only and do not purport to be
  indicative of what operating results would have been had the acquisitions
  actually taken place on January 1, 1997 or 1998, and may not be indicative of
  future operating results, (in thousands, except per share amounts).
  
  
                                         32
  <PAGE>
  
                                     eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  
  <TABLE>
  <CAPTION>
                                                                                              Year Ended
                                                                                             December 31,
                                                                                      ---------------------------
                                                                                          1997           1998
                                                                                      ------------   ------------
  <S>                                                                                 <C>            <C>
     Net revenues  ..........................................................              $41,381       $ 86,141
     Income from operations  ................................................                7,841         11,965
     Net income  ............................................................                4,988          6,472
     Net income per share:
        Basic  ..............................................................              $  0.20       $   0.12
        Diluted  ............................................................              $  0.06       $   0.06
     Weighted average shares:
        Basic  ..............................................................               24,428         52,064
        Diluted  ............................................................               84,775        116,759
  </TABLE>
  
  Butterfield & Butterfield
  
    On May 28, 1999, eBay acquired Butterfield & Butterfield Auctioneers
  Corporation ("Butterfield & Butterfield"), a Delaware corporation and all
  affiliated entities under common control including; Butterfield Credit
  Corporation Inc., 111 Potrero Partners, LLC and HBJ Partners, LLC. (collectively
  "B&B" or the "B&B Companies").
  
  Butterfield & Butterfield was established in 1865, incorporated in California in
  July 1970 and reincorporated in the state of Delaware in March 1999. Butterfield
  & Butterfield conduct auctions and perform appraisal services of fine art,
  jewelry, antiques and other collectibles primarily in San Francisco, Los Angeles
  and Chicago.
  
    Butterfield Credit Corporation Inc. ("BCCI") is a wholly-owned subsidiary of
  Butterfield & Butterfield and is incorporated in California. BCCI operates as a
  financing corporation whose sole purpose is serving Butterfield & Butterfield's
  clients.
  
    111 Potrero Partners, LLC ("111 Potrero") is a limited liability corporation
  organized in May 1996. 111 Potrero owns several commercial properties located in
  San Francisco and Los Angeles, which are currently occupied by B&B and third
  parties.
  
    HBJ Partners, LLC ("HBJ") is a limited liability corporation organized in
  California in September 1996. HBJ owns several commercial properties located in
  San Francisco, which are currently occupied by B&B and third parties. HBJ also
  has general partnership interests in 17600 Santa Fe Avenue Partners, 2959
  Victoria Street Partners and 6700 Cherry Avenue Partners. Ownership interests in
  the above partnerships at the date of acquisition were 58%, 60% and 38%,
  respectively.
  
    The aggregate consideration exchanged for the merger was 1,327,370 shares of
  eBay common stock. The merger has been accounted for as a pooling of interests.
  In April 1999, B&B withdrew its registration statement for its initial public
  offering. Accordingly, in the second quarter of 1999, the Company recorded a
  charge of approximately $2.6 million related to the costs of the withdrawn
  offering.
  
  Kruse International
  
    On May 18, 1999, eBay acquired Kruse, Inc. (d/b/a Kruse International) and all
  affiliated entities under common control including; Auburn Cordage, Inc., ACD
  Auto Sales, Inc., Reppert School of Auctioneering, Inc. and Classic Advertising
  & Promotions, Inc., each an Indiana corporation (collectively, "Kruse" or the
  "Kruse Companies").
  
    Kruse International was founded in 1971 and operated as a sole proprietorship
  until it was incorporated in the state of Indiana in August 1986. The Kruse
  Companies conduct auctions, perform appraisal services and auctioneer training
  for classic car auctions in various locations in the United States, England,
  Germany and the Netherlands.
  
    The aggregate consideration exchanged for the merger was 787,312 shares of
  eBay common stock for all shares of capital stock of the Kruse Companies. The
  merger has been accounted for as a pooling of interests.
  
                                         33
  <PAGE>
  
                                     eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  
  
  Billpoint
  
    On May 25, 1999, eBay acquired Billpoint, Inc. ("Billpoint"). Billpoint began
  operations on September 1, 1998, and was incorporated in California on September
  24, 1998. Billpoint has developed a centralized, turnkey authorization, billing
  and payment fulfillment solution that permits individuals and small merchants to
  accept credit cards as payment for Internet-based sales transactions.
  Billpoint's service is expected to derive revenues based upon a variety of fee
  arrangements, including percentage-of-transaction, fixed-fee per transaction and
  flat monthly rates.
  
    In connection with the merger, eBay issued a total of approximately 525,000
  shares of eBay common stock to the existing Billpoint shareholders as
  consideration for all shares of capital stock, and all options and warrants to
  purchase shares of common stock of Billpoint outstanding immediately prior to
  the consummation of the merger were converted into options and warrants to
  purchase shares of eBay common stock. The merger has been accounted for as a
  pooling of interests.
  
  
  alando.de.AG
  
    On June 15, 1999, eBay acquired all of the outstanding stock of alando.de.AG
  ("alando"). alando began operations on February 19, 1999 and is Germany's
  leading online person-to-person trading community. The aggregate consideration
  exchanged for the merger was 316,000 shares of eBay common stock. The merger has
  been accounted for as a pooling of interests.
  
  The components of net revenues, operating expenses and net income (loss) during
  the years ended December 31, 1996, 1997, and 1998 are as follows (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                       Net            Operating         Net Income
                                                                     Revenues          Expenses           (Loss)
                                                                 ----------------  ----------------  -----------------
  Year Ended December 31, 1996
  <S>                                                            <C>               <C>               <C>
       Kruse......................................................        $ 7,760           $ 6,024            $  (69)
       B&B........................................................         23,919            12,699             3,259
                                                                          -------           -------            ------
                                                                          $31,679           $18,723            $3,190
                                                                          =======           =======            ======
    Year Ended December 31, 1997
       Kruse......................................................        $ 7,520           $ 5,895            $ (237)
       B&B........................................................         28,106            13,577             6,424
                                                                          -------           -------            ------
                                                                          $35,626           $19,472            $6,187
                                                                          =======           =======            ======
    Year Ended December 31, 1998
       Kruse......................................................        $10,265           $ 8,119            $  (58)
       Billpoint..................................................             --                74               (74)
       B&B........................................................         28,512            14,745             5,007
                                                                          -------           -------            ------
                                                                          $38,777           $22,938            $4,875
                                                                          =======           =======            ======
  </TABLE>
  
  Note 3--Balance Sheet Components:
  
  <TABLE>
  <CAPTION>
                                                                                                     December 31,
                                                                                                -----------------------
                                                                                                   1997         1998
                                                                                                ----------   ----------
                                                                                                    (in thousands)
  <S>                                                                                           <C>          <C>
     Accounts receivable, net:
        Accounts receivable..................................................................      $8,249      $16,056
        Less:   Allowance for doubtful accounts..............................................        (763)      (2,614)
                Allowance for authorized credits.............................................         (53)      (1,017)
                                                                                                   ------      -------
                                                                                                   $7,433      $12,425
                                                                                                   ======      =======
  </TABLE>
  
  Write-offs against the allowance for doubtful accounts were $0 and $562,000 in
  the years ended December 31, 1997 and 1998, respectively.
  
  <TABLE>
  <CAPTION>
                                                                                                     December 31,
                                                                                                -----------------------
                                                                                                   1997         1998
                                                                                                ----------   ----------
                                                                                                    (in thousands)
  <S>                                                                                           <C>          <C>
     Property and equipment, net:
        Land and buildings...................................................................    $ 38,445     $ 42,150
        Computer equipment...................................................................       2,266       10,730
        Leasehold improvements...............................................................       2,159        2,312
        Furniture and fixtures...............................................................       1,009        1,697
        Vehicles and other...................................................................         599          881
                                                                                                 --------     --------
                                                                                                   44,478       57,770
     Less: Accumulated depreciation and amortization.........................................     (10,415)     (13,708)
                                                                                                 --------     --------
                                                                                                 $ 34,063     $ 44,062
                                                                                                 ========     ========
  </TABLE>
  
    Property and equipment includes $23,000 and $0 of equipment under capital
  leases at December 31, 1997 and 1998, respectively. Accumulated depreciation of
  assets under capital leases totaled $7,000 and $0 at December 31, 1997 and 1998,
  respectively.
  
                                         34
  <PAGE>
  
                                     eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  
  
  
  <TABLE>
  <CAPTION>
                                                                                                      December 31,
                                                                                                ------------------------
                                                                                                   1997          1998
                                                                                                -----------   ----------
  <S>                                                                                           <C>           <C>
                                                                                                    (in thousands)
     Intangible assets, net:
        Purchased technology.................................................................   $        --   $      500
        Covenants not to compete.............................................................           248          455
        Customer list........................................................................            --        1,484
        Goodwill.............................................................................         1,199        3,003
                                                                                                -----------   ----------
                                                                                                      1,447        5,442
        Less: Accumulated amortization.......................................................          (569)      (1,714)
                                                                                                -----------   ----------
                                                                                                $       878   $    3,728
                                                                                                ===========   ==========
     Accrued expenses:
        Accrued compensation and related benefits............................................   $     1,603   $    2,241
        Advertising accruals.................................................................            --        1,274
        Professional fees....................................................................            --          451
        Other accruals.......................................................................         1,818        2,611
                                                                                                -----------   ----------
                                                                                                $     3,421   $    6,577
                                                                                                ===========   ==========
  </TABLE>
  
  
  Note 4--Related Party Transactions:
  
  Notes receivable from stockholders
  
    At December 31, 1998, the Company held notes receivable from employees,
  officers and a director totaling $1.1 million, representing amounts owed to the
  Company from the exercise of stock options. These full recourse notes are
  secured by common stock and bear interest at a rate of 8% per annum. Interest is
  due and payable on December 1st of each year, and the principal is due on or
  before December 1, 2002.
  
  
  Professional services
  
    In connection with the recruitment of its Chief Executive Officer, the Company
  engaged the services of an executive search firm affiliated with a holder of the
  Company's Series B Mandatorily Redeemable Convertible Preferred Stock. During
  1998, the Company paid fees for services performed of $93,000 and issued 46,248
  shares of Series B Mandatorily Redeemable Convertible Preferred Stock with a
  fair value on the date earned of $93,000. The amount paid for the services and
  the fair value of the shares are included in general and administrative expenses
  in the consolidated statement of income for the year ended December 31, 1998.
  
  
  Note 5--Debt:
  
  Credit facility
  
    At December 31, 1998, the Company maintained a revolving line of credit with a
  bank that provided for borrowings of up to $4.5 million. The line of credit
  accrues interest on outstanding borrowings at a rate equal to the bank's prime
  rate.
  
                                         35
  <PAGE>
  
                                     eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  
  Notes Payable
  
    Notes payable consists of amounts payable to various financial institutions
  and a former shareholder, which are secured by specific properties and are
  detailed as follows (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                                                    December 31,
                                                                                                1997           1998
                                                                                                ----           ----
  <S>                                                                                    <C>            <C>
    Revolving line of credit, prime rate  ...............................................    $ 2,535        $ 2,991
    Mortgage notes, prime plus 1%, due September 31, 2002  ..............................      2,013          1,905
    Mortgage notes, LIBOR plus 1.75%, due July 15, 2001  ................................      3,067          3,638
    Mortgage notes, 8.255%, due May 15, 2000  ...........................................     12,407         12,249
    10.5% loan on foreclosed property due October 2010  .................................        663            618
    8.5% loan in connection with Dunnings acquisition due June 30, 2000  ................         --            500
    Related party 10% demand note  ......................................................      1,710             --
    Demand note payable, prime rate  ....................................................        100             --
    6% note, due May 1999  ..............................................................        240            140
    10% note; due April 2004  ...........................................................         77             70
    8% note, due September 2003  ........................................................         64             43
    10.5% note, due December 2002  ......................................................        111             92
    7.5% note, due October 2000  ........................................................         --             97
    7.75%-8.5% automobile notes, due December 1999 through January 2003  ................         --             65
                                                                                             -------        -------
       Subtotal  ........................................................................     22,987         22,408
    Less: Current portion  ..............................................................     (6,680)        (4,047)
                                                                                             -------        -------
                                                                                             $16,307        $18,361
                                                                                             =======        =======
  </TABLE>
  
  
    Mortgage notes outstanding are on property owned by the B&B Companies. The
  notes have variable interest rates ranging from 7.34% to 8.75% at December 31,
  1998, and are secured by certain land, buildings and improvements. The notes are
  repayable in equal monthly installments over six to ten year terms, with final
  installments consisting of all remaining unpaid principal and accrued interest
  at the end of the term.
  
    In connection with the purchase of Dunnings Auction Services, Inc., by B&B,
  the Company assumed a note payable to the prior owners in the original amount of
  $500,000. The note carries interest at 8.5%, and is due in two approximately
  equal installments on June 30, 1999 and 2000.
  
    Minimum annual repayments on these notes at December 31, 1998, are as follows
  (in thousands):
  
  <TABLE>
  <CAPTION>
  Year  ending
  December 31,                                                                                    Total
  -------------                                                                                   -----
  <S>                                                                                           <C>
     1999....................................................................................      $ 4,047
     2000....................................................................................       12,851
     2001....................................................................................        3,524
     2002....................................................................................        1,664
     2003....................................................................................           61
  </TABLE>
  
                                         36
  <PAGE>
  
                                     eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  Thereafter........................................................       261
                                                                       -------
                                                                       $22,408
                                                                       =======
  
  
  Note 6--Leasing Arrangements:
  
    The Company, through its B&B subsidiary, leases certain land and buildings.
  These leases are classified as operating leases that expire at various intervals
  between 1999 and 2010. Certain of these leases contain renewal options and have
  escalation clauses tied to changes in the Consumer Price Index. Under the terms
  of the leases, the tenants are generally responsible for the payment of property
  taxes, insurance and maintenance costs related to the leased property.
  
  
  Property on operating leases and property held for lease
  
    The following schedule provides a summary of the Company's investment in
  property under operating leases and property held for lease by major classes at
  December 31, 1997 and 1998 (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                                                  December 31,
                                                                                             1997             1998
                                                                                        --------------   --------------
  
  <S>                                                                                <C>              <C>
     Land.........................................................................         $ 6,956          $ 7,265
     Building.....................................................................           7,133            8,581
     Building improvements........................................................           8,535            9,672
     Other........................................................................              37               37
                                                                                           -------          -------
                                                                                            22,661           25,555
     Less: Accumulated depreciation...............................................          (3,751)          (4,249)
                                                                                           -------          -------
                                                                                           $18,910          $21,306
                                                                                           =======          =======
  </TABLE>
  
  
    The following is a schedule by year of minimum future rental income on
  noncancellable operating leases as of December 31, 1998, (in thousands):
  
  <TABLE>
  <CAPTION>
  
  Year  ending
  December 31,
  -----------
  <S>                                                                                                 <C>
     1999.......................................................................................          $ 3,960
     2000.......................................................................................            3,964
     2001.......................................................................................            3,967
     2002.......................................................................................            3,837
     2003.......................................................................................            3,841
     Thereafter.................................................................................           21,110
                                                                                                          -------
     Total minimum future rentals...............................................................          $40,679
                                                                                                          =======
  </TABLE>
  
  
  Note 7--Sale of Properties:
  
    During 1998, the partners of 131 North Gilbert Avenue Partners, including HBJ,
  a 63.3% holder, sold the property to an unrelated party for $2.5 million in cash
  and recognized a gain on the transaction of $200,000. In August 1998, HBJ also
  sold the Parthenia property for $865,000 in cash and recognized a gain of
  $133,000.
  
  
  
                                         37
  <PAGE>
  
                                     eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  
  Note 8--Commitments and Contingencies:
  
  Operating Leases
  
    The Company leases office space and equipment under noncancelable operating
  leases with various expiration dates through the year 2004. Rent expense for the
  years ended December 31, 1996, 1997, and 1998 totaled $9,000, $223,000 and
  $672,000, respectively.
  
    Future minimum lease payments under non-cancelable operating leases, including
  lease commitments entered into subsequent to December 31, 1998, are as follows,
  (in thousands):
  
  <TABLE>
  <CAPTION>
  
  Year ending                                                                                    Operating
  December 31,                                                                                    Leases
  -----------                                                                                     ------
  <S>                                                                                            <C>
   1999  .......................................................................................   $ 2,978
   2000  .......................................................................................     4,605
   2001  .......................................................................................     4,675
   2002  .......................................................................................     4,782
   2003  .......................................................................................     4,681
   Thereafter  .................................................................................     3,330
                                                                                                   -------
   Total minimum lease payments.  ..............................................................   $25,051
                                                                                                   =======
  </TABLE>
  
  
  Advertising
  
    During 1998, the Company entered into a three-year marketing agreement with
  America Online Inc. ("AOL"). Under the terms of the agreement, the Company will
  be provided with a specific number of advertising impressions featuring it as
  the preferred provider of person-to-person auction services on AOL's service. In
  consideration, the Company has committed to pay $12.0 million over the three-
  year term of the agreement. The Company is recognizing these fees as sales and
  marketing expenses over the greater of the ratio of the number of impressions
  delivered over the total number of contracted impressions, or a straight-line
  basis over the term of the contract. At December 31, 1998, the Company had paid
  $4.0 million to AOL, of which $1.7 million was recognized as sales and marketing
  expense. In March 1999, the Company expanded the scope of its strategic
  relationship with AOL. Under the amended agreement, eBay will be given a
  prominent presence featuring it as the preferred provider of person-to-person
  trading services on AOL's proprietary services (both domestic and
  international), AOL.com, Digital Cities, ICQ, CompuServe (both domestic and
  international) and Netscape.  In consideration for this agreement, eBay will pay
  $75 million over the four-year term of the contract and the remaining
  obligations under the previous contract were cancelled. eBay will develop a co-
  branded version of its service for each AOL property which will prominently
  feature each party's brand. AOL will be entitled to all advertising revenue from
  the co-branded site.
  
  Other contingencies
  
       From time to time, the Company is involved in disputes which have arisen in
  the ordinary course of business. Management believes that the ultimate
  resolution of these disputes will not have a material adverse impact on the
  Company's financial position or results of operations.
  
                                         38
  <PAGE>
  
                                     eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  Note 9--Income Taxes:
  
    Income before income taxes was generated entirely by domestic operations
  during 1996, 1997 and 1998. The provision for income taxes consists of the
  following, (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                      Year Ended December 31,
                                                                 ---------------------------------
                                                                   1996        1997         1998
                                                                 --------    --------      -------
  <S>                                                             <C>        <C>        <C>
     Current:
        Federal  .............................................   $    286    $    667      $ 2,419
        State and local  .....................................        121         207          963
                                                                 --------    --------      -------
                                                                      407         874        3,382
                                                                 --------    --------      -------
     Deferred:
        Federal  .............................................         59          81        1,211
        State and local  .....................................          9          16          196
                                                                 --------    --------      -------
                                                                       68          97        1,407
                                                                 --------    --------      -------
                                                                 $    475    $    971      $ 4,789
                                                                 ========    ========      =======
  </TABLE>
  
  The following is a reconciliation of the difference between the reported
  provision for income taxes and the provision computed by applying the federal
  statutory rate of 34% to income before income taxes, (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                       Year Ended  December 31,
                                                                 ---------------------------------
                                                                    1996        1997         1998
                                                                 --------     -------      --------
  <S>                                                            <C>         <C>         <C>
     Provision at statutory rate  ............................   $  1,327    $  2,840      $ 4,255
     Permanent differences:
        S Corporation income not subject to tax...............     (1,152)     (2,307)      (1,848)
        Meals and entertainment  .............................         10          16           15
        Life insurance  ......................................         22          30           42
        Acquisition related expenses  ........................         --          --          384
        Stock based compensation  ............................         --          --        1,051
        Tax exempt interest income  ..........................         --          --         (175)
        Other non-deductible expenses  .......................        144         169          (12)
        Other  ...............................................         62         (49)         283
     Statutory taxes, net of federal benefit  ................         62         272          794
                                                                 --------    --------      -------
                                                                 $   475     $    971      $ 4,789
                                                                 =======     ========      =======
  </TABLE>
  
    Under SFAS No. 109, deferred tax assets and liabilities are recognized for the
  future tax consequences of differences between the carrying amounts of assets
  and liabilities and their respective tax bases using enacted tax rates in effect
  for the year in which the differences are expected to reverse. Significant
  deferred tax assets and liabilities consist of the following, (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                                              December 31,
                                                                                         -----------------------
                                                                                            1997         1998
                                                                                         ----------   ----------
  <S>                                                                                    <C>         <C>
     Deferred tax assets:
     Accruals and reserves.............................................................     $ 175       $   171
     Depreciation......................................................................        --            61
     State income taxes................................................................        --            43
     Amortization......................................................................        --            17
                                                                                            -----       -------
                                                                                              175           292
                                                                                            -----       -------
     Deferred tax liabilities:
     Accruals and reserves not currently deductible....................................      (154)       (1,724)
     Depreciation......................................................................      (298)         (261)
                                                                                            -----       -------
                                                                                             (452)       (1,985)
                                                                                            -----       -------
     Valuation allowance...............................................................        --            --
                                                                                            -----       -------
     Net deferred tax liabilities......................................................     $(277)      $(1,693)
                                                                                            =====       =======
  </TABLE>
  
                                         39
  <PAGE>
  
                                     eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  
    In connection with the acquisition of Butterfield &Butterfield by eBay,
  Butterfield &Butterfield's status as an S Corporation was terminated and
  Butterfield &Butterfield became subject to federal and state income taxes.  The
  supplemental pro forma information below includes an increase to the provisions
  for income taxes based upon a combined federal and state tax rate of 42%.  This
  amount approximates the statutory tax rates that would have been applied if
  Butterfield &Butterfield had been taxed as a C corporation during the periods
  prior to its acquisition.  Because the acquisition of the B&B companies has
  been accounted for as a pooling of interests, there has been no adjustment to
  the historical carrying values of real estate holdings. However, these
  properties are subject to increases in tax basis which will result in a higher
  depreciable basis for income and property tax purposes. As a result, a
  deferred tax asset and a corresponding increase to stockholders' equity of
  approximately $8.8 million was recorded in the second quarter of 1999 for the
  difference between the financial statement carrying amounts and tax basis of the
  related net assets upon the closing of the transaction. The components of pro
  forma income taxes are as follows:
  
    Income before income taxes was generated entirely by domestic operations
  during 1996, 1997 and 1998.  The pro forma provision for income taxes consists
  of the following, (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                                            Year Ended December 31,
                                                                                        --------------------------------
                                                                                          1996        1997       1998
                                                                                        ---------   --------   ---------
  <S>                                                                                   <C>         <C>        <C>
     Current:
        Federal......................................................................     $1,788      $2,942      $4,303
        State and local..............................................................        342         578       1,243
                                                                                          ------      ------      ------
                                                                                           2,130       3,520       5,546
                                                                                          ------      ------      ------
     Deferred:
        Federal......................................................................       (250)         24       1,138
        State and local..............................................................        (43)          3         176
                                                                                          ------      ------      ------
                                                                                            (293)         27       1,314
                                                                                          ------      ------      ------
                                                                                          $1,837      $3,547      $6,860
                                                                                          ======      ======      ======
  </TABLE>
  
  The following is a reconciliation of the difference between the pro forma
  provision for income taxes and the pro forma provision computed by applying the
  federal statutory rate of 34% to income before income taxes, (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                                             Year Ended  December 31,
                                                                                         --------------------------------
                                                                                           1996       1997        1998
                                                                                         --------   --------   ----------
  <S>                                                                                    <C>        <C>        <C>
     Provision at statutory rate  ...................................................      $1,327     $2,840      $4,255
     Permanent differences:
        Meals and entertainment  ....................................................          10         11          15
        Life insurance  .............................................................          22         30          42
        Acquisition related expenses  ...............................................          --         --         384
        Stock compensation  .........................................................          --         --       1,051
        Tax exempt interest income  .................................................          --         --        (175)
        Other non-deductible expenses  ..............................................         197         82         (32)
        Other  ......................................................................          11         18         291
     Statutory taxes, net of federal benefit  .......................................         270        566       1,029
                                                                                           ------     ------      ------
                                                                                           $1,837     $3,547      $6,860
                                                                                           ======     ======      ======
  </TABLE>
  
  
                                         40
  <PAGE>
  
                                     eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  
  
  Note 10--Preferred Stock and Convertible Preferred Stock:
  
  Preferred Stock
  
    The Company is authorized, subject to limitations prescribed by Delaware law,
  to provide for the issuance of Preferred Stock in one or more series, to
  establish from time to time the number of shares included within each series, to
  fix the rights, preferences and privileges of the shares of each wholly unissued
  series and any qualifications, limitations or restrictions thereon, and to
  increase or decrease the number of shares of any such series (but not below the
  number of shares of such series then outstanding) without any further vote or
  action by the stockholders. At December 31, 1998, there were 5,000,000 shares of
  Preferred Stock authorized for issuance, and no shares issued or outstanding.
  
