Prepared by MERRILL CORPORATION

0000912057-01-533855.txt : 20011009 0000912057-01-533855.hdr.sgml : 20011009 ACCESSION NUMBER: 0000912057-01-533855 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 20010928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAYPAL INC CENTRAL INDEX KEY: 0001103415 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770510487 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-70438 FILM NUMBER: 1747995 BUSINESS ADDRESS: STREET 1: 1840 EMBARCADERO ROAD CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 6502511100 FORMER COMPANY: FORMER CONFORMED NAME: X COM CORP DATE OF NAME CHANGE: 20010604 S-1 1 a2059025zs-1.htm FORM S-1 Prepared by MERRILL CORPORATION
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As filed with the Securities and Exchange Commission on September 28, 2001

Registration No. 333-

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

PAYPAL, INC.

(Exact name of Registrant as specified in its charter)

Delaware		7374		77-0510487
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Number)		(I.R.S. Employer Identification No.)

1840 Embarcadero Road
Palo Alto, California 94303
(650) 251-1100
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)

Peter A. Thiel
Chief Executive Officer
PayPal, Inc.
1840 Embarcadero Road
Palo Alto, California 94303
(650) 251-1100
(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

ROBERT A. KOENIG, ESQ.
LAURA I. BUSHNELL, ESQ.
LATHAM & WATKINS
135 COMMONWEALTH DRIVE
MENLO PARK, CALIFORNIA 94025-1105
(650) 328-4600

BRUCE K. DALLAS, ESQ.
DAVIS POLK & WARDWELL
1600 EL CAMINO REAL
MENLO PARK, CALIFORNIA 94025
(650) 752-2000

Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act") check the following box. / /

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. / /

CALCULATION OF REGISTRATION FEE CHART

Title of Each Class of Securities to be Registered	Proposed Maximum Aggregate Offering Price(1)(2)	Amount of Registration Fee


Common Stock, $0.001 par value	$80,500,000	$20,125

(1): Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2): Includes shares which the underwriters have the option to purchase to cover over-allotments, if any.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

SUBJECT TO COMPLETION, DATED SEPTEMBER 28, 2001

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

P R O S P E C T U S

Shares

PayPal, Inc.

Common Stock

$ per share

We are selling shares of our common stock. We have granted the underwriters an option to purchase up to additional shares of common stock to cover over-allotments.

This is the initial public offering of our common stock. We currently expect the initial public offering price to be between $ and $ per share. We have applied to have our common stock included for quotation on the Nasdaq National Market under the symbol "PYPL."

Investing in our common stock involves risks. See "Risk Factors" beginning on page 5.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

	Per Share	Total
Public Offering Price	$	$
Underwriting Discount	$	$
Proceeds to PayPal (before expenses)	$	$

The underwriters expect to deliver the shares to purchasers on or about , 2001.

Salomon Smith Barney

Robertson Stephens

William Blair & Company

, 2001

[cover art to come]

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

TABLE OF CONTENTS

		Page
Prospectus Summary		1
Risk Factors		5
Special Note Regarding Forward-Looking Statements		18
Use of Proceeds		19
Dividend Policy		19
Capitalization		20
Dilution		21
Selected Consolidated Financial Data		22
Management's Discussion and Analysis of Financial Condition and Results of Operations		23
Business		38
Management		53
Certain Relationships and Related Party Transactions		63
Principal Stockholders		68
Description of Capital Stock		70
Shares Eligible for Future Sale		73
Underwriting		75
Legal Matters		77
Experts		77
Where You Can Find More Information		77
Index to Consolidated Financial Statements		F-1

Until , 2002 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the section entitled "Risk Factors," our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision.

PayPal, Inc.

We seek to become the global standard for online payments. We offer our account-based system to users in 36 countries including the United States. For the three months ended June 30, 2001, our payment volume to business accounts, which we refer to as Gross Merchant Sales or GMS, totaled $663.0 million. GMS equaled 88.8% of our total payment volume of $746.9 million for this period. Our GMS consists mainly of payments to small businesses. Currently, a majority of these payments relate to sales of goods and services through online auctions. As of September 1, 2001, we had 10.0 million registered users, including 2.0 million business accounts and 8.0 million personal accounts.

The small business market presents us with a potentially significant opportunity. According to the U.S. Census Bureau, approximately 22.6 million small businesses in the U.S., those with less than $1.0 million in annual receipts, generate an aggregate of $1.6 trillion in annual sales. In addition, according to The Nilson Report, only 3.1 million merchants in the U.S. currently accept credit cards, leaving a large number of sellers unable to accept traditional electronic payments. By enhancing the existing payment infrastructure, the PayPal product serves the need of these sellers for a secure, convenient and cost-effective online payment solution.

To send a payment, a PayPal account holder enters the email address of the recipient and the payment amount, and selects a funding source—credit card, bank account or PayPal balance. When a consumer who has not yet registered with PayPal visits the website of a merchant that has integrated our Web Accept feature, the consumer can open a PayPal account from the merchant's site in order to make a purchase.

Payment recipients may use their funds to make payments to others, leave the funds in their PayPal accounts and earn a money market rate of return, or withdraw the funds at any time by requesting a bank account transfer or a check delivered by mail or by using the PayPal ATM/debit card. When a PayPal sender makes an email payment to a recipient who does not yet have a PayPal account, the recipient follows a link in the payment notification email to register with PayPal and gain access to the funds.

We have achieved our rapid growth through a combination of the "push" nature of email payments to non-registered recipients and the "pull" nature of Web Accept. During the three months ended June 30, 2001, our account base grew by an average of 18,000 per day, with virtually no traditional sales or marketing.

During the three months ended June 30, 2001, we processed an average of 165,000 payments per day totaling $8.2 million in daily volume. Our target transaction size ranges from $10 to $1,000. For the same period, 84.7% of our transactions fell within this range, and our average payment amount equaled approximately $50.

We earn revenues primarily from transaction fees on GMS, from international fees and from fees on our ATM/debit card. For the three months ended June 30, 2001, we generated revenues of

$19.9 million, of which GMS fees comprised 81.9%, or $16.3 million. For the same period, our transaction fees equaled 2.5% of total payment volume, compared to our transaction processing expenses of 1.4% of total payment volume.

To establish PayPal as the online payment standard, we will continue to identify transactions and markets not served adequately by existing payment systems and to develop product features that improve upon those legacy systems. In addition to growing our customer base, our business strategy includes the following:

•: Expand small business payment volume;
•: Strengthen our position as the payment method of choice on online auctions;
•: Expand recurring revenue;
•: Increase volume of international payments;
•: Maintain low variable costs, particularly transaction losses; and
•: Grow PayPal ATM/debit card usage.

Company Information

You may contact us at our principal executive offices, 1840 Embarcadero Road, Palo Alto, California, 94303, or by telephone, (650) 251-1100. You may find us on the web at www.paypal.com. We do not incorporate by reference any information contained in our website into this prospectus, and you should not consider information contained in our website as part of this prospectus.

We have registered the "PayPal" trademark. This prospectus also contains additional trade names, trademarks and service marks of ours and of other companies. We do not intend our use or display of other parties' trademarks, trade names or service marks to imply a relationship with, or endorsement or sponsorship of, us by these other parties.

We use the terms "balance" and "account balance" to refer to funds that our customers hold until they decide to withdraw the funds, transfer the funds to others through PayPal or invest the funds in the PayPal Money Market Reserve Fund. We pool these customer funds and, as agent for our customers, we deposit the funds in bank accounts or invest the funds in short-term investment grade securities. Beginning in October 2001, we plan to deposit all customer funds not transferred to the PayPal Money Market Reserve Fund into bank accounts. We believe that, in handling customer funds, we act solely as an agent and custodian and not as a depositary.

We use the term "credit cards" to refer, where applicable, to traditional credit cards as well as debit cards participating in the Visa or MasterCard networks.

We use the term "premier account" on our website to describe fee paying accounts held by individuals. We refer to premier accounts and business accounts collectively as "business accounts."

We present operating data, such as payment volume and number of users, only for the PayPal product. To ensure continuity of the information presented, we include data for Confinity, Inc. prior to the merger with X.com Corporation in March 2000.

The Offering

Common stock offered		shares
Common stock outstanding after this offering		shares
Use of proceeds		For collateral requirements to support our transaction processing activities, capital expenditures and other general corporate purposes, including continued international expansion and development of additional product features. See "Use of Proceeds."
Proposed Nasdaq National Market symbol		PYPL

We base the number of shares outstanding after this offering on 200,022,465 shares outstanding as of September 21, 2001, and excluding:

•: a reverse stock split, which we expect to complete prior to the offering;
•: 8,769,146 shares of common stock issuable upon exercise of options outstanding at a weighted average exercise price of $0.25 per share;
•: 570,414 shares of common stock issuable upon exercise of warrants outstanding at a weighted average exercise price of $0.23 per share;
•: shares of common stock reserved for issuance under our employee stock purchase plan;
•: 219,867 shares of common stock reserved for future grant under our stock option plans; and
•: 16,540,490 shares of restricted common stock subject to repurchase by us.