  
  Convertible Preferred Stock
  
    Convertible Preferred Stock prior to the initial public offering at September
  24, 1998 was composed of the following, (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                                 Shares
                                                                        -------------------------   Liquidation   Redemption
                                                                         Authorized   Outstanding     Amount        Amount
                                                                        -------------------------   -----------   ----------
  <S>                                                                   <C>          <C>           <C>           <C>
     Series A  .........................................................     1,676         1,676        $1,000       $   --
     Series B  .........................................................     1,415         1,415         6,300        5,093
     Undesignated  .....................................................     2,909            --            --           --
                                                                             -----         -----        ------       ------
                                                                             6,000         3,091        $7,300       $5,093
                                                                             =====         =====        ======       ======
  </TABLE>
  
    On September 24, 1998, the Company completed its initial public offering of
  Common Stock. At that time, all issued and outstanding shares of the Company's
  Series A and Series B Convertible Preferred Stock were converted into an
  aggregate of 27,827,019 shares of Common Stock.
  
  Warrants for Series B Mandatorily Redeemable Convertible Preferred Stock
  
    In connection with the issuance of Series B, the Company issued warrants to
  purchase 400,000 additional shares of Series B with an exercise price of $5.00
  per share. In May 1998, these warrants were exercised, resulting in the issuance
  of 400,000 shares of Series B in exchange for cash proceeds totaling $2.0
  million.
  
  
  Note 11--Common Stock:
  
    The Company's Certificate of Incorporation, as amended, authorizes the Company
  to issue 195,000,000 shares of Common Stock. A portion of the shares outstanding
  are subject to repurchase by the Company over a four-year period from the
  earlier of the issuance date or employee hire date, as applicable. At December
  31, 1997 and 1998, there were 33,150,000 and 32,212,617 shares, respectively,
  subject to repurchase rights at an average price of $0.01 and $0.04,
  respectively, per share.
  
                                         41
  <PAGE>
  
                                     eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  
    In June 1998, in connection with the appointment of two outside directors, the
  Company sold an aggregate of 643,500 shares of common stock to two directors and
  realized net proceeds of $2.0 million. The Company recognized the $429,000
  excess of the estimated fair value of the stock over the price paid by the two
  directors as general and administrative expense in 1998.
  
    At December 31, 1998, the Company had reserved 23,497,986 and 900,000 shares
  of common stock for future issuance for the exercise of options under the stock
  option plans and issuance of shares under the employee stock purchase plan,
  respectively.
  
  Note 12--Employee Benefit Plans:
  
  401(k) Savings Plan
  
    The Company has a savings plan that qualifies as a deferred salary arrangement
  under Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). Under the
  savings plan, participating employees may defer a percentage (not to exceed 25%)
  of their eligible pretax earnings up to the Internal Revenue Service's annual
  contribution limit. All employees on the United States payroll of the Company
  age 21 years or older are eligible to participate in the 401(k) Plan. The
  Company is not required to contribute to the 401(k) Plan but in 1998 elected to
  match contributions up to a maximum of $1,500 per employee. As a result, the
  Company contributed $97,479, which was expensed in 1998. In 1998, the Company
  also committed to matching future employee contributions to a maximum of $1,500
  per employee per year.
  
    B&B has a defined savings contribution plan that covers employees after one
  year of service. Under the Plan, participants may elect to contribute up to 15%
  of their compensation, up to a maximum amount allowable under IRS regulations on
  a pre-tax basis. In addition, the Company may contribute to the plan up to 25%
  of the first 2% of each participant's compensation in an amount determined
  annually by the Board of Directors. The Company's contributions amounted to
  $14,000, $11,000 and $20,000 for the years ended December 31, 1996, 1997, and
  1998, respectively.
  
  Stock option plans
  
    In December 1996, the Company's Board of Directors adopted the 1996 Stock
  Option Plan (the "1996 Plan"), and in June 1997, adopted the 1997 Stock Option
  Plan (the "1997 Plan") (collectively, the "Plans"). The Plans provide for the
  granting of stock options to employees and consultants of the Company. Options
  granted under the Plans may be either incentive stock options ("ISO") or
  nonqualified stock options ("NSO"). ISOs may be granted only to Company
  employees (including officers and directors who are also employees). NSOs may be
  granted to Company employees and consultants.
  
    In July 1998, the Board adopted, and in August 1998 the Company's stockholders
  approved, the 1998 Equity Incentive Plan (the "1998 Plan") and reserved
  13,500,000 shares of Common Stock for issuance thereunder. The 1998 Plan
  authorized the award of options, restricted stock awards and stock bonuses (each
  an "Award"). No person will be eligible to receive more than 3,000,000 shares in
  any calendar year pursuant to Awards under the 1998 Plan other than a new
  employee of the Company who will be eligible to receive no more than 6,000,000
  shares in the calendar year in which such employee commences employment. Options
  granted under the 1998 Plan may be either ISOs or NSOs. ISOs may be granted only
  to Company employees (including officers and directors who are also employees).
  NSOs may be granted to Company employees, officers, directors, consultants,
  independent contractors and advisors of the Company.
  
    Options under the Plans may be granted for periods of up to ten years and at
  prices no less than 85% of the estimated fair value of the shares on the date of
  grant as determined by the Board of Directors, provided, however, that (i) the
  exercise price of an ISO may not be less than 100% of the estimated fair value
  of the shares on the date of grant, and (ii) the exercise price of an ISO
  granted to a 10% shareholder may not be less than 110% of the estimated fair
  value of the shares on the date of grant. Options under the 1996 and 1997 Plans
  were exercisable immediately through June 30, 1998, subject to repurchase rights
  held
  
                                         42
  <PAGE>
  
                                     eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  
  by the Company, which lapse over the vesting period, which is generally four
  years. Options under the 1998 Plan are not immediately exercisable and generally
  vest over a period of four years.
  
    The following table summarizes activity under the Company's stock option plans
  for the years ended December 31, 1996, 1997 and 1998, (shares in thousands):
  
  <TABLE>
  <CAPTION>
                                                                               Year Ended December 31,
                                                             ------------------------------------------------------------
                                                                   1996                      1997                  1998
                                                             -----------------   -----------------------------   --------
                                                                      Weighted             Weighted              Weighted
                                                                      Average              Average               Average
                                                                      Exercise             Exercise              Exercise
                                                             Shares    Price     Shares     Price      Shares     Price
                                                             ------   --------   -------   --------   --------   --------
  <S>                                                        <C>      <C>        <C>       <C>        <C>        <C>
  Outstanding at beginning of period.  ..................        --      $  --      675       $0.01    11,790       $0.02
    Granted  ............................................       675       0.01   11,592        0.02    17,287        2.15
    Exercised  ..........................................        --         --       --          --   (19,477)       0.14
    Cancelled  ..........................................        --         --     (477)       0.01      (354)       1.67
                                                                ---              ------               -------
  Outstanding at end of period  .........................       675       0.01   11,790        0.02     9,246        3.68
                                                                ===              ======               =======
  Options exercisable at end of period  .................       675              11,790        0.02       370        0.03
                                                                ===              ======               =======
  Weighted average fair value of
    options granted during period.  .....................                 0.01                 0.10                  2.80
  </TABLE>
  
    The following table summarizes information about fixed stock options
  outstanding at December 31, 1998, (shares in thousands):
  
  <TABLE>
  <CAPTION>
  
                                                             Options Outstanding at                Options Exercisable at
                                                               December 31, 1998                     December 31, 1998
                                                              -------------------                    -----------------
                                                            Weighted           Weighted
                                       Number of            Average            Average        Number of         Weighted
             Range of                   Shares             Remaining           Exercise         Shares           Average
          Exercise Prices             Outstanding       Contractual Life        Price        Exercisable     Exercise Price
  -------------------------------   ---------------   --------------------   ------------   --------------   ---------------
  <S>                               <C>               <C>                    <C>            <C>              <C>
    $ 0.01 - $ 0.22                           1,302              8.8 years         $ 0.04              370             $0.03
      0.67 -   1.00                             943                    9.3           0.75               --                --
      3.11 -   3.11                             821                    9.4           3.11               --                --
      4.67 -   5.00                           6,165                    9.6           4.91               --                --
      16.85                                      15                    9.8          32.52               --                --
                                              -----                                                    ---              ----
                                              9,246                    9.5           3.68              370              0.03
                                              =====                                                    ===
  </TABLE>
  
  Fair value disclosures
  
    The Company calculated the minimum fair value of each option grant on the date
  of grant using the Black-Scholes option pricing model as prescribed by SFAS No.
  123 using the following assumptions:
  
  <TABLE>
  <CAPTION>
                                                                                              Year Ended December 31,
                                                                                         ---------------------------------
                                                                                            1996         1997       1998
                                                                                         -----------   --------   --------
  <S>                                                                                    <C>           <C>        <C>
     Risk-free interest rates  ......................................................        6.0%       5.9%        4.9%
     Expected lives (in years)  .....................................................        5.0        5.0         3.0
     Dividend yield  ................................................................          0%         0%          0%
     Expected volatility  ...........................................................          0%         0%         80%
  </TABLE>
  
    Prior to the Company's initial public offering, the fair value of each option
  grant was determined using the minimum value method. Subsequent to the offering,
  the fair value was determined using the Black-Scholes model. The compensation
  cost associated with the Company's stock-based compensation plans, determined
  using the minimum value method prescribed by SFAS No. 123, did not result in a
  material difference from the reported net income for the years ended December
  31, 1996 and 1997. The effect of compensation cost on net income and earnings
  per share for the year ended December 31, 1998 is as follows, (in thousands,
  except per share amounts):
  
                                         43
  <PAGE>
  
                                     eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  
  <TABLE>
  <CAPTION>
                                                                                                              1998
                                                                                                             ------
  <S>                                                                                                        <C>
  Net income:
        As reported  ................................................................................        $7,273
        Pro forma  ..................................................................................        $6,497
     Net income per share--basic:
        As reported  ................................................................................        $ 0.14
        Pro forma  ..................................................................................        $ 0.12
     Net income per share--diluted:
        As reported  ................................................................................        $ 0.06
        Pro forma  ..................................................................................        $ 0.06
  </TABLE>
  
  
  1998 Employee Stock Purchase Plan
  
  In July 1998, the Board adopted, and in August 1998 the Company's stockholders
  approved, the 1998 Employee Stock Purchase Plan (the "Purchase Plan") and
  reserved 900,000 shares of Common Stock for issuance thereunder. On each January
  1, the aggregate number of shares reserved for issuance under the Purchase Plan
  will be increased automatically by the number of shares purchased under the
  Purchase Plan in the preceding calendar year. The aggregate number of shares
  reserved for issuance under the Purchase Plan shall not exceed 4,500,000 shares.
  The Purchase Plan became effective on September 24, 1998, the first business day
  on which price quotations for the Company's Common Stock were available on the
  Nasdaq National Market. Employees are generally eligible to participate in the
  Purchase Plan if they are customarily employed by the Company for more than 20
  hours per week and more than five months in a calendar year and are not (and
  would not become as a result of being granted an option under the Purchase Plan)
  5% stockholders of the Company. Under the Purchase Plan, eligible employees may
  select a rate of payroll deduction between 2% and 10% of their W-2 cash
  compensation subject to certain maximum purchase limitations. Each Offering
  Period has a maximum duration of two years (the "Offering Period") and consists
  of four six-month Purchase Periods (each, a "Purchase Period"), with the
  exception of the first Offering Period, which began on September 24, 1998 and
  will end on April 30, 1999. Offering Periods and Purchase Periods thereafter
  will begin on May 1 and November 1. The price at which the Common Stock is
  purchased under the Purchase Plan is 85% of the lesser of the fair market value
  of the Company's Common Stock on the first day of the applicable offering period
  or on the last day of that purchase period. The Purchase Plan will terminate
  after a period of ten years unless terminated earlier as permitted by the
  Purchase Plan.
  
  
  1998 Directors Stock Option Plan
  
    In July 1998, the Board adopted, and in August 1998 the Company's stockholders
  approved, the Directors Plan and reserved a total of 600,000 shares of the
  Company's Common Stock for issuance thereunder. Members of the Board who are not
  employees of the Company, or any parent, subsidiary or affiliate of the Company,
  are eligible to participate in the Directors Plan. The option grants under the
  Directors Plan are automatic and nondiscretionary, and the exercise price of the
  options must be 100% of the fair market value of the Common Stock on the date of
  grant. Each eligible director who first becomes a member of the Board on or
  after the effective date of the Registration Statement of which this Prospectus
  forms a part (the "Effective Date") will initially be granted an option to
  purchase 90,000 shares (an "Initial Grant") on the date such director first
  becomes a director. Immediately following each Annual Meeting of the Company,
  each eligible director will automatically be granted an additional option to
  purchase 15,000 shares if such director has served continuously as a member of
  the Board since the date of such director's Initial Grant or, if such director
  was ineligible to receive an Initial Grant, since the Effective Date. In March
  1999, the Board amended the Directors Plan to provide that no such grants would
  be made to eligible directors at the 1999 Annual Meeting. The Board is
  considering other changes to the Directors Plan in light of the proposed changes
  in the accounting for this type of plan. The term of such options is ten years,
  provided that they will terminate seven months following the date the director
  ceases to be a director or a consultant of the Company (twelve months if the
  termination is due to death or disability). All options
  
                                         44
  <PAGE>
  
                                     eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  
  granted under the Directors Plan will vest as to 25% of the shares on the first
  anniversary of the date of grant and as to 2.08% of the shares each month
  thereafter, provided the optionee continues as a member of the Board or as a
  consultant to the Company.
  
  
  Unearned stock-based compensation
  
    In connection with certain stock option grants during the years ended December
  31, 1997 and 1998, the Company recognized unearned compensation totaling $1.4
  million and $5.4 million, respectively, which is being amortized over the four-
  year vesting periods of the related options. Amortization expense recognized
  during the years ended December 31, 1997 and 1998 totaled approximately $25,000
  and $2.6 million, respectively.  See Note 14--Subsequent Events.
  
  Note 13--Segment Information:
  
    Effective January 1, 1998, the Company adopted the provisions of SFAS No. 131,
  "Disclosures about Segments of an Enterprise and Related Information." SFAS No.
  131 establishes the standards for reporting information about operating segments
  in annual financial statements and requires that certain selected information
  about operating segments be reported in interim financial reports. It also
  establishes standards for related disclosures about products and services and
  geographic areas. Operating segments are defined as components of an enterprise
  about which separate financial information is evaluated regularly by the chief
  decision-maker in order to allocate resources and in assessing performance.
  
    eBay has identified two primary operating segments: online services and
  offline, traditional auction services. The online services segment consists of
  the operations of eBay, Billpoint and alando. The offline, traditional auction
  services segment consists of the current operations of B&B and Kruse.
  
    Segment selection is based upon the internal organization structure, the
  manner in which these operations are managed and their performance evaluated by
  management, the availability of separate financial information, and overall
  materiality considerations. Segment performance measurement is based on
  operating income before income taxes, amortization of intangibles, stock
  compensation and merger related costs. The operating information for the two
  segments identified are as follows, (in thousands):
  
  <TABLE>
  <CAPTION>
                                                                                         Year Ended December 31, 1996
                                                                                Online          Offline           Consolidated
                                                                                ------          -------           ------------
  <S>                                                                           <C>            <C>                <C>
  Net revenues from external customers.............................             $  372          $ 31,679           $ 32,051
                                                                                ======          ========           ========
  Operating income before amortization of
     intangibles, stock compensation, and merger
     related costs.................................................             $  253          $  6,167           $  6,420
  Interest and other income (expense), net.........................                  1               376                377
  Interest expense.................................................                 --            (2,322)            (2,322)
  Amortization of intangibles, stock
     compensation, and merger related costs........................                 --               --                 --
                                                                                ------          --------           --------
  Income before income taxes, as
     reported......................................................             $  254          $  4,221           $  4,475
                                                                                ======          ========           ========
  Total assets ....................................................             $  308          $ 48,701           $ 49,009
                                                                                ======          ========           ========
  
                                                                                      Year Ended December 31, 1997
                                                                               Online            Offline           Consolidated
                                                                               ------            -------           ------------
  Net revenues from external customers.............................            $ 5,744           $ 35,626           $ 41,370
                                                                               =======           ========           ========
  Operating income before amortization of
     intangibles, stock compensation, and merger
     related costs.................................................            $ 1,487           $  8,496           $  9,983
  Interest and other income (expense), net.........................                 59                995              1,054
  </TABLE>
  
                                         45
  <PAGE>
  
                                     eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  <TABLE>
  
  <S>                                                                            <C>            <C>                 <C>
  Interest expense.................................................                 (3)            (2,368)            (2,371)
  Amortization of intangibles, stock
     compensation, and merger related costs........................                  --                --                 --
                                                                                -------           -------            -------
  Income before income taxes, as
     reported......................................................             $1,543            $ 7,123            $ 8,666
                                                                                ======            =======            =======
  Total assets.....................................................             $5,619            $56,731            $62,350
                                                                                ======            =======            =======
  
  
                                                                                          Year Ended December 31, 1998
                                                                                Online             Offline          Consolidated
                                                                                ------             --------         ------------
  Net revenues from external customers.............................            $47,352            $38,777           $ 86,129
                                                                               =======            =======           ========
  Operating income before amortization of
     intangibles, stock compensation, and merger
     related costs.................................................            $11,573            $ 6,678           $ 18,251
  Interest and other income (expense), net                                         908                891              1,799
  Interest expense.................................................                (39)            (2,152)            (2,191)
  Amortization of intangibles, stock
     compensation, and merger related costs........................             (5,486)                --             (5,486)
                                                                               -------            -------           --------
  Income before income taxes, as
     reported......................................................            $ 6,956            $ 5,417           $ 12,373
                                                                               =======            =======           ========
  Total assets.....................................................            $92,545            $56,991           $149,536
                                                                               =======            =======           ========
  </TABLE>
  
  
  Note 14--Subsequent Events:
  
  Stock split
  
    During January 1999, the Company's Board of Directors approved a three-for-one
  Common Stock split. Shareholders of record on February 9, 1999 received two
  additional shares on March 1, 1999. All share and per share amounts in these
  consolidated financial statements and notes thereto for all periods presented
  have been retroactively adjusted to reflect the stock split.
  
  
  Australian joint venture
  
  On February 17, 1999, eBay entered into a joint venture agreement with an
  Australian company, PBL Online PTY Limited (PBLO), for the formation of a
  company which will provide on-line trading services to Internet users based
  primarily in Australia and New Zealand (combined, the "Territory"). PBLO is part
  of the Publishing & Broadcasting Limited group of companies which provide a wide
  range of media services in the Territory, including magazine publishing,
  television broadcasting, on-line services, broadcast programs and electronic
  commerce services. The joint venture company will be based in Australia and will
  combine technical and software experience, market knowledge and reputation with
  PBLO's publishing, distribution, advertising and marketing channels. Operations
  of the joint venture company are expected to commence during 1999.
  
  
  Contractual arrangements
  
    On March 1, 1999, eBay commenced an insurance program for eBay users. The
  program provides coverage on qualified transactions involving fraud that occurs
  when a winning bidder of an auction sends money to a seller, in good faith, and
  does not receive the item or does not receive the item as described in the eBay
  auction. To qualify for benefits under the program, the winning bidder must be
  an eBay buyer in "good standing" and the seller must be "registered" with a
  Feedback Rating of zero (0) or above. eBay has
  
                                         46
  <PAGE>
  
                                     eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  
  entered into a contract with Lloyd's of London to underwrite the program for an
  initial period of six months at a minimum cost of $525,000.
  
    On March 2, 1999, eBay entered into a Co-branding and Advertising Agreement
  (the "Agreement") with i-Escrow, Inc. ("i-Escrow"). Under the terms of the
  Agreement, i-Escrow will develop co-branded website pages which offer third
  party escrow services to eBay users. Upon request by an eBay user, i-Escrow will
  escrow a buyer's money until the buyer confirms that the applicable item was
  physically delivered, at which time the buyer's money will be released to the
  seller. eBay is committed to actively promoting these services to sellers and
  high bidders upon successful completion of the auction, but does not have
  control over, or ownership of, the escrowed funds. The co-branded website pages
  are expected to be launched in 1999.
  
  In March 1999, the Company expanded the scope of its strategic relationship with
  AOL. Under the amended agreement, eBay will be given a prominent presence
  featuring it as the preferred provider of person-to-person trading services on
  AOL's proprietary services (both domestic and international), AOL.com, Digital
  Cities, ICQ, CompuServe (both domestic and international) and Netscape. In
  addition, eBay will develop a co-branded version of its service for each AOL
  property which will prominently feature each party's brand. AOL will be entitled
  to all advertising revenue from the co-branded site. eBay will pay $75 million
  over the four-year term of the contract. At June 30, 1999, the Company had
  advanced $18.8 million under the amended agreement. This amount will be
  amortized to sales and marketing expense commencing with the launch of the co-
  branded program.
  
    In conjunction with the expanded strategic relationship, AOL will terminate
  its original contract with the Company in August of 1999. As a result, the
  remaining $8.0 million commitment associated with the original agreement has
  been waived. AOL will continue to deliver impressions under the original
  agreement through August 1999.
  
  
  Contingencies
  
    On March 23, 1999, the Company was sued by Network Engineering Software, Inc.
  in the U.S. District Court for the Northern District of California for the
  Company's alleged willful and deliberate violation of a patent. The suit seeks
  unspecified monetary damages as well as an injunction against the Company's
  operations. It also seeks treble damages and attorneys' fees and costs. The
  Company believes that it has meritorious defenses against this suit and intends
  to vigorously defend itself. The Company could be forced to incur material
  expenses during this defense and in the event it were to lose this suit, its
  business would be harmed.
  
  
  Follow-on Offering
  
    On April 16, 1999, the Company completed its follow-on public offering of
  Common Stock. A total of 4,250,000 shares were sold by the Company at a price of
  $170.00 per share. The offering resulted in net proceeds to the Company of
  approximately $696.2 million, net of an underwriting discount of $25.3 million
  and estimated offering expenses of $1.0 million.
  
  
  Butterfield and Butterfield Offering Costs
  
    In April 1999, B&B withdrew its registration statement for its initial public
  offering. Accordingly, in the second quarter of 1999, the Company recognized a
  charge of approximately $2.6 million related to the costs of the withdrawn
  offering
  
                                         47
  <PAGE>
  
                                     eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  
  Unearned stock compensation
  
    In connection with certain Billpoint stock option and stock warrant grants
  subsequent to December 31, 1998, the Company recognized unearned compensation
  totaling $6.3 million. These amounts are being amortized over the vesting
  periods of the options or the one-year term of the warrants as applicable.
  
                                         48
  <PAGE>
  
  ITEM 7. Exhibits and Financial Statement Schedules.
  
     (c)  The following exhibits are filed herewith:
  
      Exhibit
      Number                      Exhibit Title
      ------                      -------------
  
        27.1      Financial Data Schedule.
  
  -------------------
  <PAGE>
  
  --------------------------------------------------------------------------------
  SIGNATURES
  --------------------------------------------------------------------------------
  
  
       In accordance with the requirements of the Securities Exchange Act, the
  Registrant has caused this report to be signed on its behalf by the undersigned,
  thereunto duly authorized.
  
  
                                          eBAY INC.
  
  Date: September 14, 1999
  
  
                                          Principal Financial Officer and
                                            Principal Accounting Officer:
  
  
                                          By:   /s/ Gary F. Bengier
                                             --------------------------
                                               Gary F. Bengier
                                               Chief Financial Officer and
                                                Vice President of Operations
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text: =========================================================================
                      U.S. SECURITIES AND EXCHANGE COMMISSION
  
                               Washington, D.C. 20549
  
                                 ------------------
  
                                      FORM 8-K
  
                                   CURRENT REPORT
                          Pursuant to Section 13 or 15(d)
                       of the Securities Exchange Act of 1934
  
                        Date of Report: September 14, 1999
  
                   Date of earliest event reported: May 18, 1999
  
                                     eBAY INC.
               (Exact name of Registrant as specified in its charter)
  
                                      Delaware
                   (State or other jurisdiction of incorporation)
  
         000-24821                                    77-0430924
        (Commission                                  (IRS Employer
        File Number)                                 Identification No.)
  