Except as otherwise indicated, all information in this prospectus assumes:

•: the filing of our amended and restated certificate of incorporation concurrently with the completion of this offering;
•: the automatic conversion of all outstanding shares of preferred stock into 173,570,806 shares of common stock upon the closing of this offering;
•: no exercise of the underwriters' over-allotment option; and
•: an initial public offering price of $ per share, the mid-point of the filing range set forth on the cover page of this prospectus.

Summary Consolidated Financial Information

The following table sets forth our summary consolidated financial information. You should read this information in conjunction with the consolidated financial statements and the notes to those consolidated financial statements appearing elsewhere in this prospectus.

The pro forma numbers in the table give effect to the conversion of all then outstanding shares of preferred stock into shares of common stock immediately prior to the completion of the offering.

The balance sheet data on a pro forma as adjusted basis reflects the sale of shares of common stock offered by us at an assumed initial offering price of $ per share after deducting the estimated underwriting discount and estimated offering expenses payable by us, and the receipt of net proceeds from this offering.

		Three Months Ended
		Mar. 31, 2000			June 30, 2000			Sept. 30, 2000			Dec. 31, 2000			Mar. 31, 2001			June 30, 2001
		(in thousands, except per share data) (unaudited)
Consolidated Statements of Operations:
Transaction fees		$	—		$	35		$	1,016		$	7,403		$	12,964		$	18,644
Interest on funds held for others			—			240			727			1,079			1,143			920
Investment management fees			—			—			—			22			192			348
Service agreement revenues			1,186			1,886			529			337			—			—

	Total revenues		1,186			2,161			2,272			8,841			14,299			19,912

Transaction processing expenses			—			6,230			9,764			9,098			8,754			10,660
Provision for transaction losses			13			1,343			5,432			4,241			3,103			2,437
Promotional and marketing			758			9,917			7,155			3,194			2,035			1,635
Product development			560			987			1,805			1,982			2,401			2,517
General and administrative			2,816			3,867			7,129			4,810			5,025			7,272
Customer service and operations			547			3,774			5,905			5,741			7,221			7,678
Amortization of goodwill and other intangibles			67			16,415			16,415			16,416			16,415			16,415
Service agreement costs and termination expenses			19,344			8,874			6,648			6,276			—			—

	Total operating expenses		24,105			51,407			60,253			51,758			44,954			48,614

Loss from operations			(22,919	)		(49,246	)		(57,981	)		(42,917	)		(30,655	)		(28,702	)
Interest income			152			—			1,015			957			943			798
Other income (expense), net			(46	)		1,432			(9	)		56			454			254

Net loss		$	(22,813	)	$	(47,814	)	$	(56,975	)	$	(41,904	)	$	(29,258	)	$	(27,650	)

Pro forma basic and diluted net loss per share		$	(0.15	)	$	(0.27	)	$	(0.33	)	$	(0.23	)	$	(0.15	)	$	(0.14	)

Pro forma shares used in calculating basic and diluted net loss per share			156,428			174,210			171,690			179,158			195,459			195,321

Operating Data:
Gross Merchant Sales		$	—		$	1,873		$	55,621		$	335,691		$	546,848		$	663,014
Total payment volume		$	46,263		$	248,799		$	422,760		$	543,562		$	642,737		$	746,888
Total number of payments			1,026			5,456			9,438			12,325			13,524			15,058
Total number of accounts (at period end)			824			2,190			3,718			5,518			7,200			8,798
	Number of business accounts		—			14			289			800			1,327			1,731

	As of June 30, 2001
	Actual			Pro Forma		Pro Forma As Adjusted
	(in thousands)
				(unaudited)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	134,679		$	134,679	$
Restricted cash		6,048			6,048
Funds receivable		12,456			12,456
Non-current investment securities		27,086			27,086
Total assets		249,870			249,870
Due to customers		108,571			108,571
Funds payable		10,853			10,853
Reserve for transaction losses		5,686			5,686
Convertible preferred stock		278,324			—
Total stockholders' equity (deficit)		(163,992	)		114,332

RISK FACTORS

You should consider carefully the risks described below, together with all of the other information in this prospectus, before making a decision to invest in our common stock. If any of the following risks actually occurs, our business, financial condition and results of operations could suffer. In this case, the trading price of our common stock could decline and you may lose all or part of your investment in our common stock.