  2125 Hamilton Ave., San Jose, California                95125
  (Address of principal executive offices)             (Zip Code)
  
                                   408-558-7400
               (Registrant's telephone number, including area code)
  
           (Former name or former address, if changed since last report)
  
     =========================================================================
  
                                         1
  ----------------------------------------------------------------------------
  Item 5: Other Events
  ----------------------------------------------------------------------------
  
    Pursuant to acquisitions made in May and June of 1999 accounted for using the
  pooling of interests methodology, the Company's historical financial information
  has been restated to reflect the combined operations of the Company and each of
  the acquired entities. These restatements have been reflected for the periods
  presented in the Company's quarterly report on Form 10-Q filed August 9, 1999.
  The consolidated financial statements and management's discussion and analysis
  of financial condition and results of operations for the years ended December
  31, 1996, 1997 and 1998 as presented in the Company's annual report on Form 10-
  K405 filed on March 29, 1999, have been restated and presented herein.
  
  Forward Looking Statements
  
    This document contains certain forward looking statements that involve risks
  and uncertainties, such as statements of the Company's plans, objectives,
  expectations and intentions. When used in this document, the words "expects,"
  "anticipates," "intends," "plans" and similar expressions are intended to
  identify certain of these forward looking statements. The cautionary statements
  made in this document should be read as being applicable to all related forward
  looking statements wherever they appear in this document. The Company's actual
  results could differ materially from those discussed in this document. Factors
  that could cause or contribute to such differences include those discussed
  below, as well as those discussed in the Company's Prospectus dated April 12,
  1999 and all subsequent filings.
  
    Forward looking statements are intended to address mattes that actually
  occurred through June 30, 1999 as well as those that may happen in the future.
  
  Overview
  
    eBay pioneered online person-to-person trading by developing a Web-based
  community in which buyers and sellers are brought together in an efficient and
  entertaining auction format to buy and sell personal items such as antiques,
  coins, collectibles, computers, memorabilia, stamps and toys. The eBay service
  permits sellers to list items for sale, buyers to bid on items of interest and
  all eBay users to browse through listed items in a fully-automated, topically-
  arranged, intuitive and easy-to-use online service that is available 24-hours-a-
  day, seven-days-a-week. The Company has extended its online offerings with the
  acquisitions of alando, an international online person-to-person trading
  community, and Billpoint, a provider of online billing and payment solutions.
  Recently, eBay expanded beyond its online origins into the traditional auction
  business with its acquisitions of Butterfield & Butterfield and Kruse
  International.
  
    Substantially all of the Company's revenues come from fees and commissions
  associated with online and traditional offline auction services. Online revenue
  is derived from placement and success fees paid by sellers, eBay does not charge
  fees to buyers. Sellers pay a nominal placement fee and by paying additional
  fees, sellers can have items featured in various ways. Sellers also pay a
  success fee based on the final purchase price. To date, online advertising on
  the eBay website and online payment solutions provided by Billpoint have not
  made significant contributions to net revenues, and no significant revenue
  generation is expected in the near future.  Offline revenue is derived from a
  variety of sources including sellers' commissions, buyers premiums, bidder
  registration fees, and auction related services including appraisal and
  authentication.
  
    eBay's online business model is significantly different from many existing
  online auction and other electronic commerce businesses. Because individual
  sellers, rather than eBay, sell the items listed, the Company has no
  procurement, carrying or shipping costs and no inventory risk. The Company's
  rate of expense growth is primarily driven by increases in personnel,
  expenditures for advertising and promotion, and depreciation on site hardware
  and software. The Company intends to continue investing in site infrastructure
  and expects to increase its expenses significantly, in particular its
  advertising, promotion and personnel expenses, in an effort to maintain revenue
  growth. The Company remains committed to a long-term growth strategy which
  combines the best elements of community and e-commerce and will continue to
  invest prudently but aggressively to maintain its leadership role in online
  personal trading.
  
                                         2
  Butterfield & Butterfield
  
    On May 28, 1999, eBay acquired Butterfield & Butterfield Auctioneers
  Corporation, a Delaware corporation and all affiliated entities under common
  control including; Butterfield Credit Corporation Inc., 111 Potrero Partners,
  LLC and HBJ Partners, LLC (collectively "B&B" or the "B&B Companies"). The
  aggregate consideration exchanged for the merger was 1,327,370 shares of eBay
  common stock. The merger has been accounted for as a pooling of interests. In
  April 1999, B&B withdrew its registration statement for its initial public
  offering. Accordingly, in the second quarter of 1999, the Company recorded a
  charge of approximately $2.6 million related to the costs of the withdrawn
  offering. Such amounts are included in merger related costs on the consolidated
  statement of income.
  
   Kruse International
  
    On May 18, 1999, eBay acquired Kruse, Inc. (d/b/a Kruse International) and all
  affiliated entities under common control including; Auburn Cordage, Inc., ACD
  Auto Sales, Inc., Reppert School of Auctioneering, Inc. and Classic Advertising
  & Promotions, Inc., each an Indiana corporation (collectively, "Kruse" or the
  "Kruse Companies"). Kruse International was founded in 1971 and operated as a
  sole proprietorship until it was incorporated in the state of Indiana in August
  1986. The Kruse Companies conduct auctions, perform appraisal services and
  auctioneering training for classic car auctions in various locations in the
  United States, England, Germany and the Netherlands. The aggregate consideration
  exchanged for the merger was 787,312 shares of eBay common stock for all shares
  of capital stock of the Kruse Companies. The merger has been accounted for as a
  pooling of interests.
  
   Billpoint
  
    On May 25, 1999, eBay acquired Billpoint, Inc. ("Billpoint"). Billpoint has
  developed a centralized, turnkey authorization, billing and payment fulfillment
  solution that permits individuals and small merchants to accept credit cards as
  payment for Internet-based sales transactions. Billpoint's service is expected
  to derive revenues based upon a variety of fee arrangements, including
  percentage-of-transaction, fixed-fee per transaction and flat monthly rates. In
  connection with the merger, eBay issued a total of approximately 525,000 shares
  of eBay common stock to the existing shareholders of Billpoint as consideration
  for all shares of capital stock of Billpoint, and all options and warrants to
  purchase shares of common stock of Billpoint outstanding immediately prior to
  the consummation of the merger were converted into options and warrants to
  purchase shares of eBay common stock. The merger has been accounted for as a
  pooling of interests.
  
   alando
  
    On June 15, 1999, eBay acquired alando.de.AG. ("alando"). alando is Germany's
  leading online person-to-person trading community. The aggregate consideration
  exchanged for the merger was 316,000 shares of eBay stock. The merger has been
  accounted for as a pooling of interests.
  
    The following table sets forth, for the periods presented, certain data from
  eBay's consolidated statement of income as a percentage of net revenues. This
  information should be read in conjunction with the Consolidated Financial
  Statements and Notes thereto included elsewhere in this report.
  Year Ended December 31,
                                                                                   ------------------------------------------
                                                                                       1996           1997           1998
                                                                                   -------------   -----------   ------------
  Net revenues.......................................................................     100.0%        100.0%         100.0%
  Cost of net revenues...............................................................      21.2          20.3           18.7
                                                                                         ------       -------       --------
    Gross profit.....................................................................      78.8          79.7           81.3
                                                                                         ------       -------       --------
  Operating expenses:
    Sales and marketing..............................................................      41.0          37.8           41.8
    Product development..............................................................       0.1           2.0            5.4
    General and administrative.......................................................      17.7          15.8           18.4
    Amortization of acquired intangibles.............................................        --            --            0.9
                                                                                         ------       -------       --------
       Total operating expenses......................................................      58.8          55.6           66.5
                                                                                         ------       -------       --------
  3
  Income from operations.............................................................      20.0          24.1           14.8
  Interest and other income (loss), net..............................................      (8.1)         (4.8)          (0.8)
                                                                                         ------       -------       --------
  Income before income taxes.........................................................      11.9          19.3           14.0
  Provision for income taxes.........................................................      (1.5)         (2.2)          (5.6)
                                                                                         ------       -------       --------
  Net income.........................................................................      10.4%         17.1%           8.4%
                                                                                         ======       =======       ========
  
  Supplemental Operating Data (1) (in thousands):
  Number of registered users at end of period........................................        41           341          2,181
  Gross merchandise sales (2)........................................................    $7,279       $95,271       $745,395
  Number of auctions listed..........................................................       289         4,394         33,668
  (1) Represents transactions associated with the eBay site.
  (2) Represents the aggregate sales prices of all goods for which an auction was
      successfully concluded on the eBay site (i.e., there was at least one bid
      above the seller's specified minimum price or reserve price, whichever is
      higher).
  
    It is difficult for the Company to forecast its revenues or earnings
  accurately and the operating results in one or more future quarters may fall
  below the expectations of securities analysts or investors. Although accurate
  revenue forecasts are difficult, the Company has begun to recognize the seasonal
  nature of its online business. In particular, the Company has noted strong
  sequential quarterly online revenue growth between the fourth quarter and the
  first quarter, and a lower, relatively level growth rate throughout the
  remainder of the year. Sequential revenue growth from the fourth quarter of 1997
  to the first quarter of 1998 was 128%, with the remaining quarters showing
  approximately 50% sequential growth. Within traditional auction operations, B&B
  typically experiences its strongest revenue growth in the second and fourth
  quarters, while Kruse International experiences its strongest revenue growth in
  the third quarter.
  
    Due to the inherent difficulty in forecasting net revenues, it is also
  difficult to forecast income statement expense categories as a percentage of net
  revenues. Quarterly and annual income statement expense categories as a
  percentage of net revenues may be significantly different from historical or
  projected rates. This is especially true as the Company expects to accelerate
  investment in equipment and personnel to enhance site stability and scalability
  during 1999. As a general note, the Company expects costs to increase in
  absolute dollars across all income statement categories. Further, the Company
  expects its gross margin will likely decline due primarily to the effects of
  depreciation from recently purchased site equipment and software, expected
  future purchases, increases in site operations personnel and consulting costs,
  and growth within the customer support organization, including a new facility in
  Salt Lake City.
  
    The Company's offline, traditional auction businesses tend to have results
  which are easier to forecast than their online counterparts.  Although the
  operations and results of both B&B and Kruse show seasonal trends in net
  revenues and expenses, annual results of operations are relatively stable when
  compared to the online business.  These trends may not be indicative of future
  results as the Company leverages the acquired companies' expertise and expands
  into premium online auctions and online automobile auctions.  To a large extent,
  the changes in the consolidated results of operations for the periods presented
  are due to the growth of the online auction business, thus discussions about
  year over year changes will primarily focus on the eBay online auction service.
  
   Net Revenues
  
    The Company derives revenue from a variety of sources including: listing,
  success, and featured item fees for transactions occurring online, and auction
  related fees, commissions and rental income in traditional auction operations.
  Neither Billpoint nor alando had significant operations prior to 1999, and no
  significant revenue generation is expected from either company in 1999. The
  Company's net revenues increased from $32.1 million to $41.4 million in the
  years ended December 31, 1996 and 1997, and further increased to $86.1 million
  in the year ended December 31, 1998.  The increase in the period from 1996 to
  1997 was derived from both the eBay online service and the B&B Companies.
  Increases in online net revenues were a result of the growth of the eBay site,
  both in the number of items listed and number of auctions successfully
  completed, and to a lesser extent by increases in average transaction size and
  certain increases in placement and featured item fees for listed items.
  Increases in B&B net revenues were due to the addition of several special
  auctions including two single-owner estates and a museum deaccession.  Revenue
  growth in the period from 1997 to 1998 was almost solely the result of the
  increased use of the eBay website with net revenues in the acquired Companies
  remaining comparable with prior periods.
  
                                         4
  Cost of Net Revenues
  
    Cost of net revenues for online operations consists primarily of costs
  associated with customer support and website operations. These costs include;
  compensation and allocated overhead for customer support and site operations
  personnel, ISP connectivity charges and depreciation on site equipment. Cost of
  net revenues in traditional auction operations primarily include; compensation
  for auction, appraisal, and customer support personnel and direct auction costs,
  such as event site rental. Cost of net revenues increased in absolute dollars
  from $6.8 million or 21.2% of net revenues in 1996 to $8.4 million or 20.3% of
  net revenues in 1997, and further increased to $16.1 million or 18.7% of net
  revenues in 1998. The increase from 1996 to 1997 was due almost equally to the
  eBay online business and B&B.  The increase in B&B cost of net revenues
  paralleled the increase in net revenues during the same period resulting from
  the additional specialty auctions held during the year.  Increases in absolute
  dollar expenditures for the eBay online service during the periods from 1996 to
  1997, and from 1997 to 1998 resulted from the continued development and
  expansion of the Company's customer support and site operations departments,
  depreciation of the equipment required for the Company's site operations and ISP
  connectivity charges. Costs of net revenues, especially those related to
  customer support and depreciation in the online business, are expected to
  continue to increase rapidly as the Company invests in its infrastructure in
  advance of demand, resulting in lower gross margins in the near term.
  
   Sales and Marketing
  
    The Company's sales and marketing expenses for both the online and traditional
  auction businesses are comprised primarily of compensation for the Company's
  sales and marketing personnel, advertising, tradeshow and other promotional
  costs, expenses for creative design of the Company's website and an allocation
  of overhead.  Sales and marketing expenses increased in absolute dollars from
  $13.1 million or 41.0% of net revenues in 1996 to $15.6 million or 37.8% of net
  revenues in 1997, and further increased to $36.0 million or 41.8% of net
  revenues in 1998.  During the periods from 1996 to 1997, and from 1997 to 1998,
  increases in marketing expenditures were primarily driven by the online auction
  business.  Increases from 1996 to 1997 primarily resulted from the building of
  the online marketing organization, which began late in the fourth quarter of
  1996, and the commencement of significant advertising campaigns which began in
  the third quarter of 1997.  The increase from 1997 to 1998 primarily resulted
  from substantial increases in advertising and promotional expenses, including
  costs associated with national print, broadcast and online advertising campaign
  and expenses associated with a marketing agreement with America Online Inc.,
  both of which commenced in the second half of 1998, in addition to the continued
  growth in the number of sales and marketing personnel.
  
    Online sales and marketing expenses are expected to increase in 1999, due to
  the commencement of advertising impressions delivered under a new strategic
  alliance with AOL, the expansion of international advertising and expenses
  associated with personnel additions made during 1999. Sales and marketing
  expenses in the traditional auction businesses are expected to remain comparable
  with historical levels.
  
   Product Development
  
    The Company's product development expenses for both eBay and Billpoint consist
  primarily of compensation for the Company's product development staff, payments
  to outside contractors, depreciation on equipment used for development and an
  allocation of overhead. The Company's product development expenses increased in
  absolute dollars from $28,000 or 0.1% of net revenues in 1996 to $831,000 or
  2.0% of net revenues in 1997, and further increased to $4.6 million or 5.4% of
  net revenues in 1998.  The year over year changes, and all expenditures
  discussed, were incurred by the eBay online business.  Neither B&B nor Kruse had
  any product development costs through December 31, 1998.  The increase in
  absolute dollars during the periods from 1996 to 1997, and from 1997 to 1998
  resulted primarily from increases in salaries, benefits and other personnel
  related costs as the Company significantly increased the size of its product
  development staff, as well as expenses related to contractors and consultants
  employed within the product development department. Product development expenses
  are expected to increase in future periods primarily from personnel additions,
  the impact of Billpoint product development costs in 1999, and additional
  depreciation costs as the Company continues to purchase equipment to improve and
  expand its operations both domestically and internationally.
  
                                         5
  General and Administrative
  
    The Company's general and administrative expenses consist primarily of
  compensation for personnel and, to a lesser extent, fees for external
  professional advisors, provisions for doubtful accounts and an allocation of
  overhead. The Company's general and administrative expenses increased in
  absolute dollars from $5.7 million or 17.7% of net revenues in 1996 to $6.5
  million or 15.8% of net revenues in 1997, and further increased to $15.8 million
  or 18.4% of net revenues in 1998.  During the periods from 1996 to 1997, and
  from 1997 to 1998, increases in general and administrative expenses were
  primarily driven by the online auction business.  The increase from 1996 to 1997
  primarily resulted from increases in salaries, benefits and other personnel
  related expenses, and to a lesser extent, from increases in the allowance for
  doubtful accounts, fees for professional services and overhead costs.  The
  increase in expenses from 1997 to 1998 primarily resulted from several stock
  related transactions occurring in 1998.  These include the Company's
  contribution in June 1998 of 321,750 shares of common stock with an estimated
  fair value of $1.2 million to a charitable foundation, compensation expense of
  $429,000 associated with the purchase of restricted shares of common stock by
  the Company's outside directors and compensation expense of approximately $1.7
  million associated with stock options granted to employees.  Additional year
  over year increases resulted from increases in personnel related expenses, the
  allowance for doubtful accounts, fees for professional services and overhead
  costs.  Although the Company does not expect new, significant stock compensation
  expenses in 1999 and future periods, the Company expects general and
  administrative expenses to increase in absolute dollars in order to provide
  continued support for the rapidly growing organization.
  
   Amortization of Acquired Intangibles
  
    During 1998, eBay recognized expenses totaling $150,000 for in-process
  technology assumed in the acquisition of Jump and charged this amount to
  operations because the technology had not reached the state of technological
  feasibility and at the acquisition date had no alternative future use.  The
  Company also recognized amortization expense of approximately $655,000 in 1998
  associated with covenants not to compete, a customer list, and goodwill assumed
  in the Jump acquisition.  See Note 2 of Notes to Consolidated Financial
  Statements.
  
   Interest and Other Income (Loss), Net
  
    The Company's interest and other income (loss), net, consists of interest
  earned on cash, cash equivalents, and short term investments offset by interest
  expense, minority interests in consolidated companies, and equity interests in
  the income or loss from partnership investments. Interest expense is primarily
  derived from interest payments on real estate mortgages held by B&B companies.
  The Company's interest and other (loss), net declined from $(2.6) million or
  (8.1)% of net revenues in 1996 to $(2.0) million or (4.8)% of net revenues in
  1997 and further declined to $(703,000) or (0.8)% in 1998. The change in
  absolute dollars from 1996 to 1997 was a result of additional interest earned at
  B&B due to larger cash balances on hand at the various companies. From 1997 to
  1998, eBay's online business was the primary contributor to interest income from
  interest earned on the net proceeds from the Company's initial public offering
  in September 1998 and, to a lesser extent, interest earned on proceeds from the
  exercise of warrants in May 1998. Interest expense was approximately comparable
  between 1996, 1997, and 1998. The Company expects interest and other income
  (loss), net to be positive in 1999 due primarily to interest earned on the
  proceeds from the company's follow on offering completed in April 1999.
  
   Provision for Income Taxes
  
    The Company's effective federal and state income tax rate was 10.6%, 11.2% and
  38.7% in the years ended December 31, 1996, 1997 an 1998, respectively.  During
  1996 and 1997, the majority of the Company's revenue was earned by B&B, which
  had been taxed as an S Corporation prior to the acquisition. In connection with
  its acquisition, B&B's status as an S Corporation was terminated, and B&B became
  subject to federal and state income taxes. The supplemental pro forma financial
  information presented in the financial statements includes an increase to the
  provisions for income taxes based upon a combined federal and state tax rate
  which approximates the statutory tax rates that would have applied if B&B had
  been taxed as a C Corporation during the periods prior to its acquisition by
  eBay. The rate change from 1997 to 1998 resulted from two factors, a larger
  portion of the revenue was generated by eBay, a C Corporation, and from changes
  in certain non-cash, non-deductible expenses as a percentage of pre-tax income.
  The Company expects the consolidated effective tax rate to be at or near 42%
  throughout 1999.
  
                                         6
  Stock-Based Compensation
  
    In connection with the grant of certain stock options and warrants from May
  1997 through June 1998, the Company recorded aggregate unearned compensation
  totaling $6.8 million, which is being amortized over the four-year vesting
  period of the options. Of the total unearned compensation, approximately $25,000
  was amortized in 1997 and $2.7 million was amortized in 1998.  These
  amortization amounts were allocated among the operational expense categories
  based upon the primary activity of the related employees.
  
  Liquidity and Capital Resources
  
    Since inception, the Company has financed its operations primarily from net
  cash generated from operating activities. The Company has obtained additional
  financing from the sale of preferred stock and warrants, proceeds from the
  exercise of those warrants, proceeds from the exercise of stock options,
  proceeds from its initial public offering.
  
    Net cash provided by operating activities was $11.2 million in 1996, $11.6
  million in 1997 and $6.0 million in 1998.  Net cash provided by operating
  activities resulted primarily from the Company's net income before non-cash
  charges for amortization of unearned compensation, the provision for doubtful
  accounts, depreciation and amortization, as well as increases in various
  liabilities, offset by partnership losses, changes in accounts receivable, and
  taxes payable.
  
    Net cash used in investing activities totaled $1.9 million in 1996, $3.0
  million in 1997, and $53.0 million in 1998.  Purchases of property, equipment
  and intangibles was a primary use for invested cash in all years presented,
  offset in 1996 and 1998 by the sale of property and equipment.   During 1998,
  proceeds from the initial public offering were used to purchase $40.4 million of
  short-term investments.
  
    Net cash provided by (used in) financing activities was $(8.1) million in
  1996, $560,000 in 197 and $72.2 million in 1998.  Net cash used in financing
  activities during 1996 resulted from principal payments on long-term debt and
  leases, and distributions to stockholders in the B&B companies.  During 1997,
  the Company made distributions to B&B stockholders, which were offset by
  proceeds from debt and equity financing. The Company completed its initial
  public offering in September 1998, holders exercise preferred stock warrants in
  May 1998, and B&B stockholders contributed cash to the B&B companies to create
  the net cash provided by financing activities in 1998.
  
    eBay had no material commitments for capital expenditures at December 31,
  1998, but expects such expenditures to be at least $14.0 million during 1999.
  Such expenditures will primarily be for computer equipment, furniture and
  fixtures and leasehold improvements. eBay also has total minimum lease
  obligations of $25.1 under certain noncancellable operating leases and
  notes payable obligations of $22.4 million through December 2004. In March 1999,
  eBay and AOL expanded the scope of their strategic relationship. Under this new
  agreement eBay will pay AOL $75 million for advertising over the four-year term
  of the contract. See Notes 5, 6 and 8 of Notes to Consolidated Financial
  Statements.
  
    The Company believes that its existing cash, cash equivalents and investments,
  and any cash generated from operations will be sufficient to fund its operating
  activities, capital expenditures and other obligations for the foreseeable
  future. However, if during that period or thereafter the Company is not
  successful in generating sufficient cash flow from operations or in raising
  additional capital when required in sufficient amounts and on terms acceptable
  to the Company, the Company's business could suffer.
  
  Year 2000 Issues
  
    Many currently installed computer systems and software products are coded to
  accept only two-digit entries in the date code field and cannot reliably
  distinguish dates beginning on January 1, 2000 from dates prior to the year
  2000. Many companies' software and computer systems may need to be upgraded or
  replaced in order to correctly process dates beginning in 2000 and to comply
  with the "Year 2000" requirements. The Company has reviewed its internal
  programs and has determined that there are no significant Year 2000 issues
  within the Company's systems or services. The Company has completed
  modifications to its internal systems to fix identified Year 2000 issues in an
  attempt to ensure Year 2000 compliance. The costs of these modifications have
  not been material and have involved a reallocation of internal resources
  
                                         7
  rather than incremental expenditures. Although the Company believes that its own
  software is Year 2000 compliant, the Company may be wrong. If the Company is
  wrong, it could face unexpected expenses to fix the problem or unanticipated
  website outages, either of which would harm its business. The Company uses
  third-party equipment and software that may not be Year 2000 compliant.
  Following a website outage in June 1999, the Company undertook a comprehensive
  site review including a further review of its website for year 2000 compliance.
  This review identified certain software "patches" for third party software that
  needed to be implemented for Year 2000 compliance. The process of implementing
  these patches has commenced and it is expected to be completed shortly after the
  end of the third quarter. The cost of this implementation is not expected to be
  material and is being accomplished through a reallocation of internal resources.
  The Company is also conducting a further review of third party software and
  embedded systems used in its online auction business. In connection with its
  acquisitions of each of its newly acquired businesses, the Company received
  representations and warranties that the systems and software of these businesses
  are Year 2000 compliant. While the Company has no reason to doubt these
  assurances, it is reviewing the Year 2000 status of the software and systems of
  its newly acquired businesses. The Company expects that the incremental cost of
  all of these reviews will not exceed $200,000. The cost of any necessary
  upgrades or changes cannot currently be precisely estimated. The Company may be
  harmed if necessary upgrades or changes are not identified, or if identified are
  not timely and successfully implemented at an acceptable cost. The Company also
  may be harmed by Year 2000 problems at its vendors and business partners. For
  example, the Company relies on credit card companies to collect the majority of
  its revenues from users. Due to the nature of the credit card system, some
  industry analysts have questioned the effect of the year 2000 on credit card
  processing and billing. Failure of the Company's credit card vendors or other
  third-party equipment or software vendors to properly process dates for the year
  2000 and thereafter could require the Company to incur unanticipated expenses in
  seeking alternative means of payment or hardware or software replacements. It
  also could result in loss of revenues or unanticipated eBay website outages. The
  Company's marketing efforts are also dependent on the continued operation of
  Internet portals and other Internet sites on which it advertises.
  
    Although the Company has developed contingency plans with respect to
  collecting payment under these circumstances, the Company is unable to make
  contingency plans if any significant number of the computers constituting the
  Internet fail to process dates properly for the year 2000 and there is a
  systemwide slowdown or breakdown. The Company's business is dependent on the
  continued successful operation of the Internet. Any interruption or significant
  degradation of Internet operations due to Year 2000 problems could harm the
  Company's business.
  
  Risk Factors that may Affect Results of Operations and Financial Condition
  
   Our operating results may fluctuate.
  
    Our operating results have varied on a quarterly basis during our short
  operating history. Our operating results may fluctuate significantly as a result
  of a variety of factors, many of which are outside our control. Factors that may
  affect our quarterly operating results include the following:
  
    .  our ability to retain an active user base, to attract new users who list
       items for sale and who complete transactions through our service and to
       maintain customer satisfaction;
  
    .  our ability to keep our website operational and to manage the number of
       items listed on our service;
  
    .  federal, state or local government regulation, including investigations
       prompted by items improperly listed or sold by our users;
  
    .  the introduction of new sites, services and products by us or our
       competitors;
  
    .  volume, size, timing and completion rate of trades on our website;
  
    .  seasonal effects on revenue in our online service and our land-based
       auction business;
  
    .  our ability to integrate, manage and grow our recent acquisitions;
  
    .  the success of our brand building and marketing campaigns;
  
                                         8
  .  the amount and timing of operating costs and capital expenditures relating
       to maintaining and expanding our business, operations and infrastructure;
  
    .  our ability to upgrade and develop our systems and infrastructure to
       accommodate growth;
  
    .  our ability to attract new personnel in a timely and effective manner;
  
    .  our ability to retain key employees in both our historical online business
       and our recent acquisitions;
  
    .  the timing, cost and availability of advertising in traditional media and
       on other websites and online services;
  
    .  the ability of our land-based auction businesses to acquire high quality
       properties;
  
    .  the timing of marketing expenses under existing contracts;
  
    .  consumer trends and popularity of some categories of collectible items;
  
    .  the level of use of the Internet and online services;
  
    .  increasing consumer acceptance of the Internet and other online services
       for commerce and, in particular, the trading of products such as those
       listed on our website;
  
    .  consumer confidence in the security of transactions on our website; and
  
    .  general economic conditions and economic conditions specific to the
       Internet and electronic commerce industries.
  
    Our limited operating history and the emerging nature of the markets in which
  we compete make it difficult for us to forecast our revenues or earnings
  accurately. We believe that period-to-period comparisons of our operating
  results may not be meaningful and you should not rely upon them as an indication
  of future performance. We do not have backlog, and almost all of our net
  revenues each quarter come from auctions that are completed during that quarter.
  Our operating results in one or more future quarters may fall below the
  expectations of securities analysts and investors. In that event, the trading
  price of our common stock would almost certainly decline.
  
   Our failure to manage growth could harm us.
  
    We currently are experiencing a period of significant expansion in our
  headcount, facilities and infrastructure and we anticipate that further
  expansion will be required to address potential growth in our customer base and
  market opportunities. This expansion has placed, and we expect it will continue
  to place, a significant strain on our management, operational and financial
  resources. The areas that are put under severe strain by our rate of growth
  include the following:
  
    .  The website. We must constantly add new hardware, update software and add
       new engineering personnel to accommodate the increased use of our website.
       If we are unable to increase the capacity of our systems at least as fast
       as the growth in demand for this capacity, our website may become unstable
       and may cease to operate for periods of time. We have experienced periodic
       unscheduled downtime. Continued unscheduled downtime would harm our
       business and also would discourage users of our website and reduce future
       revenues.
  
    .  Customer Support. We must expand our customer support operations to
       accommodate the increased number of users and transactions on our website.
       If we are unable to hire and successfully train sufficient employees or
       contractors in this area, users of our website may have negative
       experiences and current and future revenues could suffer.
  
                                         9
  .  Customer Accounts. Our revenues are dependent on prompt and accurate
       billing processes. If we are unable to grow our transaction processing
       abilities to accommodate the increasing number of transactions that must be
       billed, our ability to collect revenue will be harmed.
  
    We must continue to hire, train and manage new employees at a rapid rate. The
  majority of our employees today have been with us less than one year and we
  expect that our rate of hiring will continue at a very high pace. To manage the
  expected growth of our operations and personnel, we will need to improve our
  transaction processing, operational and financial systems, procedures and
  controls. Our current and planned personnel, systems, procedures and controls
  may not be adequate to support our future operations. We may be unable to hire,
  train, retain and manage required personnel or to identify and take advantage of
  existing and potential strategic relationships and market opportunities.
  
   The inability to expand our systems may limit our growth.
  
    We seek to generate a high volume of traffic and transactions on our service.
  The satisfactory performance, reliability and availability of our website,
  processing systems and network infrastructure are critical to our reputation and
  our ability to attract and retain large numbers of users. Our revenues depend on
  the number of items listed by users, the volume of user auctions that are
  successfully completed and the final prices paid for the items listed. If the
  volume of traffic on our website or the number of auctions being conducted by
  customers continues to increase, we will need to expand and upgrade our
  technology, transaction processing systems and network infrastructure. Such
  expansion will be costly and is expected to eventually require an expensive re-
  architecting of our technology. We may not be able to accurately project the
  rate or timing of increases, if any, in the use of our service or to timely
  expand and upgrade our systems and infrastructure to accommodate any increases.
  
    We use internally developed systems to operate our service and for transaction
  processing, including billing and collections processing. We must continually
  improve these systems in order to accommodate the level of use of our website.
  In addition, we may add new features and functionality to our services that
  would result in the need to develop or license additional technologies. Our
  inability to add additional software and hardware or to upgrade our technology,
  transaction processing systems or network infrastructure to accommodate
  increased traffic or transaction volume could have adverse consequences. These
  consequences include unanticipated system disruptions, slower response times,
  degradation in levels of customer support, impaired quality of the users'
  experience on our service and delays in reporting accurate financial
  information. Our failure to provide new features or functionality also could
  result in these consequences. We may be unable to effectively upgrade and expand
  our systems in a timely manner or to integrate smoothly any newly developed or
  purchased technologies with our existing systems. These difficulties could harm
  or limit our ability to expand our business.
  
   System failures could harm our business.
  
    We have experienced system failures from time to time. Our website has been
  interrupted for periods of up to 22 hours. In addition to placing increased
  burdens on our engineering staff, these outages create a flood of user questions
  and complaints that must be responded to by our customer support personnel. Any
  unscheduled interruption in our service results in an immediate loss of revenue
  that can be substantial. If we experience frequent or persistent system
  failures, our reputation and brand could be permanently harmed. We are currently
  taking steps to increase the reliability and redundancy of our system. These
  steps are expensive and may not be successful in reducing the frequency or
  duration of unscheduled downtime.
  
    Substantially all of our computer hardware for operating our service currently
  is located at the facilities of Exodus Communications, Inc. ("Exodus") in Santa
  Clara, California. These systems and operations are vulnerable to damage or
  interruption from earthquakes, floods, fires, power loss, telecommunication
  failures and similar events. They are also subject to break-ins, sabotage,
  intentional acts of vandalism and similar misconduct. We do not have fully
  redundant systems, a formal disaster recovery plan or alternative providers of
  hosting services, and we do not carry business interruption insurance to
  compensate us for losses that may occur. Despite any precautions we may take,
  the occurrence of a natural disaster or other unanticipated problems at the
  Exodus facility could result in interruptions in our services. In addition, the
  failure by Exodus to provide our required data communications capacity could
  result in interruptions in our service. Any damage to or failure of our systems
  could result in interruptions in our service. Such interruptions will reduce our
  revenues and profits, and our future revenues and profits will be harmed if our
  users believe that our system is unreliable.
  
                                         10
  We may not maintain profitability.
  
    We believe that our continued profitability and growth will depend in large
    part on our ability to do the following:
  
    . increase our brand name awareness;
  
    . provide our customers with superior community and trading experiences;
  
    . maintain sufficient transaction volume to attract buyers and sellers; and
  
    . manage the costs of our business, including the costs associated with
      maintaining and developing our site, customer support, and international
      expansion.
  
    We are investing heavily in marketing and promotion, customer support, further
  development of our website, including stability, redundancy and more advanced
  architecture and operating infrastructure development. We have significant
  ongoing commitments in some of these areas. As a result, we may be unable to
  adjust our spending rapidly enough to compensate for any unexpected revenue
  shortfall, which would harm our profitability. The emergence of competitors,
  many of whom are offering free auctions to users, may limit our ability to raise
  user fees in response to declines in profitability or require us to reduce our
  fees. In addition, we are spending in advance of anticipated growth, which may
  also harm our profitability. Our historic growth rates are not sustainable and
  in the near future we expect our costs, including those related to growing our
  infrastructure and our new initiatives internationally, regionally, and with
  respect to premium items, to increase. In view of the rapidly evolving nature of
  our business and our limited operating history, we believe that period-to-period
  comparisons of our operating results are not necessarily meaningful. You should
  not rely upon our historical results as indications of our future performance.
  
   Our business has been seasonal.
  
    Our results of operations historically have been somewhat seasonal in nature
  because many of our users reduce their activities on our website during the
  Thanksgiving and Christmas holidays and with the onset of good weather. We
  expect the growth rate of our revenue in the second and subsequent quarters will
  be significantly below our first quarter growth rate. Both B&B and Kruse have
  significant quarter to quarter variations in their results depending on the
  timing of auctions and the availability of high quality items from large
  collections and estates. B&B typically has its best operating results in the
  traditional fall and spring auction seasons and has historically incurred
  operating losses in the first and third quarters. Kruse typically sees a
  seasonal peak in operations in the third quarter. Seasonal or cyclical
  variations in our business may become more pronounced over time and may harm our
  results of operations in the future.
  
   Acquisitions could result in operating difficulties and other harmful
  consequences.
  
    If appropriate opportunities present themselves, we intend to acquire
  businesses, technologies, services or products that we believe are strategic. We
  recently completed four acquisitions. The process of integrating any acquisition
  may create unforeseen operating difficulties and expenditures and is itself
  risky. The areas where we may face difficulties include:
  
    .  diversion of management time (both ours and at the acquired companies)
       during the period of negotiation through closing and further diversion of
       such time after closing from focus on operating the businesses to issues of
       integration and future products;
  
    .  decline in employee morale and retention issues resulting from changes in
       compensation, reporting relationships, future prospects, or the direction
       of the business;
  
    .  the need to integrate each company's accounting, management information,
       human resource and other administrative systems to permit effective
       management and the lack of control if such integration is delayed or not
       implemented; and
  
                                         11
  .  the need to implement controls, procedures and policies appropriate for a
       larger public company at companies that prior to acquisition had been
       smaller, private companies.
  
    We have almost no experience in managing this integration process. Moreover,
  the anticipated benefits of any or all of these acquisitions may not be
  realized. Future acquisitions could result in potentially dilutive issuances of
  equity securities, the incurrence of debt, contingent liabilities or
  amortization expenses related to goodwill and other intangible assets, any of
  which could harm our business. Future acquisitions may require us to obtain
  additional equity or debt financing, which may not be available on favorable
  terms or at all. Even if available, this financing may be dilutive.
  
   Our business may be harmed by the listing or sale by our users of illegal
  items.
  
    The law relating to the liability of providers of online services for the
  activities of their users on their service is currently unsettled. We are aware
  that certain goods, such as firearms, other weapons, adult material, tobacco
  products, alcohol and other goods that may be subject to regulation by local,
  state or federal authorities, have been listed and traded on our service. We may
  be unable to prevent the sale of unlawful goods, or the sale of goods in an
  unlawful manner, by users of our service, and we may be subject to civil or
  criminal liability for unlawful activities carried out by users through our
  service. In order to reduce our exposure to this liability, we have prohibited
  the listing of certain items and increased the number of personnel reviewing
  questionable items. We may in the future implement other protective measures
  that could require us to spend substantial resources and/or to reduce revenues
  by prohibiting additional categories of listings. These actions could harm our
  financial results. Any costs incurred as a result of liability or asserted
  liability relating to the sale of unlawful goods or the unlawful sale of goods,
  could harm our business. In addition, we have from time to time received
  significant media attention relating to the listing or sale of unlawful goods on
  our website. A continuation of this negative publicity could damage our
  reputation and diminish the value of our brand name. It also could make users
  reluctant to continue to use our services.
  
   Our business may be harmed by the listing or sale by our users of pirated
  items.
  
    We have received in the past, and we anticipate we will receive in the future,
  communications alleging that certain items listed or sold through our service by
  our users infringe third-party copyrights, trademarks and tradenames or other
  intellectual property rights. Although we have actively sought to work with the
  content community to eliminate infringing listings on our website, some content
  owners have expressed the view that our efforts are insufficient. An allegation
  of infringement of third-party intellectual property rights may result in
  litigation against us. Any such litigation could be costly for us, could result
  in increased costs of doing business through adverse judgment or settlement,
  could require us to change our business practices in expensive ways, or could
  otherwise harm our business.
  
   Our business may be harmed by fraudulent activities on our website.
  
    Our future success will depend largely upon sellers reliably delivering and
  accurately representing their listed goods and buyers paying the agreed purchase
  price. We do not take responsibility for delivery of payment or goods to any
  user of our service. We have received in the past, and anticipate that we will
  receive in the future, communications from users who did not receive the
  purchase price or the goods that were to have been exchanged. While we can
  suspend the accounts of users who fail to fulfill their delivery obligations to
  other users, we do not have the ability to require users to make payments or
  deliver goods or otherwise make users whole, other than through our limited
  insurance program. Other than through this program, we do not compensate users
  who believe they have been defrauded by other users. We also periodically
  receive complaints from buyers as to the quality of the goods purchased. Any
  negative publicity generated as a result of fraudulent or deceptive conduct by
  users of our service could damage our reputation and diminish the value of our
  brand name. We may in the future receive additional requests from users
  requesting reimbursement or threatening legal action against us if no
  reimbursement is made. Any resulting litigation could be costly for us, divert
  management attention, result in increased costs of doing business, lead to
  adverse judgments or could otherwise harm our business.
  
   Government inquiries may lead to charges or penalties.
  
    On January 29, 1999, we received requests to produce certain records and
  information to the federal government relating to an investigation of possible
  illegal transactions in connection with our website. We have been informed that
  the inquiry includes an examination of our practices with respect to these
  transactions. We are fully cooperating with the inquiry. In
  
                                         12
  order to protect the investigation, the court has ordered that no further public
  disclosures be made with respect to the matter at this time. Should this or any
  other investigation lead to civil or criminal charges against us, we would
  likely be harmed by negative publicity, the costs of litigation, the diversion
  of management time and other negative effects, even if we ultimately prevail.
  Our business would certainly suffer if we were not to prevail in any action like
  this. Even the process of providing records and information could be expensive,
  time consuming and result in the diversion of management attention.
  
    A large number of transactions occur on our website. As a result, we believe
  that government regulators have received a substantial number of consumer
  complaints about us which, while small as a percentage of our total
  transactions, are large in aggregate numbers. We have from time to time been
  contacted by various federal, state and local regulatory agencies and been told
  that they have questions with respect to the adequacy of the steps we take to
  protect our users from fraud. For example, the City of New York--Department of
  Consumer Affairs received complaints from users about transactions on our
  website. In investigating these complaints, the Department of Consumer Affairs
  requested information about us and these transactions. We have provided the
  requested information. We are likely to receive additional inquiries from
  regulatory agencies in the future, which may lead to action against us. We have
  responded to all inquiries from regulatory agencies by describing our current
  and planned antifraud efforts. If one or more of these agencies is not satisfied
  with our response to current or future inquiries, the resultant investigations
  and potential fines, changes in business practices, or other penalties could
  harm our business.
  
   Some of our businesses are subject to regulation; others may be.
  
    Both B&B and Kruse are subject to regulation in some jurisdictions governing
  the manner in which auctions are conducted. Both are required to obtain
  licensure in certain jurisdictions with respect to their business or to permit
  the sale of certain properties (e.g. wine, automobiles, real estate). Such
  licenses must generally be regularly renewed and are subject to revocation for
  violation of law, violation of the regulations governing auctions in general or
  the sale of the particular item and other events. If either company was unable
  to renew a license or had a license revoked it would be harmed. In addition,
  changes to the regulations or the licensure requirements could increase the
  complexity and the cost of doing auctions, thereby harming us.
  
    As our activities and the types of goods listed on our site expand, state
  regulatory agencies may claim that we are subject to licensure in their
  jurisdiction. Such claims could result in costly litigation or may require us to
  change our manner of doing business in ways that increase our costs or reduce
  our revenues or force us to prohibit listings of certain items. We could also be
  subject to fines or other penalties. Any of the above outcomes could harm us.
  Furthermore, businesses that handle consumers' funds are potentially subject to
  numerous regulations, including those related to banking, credit cards, escrow,
  fair credit reporting and others. Billpoint is a new business with a relatively
  novel approach to facilitating payments. It is not yet known how regulatory
  agencies will treat Billpoint. The cost and complexity of Billpoint's business
  may increase if certain regulations are deemed to apply to its business.
  
   We are subject to risks associated with information disseminated through our
  service.
  
    The law relating to the liability of online services companies for information
  carried on or disseminated through their services is currently unsettled. Claims
  could be made against online services companies under both United States and
  foreign law for defamation, libel, invasion of privacy, negligence, copyright or
  trademark infringement, or other theories based on the nature and content of the
  materials disseminated through their services. A number of private lawsuits
  seeking to impose liability upon other online services companies currently are
  pending. In addition, federal, state and foreign legislation have been proposed
  that impose liability for or prohibit the transmission over the Internet of
  certain types of information. Our service features a Feedback Forum, which
  includes information from users regarding other users. Although all such
  feedback is generated by users and not by us, it is possible that a claim of
  defamation or other injury could be made against us for content posted in the
  Feedback Forum. Such claims are more likely and have a greater probability of
  success as we expand internationally. If we become liable for information
  provided by our users and carried on our service, we could be directly harmed
  and we may be forced to implement new measures to reduce our exposure to this
  liability. This may require us to expend substantial resources and/or to
  discontinue certain service offerings. In addition, the increased attention
  focused upon liability issues as a result of these lawsuits and legislative
  proposals could harm our reputation or otherwise impact the growth of our
  business. We carry liability insurance, but it may not be adequate to fully
  compensate us if we become liable
  
                                         13
  for information carried on or through our service. Any costs incurred as a
  result of this liability or asserted liability could harm our business.
  
   We are subject to intellectual property litigation.
  
    On March 23, 1999 we were sued by Network Engineering Software, Inc. in the
  U.S. District Court for the Northern District of California for our alleged
  willful and deliberate violation of a patent. The suit seeks unspecified
  monetary damages as well as an injunction against our operations. It also seeks
  treble damages and attorneys' fees and costs. We have answered, denying these
  allegations and alleging that the patent is invalid. Discovery has commenced and
  we have filed a summary judgement motion seeking to invalidate certain claims in
  the patent. We believe that we have meritorious defenses against this suit and
  intend to vigorously defend ourselves. We could be forced to incur material
  expenses during this defense and in the event we were to lose this suit, our
  business would be harmed.
  
    Other third parties have from time to time claimed and may claim in the future
  that we have infringed their past, current or future technologies. We expect
  that participants in our markets increasingly will be subject to infringement
  claims as the number of services and competitors in our industry segment grows.
  Any claim like this, whether meritorious or not, could be time-consuming, result
  in costly litigation, cause service upgrade delays or require us to enter into
  royalty or licensing agreements. These royalty or licensing agreements might not
  be available on acceptable terms or at all. As a result, any claim like this
  could harm our business.
  
   Unauthorized break-ins to our service could harm our business.
  
    Our servers are vulnerable to computer viruses, physical or electronic break-
  ins and similar disruptions, which could lead to interruptions, delays, loss of
  data or the inability to complete customer auctions. In addition, unauthorized
  persons may improperly access our data. We have experienced an unauthorized
  break-in by a "hacker" who stated that he can in the future damage or change our
  system or take confidential information. Any such actions by this or any other
  individual could harm us. Such actions may be very expensive to remedy and could
  damage our reputation and discourage new and existing users from using our
  service.
  
   Our stock price has been and may continue to be extremely volatile.
  
    The trading price of our common stock has been and is likely to be extremely
  volatile. Our stock price could be subject to wide fluctuations in response to a
  variety of factors, including the following:
  
    . actual or anticipated variations in our quarterly operating results;
  
    . unscheduled system downtime;
  
    . additions or departures of key personnel;
  
    . announcements of technological innovations or new services by us or our
      competitors;
  
    . changes in financial estimates by securities analysts;
  
    . conditions or trends in the Internet and online commerce industries;
  
    . the emergence of online securities trading;
  
    . changes in the market valuations of other Internet or online service
      companies;
  
    . developments in Internet regulation;
  
    . announcements by us or our competitors of significant acquisitions,
  
                                         14
  . strategic partnerships, joint ventures or capital commitments;
  
    . sales of our common stock or other securities in the open market; and
  
    . other events or factors that may be beyond our control.
  
    In addition, the trading price of Internet stocks in general, and ours in
  particular, have experienced extreme price and volume fluctuations in recent
  months. These fluctuations often have been unrelated or disproportionate to the
  operating performance of these companies. The valuations of many Internet
  stocks, including ours, are extraordinarily high based on conventional valuation
  standards such as price to earnings and price to sales ratios. The trading price
  of our common stock has increased enormously from the initial public offering
  price. These trading prices and valuations may not be sustained. Any negative
  change in the public's perception of the prospects of Internet or e-commerce
  companies could depress our stock price regardless of our results. Other broad
  market and industry factors may decrease the market price of our common stock,
  regardless of our operating performance. Market fluctuations, as well as general
  political and economic conditions such as recession or interest rate or currency
  rate fluctuations, also may decrease the market price of our common stock. In
  the past, following declines in the market price of a company's securities,
  securities class-action litigation often has been instituted against the
  company. Litigation of this type, if instituted, could result in substantial
  costs and a diversion of management's attention and resources.
  
   New and existing regulations could harm our business.
  
    We are subject to the same federal, state and local laws as other companies
  conducting business on the Internet. Today there are relatively few laws
  specifically directed towards online services. However, due to the increasing
  popularity and use of the Internet and online services, it is possible that laws
  and regulations will be adopted with respect to the Internet or online services.
  These laws and regulations could cover issues such as online contracts, user
  privacy, freedom of expression, pricing, fraud, content and quality of products
  and services, taxation, advertising, intellectual property rights and
  information security. Applicability to the Internet of existing laws governing
  issues such as property ownership, copyrights and other intellectual property
  issues, taxation, libel, obscenity and personal privacy is uncertain. The vast
  majority of these laws were adopted prior to the advent of the Internet and
  related technologies and, as a result, do not contemplate or address the unique
  issues of the Internet and related technologies. Those laws that do reference
  the Internet, such as the recently passed Digital Millennium Copyright Act, have
  not yet been interpreted by the courts and their applicability and reach are
  therefore uncertain. In addition, numerous states, including the State of
  California, where our headquarters are located, have regulations regarding how
  "auctions" may be conducted and the liability of "auctioneers" in conducting
  such auctions. No legal determination has been made with respect to the
  applicability of the California regulations to our business to date and little
  precedent exists in this area. One or more states may attempt to impose these
  regulations upon us in the future, which could harm our business. In addition,
  as the nature of the products listed by our users change, we may become subject
  to new regulatory restrictions. See "Some of our businesses are subject to
  regulation; others may be."
  