Risks Related To Our Business

We might not implement successfully strategies to increase adoption of our electronic payment methods.

Our future profitability will depend, in part, on our ability to implement successfully our strategy to increase adoption of our online payment methods. We cannot assure you that the relatively new market for online payment mechanisms will remain viable. We expect to invest substantial amounts to:

•: Drive consumer and merchant awareness of electronic payments;
•: Encourage consumers and merchants to sign up for and use our electronic payment product;
•: Enhance our infrastructure to handle seamless processing of transactions;
•: Continue to develop state of the art, easy-to-use technology;
•: Increase the number of users who collect and pay electronically; and
•: Diversify our customer base.

Our investment in these programs will affect adversely our short-term profitability. Additionally, our failure to implement successfully these programs or to increase substantially adoption of our electronic payment method by customers who pay for the service could have a material adverse effect on our business.

We depend on online auction transactions for a significant percentage of our payment volume. We generate a significant portion of our business on eBay, which has established a competing payment system.

For the three months ended June 30, 2001, our customers identified to us approximately 69.6% of the dollar volume of all payments made through the PayPal system as settlements from purchases made at online auction websites, particularly eBay. We rely on these transactions for a substantial portion of our customer base and our payment volume. We do not have any contractual relationship with eBay, and eBay owns a majority stake in a competing payment service, eBay Online Payments, formerly known as Billpoint. eBay could choose to restrict or prohibit its sellers from advertising PayPal for payments or compel sellers to use eBay Online Payments on eBay's site. Whether or not eBay imposes such restrictions, we expect eBay to continue to develop and promote its own payment service and to integrate that service tightly into its site in order to foster the use of its payment service. If our ability to process payments for purchases made on online auction websites, particularly eBay, became impaired, or if these online auction sites took additional steps to integrate their payment services, our business could suffer.

The payments industry remains highly competitive. If we do not compete effectively, the demand for our product may decline.

The market for our product is emerging, intensely competitive and characterized by rapid technological change. We compete with existing payment methods and other companies, including, among others:

•: eBay Online Payments, formerly known as Billpoint, a joint venture between eBay and Wells Fargo;
•: Yahoo! PayDirect offered by Yahoo!;
•: c2it offered by Citigroup;
•: email payment services offered by the U.S. Postal Service through CheckFree; and
•: MoneyZap and BidPay offered by Western Union.

Many of these competitors have longer operating histories, significantly greater financial, technical, marketing, customer service and other resources, greater name recognition or a larger base of customers in affiliated businesses than we do. For example, Citigroup's c2it has existing arrangements with AOL Time Warner and Microsoft. c2it could use these arrangements to market directly its competing payment product to the customers of AOL Time Warner and Microsoft, which could result in c2it gaining substantial market share in a short period of time. Our competitors may respond to new or emerging technologies and changes in customer requirements faster and more effectively than we can, or may devote greater resources to the development, promotion and sale of products and services than we can, including offering competing payment services at lower prices. Competing services tied to established banks and other financial institutions may offer greater liquidity and engender greater consumer confidence in the safety and efficacy of their services than we do. If these competitors acquired significant market share, this could have a material adverse effect on our business.

We also compete with providers of traditional payment methods, particularly credit cards, checks, money orders and Automated Clearing House, or ACH, transactions. Associations of traditional financial institutions such as Visa, MasterCard and the National Automated Clearing House Association, or NACHA, generally set the features of these payment methods. The associations have initiated programs to enhance the usability of these payment methods for online transactions and could lower fees charged to other online merchants. Either of these changes could reduce the competitive value of our product and make it more difficult for us to retain and attract customers.

We cannot assure you that we will be profitable because we have operated our business only for a short period of time and have only limited operating history upon which to evaluate our business.

PayPal, Inc. resulted from a merger between Confinity, Inc., incorporated in December 1998, and X.com Corporation, incorporated in March 1999. Accordingly, we have only a limited operating history on which to base an evaluation of our business and prospects. The revenue and income potential of our business and the market for online payments through alternative mechanisms have not been proven. We will encounter risks and difficulties commonly faced by early-stage companies in new and rapidly evolving markets.

We have not reached profitability to date. We have accumulated net losses of $231.0 million from our inception, March 8, 1999, through June 30, 2001, and net losses of $27.7 million during the three months ended June 30, 2001.

We intend to continue to make significant investments in our systems, infrastructure and customer service operations. As a result, we anticipate having a net loss from operations in fiscal 2001 and may

not be able to reach or sustain profitability in the future. Our ability to achieve and maintain profitability will depend on, among other things, market acceptance of our product.

We face significant risks of loss due to fraud and disputes between senders and recipients.

We face significant risks of loss due to fraud and disputes between senders and recipients, including:

•: unauthorized use of credit card and bank account information and identity theft;
•: merchant fraud and other disputes over the quality of goods and services;
•: breaches of system security;
•: employee fraud; and
•: use of our system for illegal or improper purposes.

For the year ended December 31, 2000, our provision for transaction losses totaled $11.0 million, representing 0.87% of our total payment volume, and for the three months ended June 30, 2001, $2.4 million, representing 0.33% of our total payment volume. Our provision for transaction losses may increase in future quarters following our recent increase from $250 to $1,000 in the initial sending limit for senders who have not yet verified a bank account with us.

When a sender pays a merchant for goods or services through PayPal using a credit card and the cardholder disputes the charge, the amount of the disputed item gets charged back to us and the credit card associations may levy fees against us. Charge-backs may arise from the unauthorized use of a cardholder's card number or from a cardholder's claim that a merchant failed to perform. Charge-backs result not only in our loss of fees earned with respect to the payment, but also leave us liable for the entire underlying transaction amount. If our charge-back rate becomes excessive, credit card associations also can require us to pay fines. Earlier this year, as a result of high charge-back rates in the second half of 2000, MasterCard determined that we violated its operating rules by having excessive charge-backs and fined us. Although we resolved this situation to MasterCard's satisfaction and have reduced our charge-back rate, we cannot assure you that new causes of excessive charge-backs will not arise in the future.

We have taken measures to detect and reduce the risk of fraud, but we cannot assure you of these measures' effectiveness. If these measures do not succeed, our business will suffer.

Unauthorized use of credit cards and bank accounts could expose us to substantial losses.

The highly automated nature of, and liquidity offered by, our payment product makes us an attractive target for fraud. In configuring our product, we face an inherent trade-off between customer convenience and security. Identity thieves and those committing fraud using stolen credit card or bank account numbers, often in bulk and in conjunction with automated mechanisms of online communication, potentially can steal large amounts of money from businesses such as ours. We believe that several of our competitors in the electronic payments business have gone out of business or significantly restricted their businesses largely due to losses from this type of fraud. We expect that technically knowledgeable criminals will continue to attempt to circumvent our anti-fraud systems. Our gross amount of charge-backs, before reversals and internal recoveries, from unauthorized use of credit cards for transactions that occurred during the year ended December 31, 2000 totaled $8.9 million. During the four months between July and October 2000, we experienced a significant fraud episode and, as a result, we incurred gross losses due to unauthorized charge-backs totaling $5.7 million. This amount represented 64.0% of total charge-backs due to unauthorized transactions for the year ended December 31, 2000. For the year ended December 31, 2000, the amount of losses with respect to unauthorized use of bank accounts totaled $0.3 million. The gross amount of charge-backs received

through September 1, 2001 with respect to unauthorized use of credit cards for transactions that occurred during the six months ended June 30, 2001 totaled $2.3 million. For the six months ended June 30, 2001, the amount of our losses with respect to unauthorized use of bank accounts totaled $0.5 million.

We incur charge-backs and other losses from merchant fraud, payment disputes and insufficient funds, and our liability from these items could have a material adverse effect on our business and result in our losing the right to accept credit cards for payment.

We incur substantial losses from merchant fraud, including claims from customers that merchants have not performed, that their goods or services do not match the merchant's description or that the customer did not authorize the purchase. We also incur losses from erroneous transmissions and from customers who have closed bank accounts or have insufficient funds in them to satisfy payments. Our merchant-related charge-backs totaled $5.1 million for the year ended December 31, 2000. The gross amount of charge-backs received through September 1, 2001 with respect to merchant-related disputes for transactions that occurred during the six months ended June 30, 2001 totaled $4.0 million. Our liability for such items could have a material adverse effect on our business, and if they become excessive, could result in our losing the right to accept credit cards for payment.