    Several states and Congress have proposed legislation that would limit the
  uses of personal user information gathered online or require online services to
  establish privacy policies. The Federal Trade Commission also has settled a
  proceeding with one online service regarding the manner in which personal
  information is collected from users and provided to third parties. Changes to
  existing laws or the passage of new laws intended to address these issues could
  directly affect the way we do business or could create uncertainty in the
  marketplace. This could reduce demand for our services, increase the cost of
  doing business as a result of litigation costs or increased service delivery
  costs, or otherwise harm our business. In addition, because our services are
  accessible worldwide, and we facilitate sales of goods to users worldwide,
  foreign jurisdictions may claim that we are required to comply with their laws.
  As we expand our international activities, we will be obligated to comply with
  such laws. Our failure to comply with foreign laws could subject us to penalties
  ranging from fines to bans on our ability to offer our services.
  
    In the United States, companies are required to qualify as foreign
  corporations in states where they are conducting business. As an Internet
  company, it is unclear in which states we are actually conducting business. Our
  failure to qualify as a foreign corporation in a jurisdiction where we are
  required to do so could subject us to taxes and penalties for the failure to
  qualify and could result in our inability to enforce contracts in those
  jurisdictions. Any new legislation or regulation, or the application of laws or
  regulations from jurisdictions whose laws do not currently apply to our
  business, could harm our business.
  
                                         15
  We are dependent on the continued growth of the online person-to-person
   commerce market.
  
    The market for the sale of goods over the Internet, particularly through
  person-to-person trading, is a new and emerging market. Our future revenues and
  profits will be substantially dependent upon the widespread acceptance of the
  Internet and online services as a medium for commerce by consumers. Rapid growth
  in the use of and interest in the Web, the Internet and online services is a
  recent phenomenon. This acceptance and use may not continue. Even if the
  Internet is accepted, concerns about fraud, privacy and other problems may mean
  that a sufficiently broad base of consumers will not adopt the Internet as a
  medium of commerce. In particular, our website requires users to make publicly
  available their e-mail addresses and other personal information that some
  potential users may be unwilling to provide. These concerns may increase as
  additional publicity over privacy issues on eBay or generally over the Internet
  increase. Market acceptance for recently introduced services and products over
  the Internet is highly uncertain, and there are few proven services and
  products. In order to expand our user base, we must appeal to and acquire
  consumers who historically have used traditional means of commerce to purchase
  goods.
  
   There are many risks associated with international operations.
  
    We are expanding internationally. We recently acquired alando, a leading
  German person-to-person trading company. Expansion into international markets
  will require management attention and resources. We have limited experience in
  localizing our service to conform to local cultures, standards and policies. We
  may have to compete with local companies who understand the local market better
  than we do. We may not be successful in expanding into international markets or
  in generating revenues from foreign operations. As we continue to expand
  internationally, we are subject to risks of doing business internationally,
  including the following:
  
    . regulatory requirements that may limit or prevent the offering of our
      services in local jurisdictions;
  
    . legal uncertainty regarding liability for the listings of our users,
      including less Internet-friendly basic law and unique local laws;
  
    . government-imposed limitations on the public's access to the Internet;
  
    . difficulties in staffing and managing foreign operations;
  
    . longer payment cycles, different accounting practices and problems in
      collecting accounts receivable;
  
    . cultural nonacceptance of online auctions;
  
    . political instability;
  
    . seasonal reductions in business activity;
  
    . potentially adverse tax consequences; and
  
    . administrative burdens in collecting local taxes, including value-added
      taxes.
  
    Some of these factors may cause our international costs to exceed our domestic
  costs of doing business. To the extent we expand our international operations
  and have additional portions of our international revenues denominated in
  foreign currencies, we also could become subject to increased difficulties in
  collecting accounts receivable and risks relating to foreign currency exchange
  rate fluctuations.
  
   Our business may be subject to sales and other taxes.
  
                                         16
  We do not collect sales or other similar taxes on goods sold by users through
  our service. One or more states may seek to impose sales tax collection
  obligations on companies such as ours that engage in or facilitate online
  commerce. Several proposals have been made at the state and local level that
  would impose additional taxes on the sale of goods and services through the
  Internet. These proposals, if adopted, could substantially impair the growth of
  electronic commerce, and could diminish our opportunity to derive financial
  benefit from our activities. The U.S. federal government recently enacted
  legislation prohibiting states or other local authorities from imposing new
  taxes on Internet commerce for a period of three years. This tax moratorium will
  last only for a limited period and does not prohibit states or the Internal
  Revenue Service from collecting taxes on our income, if any, or from collecting
  taxes that are due under existing tax rules. A successful assertion by one or
  more states or any foreign country that we should collect sales or other taxes
  on the exchange of merchandise on our system could harm our business.
  
   We are dependent on key personnel.
  
    Our future performance will be substantially dependent on the continued
  services of our senior management and other key personnel. Our future
  performance also will depend on our ability to retain and motivate our other
  officers and key employees. The loss of the services of any of our executive
  officers or other key employees could harm our business. We do not have long-
  term employment agreements with any of our key personnel and we do not maintain
  any "key person" life insurance policies. Our new businesses are all dependent
  on attracting and retaining key employees. The land-based auction businesses are
  particularly dependent on specialists and senior management because of the
  relationships these individuals have established with sellers who consign
  property for sale at auction. Dean Kruse is particularly important to Kruse. The
  loss of any of these individuals could result in the loss of significant future
  business and would harm us. Such personnel are in great demand by other auction
  companies. In addition, employee turnover frequently increases during the period
  following an acquisition as employees evaluate possible changes in compensation,
  culture, reporting relationships, and the direction of the business. Such
  increased turnover could increase our costs and reduce our future revenues. Our
  future success also will depend on our ability to attract, train, retain and
  motivate highly skilled technical, managerial, marketing and customer support
  personnel. Competition for these personnel is intense, especially for engineers
  and especially in the San Francisco Bay Area, and we may be unable to
  successfully attract, integrate or retain sufficiently qualified personnel. In
  making employment decisions, particularly in the Internet and high-technology
  industries, job candidates often consider the value of the stock options they
  are to receive in connection with their employment. The recent decrease in our
  stock price may make it more difficult to retain and motivate employees whose
  stock option strike prices are now substantially above current market prices.
  
   Our new land-based auction businesses need to continue to acquire properties.
  
    The businesses of B&B and Kruse are both dependent on the continued
  acquisition of high quality auction properties from sellers. Their future
  success will depend in part on their ability to maintain an adequate supply of
  high quality auction property, particularly fine and decorative arts and
  collectibles and collectible automobiles, respectively. There is intense
  competition for these pieces with other auction companies and dealers. In
  addition, a small number of key senior management and specialists maintain the
  relationships with the primary sources of auction property and the loss of any
  of these individuals could adversely affect the business of B&B and Kruse. See
  "We are dependent on key personnel."
  
   Our new land-based auction businesses could suffer losses from price
    guarantees, advances or rescissions of sales.
  
    In order to secure high quality auction properties from sellers, B&B and Kruse
  may give a guaranteed minimum price or a cash advance to a seller, based on the
  estimated value of the property. If the auction proceeds are less than the
  amount guaranteed, or less than the amount advanced and the seller does not
  repay the difference, the company involved will suffer a loss. In addition,
  under certain circumstances a buyer who believes that an item purchased at
  auction does not have good title, provenance or authenticity may rescind the
  purchase. Under such circumstances, the company involved will lose its
  commissions and fees on the sale even if the seller, in accordance with the
  terms and conditions of sale, in turn accepts back the item and returns the
  funds he or she received from the sale.
  
   We acquired real property with some of our new businesses.
  
                                         17
  In connection with the acquisition of Kruse and B&B we acquired real property
  including land, buildings and interests in partnerships holding land and
  buildings. We have no experience in managing real property. Ownership of this
  property subjects us to new risks, including:
  
    . the possibility of environmental contamination and the costs associated with
      fixing any environmental problems;
  
    . the possible need for structural improvements in order to comply with
      zoning, seismic, disability act or other requirements; and
  
    . possible disputes with tenants, partners or others.
  
   Our market is intensely competitive.
  
    The market for person-to-person trading over the Internet is new, rapidly
  evolving and intensely competitive, and we expect competition to intensify in
  the future. Barriers to entry are relatively low, and current and new
  competitors can launch new sites at a relatively low cost using commercially
  available software. We currently or potentially compete with a number of other
  companies. Our direct competitors include various online person-to-person
  auction services, including Yahoo! Auctions, Amazon.com, Excite, Inc., Auction
  Universe and a number of other small services, including those that serve
  specialty or regional markets such as CityAuction. We also compete indirectly
  with business-to-consumer online auction services such as Onsale, First Auction,
  Surplus Auction and uBid. Lycos, Inc. Dell Computers and Priceline, Inc. have
  all recently announced plans to enter the person-to-person trading arena.
  Traditional auction companies such as Sotheby's are offering or have announced
  plans to create Internet auction sites. We potentially face competition from a
  number of large online communities and services that have expertise in
  developing online commerce and in facilitating online person-to-person
  interaction. Some of these potential competitors, including AOL and Microsoft
  Corporation, currently offer business-to-consumer trading services and
  classified ad services. Some of these companies also may introduce person-to-
  person trading to their large user populations. Other large companies with
  strong brand recognition and experience in online commerce, such as Cendant
  Corporation, QVC, USA Network and large newspaper or media companies, also may
  seek to compete in the online auction market. Internationally, most countries
  have competitors in the person to person trading business including some
  companies that are larger and have more resources than eBay.  The principal
  competitive factors in our market include the following:
  
    . volume of transactions and selection of goods;
  
    . community cohesion and interaction;
  
    . system reliability;
  
    . customer service;
  
    . reliability of delivery and payment by users;
  
    . brand recognition;
  
    . website convenience and accessibility;
  
    . level of service fees; and
  
    . quality of search tools.
  
    Some current and many potential competitors have longer company operating
  histories, larger customer bases and greater brand recognition in other business
  and Internet markets than we do. Some of these competitors also have
  significantly greater financial, marketing, technical and other resources. Other
  online trading services may be acquired by, receive investments from or enter
  into other commercial relationships with larger, well established and well
  financed
  
                                         18
  companies. As a result, some of our competitors with other revenue sources may
  be able to devote more resources to marketing and promotional campaigns, adopt
  more aggressive pricing policies and devote substantially more resources to
  website and systems development than we are able to. Increased competition may
  result in reduced operating margins, loss of market share and diminished value
  of our brand. Some of our competitors have offered services for free and others
  may do this as well. We may be unable to compete successfully against current
  and future competitors.
  
    In order to respond to changes in the competitive environment, we may, from
  time to time, make pricing, service or marketing decisions or acquisitions that
  could harm our business. For example, we implemented an insurance program that
  generally insures items up to a value of $200, with a $25 deductible, for users
  with a non-negative feedback rating at no cost to the user. The financial impact
  of this insurance program is not yet known. New technologies may increase the
  competitive pressures by enabling our competitors to offer a lower cost service.
  Some Web-based applications that direct Internet traffic to certain websites may
  channel users to trading services that compete with us.
  
    Although we have established Internet traffic arrangements with several large
  online services and search engine companies, these arrangements may not be
  renewed on commercially reasonable terms. Even if these arrangements are
  renewed, they may not result in increased usage of our service. In addition,
  companies that control access to transactions through network access or Web
  browsers could promote our competitors or charge us substantial fees for
  inclusion.
  
    The land-based auction business is intensely competitive. B&B competes with
  two larger and better known auction companies, Sotheby's Holdings, Inc. and
  Christie's International plc, as well as numerous regional auction companies. To
  the extent that these companies increase their focus on the middle market
  properties that form the core of B&B's business, its business may suffer. Kruse
  is subject to competition from numerous regional competitors. In addition,
  competition with Internet based auctions may harm the land-based auction
  business. Although Billpoint's business is new, several companies are beginning
  to enter this market and large competitors, including banks and credit card
  companies, may become competitors.
  
   Our business is dependent on the development and maintenance of the Web
  infrastructure.
  
    The success of our service will depend largely on the development and
  maintenance of the Web infrastructure. This includes maintenance of a reliable
  network backbone with the necessary speed, data capacity and security, as well
  as timely development of complementary products such as high speed modems, for
  providing reliable Web access and services. Because global commerce and the
  online exchange of information is new and evolving, we cannot predict whether
  the Web will prove to be a viable commercial marketplace in the long term. The
  Web has experienced, and is likely to continue to experience, significant growth
  in the numbers of users and amount of traffic. If the Web continues to
  experience increased numbers of users, increased frequency of use or increased
  bandwidth requirements, the Web infrastructure may be unable to support the
  demands placed on it. In addition, the performance of the Web may be harmed by
  increased users or bandwidth requirements.
  
    The Web has experienced a variety of outages and other delays as a result of
  damage to portions of its infrastructure, and it could face outages and delays
  in the future. This might include outages and delays resulting from the "Year
  2000" problem. See "Management's Discussion and Analysis, Year 2000." These
  outages and delays could reduce the level of Web usage as well as the level of
  traffic and the processing of auctions on our service. In addition, the Web
  could lose its viability due to delays in the development or adoption of new
  standards and protocols to handle increased levels of activity or due to
  increased governmental regulation. The infrastructure and complementary products
  or services necessary to make the Web a viable commercial marketplace for the
  long term may not be developed successfully or in a timely manner. Even if these
  products or services are developed, the Web may not become a viable commercial
  marketplace for services such as those that we offer.
  
   Our business is subject to online commerce security risks.
  
    A significant barrier to online commerce and communications is the secure
  transmission of confidential information over public networks. Our security
  measures may not prevent security breaches. Our failure to prevent security
  breaches could harm our business. Currently, a significant number of our users
  authorize us to bill their credit card accounts directly for all transaction
  fees charged by us. We rely on encryption and authentication technology licensed
  from third parties to provide the security and authentication technology to
  effect secure transmission of confidential information, including
  
                                         19
  customer credit card numbers. Advances in computer capabilities, new discoveries
  in the field of cryptography, or other developments may result in a compromise
  or breach of the technology used by us to protect customer transaction data. Any
  such compromise of our security could harm our reputation and, therefore, our
  business. In addition, a party who is able to circumvent our security measures
  could misappropriate proprietary information or cause interruptions in our
  operations. An individual has claimed to have misappropriated some of our
  confidential information by breaking into our computer system. We may need to
  expend significant resources to protect against security breaches or to address
  problems caused by breaches. Security breaches like the recent one could damage
  our reputation and expose us to a risk of loss or litigation and possible
  liability. Our insurance policies carry low coverage limits, which may not be
  adequate to reimburse us for losses caused by security breaches.
  
   We must keep pace with rapid technological change to remain competitive.
  
    The market in which we compete is characterized by rapidly changing
  technology, evolving industry standards, frequent new service and product
  introductions and enhancements and changing customer demands. These market
  characteristics are worsened by the emerging nature of the Internet and the
  apparent need of companies from a multitude of industries to offer Web-based
  products and services. Our future success therefore will depend on our ability
  to adapt to rapidly changing technologies, to adapt our services to evolving
  industry standards and to continually improve the performance, features and
  reliability of our service. Our failure to adapt to such changes would harm our
  business. In addition, the widespread adoption of new Internet, networking or
  telecommunications technologies or other technological changes could require
  substantial expenditures to modify or adapt our services or infrastructure.
  
   We need to develop new services, features and functions in order to expand.
  
    We plan to expand our operations by developing new or complementary services,
  products or transaction formats or expanding the breadth and depth of services.
  We may be unable to expand our operations in a cost-effective or timely manner.
  Even if we do expand, we may not maintain or increase our overall market
  acceptance. If we launch a new business or service that is not favorably
  received by consumers, it could damage our reputation and diminish the value of
  our brand. We anticipate that future services may include pre- and post-trade
  services, including the following:
  
    . the scanning and uploading of photographs of listed items;
  
    . authentication and appraisal; and
  
    . arrangements to facilitate shipment of products.
  
    We may pursue strategic relationships with third parties to provide many of
  these services. By using third parties to deliver these services, we may be
  unable to control the quality of these services and our ability to address
  problems if any of these third parties fails to perform adequately will be
  reduced. Expanding our operations in this manner also will require significant
  additional expenses and development, operations and other resources and will
  strain our management, financial and operational resources. The lack of market
  acceptance of any new services could harm our business.
  
   Our growth will depend on our ability to develop our brand.
  
    We believe that our historical growth has been largely attributable to word of
  mouth. We have benefited from frequent and high visibility media exposure both
  nationally and locally. We do not expect the frequency or quality of this media
  exposure to continue. However, we believe that continuing to strengthen our
  brand will be critical to achieving widespread acceptance of our service.
  Promoting and positioning our brand will depend largely on the success of our
  marketing efforts and our ability to provide high quality services. In order to
  promote our brand, we will need to increase our marketing budget and otherwise
  increase our financial commitment to creating and maintaining brand loyalty
  among users. Brand promotion activities may not yield increased revenues, and
  even if they do, any increased revenues may not offset the expenses we incurred
  in building our brand. If we do attract new users to our service, they may not
  conduct transactions over our service on a regular basis. If we fail to promote
  and maintain our brand or incur substantial expenses in an unsuccessful attempt
  to promote and maintain our brand, our business would be harmed.
  
                                         20
  We may be unable to adequately protect or enforce our intellectual property
  rights.
  
    We regard the protection of our copyrights, service marks, trademarks, trade
  dress and trade secrets as critical to our success. We rely on a combination of
  patent, copyright, trademark, service mark and trade secret laws and contractual
  restrictions to protect our proprietary rights in products and services. We have
  entered into confidentiality and invention assignment agreements with our
  employees and contractors, and nondisclosure agreements with parties with which
  we conduct business in order to limit access to and disclosure of our
  proprietary information. These contractual arrangements and the other steps
  taken by us to protect our intellectual property may not prevent
  misappropriation of our technology or deter independent third-party development
  of similar technologies. We pursue the registration of our trademarks and
  service marks in the U.S. and internationally. Effective trademark, service
  mark, copyright and trade secret protection may not be available in every
  country in which our services are made available online. We have licensed in the
  past, and expect to license in the future, certain of our proprietary rights,
  such as trademarks or copyrighted material, to third parties. These licensees
  may take actions that might diminish the value of our proprietary rights or harm
  our reputation. We also rely on certain technologies that we license from third
  parties, such as Oracle Corporation, Microsoft and Sun Microsystems Inc., the
  suppliers of key database technology, the operating system and specific hardware
  components for our service. These third-party technology licenses may not
  continue to be available to us on commercially reasonable terms. The loss of
  this technology could require us to obtain substitute technology of lower
  quality or performance standards or at greater cost.
  
   Our business is subject to consumer trends and discretionary consumer spending.
  
    We derive most of our revenues from fees received from sellers for listing
  products for sale on our service and fees received from successfully completed
  auctions. Our future revenues will depend upon continued demand for the types of
  goods that are listed by users of our service. The popularity of certain
  categories of items, such as toys, dolls and memorabilia, among consumers may
  vary over time due to perceived scarcity, subjective value, and societal and
  consumer trends in general. A decline in the popularity of, or demand for,
  certain collectibles or other items sold through our service could reduce the
  overall volume of transactions on our service, resulting in reduced revenues. In
  addition, consumer "fads" may temporarily inflate the volume of certain types of
  items listed on our service, placing a significant strain upon our
  infrastructure and transaction capacity. These trends also may cause significant
  fluctuations in our operating results from one quarter to the next. Any decline
  in demand for the goods offered through our service as a result of changes in
  consumer trends could harm our business. A decline in consumer spending would
  harm our new land-based auction businesses. Sales of fine and decorative art,
  collectable cars and other collectibles would be adversely affected by a decline
  in discretionary consumer spending, especially for luxury items. Changes in
  buyer's tastes, economic conditions or consumer trends could cause declines in
  the number or dollar volume of items auctioned and thereby harm the business of
  these companies.
  
                                         21
  REPORT OF INDEPENDENT ACCOUNTANTS
  
  To the Board of Directors and Stockholders of
  eBay Inc.
  
    In our opinion, the accompanying consolidated balance sheet and the related
  consolidated statements of income, of stockholders' equity and of cash flows
  present fairly, in all material respects, the financial position of eBay Inc.
  and its subsidiary at December 31, 1997 and 1998, and the results of their
  operations and their cash flows for each of the three years in the period ended
  December 31, 1998, in conformity with generally accepted accounting principles.
  These financial statements are the responsibility of the Company's management;
  our responsibility is to express an opinion on these financial statements based
  on our audits. We conducted our audits of these statements in accordance with
  generally accepted auditing standards which require that we plan and perform the
  audit to obtain reasonable assurance about whether the financial statements are
  free of material misstatement. An audit includes examining, on a test basis,
  evidence supporting the amounts and disclosures in the financial statements,
  assessing the accounting principles used and significant estimates made by
  management, and evaluating the overall financial statement presentation. We
  believe that our audits provide a reasonable basis for the opinion expressed
  above.
  
  PRICEWATERHOUSECOOPERS LLP
  
  San Jose, California
  January 22, 1999,
  except as to the pooling of
  interests transactions described
  in Note 2, and as to Note 14,
  which are as of September 9, 1999.
  
                                         22
  eBAY INC.
  
                             CONSOLIDATED BALANCE SHEET
                      (in thousands, except per share amounts)
  December 31,
                                                                                                  ----------------------------
                                                                                                      1997            1998
                                                                                                  -------------   ------------
  ASSETS
  Current assets:
    Cash and cash equivalents................................................................        $12,109       $ 37,285
    Short-term investments...................................................................             --         40,401
    Accounts receivable, net.................................................................          7,433         12,425
    Other current assets.....................................................................          3,563          7,479
                                                                                                     -------       --------
       Total current assets..................................................................         23,105         97,590
  Property and equipment, net................................................................         34,063         44,062
  Intangible assets, net.....................................................................            878          3,728
  Note receivable............................................................................          2,806          1,946
  Other assets...............................................................................          1,498          2,210
                                                                                                     -------       --------
                                                                                                     $62,350       $149,536
                                                                                                     =======       ========
                               LIABILITIES, MANDATORILY REDEEMABLE
                                 CONVERTIBLE PREFERRED STOCK AND
                                      STOCKHOLDERS' EQUITY
  
  Current liabilities:
    Notes payable, current...................................................................        $ 6,680       $  4,047
    Accounts payable.........................................................................         13,109          9,997
    Accrued expenses.........................................................................          3,421          6,577
    Customer advances and deferred revenue...................................................            361            973
    Income taxes payable.....................................................................          1,415          1,380
    Deferred tax liabilities, current........................................................             --          1,682
                                                                                                     -------       --------
       Total current liabilities.............................................................         24,986         24,656
  Notes payable, long term...................................................................         16,307         18,361
  Environmental accruals.....................................................................          5,700          5,900
  Minority interest and other liabilities....................................................          2,617             81
                                                                                                     -------       --------
                                                                                                      49,610         48,998
                                                                                                     -------       --------
  
  Series B Mandatorily Redeemable Convertible Preferred Stock and Series B warrants..........          3,018             --
                                                                                                     -------       --------
  
  Commitments and Contingencies (Notes 5, 6 and 8)
  
  Stockholders' equity:
    Series A Convertible Preferred Stock, $0.001 par value; 1,676 and no shares
       authorized, 1,676 and no shares issued and outstanding................................              4             --
    Common Stock, $0.001 par value; 180,000 and 195,000 shares authorized, 63,315
       and 123,225 shares issued and outstanding.............................................             63            123
    Additional paid-in capital...............................................................          2,539         87,779
    Notes receivable from stockholders.......................................................            (68)        (1,130)
    Unearned compensation....................................................................         (1,399)        (4,139)
    Partnership equity.......................................................................         10,297         15,620
    Retained earnings........................................................................         (1,714)         2,285
                                                                                                     -------       --------
       Total stockholders' equity............................................................          9,722        100,538
                                                                                                     -------       --------
                                                                                                     $62,350       $149,536
                                                                                                     =======       ========
  The accompanying notes are an integral part of these consolidated financial
                                    statements.
  
                                         23
  eBAY INC.
  