Security and privacy breaches in our electronic transactions may expose us to additional liability.

Any inability on our part to protect the security and privacy of our electronic transactions could have a material adverse effect on our profitability. A security or privacy breach could:

•: expose us to additional liability;
•: increase our expenses relating to resolution of these breaches;
•: deter customers from using our product; and
•: decrease market acceptance of electronic commerce transactions generally.

We cannot assure you that our use of applications designed for data security and integrity will address changing technologies or the security and privacy concerns of existing and potential customers. Any failures in our security and privacy measures could have a material adverse effect on our business, financial condition and results of operations.

We could incur substantial losses from employee fraud.

The large volume of payments that we handle for our customers makes us vulnerable to employee fraud or other internal security breaches. We cannot assure you that our internal security systems will prevent material losses from employee fraud.

Our payment system might be used for illegal or improper purposes.

Despite measures we have taken to detect and prevent identify theft, unauthorized uses of credit cards and similar misconduct, our payment system remains susceptible to potentially illegal or improper uses. These may include illegal online gaming, fraudulent sales of goods or services, illicit sales of prescription medications or controlled substances, software and other intellectual property piracy, money laundering, bank fraud, child pornography trafficking, prohibited sales of alcoholic beverages and tobacco products and online securities fraud. Despite measures we have taken to detect and lessen the risk of this kind of conduct, we cannot assure you that these measures will succeed. Our business could suffer if customers use our system for illegal or improper purposes.

Our status under state, federal and international financial services regulation is unclear. Violation of any present or future regulation could expose us to substantial liability, force us to change our business practices or force us to cease offering our current product.

We operate in an industry subject to government regulation. We currently are subject to some states' money transmitter regulations, to federal regulations in our role as transfer agent and investment adviser to The PayPal Money Market Reserve Fund and to federal electronic fund transfer and money laundering regulations. In the future, we might be subjected to:

•: state or federal banking regulations;
•: additional states' money transmitter regulations and federal money laundering regulations;
•: international banking or financial services regulations or laws governing other regulated industries; or
•: U.S. and international regulation of Internet transactions.

If we are found to be in violation of any current or future regulations, we could be:

•: exposed to financial liability, including substantial fines which could be imposed on a per transaction basis and disgorgement of our profits;
•: forced to change our business practices; or
•: forced to cease doing business altogether or with the residents of one or more states or countries.

If we were found subject to or in violation of any laws or regulations governing banks, money transmitters or electronic fund transfers, we could be subject to liability and forced to change our business practices.

We believe the licensing requirements of the Office of the Comptroller of the Currency, the Federal Reserve Board or other federal or state agencies that regulate or monitor banks or other types of providers of electronic commerce services do not apply to us. One or more states may conclude that, under its or their statutes, we are engaged in an unauthorized banking business. In that event, we might be subject to monetary penalties and adverse publicity and might be required to cease doing business with residents of those states. A number of states have enacted legislation regulating check sellers, money transmitters or service providers to banks, and we have applied for, or are in the process of applying for, licenses under this legislation in particular jurisdictions. To date, we have obtained licenses in two states. As a licensed money transmitter, we are subject to bonding requirements, restrictions on our investment of customer funds, reporting requirements and inspection by state regulatory agencies. If our pending applications were denied, or if we were found to be subject to and in violation of any banking or money services laws or regulations, we also could be subject to liability or forced to change our business practices, including but not limited to suspending the offering of our services to residents of states where we do not have a license. Such liability or changes could have a material adverse effect on our business, results of operations and financial condition. Even if we are not forced to change our business practices, we could be required to obtain licenses or regulatory approvals that could impose a substantial cost on us.

Although there have been no definitive interpretations to date, we have assumed that our product is subject to the Electronic Fund Transfer Act and Regulation E of the Federal Reserve Board. As a result, among other things, we must provide advance disclosure of changes to our product, follow specified error resolution procedures and absorb losses from transactions not authorized by the consumer. In addition, we are subject to the financial privacy provisions of the Gramm-Leach-Bliley Act and related regulations. As a result, some customer financial information that we receive is subject to limitations on reuse and disclosure under the Gramm-Leach-Bliley Act and related regulations. Additionally, pending legislation at the state and federal levels may restrict further our information

gathering and disclosure practices. Existing and potential future privacy laws may limit our ability to develop new products and services that make use of data gathered through our product. The provisions of these laws and related regulations are complicated, and we do not have extensive experience in complying with these laws and related regulations. Even technical violations of these laws can result in penalties of up to $1,000 assessed for each non-compliant transaction. During the three months ended June 30, 2001, we processed approximately 165,000 transactions per day, and any violations could expose us to significant liability.