                          CONSOLIDATED STATEMENT OF INCOME
                      (in thousands, except per share amounts)
  Year Ended December 31,
                                                                                         1996           1997          1998
                                                                                     -------------   -----------   -----------
  Net revenues:
   Fees and services............................................................        $28,159       $37,070      $ 81,643
   Real estate rentals..........................................................          3,892         4,300         4,486
                                                                                        -------       -------      --------
    Total net revenues..........................................................         32,051        41,370        86,129
                                                                                        -------       -------      --------
  Cost of net revenues:
   Fees and services............................................................          5,181         6,631        13,948
   Real estate rentals..........................................................          1,622         1,773         2,146
                                                                                        -------       -------      --------
    Total cost of net revenues..................................................          6,803         8,404        16,094
                                                                                        -------       -------      --------
      Gross profit..............................................................         25,248        32,966        70,035
                                                                                        -------       -------      --------
  Operating expenses:
   Sales and marketing..........................................................         13,139        15,618        35,976
   Product development..........................................................             28           831         4,640
   General and administrative...................................................          5,661         6,534        15,849
   Amortization of acquired intangibles.........................................             --            --           805
                                                                                        -------       -------      --------
      Total operating expenses..................................................         18,828        22,983        57,270
                                                                                        -------       -------      --------
  Income from operations........................................................          6,420         9,983        12,765
  Interest and other income, net................................................            377         1,054         1,799
  Interest expense..............................................................         (2,322)       (2,371)       (2,191)
                                                                                        -------       -------      --------
  Income before income taxes, minority interest
     and equity interest in partnership income (loss)...........................          4,475         8,666        12,373
  Provision for income taxes....................................................           (475)         (971)       (4,789)
  Equity interest in partnership income (loss)..................................           (576)         (314)           70
  Minority interest in consolidated company.....................................            (86)         (320)         (381)
                                                                                        -------       -------      --------
  Net income....................................................................        $ 3,338       $ 7,061      $  7,273
                                                                                        =======       =======      ========
  Net income per share:
     Basic......................................................................          $0.39         $0.29         $0.14
                                                                                        =======       =======      ========
     Diluted....................................................................          $0.07         $0.08         $0.06
                                                                                        =======       =======      ========
  Weighted average shares:
     Basic......................................................................          8,490        24,428        52,064
                                                                                        =======       =======      ========
     Diluted....................................................................         45,060        84,775       116,759
                                                                                        =======       =======      ========
  
  Supplemental pro forma information:
   Income before income taxes, minority interest and equity interest                    $ 4,475       $ 8,666      $ 12,373
    in partnership income (loss)................................................
   Provision for income taxes as reported.......................................           (475)         (971)       (4,789)
   Pro forma adjustment to provision for income taxes (Note 9)..................         (1,362)       (2,576)       (2,071)
   Minority interest in combined company as reported............................            (86)         (320)         (381)
   Equity interest in partnership income (loss) as reported.....................           (576)         (314)           70
                                                                                        -------       -------      --------
  Pro forma net income..........................................................        $ 1,976       $ 4,485      $  5,202
                                                                                        =======       =======      ========
  Pro forma net income per share:
     Basic......................................................................          $0.23         $0.18         $0.10
                                                                                        =======       =======      ========
     Diluted....................................................................          $0.04         $0.05         $0.04
                                                                                        =======       =======      ========
  The accompanying notes are an integral part of these consolidated financial
                                    statements.
  
                                         24
  eBAY INC.
  
                  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                  (in thousands)
  Notes
                                                           Convertible                              Additional    Receivable
                                                         Preferred Stock         Common Stock        Paid-in         from
                                                       Shares    Par Value    Shares    Par Value    Capital     Shareholders
                                                       -------   ----------   -------   ---------   ----------   -------------
  Balance at December 31, 1995....................         --       $   --      2,115      $    2      $   948        $    --
  Issuance of Common Stock for
      cash and notes..............................         --           --     61,200          61           17            (68)
  Issuance of Preferred Stock.....................      1,676            4         --          --           --             --
  Contributions from partners.....................         --           --         --          --           --             --
  Distributions to partners.......................         --           --         --          --           --             --
  Net income......................................         --           --         --          --           --             --
                                                       ------       ------    -------      ------      -------        -------
  Balance at December 31, 1996....................      1,676            4     63,315          63          965            (68)
  Accretion of Mandatorily
   Redeemable Convertible Preferred
   Stock to redemption value......................         --           --         --          --           --             --
  Unearned compensation...........................         --           --         --          --        1,424             --
  Amortization of unearned
   compensation...................................         --           --         --          --           --             --
  Contributions from partners.....................         --           --         --          --          150             --
  Distributions to partners.......................         --           --         --          --           --             --
  Net income......................................         --           --         --          --           --             --
                                                       ------       ------    -------      ------      -------        -------
  Balance at December 31, 1997....................      1,676            4     63,315          63        2,539            (68)
  Accretion of Mandatorily
   Redeemable Convertible Preferred
   Stock to redemption value......................         --           --         --          --           --             --
  Unearned compensation...........................         --           --         --          --        5,831             --
  Amortization of unearned
   compensation...................................         --           --         --          --           --             --
  Issuance of Common Stock for
   cash and notes.................................         --           --     19,290          20        4,685         (1,378)
  Issuance of Common Stock for
   acquisition of Jump Incorporated...............         --           --        428          --        2,000             --
  Contribution of Common Stock to
   charitable foundation..........................         --           --        322          --        1,215             --
  Issuance of Common Stock for cash in
   initial public offering, net of offering
   expenses of $6,168.............................         --           --     12,043          12       66,076             --
  Conversion of Preferred Stock to
   Common Stock in conjunction
   with initial public offering...................     (1,676)          (4)    27,827          28        5,133             --
  Note repayments.................................         --           --         --          --           --            316
  Contributions from partners.....................         --           --         --          --          300             --
  Distributions to partners.......................         --           --         --          --           --             --
  Net income......................................         --           --         --          --           --             --
                                                       ------       ------    -------      ------      -------        -------
  Balance at December 31, 1998....................         --       $   --    123,225      $  123      $87,779        $(1,130)
                                                       ======       ======    =======      ======      =======        =======
  Total
                                                                       Unearned      Partnership   Retained    Stockholders'
                                                                     Compensation      Equity      Earnings        Equity
                                                                     ------------    -----------   --------    ------------
  Balance at December 31, 1995...................................       $    --        $ 9,342    $(5,404)        $  4,888
  Issuance of Common Stock for
      cash and notes.............................................            --             --         --               10
  Issuance of Preferred Stock....................................            --             --         --                4
  Contributions from partners....................................            --            467         --              467
  Distributions to partners......................................            --             --     (2,107)          (2,107)
  Net income.....................................................            --             --      3,338            3,338
                                                                        -------        -------    -------         --------
  Balance at December 31, 1996...................................            --          9,809     (4,173)           6,600
  Accretion of Mandatorily
   Redeemable Convertible Preferred
   Stock to redemption value.....................................            --             --        (46)             (46)
  Unearned compensation..........................................        (1,424)            --         --               --
  Amortization of unearned
   compensation..................................................            25             --         --               25
  Contributions from partners....................................            --            488         --              638
  Distributions to partners......................................            --             --     (4,556)          (4,556)
  Net income.....................................................            --             --      7,061            7,061
                                                                        -------        -------    -------         --------
  Balance at December 31, 1997...................................        (1,399)        10,297     (1,714)           9,722
  Accretion of Mandatorily
   Redeemable Convertible Preferred
   Stock to redemption value.....................................            --             --        (46)             (46)
  Unearned compensation..........................................        (5,831)            --         --               --
  Amortization of unearned
   compensation..................................................         3,091             --         --            3,091
  Issuance of Common Stock for
   cash and notes................................................            --             --         --            3,327
  Issuance of Common Stock for
   acquisition of Jump Incorporated..............................            --             --         --            2,000
  Contribution of Common Stock to
   charitable foundation.........................................            --             --         --            1,215
  Issuance of Common Stock for cash in
   initial public offering, net of offering
   expenses of $6,168............................................            --             --         --           66,088
  Conversion of Preferred Stock to
   Common Stock in conjunction
   with initial public offering..................................            --             --         --            5,157
  Note repayments................................................            --             --         --              316
  Contributions from partners....................................            --          5,323         --            5,623
  Distributions to partners......................................            --             --     (3,228)          (3,228)
  Net income.....................................................            --             --      7,273            7,273
                                                                        -------        -------    -------         --------
  Balance at December 31, 1998...................................       $(4,139)       $15,620    $ 2,285         $100,538
                                                                        =======        =======    =======         ========
  
                   The accompanying notes are an integral part of these consolidated financial statements.
  25
  eBAY INC.
  
                       CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (in thousands)
  Year Ended December 31,
                                                                                    1996       1997        1998
                                                                                  --------   ---------   ---------
  Cash flows from operating activities:
      Net income...............................................................   $ 3,338     $ 7,061    $  7,273
    Adjustments to reconcile net income to net cash provided
      by operating activities:
       Provision for doubtful accounts and authorized credits..................        18         373       3,377
       Depreciation and amortization...........................................     1,357       1,519       4,526
       Amortization of unearned compensation...................................        --          25       2,661
       Compensation expense associated with purchases of
        Common Stock by outside directors......................................        --          --         429
       Charitable contribution of Common Stock.................................        --          --       1,215
       Series B Preferred stock issued for services............................        --          --          93
       Minority interest in deficit of consolidated companies..................        86          24         764
       Loss on impairment of asset held for sale...............................        --          --         200
       Acquired research and development.......................................        --          --         150
       Equity in partnership net (income) loss.................................       576        (146)     (4,025)
       (Gain) loss on sale of property.........................................       190          --        (333)
       Changes in assets and liabilities:
          Accounts receivable..................................................     3,801      (1,302)     (8,369)
          Other assets.........................................................       163        (742)     (3,702)
          Accounts payable.....................................................       451       3,104      (3,112)
          Accrued expenses.....................................................       (18)        769       3,164
          Customer advances and deferred revenue...............................        38         184         612
          Income taxes payable.................................................       354         363         (35)
          Deferred tax liabilities, current....................................        55         102       1,682
          Environmental accruals...............................................       750          --         200
          Other liabilities....................................................        17         293        (729)
                                                                                  -------     -------    --------
  Net cash provided by operating activities....................................    11,176      11,627       6,041
                                                                                  -------     -------    --------
  Cash flows from investing activities:
    Purchases of property and equipment........................................    (1,598)     (2,990)    (12,758)
    Purchases of short-term investments........................................        --          --     (40,401)
    Proceeds from sale of property and equipment...............................     1,051          --       1,274
    Purchases of intangible assets.............................................       (36)       (141)     (1,248)
    Payments (advances) on notes receivable....................................    (1,337)        145         109
                                                                                  -------     -------    --------
  Net cash used in investing activities........................................    (1,920)     (2,986)    (53,024)
                                                                                  -------     -------    --------
  Cash flows from financing activities:
    Proceeds from issuance of Preferred Stock, net.............................         4       2,972       2,110
    Proceeds from issuance of Common Stock, net................................        10          --      69,305
    Repayments of Stockholder loans............................................        --          --         316
    Proceeds (principal payments) on long-term debt and leases.................    (6,452)      1,506      (1,967)
    Contributions from Stockholders............................................       467         638       5,623
    Distributions to Stockholders..............................................    (2,107)     (4,556)     (3,228)
                                                                                  -------     -------    --------
  Net cash provided by (used in) financing activities..........................    (8,078)        560      72,159
                                                                                  -------     -------    --------
  Net increase in cash and cash equivalents....................................     1,178       9,201      25,176
  Cash and cash equivalents at beginning of year...............................     1,730       2,908      12,109
                                                                                  -------     -------    --------
  Cash and cash equivalents at end of year.....................................   $ 2,908     $12,109    $ 37,285
                                                                                  =======     =======    ========
  Supplemental cash flow disclosures:
    Cash paid for interest.....................................................   $ 2,238     $ 1,893    $  1,710
    Cash paid for income taxes.................................................   $    26     $   540    $  4,932
  Non-cash investing and financing activities:
    Property and equipment leases..............................................   $    --     $    23    $     --
    Common stock issued for note receivable....................................   $    68     $    --    $  1,378
    Common stock issued for acquisition........................................   $    --     $    --    $  2,000
    Issuance of note payable for non-compete agreement.........................   $    --     $   240    $     --
    Building and inventory obtained in connection with foreclosure.............   $    --     $ 1,510    $    751
    Notes and accounts payable assumed in connection with foreclosure..........   $    --     $   695    $     --
    Receivables canceled in connection with foreclosure........................   $    --     $   815    $    500
    Land and building transferred in exchange for assumption of debt...........   $    --     $    --    $    835
  
               The accompanying notes are an integral part of these consolidated financial statements.
  26
  eBAY INC.
  
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
  Note 1--The Company and Summary of Significant Accounting Policies:
  
  The Company
  
    eBay Inc. ("eBay" or the "Company") was incorporated in California in May
  1996, and reincorporated in Delaware in April 1998. eBay pioneered online
  person-to-person trading by developing a Web-based community in which buyers and
  sellers are brought together in an auction format to trade personal items such
  as antiques, coins, collectibles, computers, memorabilia, stamps and toys. The
  eBay online service permits sellers to list items for sale, buyers to bid on
  items of interest and all eBay users to browse through listed items in a fully-
  automated, topically-arranged service that is available online 24-hours-a-day,
  seven-days-a-week. eBay also engages in the traditional auction business through
  its subsidiaries, Butterfield & Butterfield ("B&B") and Kruse International
  ("Kruse") and in online payment processing through its Billpoint, Inc.
  ("Billpoint") subsidiary.
  
  Initial public offering
  
    On September 24, 1998, the Company completed its initial public offering of
  4,025,000 shares of its Common Stock, the net proceeds of which aggregated
  approximately $66.1 million. At the closing of the offering, all issued and
  outstanding shares of the Company's Convertible Preferred Stock and Mandatorily
  Redeemable Convertible Preferred Stock were converted into an aggregate of
  27,827,019 shares of Common Stock.
  
  Use of estimates
  
    The preparation of consolidated financial statements in conformity with
  generally accepted accounting principles requires management to make estimates
  and assumptions that affect the reported amounts of assets and liabilities and
  disclosure of contingent assets and liabilities at the date of the consolidated
  financial statements and the reported amounts of revenues and expenses during
  the reporting period. Actual results could differ from those estimates.
  
  Principles of consolidation and basis of presentation
  
    The financial statements as of December 31, 1996, 1997, and 1998, and for the
  years then ended are consolidated and include the Company and its subsidiaries.
  All significant intercompany balances and transactions have been eliminated in
  consolidation.
  
    In May and June of 1999, the Company acquired four businesses, each of which
  were accounted for as pooling of interests (see Note 2--"Acquisitions").
  Accordingly, all financial information included herein has been restated to
  reflect the combined operations of eBay and the acquired companies. Certain
  prior period balances have been reclassified to conform to the current period
  presentation.
  
                                         27
  eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  
  Fair value of financial instruments
  
    The Company's financial instruments, including cash, cash equivalents,
  accounts receivable, and accounts payable are carried at cost, which
  approximates their fair value because of the short-term maturity of these
  instruments. Capital lease obligations are carried at cost, which approximates
  fair value due to the proximity of the implicit rates of these financial
  instruments and the prevailing market rates for similar instruments.
  
    Short and long-term investments, which include marketable equity securities,
  municipal, government and corporate bonds are classified as available-for-sale
  and reported at fair value. Unrealized gains and losses are excluded from
  earnings and reported as a component of Stockholders' equity.  The following
  schedule summarizes the estimated fair value of the Company's cash, cash
  equivalents and short-term investments, (in thousands):
  December 31,
                                                                         1997         1998
                                                                      -----------  -----------
  Cash and cash equivalents:
        Cash.....................................................     $     2,611  $     7,828
        Money market funds.......................................           9,498        6,892
        Municipal bonds and notes................................              --       19,555
        Corporate securities.....................................              --        3,010
                                                                      -----------  -----------
                                                                      $    12,109  $    37,285
                                                                      ===========  ===========
     Short-term investments:
        Municipal bonds and notes................................     $        --  $    40,401
                                                                      ===========  ===========
  The estimated fair value of short-term investments classified by date of
  contractual maturity is as follows, (in thousands):
  December 31,
                                                                         1997         1998
                                                                      -----------  -----------
  Due within one year or less.................................     $        --  $    12,287
     Due after one year through two years........................              --       28,114
                                                                      -----------  -----------
                                                                      $        --  $    40,401
                                                                      ===========  ===========
  Concentration of credit risk
  
    Financial instruments that potentially subject the Company to a concentration
  of credit risk consist of cash, cash equivalents, short-term investments and
  accounts receivable. Cash, cash equivalents and short-term investments are
  deposited with high credit, quality financial institutions. The Company's
  accounts receivable are derived from revenue earned from customers located in
  the U.S. and throughout the world and are denominated in U.S. dollars. Accounts
  receivable balances are typically settled through customer credit cards and, as
  a result, the majority of accounts receivable are collected upon processing of
  credit card transactions. The Company maintains an allowance for doubtful
  accounts receivable based upon the expected collectibility of accounts
  receivable. During the years ended December 31, 1996, 1997 and 1998, no
  customers accounted for more than 10% of net revenues or net accounts
  receivable.
  
  Property and equipment
  
    Property and equipment are stated at historical cost. Depreciation and
  amortization are computed using the straight-line method over the estimated
  useful lives of the assets, generally five years or less for equipment and
  furniture, and up to 31.5 years for buildings and building improvements. Leased
  capital assets are depreciated using the straight-line method over the shorter
  of the lease term or the estimated useful lives of the assets.
  
                                         28
  eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  
  Intangible assets
  
    Goodwill and other intangible assets resulting from the acquisition of Jump
  Incorporated ("Jump") were estimated by management to be primarily associated
  with the acquired customer list, workforce and technological know how. As a
  result of the rapid technological changes occurring in the Internet industry and
  the intense competition for qualified Internet professionals, goodwill and other
  intangible assets are amortized on a straight-line basis over the estimated
  periods of benefit, which range from eight to 24 months.  See Note 2--
  Acquisitions.
  
    Goodwill and other intangible assets resulting from the acquisition of
  Dunnings Auctions Services, Inc. ("Dunnings") by B&B were estimated by
  management to be primarily associated with a covenant not to compete and
  goodwill and are being amortized over their estimated useful lives of five and
  fifteen years, respectively.
  
  Environmental expenditures
  
    The Company owns or controls real estate properties that are either used in
  the auction business or leased to unrelated parties for various commercial
  applications. Certain environmental and structural deficiencies have been
  identified in the past for which the Company has remediation responsibility. The
  amounts accrued to correct these matters are based upon estimates developed in
  preliminary studies by external consultants. Due to uncertainties inherent in
  the estimation process, the amounts accrued for these matters may be revised in
  future periods as additional information is obtained.
  
    Environmental expenditures that relate to current operations are charged to
  expense or capitalized as appropriate. Expenditures that relate to an existing
  condition caused by past operations, and that do not contribute to current or
  future revenue generation, are charged to expense. Liabilities are recorded when
  environmental assessments are made, remediation obligations are probable and the
  costs can be reasonably estimated. The timing of these accruals is generally
  upon the completion of feasibility studies.
  
   Investment in general partnerships
  
    Interests in general partnerships in which the Company holds more than 50
  percent ownership and exerts control are consolidated. The consolidated accounts
  include 100 percent of the assets and liabilities of these general partnerships
  and the ownership interests of minority investors are recorded as minority
  interests and are included within other liabilities. Investments in general
  partnerships in which the Company holds more than 20 percent ownership and does
  not exert control are accounted for using the equity method of accounting and
  are recorded as investment in partnerships. The recognized losses in excess of
  the Company's investments are included within other liabilities.
  
  Impairment of long-lived assets
  
    The Company evaluates the recoverability of long-lived assets in accordance
  with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
  for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
  of". SFAS No. 121 requires recognition of impairment of long-lived assets in the
  event the net book value of such assets exceeds the future undiscounted cash
  flows attributable to such assets.
  
  Revenue recognition
  
    Online auction revenues are derived primarily from placement fees charged for
  the listing of items for auction and success fees calculated as a percentage of
  the final sales transaction value. Revenues related to
  
                                         29
  eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  
  placement fees are recognized at the time the item is listed, while those
  related to success fees are recognized at the time that the auction is
  successfully concluded. An auction is considered successfully concluded when
  there is at least one bid above the seller's specified minimum price or reserve
  price, whichever is higher, at the end of the auction term. Provisions for
  doubtful accounts and authorized credits to sellers are provided at the time of
  revenue recognition based upon the Company's historical experience.
  
    Kruse auction revenues are derived primarily from entry fees on auction items,
  bidder registration fees and commission fees calculated as a percentage of the
  final auction sales transaction value. Revenues related to these fees are
  recognized upon the completion of an auction. Revenues are also derived from
  sponsorship fees paid by various corporations. Sponsorship fee revenues are
  recognized over the term of the sponsorship agreement. Advertising revenues and
  auctioneer tuition fees do not represent a significant source of revenues and
  are recognized as advertising and auctioneer training services are provided.
  
    B&B auction revenues are derived primarily from auction commissions and fees
  from the sale of property through the traditional auction process. Revenues from
  these sources are recognized at the date the related auction is concluded.
  Service revenues are derived from financial, appraisal and other related
  services and are recognized as such services are rendered. Rental revenues are
  derived from property rentals to third parties.
  
  Product development costs
  
    Product development costs include expenses incurred by the Company to develop,
  enhance, manage, monitor and operate the Company's website. Product development
  costs are expensed as incurred.
  
  Advertising expense
  
    The Company recognizes advertising expenses in accordance with Statement of
  Position ("SOP") 93-7 "Reporting on Advertising Costs." As such, the Company
  expenses the costs of producing advertisements at the time production occurs,
  and expenses the cost of communicating advertising in the period in which the
  advertising space or airtime is used. Internet advertising expenses are
  recognized based on the terms of the individual agreements, but generally over
  the greater of the ratio of the number of impressions delivered over the total
  number of contracted impressions, or a straight-line basis over the term of the
  contract. Advertising expenses totaled $2.6 million, $2.8 million, and $15.4
  million during the years ended December 31, 1996, 1997 and 1998, respectively.
  
  Stock-based compensation
  
    The Company accounts for stock-based employee compensation arrangements in
  accordance with provisions of Accounting Principles Board ("APB") Opinion No.
  25, "Accounting for Stock Issued to Employees," and complies with the disclosure
  provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB
  No. 25, compensation expense is based on the difference, if any, on the date of
  the grant, between the fair value of the Company's stock and the exercise price.
  The Company accounts for stock issued to non-employees in accordance with the
  provisions of SFAS No. 123 and the Emerging Issues Task Force Consensus on Issue
  No. 96-18.
  
  Income taxes
  
    Income taxes are accounted for using an asset and liability approach which
  requires the recognition of taxes payable or refundable for the current year and
  deferred tax liabilities and assets for the future tax consequences of events
  that have been recognized in the Company's financial statements or tax returns.
  The measurement of current and deferred tax liabilities and assets are based on
  provisions of the enacted tax
  
                                         30
  eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  
  law; the effects of future changes in tax laws or rates are not anticipated. The
  measurement of deferred tax assets is reduced, if necessary, by the amount of
  any tax benefits that, based on available evidence, are not expected to be
  realized.
  
  Net income per share
  
    The Company computes net income per share in accordance with SFAS No. 128,
  "Earnings per Share."  Under the provisions of SFAS No. 128, basic net income
  per share is computed by dividing the net income available to common
  stockholders for the period by the weighted average number of common shares
  outstanding during the period. Diluted net income per share is computed by
  dividing the net income for the period by the weighted average number of common
  and common equivalent shares outstanding during the period. Common equivalent
  shares, composed of unvested, restricted Common Stock and incremental common
  shares issuable upon the exercise of stock options and warrants and upon
  conversion of Series A and Series B Convertible Preferred Stock, are included in
  diluted net income per share to the extent such shares are dilutive.
  
    The following table sets forth the computation of basic and diluted net income
  per share for the periods indicated, (in thousands, except per share amounts):
  Year Ended December 31,
                                                                                    ------------------------------------------
                                                                                        1996           1997           1998
                                                                                    ------------   ------------   ------------
  Numerator:
    Net income...................................................................      $  3,338       $  7,061       $  7,273
    Accretion of Series B Mandatorily Redeemable Convertible Preferred
      Stock to redemption value..................................................            --            (46)           (46)
                                                                                       --------       --------       --------
    Net income available to common stockholders..................................      $  3,338       $  7,015       $  7,227
                                                                                       ========       ========       ========
  Denominator:
    Weighted average shares......................................................        32,715         63,315         91,642
    Weighted average unvested common shares subject to repurchase
      agreements.................................................................       (24,225)       (38,887)       (39,578)
                                                                                       --------       --------       --------
    Denominator for basic calculation............................................         8,490         24,428         52,064
    Weighted average effect of dilutive securities:
       Series A Preferred Stock..................................................        12,345         15,088         11,037
       Series B Preferred Stock..................................................            --          6,372          8,054
       Series B Preferred Stock warrants.........................................            --             --          1,098
       Unvested common shares subject to
          repurchase agreements..................................................        24,225         38,887         39,578
       Employee stock options....................................................            --             --          4,928
                                                                                       --------       --------       --------
    Denominator for diluted calculation..........................................        45,060         84,775        116,759
                                                                                       ========       ========       ========
  Net income per share:
    Basic........................................................................      $   0.39       $   0.29          $0.14
                                                                                       ========       ========       ========
    Diluted......................................................................      $   0.07       $   0.08          $0.06
                                                                                       ========       ========       ========
  Comprehensive income
  
    Effective January 1, 1998 the Company adopted the provisions of SFAS No. 130,
  "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
  reporting comprehensive income and its components in financial statements.
  Comprehensive income, as defined, includes all changes in equity (net assets)
  during a period from non-owner sources. During the years ended December 31,
  1996, 1997 and 1998, the Company has not had any material transactions that are
  required to be reported in comprehensive income.
  
  Recent accounting pronouncements
  
                                         31
  eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  
    In March 1998, the American Institute of Certified Public Accountants issued
  SOP No. 98-1, "Software for Internal Use," which provides guidance on accounting
  for the cost of computer software developed or obtained for internal use. SOP
  No. 98-1 is effective for financial statements for fiscal years beginning after
  December 15, 1998. The Company does not expect that the adoption of SOP No. 98-1
  will have a material impact on its consolidated financial statements.
  
    In June 1998, the Financial Accounting Standards Board issued SFAS
  No. 133, "Accounting for Derivatives and Hedging Activities."  SFAS 133 is
  effective for all fiscal quarters beginning with the quarter ending June 30,
  1999.  SFAS 133 establishes accounting and reporting standards of derivative
  instruments, including certain derivative instruments imbedded in other
  contracts, and for hedging activities.  In July 1999, the FASB issued SFAS No.
  137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
  the Effective Date of FASB Statement No. 133," "(SFAS 137").  SFAS 137 deferred
  the effective date until the first fiscal quarter ended on or following June 30,
  2000.  The Company will adopt SFAS 133 in its quarter ending June 30, 2000 and
  does not expect such adoption to have a material impact on the Company's results
  of operations, financial position or cash flows.
  
  Note 2--Acquisitions:
  
  Jump Incorporated
  
    Effective June 30, 1998, the Company acquired all the outstanding shares of
  Jump, which provides a forum where Internet users can buy and sell items in an
  online auction format. The acquisition has been accounted for using the purchase
  method of accounting and accordingly, the purchase price has been allocated to
  the tangible and intangible assets acquired and liabilities assumed on the basis
  of their respective fair values on the acquisition date. The fair value of
  intangible assets was determined using a combination of methods, including
  replacement cost estimates for acquired research and development and completed
  technology, a risk-adjusted income approach for the acquired customer list and
  the amounts paid for covenants not to compete.
  
    The total purchase price of approximately $2.3 million consisted of 428,544
  shares of the Company's Common Stock with an estimated fair value of
  approximately $2.0 million and other acquisition related expenses of
  approximately $335,000, consisting primarily of payments for non-compete
  agreements totaling approximately $208,000 and legal and other professional
  fees. Of the total purchase price, approximately $150,000 was allocated to in-
  process technology and was immediately charged to operations because such in-
  process technology had not reached the stage of technological feasibility at the
  acquisition date and had no alternative future use. The remainder of the
  purchase price was allocated to net tangible liabilities assumed ($31,000) and
  intangible assets, including completed technology ($500,000), customer list
  ($1.5 million), covenants not to compete ($208,000) and goodwill ($24,000). The
  intangible assets are being amortized over their estimated useful lives of eight
  to 24 months.
  
    The acquisition has been structured as a tax free exchange of stock,
  therefore, the differences between the recognized fair values of the acquired
  assets, including tangible assets, and their historical tax bases are not
  deductible for tax purposes.
  
    The following unaudited pro forma consolidated financial information reflects
  the results of operations for the years ended December 31, 1997 and 1998, as if
  the acquisition had occurred on January 1, 1997 and 1998, respectively, and
  after giving effect to purchase accounting adjustments. These pro forma results
  have been prepared for comparative purposes only and do not purport to be
  indicative of what operating results would have been had the acquisitions
  actually taken place on January 1, 1997 or 1998, and may not be indicative of
  future operating results, (in thousands, except per share amounts).
  
                                         32
  eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  Year Ended
                                                                                             December 31,
                                                                                      ---------------------------
                                                                                          1997           1998
                                                                                      ------------   ------------
  Net revenues  ..........................................................              $41,381       $ 86,141
     Income from operations  ................................................                7,841         11,965
     Net income  ............................................................                4,988          6,472
     Net income per share:
        Basic  ..............................................................              $  0.20       $   0.12
        Diluted  ............................................................              $  0.06       $   0.06
     Weighted average shares:
        Basic  ..............................................................               24,428         52,064
        Diluted  ............................................................               84,775        116,759
  Butterfield & Butterfield
  
    On May 28, 1999, eBay acquired Butterfield & Butterfield Auctioneers
  Corporation ("Butterfield & Butterfield"), a Delaware corporation and all
  affiliated entities under common control including; Butterfield Credit
  Corporation Inc., 111 Potrero Partners, LLC and HBJ Partners, LLC. (collectively
  "B&B" or the "B&B Companies").
  
  Butterfield & Butterfield was established in 1865, incorporated in California in
  July 1970 and reincorporated in the state of Delaware in March 1999. Butterfield
  & Butterfield conduct auctions and perform appraisal services of fine art,
  jewelry, antiques and other collectibles primarily in San Francisco, Los Angeles
  and Chicago.
  
    Butterfield Credit Corporation Inc. ("BCCI") is a wholly-owned subsidiary of
  Butterfield & Butterfield and is incorporated in California. BCCI operates as a
  financing corporation whose sole purpose is serving Butterfield & Butterfield's
  clients.
  
    111 Potrero Partners, LLC ("111 Potrero") is a limited liability corporation
  organized in May 1996. 111 Potrero owns several commercial properties located in
  San Francisco and Los Angeles, which are currently occupied by B&B and third
  parties.
  
    HBJ Partners, LLC ("HBJ") is a limited liability corporation organized in
  California in September 1996. HBJ owns several commercial properties located in
  San Francisco, which are currently occupied by B&B and third parties. HBJ also
  has general partnership interests in 17600 Santa Fe Avenue Partners, 2959
  Victoria Street Partners and 6700 Cherry Avenue Partners. Ownership interests in
  the above partnerships at the date of acquisition were 58%, 60% and 38%,
  respectively.
  
    The aggregate consideration exchanged for the merger was 1,327,370 shares of
  eBay common stock. The merger has been accounted for as a pooling of interests.
  In April 1999, B&B withdrew its registration statement for its initial public
  offering. Accordingly, in the second quarter of 1999, the Company recorded a
  charge of approximately $2.6 million related to the costs of the withdrawn
  offering.
  
  Kruse International
  
    On May 18, 1999, eBay acquired Kruse, Inc. (d/b/a Kruse International) and all
  affiliated entities under common control including; Auburn Cordage, Inc., ACD
  Auto Sales, Inc., Reppert School of Auctioneering, Inc. and Classic Advertising
  & Promotions, Inc., each an Indiana corporation (collectively, "Kruse" or the
  "Kruse Companies").
  
    Kruse International was founded in 1971 and operated as a sole proprietorship
  until it was incorporated in the state of Indiana in August 1986. The Kruse
  Companies conduct auctions, perform appraisal services and auctioneer training
  for classic car auctions in various locations in the United States, England,
  Germany and the Netherlands.
  
    The aggregate consideration exchanged for the merger was 787,312 shares of
  eBay common stock for all shares of capital stock of the Kruse Companies. The
  merger has been accounted for as a pooling of interests.
  
                                         33
  eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  
  Billpoint
  
    On May 25, 1999, eBay acquired Billpoint, Inc. ("Billpoint"). Billpoint began
  operations on September 1, 1998, and was incorporated in California on September
  24, 1998. Billpoint has developed a centralized, turnkey authorization, billing
  and payment fulfillment solution that permits individuals and small merchants to
  accept credit cards as payment for Internet-based sales transactions.
  Billpoint's service is expected to derive revenues based upon a variety of fee
  arrangements, including percentage-of-transaction, fixed-fee per transaction and
  flat monthly rates.
  
    In connection with the merger, eBay issued a total of approximately 525,000
  shares of eBay common stock to the existing Billpoint shareholders as
  consideration for all shares of capital stock, and all options and warrants to
  purchase shares of common stock of Billpoint outstanding immediately prior to
  the consummation of the merger were converted into options and warrants to
  purchase shares of eBay common stock. The merger has been accounted for as a
  pooling of interests.
  
  alando.de.AG
  
    On June 15, 1999, eBay acquired all of the outstanding stock of alando.de.AG
  ("alando"). alando began operations on February 19, 1999 and is Germany's
  leading online person-to-person trading community. The aggregate consideration
  exchanged for the merger was 316,000 shares of eBay common stock. The merger has
  been accounted for as a pooling of interests.
  
  The components of net revenues, operating expenses and net income (loss) during
  the years ended December 31, 1996, 1997, and 1998 are as follows (in thousands):
  Net            Operating         Net Income
                                                                     Revenues          Expenses           (Loss)
                                                                 ----------------  ----------------  -----------------
  Year Ended December 31, 1996
  Kruse......................................................        $ 7,760           $ 6,024            $  (69)
       B&B........................................................         23,919            12,699             3,259
                                                                          -------           -------            ------
                                                                          $31,679           $18,723            $3,190
                                                                          =======           =======            ======
    Year Ended December 31, 1997
       Kruse......................................................        $ 7,520           $ 5,895            $ (237)
       B&B........................................................         28,106            13,577             6,424
                                                                          -------           -------            ------
                                                                          $35,626           $19,472            $6,187
                                                                          =======           =======            ======
    Year Ended December 31, 1998
       Kruse......................................................        $10,265           $ 8,119            $  (58)
       Billpoint..................................................             --                74               (74)
       B&B........................................................         28,512            14,745             5,007
                                                                          -------           -------            ------
                                                                          $38,777           $22,938            $4,875
                                                                          =======           =======            ======
  Note 3--Balance Sheet Components:
  December 31,
                                                                                                -----------------------
                                                                                                   1997         1998
                                                                                                ----------   ----------
                                                                                                    (in thousands)
  Accounts receivable, net:
        Accounts receivable..................................................................      $8,249      $16,056
        Less:   Allowance for doubtful accounts..............................................        (763)      (2,614)
                Allowance for authorized credits.............................................         (53)      (1,017)
                                                                                                   ------      -------
                                                                                                   $7,433      $12,425
                                                                                                   ======      =======
  Write-offs against the allowance for doubtful accounts were $0 and $562,000 in
  the years ended December 31, 1997 and 1998, respectively.
  December 31,
                                                                                                -----------------------
                                                                                                   1997         1998
                                                                                                ----------   ----------
                                                                                                    (in thousands)
  Property and equipment, net:
        Land and buildings...................................................................    $ 38,445     $ 42,150
        Computer equipment...................................................................       2,266       10,730
        Leasehold improvements...............................................................       2,159        2,312
        Furniture and fixtures...............................................................       1,009        1,697
        Vehicles and other...................................................................         599          881
                                                                                                 --------     --------
                                                                                                   44,478       57,770
     Less: Accumulated depreciation and amortization.........................................     (10,415)     (13,708)
                                                                                                 --------     --------
                                                                                                 $ 34,063     $ 44,062
                                                                                                 ========     ========
  Property and equipment includes $23,000 and $0 of equipment under capital
  leases at December 31, 1997 and 1998, respectively. Accumulated depreciation of
  assets under capital leases totaled $7,000 and $0 at December 31, 1997 and 1998,
  respectively.
  
                                         34
  eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  December 31,
                                                                                                ------------------------
                                                                                                   1997          1998
                                                                                                -----------   ----------
  (in thousands)
     Intangible assets, net:
        Purchased technology.................................................................   $        --   $      500
        Covenants not to compete.............................................................           248          455
        Customer list........................................................................            --        1,484
        Goodwill.............................................................................         1,199        3,003
                                                                                                -----------   ----------
                                                                                                      1,447        5,442
        Less: Accumulated amortization.......................................................          (569)      (1,714)
                                                                                                -----------   ----------
                                                                                                $       878   $    3,728
                                                                                                ===========   ==========
     Accrued expenses:
        Accrued compensation and related benefits............................................   $     1,603   $    2,241
        Advertising accruals.................................................................            --        1,274
        Professional fees....................................................................            --          451
        Other accruals.......................................................................         1,818        2,611
                                                                                                -----------   ----------
                                                                                                $     3,421   $    6,577
                                                                                                ===========   ==========
  Note 4--Related Party Transactions:
  
  Notes receivable from stockholders
  
    At December 31, 1998, the Company held notes receivable from employees,
  officers and a director totaling $1.1 million, representing amounts owed to the
  Company from the exercise of stock options. These full recourse notes are
  secured by common stock and bear interest at a rate of 8% per annum. Interest is
  due and payable on December 1st of each year, and the principal is due on or
  before December 1, 2002.
  
  Professional services
  
    In connection with the recruitment of its Chief Executive Officer, the Company
  engaged the services of an executive search firm affiliated with a holder of the
  Company's Series B Mandatorily Redeemable Convertible Preferred Stock. During
  1998, the Company paid fees for services performed of $93,000 and issued 46,248
  shares of Series B Mandatorily Redeemable Convertible Preferred Stock with a
  fair value on the date earned of $93,000. The amount paid for the services and
  the fair value of the shares are included in general and administrative expenses
  in the consolidated statement of income for the year ended December 31, 1998.
  
  Note 5--Debt:
  
  Credit facility
  
    At December 31, 1998, the Company maintained a revolving line of credit with a
  bank that provided for borrowings of up to $4.5 million. The line of credit
  accrues interest on outstanding borrowings at a rate equal to the bank's prime
  rate.
  
                                         35
  eBAY INC.
  
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  
  Notes Payable
  
    Notes payable consists of amounts payable to various financial institutions
  and a former shareholder, which are secured by specific properties and are
  detailed as follows (in thousands):
  December 31,
                                                                                                1997           1998
                                                                                                ----           ----
  Revolving line of credit, prime rate  ...............................................    $ 2,535        $ 2,991
    Mortgage notes, prime plus 1%, due September 31, 2002  ..............................      2,013          1,905
    Mortgage notes, LIBOR plus 1.75%, due July 15, 2001  ................................      3,067          3,638
    Mortgage notes, 8.255%, due May 15, 2000  ...........................................     12,407         12,249
    10.5% loan on foreclosed property due October 2010  .................................        663            618
    8.5% loan in connection with Dunnings acquisition due June 30, 2000  ................         --            500
    Related party 10% demand note  ......................................................      1,710             --
    Demand note payable, prime rate  ....................................................        100             --
    6% note, due May 1999  ..............................................................        240            140
    10% note; due April 2004  ...........................................................         77             70
    8% note, due September 2003  ........................................................         64             43
    10.5% note, due December 2002  ......................................................        111             92
    7.5% note, due October 2000  ........................................................         --             97
    7.75%-8.5% automobile notes, due December 1999 through January 2003  ................         --             65
                                                                                             -------        -------
       Subtotal  ........................................................................     22,987         22,408
    Less: Current portion  ..............................................................     (6,680)        (4,047)
                                                                                             -------        -------
                                                                                             $16,307        $18,361
                                                                                             =======        =======
  Mortgage notes outstanding are on property owned by the B&B Companies. The
  notes have variable interest rates ranging from 7.34% to 8.75% at December 31,
  1998, and are secured by certain land, buildings and improvements. The notes are
  repayable in equal monthly installments over six to ten year terms, with final
  installments consisting of all remaining unpaid principal and accrued interest
  at the end of the term.
  
    In connection with the purchase of Dunnings Auction Services, Inc., by B&B,
  the Company assumed a note payable to the prior owners in the original amount of
  $500,000. The note carries interest at 8.5%, and is due in two approximately
  equal installments on June 30, 1999 and 2000.
  
    Minimum annual repayments on these notes at December 31, 1998, are as follows
  (in thousands):
  Year  ending
  December 31,                                                                                    Total
  -------------                                                                                   -----
  1999....................................................................................      $ 4,047
     2000....................................................................................       12,851
     2001....................................................................................        3,524
     2002....................................................................................        1,664
     2003....................................................................................           61
  36
  eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  Thereafter........................................................       261
                                                                       -------
                                                                       $22,408
                                                                       =======
  
  Note 6--Leasing Arrangements:
  
    The Company, through its B&B subsidiary, leases certain land and buildings.
  These leases are classified as operating leases that expire at various intervals
  between 1999 and 2010. Certain of these leases contain renewal options and have
  escalation clauses tied to changes in the Consumer Price Index. Under the terms
  of the leases, the tenants are generally responsible for the payment of property
  taxes, insurance and maintenance costs related to the leased property.
  
  Property on operating leases and property held for lease
  
    The following schedule provides a summary of the Company's investment in
  property under operating leases and property held for lease by major classes at
  December 31, 1997 and 1998 (in thousands):
  December 31,
                                                                                             1997             1998
                                                                                        --------------   --------------
  Land.........................................................................         $ 6,956          $ 7,265
     Building.....................................................................           7,133            8,581
     Building improvements........................................................           8,535            9,672
     Other........................................................................              37               37
                                                                                           -------          -------
                                                                                            22,661           25,555
     Less: Accumulated depreciation...............................................          (3,751)          (4,249)
                                                                                           -------          -------
                                                                                           $18,910          $21,306
                                                                                           =======          =======
  The following is a schedule by year of minimum future rental income on
  noncancellable operating leases as of December 31, 1998, (in thousands):
  Year  ending
  December 31,
  -----------
  1999.......................................................................................          $ 3,960
     2000.......................................................................................            3,964
     2001.......................................................................................            3,967
     2002.......................................................................................            3,837
     2003.......................................................................................            3,841
     Thereafter.................................................................................           21,110
                                                                                                          -------
     Total minimum future rentals...............................................................          $40,679
                                                                                                          =======
  Note 7--Sale of Properties:
  
    During 1998, the partners of 131 North Gilbert Avenue Partners, including HBJ,
  a 63.3% holder, sold the property to an unrelated party for $2.5 million in cash
  and recognized a gain on the transaction of $200,000. In August 1998, HBJ also
  sold the Parthenia property for $865,000 in cash and recognized a gain of
  $133,000.
  
                                         37
  eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  Note 8--Commitments and Contingencies:
  
  Operating Leases
  
    The Company leases office space and equipment under noncancelable operating
  leases with various expiration dates through the year 2004. Rent expense for the
  years ended December 31, 1996, 1997, and 1998 totaled $9,000, $223,000 and
  $672,000, respectively.
  
    Future minimum lease payments under non-cancelable operating leases, including
  lease commitments entered into subsequent to December 31, 1998, are as follows,
  (in thousands):
  Year ending                                                                                    Operating
  December 31,                                                                                    Leases
  -----------                                                                                     ------
  1999  .......................................................................................   $ 2,978
   2000  .......................................................................................     4,605
   2001  .......................................................................................     4,675
   2002  .......................................................................................     4,782
   2003  .......................................................................................     4,681
   Thereafter  .................................................................................     3,330
                                                                                                   -------
   Total minimum lease payments.  ..............................................................   $25,051
                                                                                                   =======
  Advertising
  
    During 1998, the Company entered into a three-year marketing agreement with
  America Online Inc. ("AOL"). Under the terms of the agreement, the Company will
  be provided with a specific number of advertising impressions featuring it as
  the preferred provider of person-to-person auction services on AOL's service. In
  consideration, the Company has committed to pay $12.0 million over the three-
  year term of the agreement. The Company is recognizing these fees as sales and
  marketing expenses over the greater of the ratio of the number of impressions
  delivered over the total number of contracted impressions, or a straight-line
  basis over the term of the contract. At December 31, 1998, the Company had paid
  $4.0 million to AOL, of which $1.7 million was recognized as sales and marketing
  expense. In March 1999, the Company expanded the scope of its strategic
  relationship with AOL. Under the amended agreement, eBay will be given a
  prominent presence featuring it as the preferred provider of person-to-person
  trading services on AOL's proprietary services (both domestic and
  international), AOL.com, Digital Cities, ICQ, CompuServe (both domestic and
  international) and Netscape.  In consideration for this agreement, eBay will pay
  $75 million over the four-year term of the contract and the remaining
  obligations under the previous contract were cancelled. eBay will develop a co-
  branded version of its service for each AOL property which will prominently
  feature each party's brand. AOL will be entitled to all advertising revenue from
  the co-branded site.
  
  Other contingencies
  
       From time to time, the Company is involved in disputes which have arisen in
  the ordinary course of business. Management believes that the ultimate
  resolution of these disputes will not have a material adverse impact on the
  Company's financial position or results of operations.
  
                                         38
  eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  Note 9--Income Taxes:
  
    Income before income taxes was generated entirely by domestic operations
  during 1996, 1997 and 1998. The provision for income taxes consists of the
  following, (in thousands):
  Year Ended December 31,
                                                                 ---------------------------------
                                                                   1996        1997         1998
                                                                 --------    --------      -------
  Current:
        Federal  .............................................   $    286    $    667      $ 2,419
        State and local  .....................................        121         207          963
                                                                 --------    --------      -------
                                                                      407         874        3,382
                                                                 --------    --------      -------
     Deferred:
        Federal  .............................................         59          81        1,211
        State and local  .....................................          9          16          196
                                                                 --------    --------      -------
                                                                       68          97        1,407
                                                                 --------    --------      -------
                                                                 $    475    $    971      $ 4,789
                                                                 ========    ========      =======
  The following is a reconciliation of the difference between the reported
  provision for income taxes and the provision computed by applying the federal
  statutory rate of 34% to income before income taxes, (in thousands):
  Year Ended  December 31,
                                                                 ---------------------------------
                                                                    1996        1997         1998
                                                                 --------     -------      --------
  Provision at statutory rate  ............................   $  1,327    $  2,840      $ 4,255
     Permanent differences:
        S Corporation income not subject to tax...............     (1,152)     (2,307)      (1,848)
        Meals and entertainment  .............................         10          16           15
        Life insurance  ......................................         22          30           42
        Acquisition related expenses  ........................         --          --          384
        Stock based compensation  ............................         --          --        1,051
        Tax exempt interest income  ..........................         --          --         (175)
        Other non-deductible expenses  .......................        144         169          (12)
        Other  ...............................................         62         (49)         283
     Statutory taxes, net of federal benefit  ................         62         272          794
                                                                 --------    --------      -------
                                                                 $   475     $    971      $ 4,789
                                                                 =======     ========      =======
  Under SFAS No. 109, deferred tax assets and liabilities are recognized for the
  future tax consequences of differences between the carrying amounts of assets
  and liabilities and their respective tax bases using enacted tax rates in effect
  for the year in which the differences are expected to reverse. Significant
  deferred tax assets and liabilities consist of the following, (in thousands):
  December 31,
                                                                                         -----------------------
                                                                                            1997         1998
                                                                                         ----------   ----------
  Deferred tax assets:
     Accruals and reserves.............................................................     $ 175       $   171
     Depreciation......................................................................        --            61
     State income taxes................................................................        --            43
     Amortization......................................................................        --            17
                                                                                            -----       -------
                                                                                              175           292
                                                                                            -----       -------
     Deferred tax liabilities:
     Accruals and reserves not currently deductible....................................      (154)       (1,724)
     Depreciation......................................................................      (298)         (261)
                                                                                            -----       -------
                                                                                             (452)       (1,985)
                                                                                            -----       -------
     Valuation allowance...............................................................        --            --
                                                                                            -----       -------
     Net deferred tax liabilities......................................................     $(277)      $(1,693)
                                                                                            =====       =======
  39
  eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
    In connection with the acquisition of Butterfield &Butterfield by eBay,
  Butterfield &Butterfield's status as an S Corporation was terminated and
  Butterfield &Butterfield became subject to federal and state income taxes.  The
  supplemental pro forma information below includes an increase to the provisions
  for income taxes based upon a combined federal and state tax rate of 42%.  This
  amount approximates the statutory tax rates that would have been applied if
  Butterfield &Butterfield had been taxed as a C corporation during the periods
  prior to its acquisition.  Because the acquisition of the B&B companies has
  been accounted for as a pooling of interests, there has been no adjustment to
  the historical carrying values of real estate holdings. However, these
  properties are subject to increases in tax basis which will result in a higher
  depreciable basis for income and property tax purposes. As a result, a
  deferred tax asset and a corresponding increase to stockholders' equity of
  approximately $8.8 million was recorded in the second quarter of 1999 for the
  difference between the financial statement carrying amounts and tax basis of the
  related net assets upon the closing of the transaction. The components of pro
  forma income taxes are as follows:
  
    Income before income taxes was generated entirely by domestic operations
  during 1996, 1997 and 1998.  The pro forma provision for income taxes consists
  of the following, (in thousands):
  Year Ended December 31,
                                                                                        --------------------------------
                                                                                          1996        1997       1998
                                                                                        ---------   --------   ---------
  Current:
        Federal......................................................................     $1,788      $2,942      $4,303
        State and local..............................................................        342         578       1,243
                                                                                          ------      ------      ------
                                                                                           2,130       3,520       5,546
                                                                                          ------      ------      ------
     Deferred:
        Federal......................................................................       (250)         24       1,138
        State and local..............................................................        (43)          3         176
                                                                                          ------      ------      ------
                                                                                            (293)         27       1,314
                                                                                          ------      ------      ------
                                                                                          $1,837      $3,547      $6,860
                                                                                          ======      ======      ======
  The following is a reconciliation of the difference between the pro forma
  provision for income taxes and the pro forma provision computed by applying the
  federal statutory rate of 34% to income before income taxes, (in thousands):
  Year Ended  December 31,
                                                                                         --------------------------------
                                                                                           1996       1997        1998
                                                                                         --------   --------   ----------
  Provision at statutory rate  ...................................................      $1,327     $2,840      $4,255
     Permanent differences:
        Meals and entertainment  ....................................................          10         11          15
        Life insurance  .............................................................          22         30          42
        Acquisition related expenses  ...............................................          --         --         384
        Stock compensation  .........................................................          --         --       1,051
        Tax exempt interest income  .................................................          --         --        (175)
        Other non-deductible expenses  ..............................................         197         82         (32)
        Other  ......................................................................          11         18         291
     Statutory taxes, net of federal benefit  .......................................         270        566       1,029
                                                                                           ------     ------      ------
                                                                                           $1,837     $3,547      $6,860
                                                                                           ======     ======      ======
  40
  eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  Note 10--Preferred Stock and Convertible Preferred Stock:
  
  Preferred Stock
  
    The Company is authorized, subject to limitations prescribed by Delaware law,
  to provide for the issuance of Preferred Stock in one or more series, to
  establish from time to time the number of shares included within each series, to
  fix the rights, preferences and privileges of the shares of each wholly unissued
  series and any qualifications, limitations or restrictions thereon, and to
  increase or decrease the number of shares of any such series (but not below the
  number of shares of such series then outstanding) without any further vote or
  action by the stockholders. At December 31, 1998, there were 5,000,000 shares of
  Preferred Stock authorized for issuance, and no shares issued or outstanding.
  
  Convertible Preferred Stock
  
    Convertible Preferred Stock prior to the initial public offering at September
  24, 1998 was composed of the following, (in thousands):
  Shares
                                                                        -------------------------   Liquidation   Redemption
                                                                         Authorized   Outstanding     Amount        Amount
                                                                        -------------------------   -----------   ----------
  Series A  .........................................................     1,676         1,676        $1,000       $   --
     Series B  .........................................................     1,415         1,415         6,300        5,093
     Undesignated  .....................................................     2,909            --            --           --
                                                                             -----         -----        ------       ------
                                                                             6,000         3,091        $7,300       $5,093
                                                                             =====         =====        ======       ======
  On September 24, 1998, the Company completed its initial public offering of
  Common Stock. At that time, all issued and outstanding shares of the Company's
  Series A and Series B Convertible Preferred Stock were converted into an
  aggregate of 27,827,019 shares of Common Stock.
  
  Warrants for Series B Mandatorily Redeemable Convertible Preferred Stock
  
    In connection with the issuance of Series B, the Company issued warrants to
  purchase 400,000 additional shares of Series B with an exercise price of $5.00
  per share. In May 1998, these warrants were exercised, resulting in the issuance
  of 400,000 shares of Series B in exchange for cash proceeds totaling $2.0
  million.
  
  Note 11--Common Stock:
  
    The Company's Certificate of Incorporation, as amended, authorizes the Company
  to issue 195,000,000 shares of Common Stock. A portion of the shares outstanding
  are subject to repurchase by the Company over a four-year period from the
  earlier of the issuance date or employee hire date, as applicable. At December
  31, 1997 and 1998, there were 33,150,000 and 32,212,617 shares, respectively,
  subject to repurchase rights at an average price of $0.01 and $0.04,
  respectively, per share.
  
                                         41
  eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
    In June 1998, in connection with the appointment of two outside directors, the
  Company sold an aggregate of 643,500 shares of common stock to two directors and
  realized net proceeds of $2.0 million. The Company recognized the $429,000
  excess of the estimated fair value of the stock over the price paid by the two
  directors as general and administrative expense in 1998.
  
    At December 31, 1998, the Company had reserved 23,497,986 and 900,000 shares
  of common stock for future issuance for the exercise of options under the stock
  option plans and issuance of shares under the employee stock purchase plan,
  respectively.
  
  Note 12--Employee Benefit Plans:
  
  401(k) Savings Plan
  
    The Company has a savings plan that qualifies as a deferred salary arrangement
  under Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). Under the
  savings plan, participating employees may defer a percentage (not to exceed 25%)
  of their eligible pretax earnings up to the Internal Revenue Service's annual
  contribution limit. All employees on the United States payroll of the Company
  age 21 years or older are eligible to participate in the 401(k) Plan. The
  Company is not required to contribute to the 401(k) Plan but in 1998 elected to
  match contributions up to a maximum of $1,500 per employee. As a result, the
  Company contributed $97,479, which was expensed in 1998. In 1998, the Company
  also committed to matching future employee contributions to a maximum of $1,500
  per employee per year.
  
    B&B has a defined savings contribution plan that covers employees after one
  year of service. Under the Plan, participants may elect to contribute up to 15%
  of their compensation, up to a maximum amount allowable under IRS regulations on
  a pre-tax basis. In addition, the Company may contribute to the plan up to 25%
  of the first 2% of each participant's compensation in an amount determined
  annually by the Board of Directors. The Company's contributions amounted to
  $14,000, $11,000 and $20,000 for the years ended December 31, 1996, 1997, and
  1998, respectively.
  
  Stock option plans
  
    In December 1996, the Company's Board of Directors adopted the 1996 Stock
  Option Plan (the "1996 Plan"), and in June 1997, adopted the 1997 Stock Option
  Plan (the "1997 Plan") (collectively, the "Plans"). The Plans provide for the
  granting of stock options to employees and consultants of the Company. Options
  granted under the Plans may be either incentive stock options ("ISO") or
  nonqualified stock options ("NSO"). ISOs may be granted only to Company
  employees (including officers and directors who are also employees). NSOs may be
  granted to Company employees and consultants.
  
    In July 1998, the Board adopted, and in August 1998 the Company's stockholders
  approved, the 1998 Equity Incentive Plan (the "1998 Plan") and reserved
  13,500,000 shares of Common Stock for issuance thereunder. The 1998 Plan
  authorized the award of options, restricted stock awards and stock bonuses (each
  an "Award"). No person will be eligible to receive more than 3,000,000 shares in
  any calendar year pursuant to Awards under the 1998 Plan other than a new
  employee of the Company who will be eligible to receive no more than 6,000,000
  shares in the calendar year in which such employee commences employment. Options
  granted under the 1998 Plan may be either ISOs or NSOs. ISOs may be granted only
  to Company employees (including officers and directors who are also employees).
  NSOs may be granted to Company employees, officers, directors, consultants,
  independent contractors and advisors of the Company.
  
    Options under the Plans may be granted for periods of up to ten years and at
  prices no less than 85% of the estimated fair value of the shares on the date of
  grant as determined by the Board of Directors, provided, however, that (i) the
  exercise price of an ISO may not be less than 100% of the estimated fair value
  of the shares on the date of grant, and (ii) the exercise price of an ISO
  granted to a 10% shareholder may not be less than 110% of the estimated fair
  value of the shares on the date of grant. Options under the 1996 and 1997 Plans
  were exercisable immediately through June 30, 1998, subject to repurchase rights
  held
  
                                         42
  eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  by the Company, which lapse over the vesting period, which is generally four
  years. Options under the 1998 Plan are not immediately exercisable and generally
  vest over a period of four years.
  
    The following table summarizes activity under the Company's stock option plans
  for the years ended December 31, 1996, 1997 and 1998, (shares in thousands):
  Year Ended December 31,
                                                             ------------------------------------------------------------
                                                                   1996                      1997                  1998
                                                             -----------------   -----------------------------   --------
                                                                      Weighted             Weighted              Weighted
                                                                      Average              Average               Average
                                                                      Exercise             Exercise              Exercise
                                                             Shares    Price     Shares     Price      Shares     Price
                                                             ------   --------   -------   --------   --------   --------
  Outstanding at beginning of period.  ..................        --      $  --      675       $0.01    11,790       $0.02
    Granted  ............................................       675       0.01   11,592        0.02    17,287        2.15
    Exercised  ..........................................        --         --       --          --   (19,477)       0.14
    Cancelled  ..........................................        --         --     (477)       0.01      (354)       1.67
                                                                ---              ------               -------
  Outstanding at end of period  .........................       675       0.01   11,790        0.02     9,246        3.68
                                                                ===              ======               =======
  Options exercisable at end of period  .................       675              11,790        0.02       370        0.03
                                                                ===              ======               =======
  Weighted average fair value of
    options granted during period.  .....................                 0.01                 0.10                  2.80
  The following table summarizes information about fixed stock options
  outstanding at December 31, 1998, (shares in thousands):
  Options Outstanding at                Options Exercisable at
                                                               December 31, 1998                     December 31, 1998
                                                              -------------------                    -----------------
                                                            Weighted           Weighted
                                       Number of            Average            Average        Number of         Weighted
             Range of                   Shares             Remaining           Exercise         Shares           Average
          Exercise Prices             Outstanding       Contractual Life        Price        Exercisable     Exercise Price
  -------------------------------   ---------------   --------------------   ------------   --------------   ---------------
  $ 0.01 - $ 0.22                           1,302              8.8 years         $ 0.04              370             $0.03
      0.67 -   1.00                             943                    9.3           0.75               --                --
      3.11 -   3.11                             821                    9.4           3.11               --                --
      4.67 -   5.00                           6,165                    9.6           4.91               --                --
      16.85                                      15                    9.8          32.52               --                --
                                              -----                                                    ---              ----
                                              9,246                    9.5           3.68              370              0.03
                                              =====                                                    ===
  Fair value disclosures
  
    The Company calculated the minimum fair value of each option grant on the date
  of grant using the Black-Scholes option pricing model as prescribed by SFAS No.
  123 using the following assumptions:
  Year Ended December 31,
                                                                                         ---------------------------------
                                                                                            1996         1997       1998
                                                                                         -----------   --------   --------
  Risk-free interest rates  ......................................................        6.0%       5.9%        4.9%
     Expected lives (in years)  .....................................................        5.0        5.0         3.0
     Dividend yield  ................................................................          0%         0%          0%
     Expected volatility  ...........................................................          0%         0%         80%
  Prior to the Company's initial public offering, the fair value of each option
  grant was determined using the minimum value method. Subsequent to the offering,
  the fair value was determined using the Black-Scholes model. The compensation
  cost associated with the Company's stock-based compensation plans, determined
  using the minimum value method prescribed by SFAS No. 123, did not result in a
  material difference from the reported net income for the years ended December
  31, 1996 and 1997. The effect of compensation cost on net income and earnings
  per share for the year ended December 31, 1998 is as follows, (in thousands,
  except per share amounts):
  
                                         43
  eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  1998
                                                                                                             ------
  Net income:
        As reported  ................................................................................        $7,273
        Pro forma  ..................................................................................        $6,497
     Net income per share--basic:
        As reported  ................................................................................        $ 0.14
        Pro forma  ..................................................................................        $ 0.12
     Net income per share--diluted:
        As reported  ................................................................................        $ 0.06
        Pro forma  ..................................................................................        $ 0.06
  1998 Employee Stock Purchase Plan
  
  In July 1998, the Board adopted, and in August 1998 the Company's stockholders
  approved, the 1998 Employee Stock Purchase Plan (the "Purchase Plan") and
  reserved 900,000 shares of Common Stock for issuance thereunder. On each January
  1, the aggregate number of shares reserved for issuance under the Purchase Plan
  will be increased automatically by the number of shares purchased under the
  Purchase Plan in the preceding calendar year. The aggregate number of shares
  reserved for issuance under the Purchase Plan shall not exceed 4,500,000 shares.
  The Purchase Plan became effective on September 24, 1998, the first business day
  on which price quotations for the Company's Common Stock were available on the
  Nasdaq National Market. Employees are generally eligible to participate in the
  Purchase Plan if they are customarily employed by the Company for more than 20
  hours per week and more than five months in a calendar year and are not (and
  would not become as a result of being granted an option under the Purchase Plan)
  5% stockholders of the Company. Under the Purchase Plan, eligible employees may
  select a rate of payroll deduction between 2% and 10% of their W-2 cash
  compensation subject to certain maximum purchase limitations. Each Offering
  Period has a maximum duration of two years (the "Offering Period") and consists
  of four six-month Purchase Periods (each, a "Purchase Period"), with the
  exception of the first Offering Period, which began on September 24, 1998 and
  will end on April 30, 1999. Offering Periods and Purchase Periods thereafter
  will begin on May 1 and November 1. The price at which the Common Stock is
  purchased under the Purchase Plan is 85% of the lesser of the fair market value
  of the Company's Common Stock on the first day of the applicable offering period
  or on the last day of that purchase period. The Purchase Plan will terminate
  after a period of ten years unless terminated earlier as permitted by the
  Purchase Plan.
  
  1998 Directors Stock Option Plan
  
    In July 1998, the Board adopted, and in August 1998 the Company's stockholders
  approved, the Directors Plan and reserved a total of 600,000 shares of the
  Company's Common Stock for issuance thereunder. Members of the Board who are not
  employees of the Company, or any parent, subsidiary or affiliate of the Company,
  are eligible to participate in the Directors Plan. The option grants under the
  Directors Plan are automatic and nondiscretionary, and the exercise price of the
  options must be 100% of the fair market value of the Common Stock on the date of
  grant. Each eligible director who first becomes a member of the Board on or
  after the effective date of the Registration Statement of which this Prospectus
  forms a part (the "Effective Date") will initially be granted an option to
  purchase 90,000 shares (an "Initial Grant") on the date such director first
  becomes a director. Immediately following each Annual Meeting of the Company,
  each eligible director will automatically be granted an additional option to
  purchase 15,000 shares if such director has served continuously as a member of
  the Board since the date of such director's Initial Grant or, if such director
  was ineligible to receive an Initial Grant, since the Effective Date. In March
  1999, the Board amended the Directors Plan to provide that no such grants would
  be made to eligible directors at the 1999 Annual Meeting. The Board is
  considering other changes to the Directors Plan in light of the proposed changes
  in the accounting for this type of plan. The term of such options is ten years,
  provided that they will terminate seven months following the date the director
  ceases to be a director or a consultant of the Company (twelve months if the
  termination is due to death or disability). All options
  
                                         44
  eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  granted under the Directors Plan will vest as to 25% of the shares on the first
  anniversary of the date of grant and as to 2.08% of the shares each month
  thereafter, provided the optionee continues as a member of the Board or as a
  consultant to the Company.
  
  Unearned stock-based compensation
  
    In connection with certain stock option grants during the years ended December
  31, 1997 and 1998, the Company recognized unearned compensation totaling $1.4
  million and $5.4 million, respectively, which is being amortized over the four-
  year vesting periods of the related options. Amortization expense recognized
  during the years ended December 31, 1997 and 1998 totaled approximately $25,000
  and $2.6 million, respectively.  See Note 14--Subsequent Events.
  
  Note 13--Segment Information:
  
    Effective January 1, 1998, the Company adopted the provisions of SFAS No. 131,
  "Disclosures about Segments of an Enterprise and Related Information." SFAS No.
  131 establishes the standards for reporting information about operating segments
  in annual financial statements and requires that certain selected information
  about operating segments be reported in interim financial reports. It also
  establishes standards for related disclosures about products and services and
  geographic areas. Operating segments are defined as components of an enterprise
  about which separate financial information is evaluated regularly by the chief
  decision-maker in order to allocate resources and in assessing performance.
  
    eBay has identified two primary operating segments: online services and
  offline, traditional auction services. The online services segment consists of
  the operations of eBay, Billpoint and alando. The offline, traditional auction
  services segment consists of the current operations of B&B and Kruse.
  
    Segment selection is based upon the internal organization structure, the
  manner in which these operations are managed and their performance evaluated by
  management, the availability of separate financial information, and overall
  materiality considerations. Segment performance measurement is based on
  operating income before income taxes, amortization of intangibles, stock
  compensation and merger related costs. The operating information for the two
  segments identified are as follows, (in thousands):
  Year Ended December 31, 1996
                                                                                Online          Offline           Consolidated
                                                                                ------          -------           ------------
  Net revenues from external customers.............................             $  372          $ 31,679           $ 32,051
                                                                                ======          ========           ========
  Operating income before amortization of
     intangibles, stock compensation, and merger
     related costs.................................................             $  253          $  6,167           $  6,420
  Interest and other income (expense), net.........................                  1               376                377
  Interest expense.................................................                 --            (2,322)            (2,322)
  Amortization of intangibles, stock
     compensation, and merger related costs........................                 --               --                 --
                                                                                ------          --------           --------
  Income before income taxes, as
     reported......................................................             $  254          $  4,221           $  4,475
                                                                                ======          ========           ========
  Total assets ....................................................             $  308          $ 48,701           $ 49,009
                                                                                ======          ========           ========
  
                                                                                      Year Ended December 31, 1997
                                                                               Online            Offline           Consolidated
                                                                               ------            -------           ------------
  Net revenues from external customers.............................            $ 5,744           $ 35,626           $ 41,370
                                                                               =======           ========           ========
  Operating income before amortization of
     intangibles, stock compensation, and merger
     related costs.................................................            $ 1,487           $  8,496           $  9,983
  Interest and other income (expense), net.........................                 59                995              1,054
  45
  eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  Interest expense.................................................                 (3)            (2,368)            (2,371)
  Amortization of intangibles, stock
     compensation, and merger related costs........................                  --                --                 --
                                                                                -------           -------            -------
  Income before income taxes, as
     reported......................................................             $1,543            $ 7,123            $ 8,666
                                                                                ======            =======            =======
  Total assets.....................................................             $5,619            $56,731            $62,350
                                                                                ======            =======            =======
  
                                                                                          Year Ended December 31, 1998
                                                                                Online             Offline          Consolidated
                                                                                ------             --------         ------------
  Net revenues from external customers.............................            $47,352            $38,777           $ 86,129
                                                                               =======            =======           ========
  Operating income before amortization of
     intangibles, stock compensation, and merger
     related costs.................................................            $11,573            $ 6,678           $ 18,251
  Interest and other income (expense), net                                         908                891              1,799
  Interest expense.................................................                (39)            (2,152)            (2,191)
  Amortization of intangibles, stock
     compensation, and merger related costs........................             (5,486)                --             (5,486)
                                                                               -------            -------           --------
  Income before income taxes, as
     reported......................................................            $ 6,956            $ 5,417           $ 12,373
                                                                               =======            =======           ========
  Total assets.....................................................            $92,545            $56,991           $149,536
                                                                               =======            =======           ========
  Note 14--Subsequent Events:
  
  Stock split
  
    During January 1999, the Company's Board of Directors approved a three-for-one
  Common Stock split. Shareholders of record on February 9, 1999 received two
  additional shares on March 1, 1999. All share and per share amounts in these
  consolidated financial statements and notes thereto for all periods presented
  have been retroactively adjusted to reflect the stock split.
  
  Australian joint venture
  
  On February 17, 1999, eBay entered into a joint venture agreement with an
  Australian company, PBL Online PTY Limited (PBLO), for the formation of a
  company which will provide on-line trading services to Internet users based
  primarily in Australia and New Zealand (combined, the "Territory"). PBLO is part
  of the Publishing & Broadcasting Limited group of companies which provide a wide
  range of media services in the Territory, including magazine publishing,
  television broadcasting, on-line services, broadcast programs and electronic
  commerce services. The joint venture company will be based in Australia and will
  combine technical and software experience, market knowledge and reputation with
  PBLO's publishing, distribution, advertising and marketing channels. Operations
  of the joint venture company are expected to commence during 1999.
  
  Contractual arrangements
  
    On March 1, 1999, eBay commenced an insurance program for eBay users. The
  program provides coverage on qualified transactions involving fraud that occurs
  when a winning bidder of an auction sends money to a seller, in good faith, and
  does not receive the item or does not receive the item as described in the eBay
  auction. To qualify for benefits under the program, the winning bidder must be
  an eBay buyer in "good standing" and the seller must be "registered" with a
  Feedback Rating of zero (0) or above. eBay has
  
                                         46
  eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  entered into a contract with Lloyd's of London to underwrite the program for an
  initial period of six months at a minimum cost of $525,000.
  
    On March 2, 1999, eBay entered into a Co-branding and Advertising Agreement
  (the "Agreement") with i-Escrow, Inc. ("i-Escrow"). Under the terms of the
  Agreement, i-Escrow will develop co-branded website pages which offer third
  party escrow services to eBay users. Upon request by an eBay user, i-Escrow will
  escrow a buyer's money until the buyer confirms that the applicable item was
  physically delivered, at which time the buyer's money will be released to the
  seller. eBay is committed to actively promoting these services to sellers and
  high bidders upon successful completion of the auction, but does not have
  control over, or ownership of, the escrowed funds. The co-branded website pages
  are expected to be launched in 1999.
  
  In March 1999, the Company expanded the scope of its strategic relationship with
  AOL. Under the amended agreement, eBay will be given a prominent presence
  featuring it as the preferred provider of person-to-person trading services on
  AOL's proprietary services (both domestic and international), AOL.com, Digital
  Cities, ICQ, CompuServe (both domestic and international) and Netscape. In
  addition, eBay will develop a co-branded version of its service for each AOL
  property which will prominently feature each party's brand. AOL will be entitled
  to all advertising revenue from the co-branded site. eBay will pay $75 million
  over the four-year term of the contract. At June 30, 1999, the Company had
  advanced $18.8 million under the amended agreement. This amount will be
  amortized to sales and marketing expense commencing with the launch of the co-
  branded program.
  
    In conjunction with the expanded strategic relationship, AOL will terminate
  its original contract with the Company in August of 1999. As a result, the
  remaining $8.0 million commitment associated with the original agreement has
  been waived. AOL will continue to deliver impressions under the original
  agreement through August 1999.
  
  Contingencies
  
    On March 23, 1999, the Company was sued by Network Engineering Software, Inc.
  in the U.S. District Court for the Northern District of California for the
  Company's alleged willful and deliberate violation of a patent. The suit seeks
  unspecified monetary damages as well as an injunction against the Company's
  operations. It also seeks treble damages and attorneys' fees and costs. The
  Company believes that it has meritorious defenses against this suit and intends
  to vigorously defend itself. The Company could be forced to incur material
  expenses during this defense and in the event it were to lose this suit, its
  business would be harmed.
  
  Follow-on Offering
  
    On April 16, 1999, the Company completed its follow-on public offering of
  Common Stock. A total of 4,250,000 shares were sold by the Company at a price of
  $170.00 per share. The offering resulted in net proceeds to the Company of
  approximately $696.2 million, net of an underwriting discount of $25.3 million
  and estimated offering expenses of $1.0 million.
  
  Butterfield and Butterfield Offering Costs
  
    In April 1999, B&B withdrew its registration statement for its initial public
  offering. Accordingly, in the second quarter of 1999, the Company recognized a
  charge of approximately $2.6 million related to the costs of the withdrawn
  offering
  
                                         47
  eBAY INC.
  
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  
  Unearned stock compensation
  
    In connection with certain Billpoint stock option and stock warrant grants
  subsequent to December 31, 1998, the Company recognized unearned compensation
  totaling $6.3 million. These amounts are being amortized over the vesting
  periods of the options or the one-year term of the warrants as applicable.
  
                                         48
  ITEM 7. Exhibits and Financial Statement Schedules.
  
     (c)  The following exhibits are filed herewith:
  
      Exhibit
      Number                      Exhibit Title
      ------                      -------------
  
        27.1      Financial Data Schedule.
  
  -------------------
  --------------------------------------------------------------------------------
  SIGNATURES
  --------------------------------------------------------------------------------
  
       In accordance with the requirements of the Securities Exchange Act, the
  Registrant has caused this report to be signed on its behalf by the undersigned,
  thereunto duly authorized.
  
                                          eBAY INC.
  
  Date: September 14, 1999
  
                                          Principal Financial Officer and
                                            Principal Accounting Officer:
  
                                          By:   /s/ Gary F. Bengier
                                             --------------------------
                                               Gary F. Bengier
                                               Chief Financial Officer and
                                                Vice President of Operations