We are subject to laws and regulations on money laundering and other illegal activities that could have a material adverse impact on our business and could subject us to civil and criminal liability.

We are subject to money laundering laws that prohibit, among other things, our involvement in transferring the proceeds of criminal activities. We are subject to regulations that will require us to register with the Department of Treasury and to report suspicious activities involving transactions of $2,000 or more. The interpretation of suspicious activities in this context is uncertain. These regulations could impose significant costs on us or make it more difficult for new customers to join our network. We could be required to learn more about our customers before opening an account, or to monitor our customers' activities more closely, which could raise our costs significantly or reduce the attractiveness of our product. Failure to comply with applicable state and federal money laundering laws could result in significant criminal and civil penalties and significant forfeiture of assets. Even if we comply with these laws, federal and state law enforcement agencies could seize customer funds that are proceeds of unlawful activity, which could result in adverse publicity for us and affect our business adversely. Some online casinos use our product to accept and make payments. If these casinos are operating illegally, which may be uncertain, we may be subject to civil or criminal prosecution. Finally, we also are subject to regulations requiring us to keep detailed records on transfers of $3,000 or more.

Our status under banking or financial services laws or other laws in countries outside the U.S. is unclear.

We offer our product to customers with Visa or MasterCard credit cards in 35 countries outside the U.S. In seven countries outside the U.S.—Canada, the United Kingdom, Germany, the Netherlands, France, Australia and New Zealand—customers can withdraw funds to local bank accounts. The status of our product as a bank, regulated financial institution or other regulated business in these countries is unclear. If we were found to be subject to and in violation of any foreign laws or regulations, we could be subject to liability, forced to change our business practices or forced to suspend operations in one or more countries. Liability or changes could have a material adverse effect on our business, results of operations and financial condition. Alternatively, we could be required to obtain licenses or regulatory approvals that could impose a substantial cost on us.

We are subject to U.S. and foreign government regulation of the Internet, the impact of which is difficult to predict.

There are currently few laws or regulations that apply specifically to the sale of goods and services on the Internet. The application to us of existing laws and regulations relating to issues such as banking, currency exchange, online gaming, pricing, taxation, quality of services, electronic contracting, consumer protection, privacy, and intellectual property ownership and infringement is unclear. In addition, we may become subject to new laws and regulations directly applicable to the Internet or our activities. Any existing or new legislation applicable to us could expose us to substantial liability, including significant expenses necessary to comply with these laws and regulations, and reduce use of the Internet on which we depend.

In 1998, the U.S. government enacted a three-year moratorium, which expires on October 21, 2001, prohibiting states and local governments from imposing new taxes on Internet access or electronic commerce transactions. Upon expiration of this moratorium, if it is not extended, states and local

governments may levy additional taxes on Internet access and electronic commerce transactions. An increase in the taxation of electronic commerce transactions may make the Internet less attractive for consumers and businesses which could have a material adverse effect on our business, results of operations and financial condition.

Our financial success will remain highly sensitive to changes in the rate at which our customers fund payments using credit cards rather than bank account transfers or existing PayPal account balances.

We pay significant transaction fees when senders fund payment transactions using credit cards, nominal fees when customers fund payment transactions by electronic transfer of funds from bank accounts and no fees when customers fund payment transactions from an existing PayPal account balance. For the three months ended June 30, 2001, senders funded 50.5% of our payment volume using credit cards. Senders may resist funding payments by electronic transfer from bank accounts because of the greater protection offered by credit cards, including the ability to dispute and reverse merchant charges, because of frequent flier miles or other incentives offered by credit cards or because of generalized fears regarding privacy or loss of control in surrendering bank account information to a third party.

We rely on financial institutions, including several current or potential competitors, to process our payment transactions. Should any of these institutions decide to stop processing our payment transactions, our business could suffer.

Because we are not a bank, we cannot belong to and directly access the credit card associations or the ACH payment network. As a result, we must rely on banks or their independent service operators to process our transactions. We currently use a subsidiary of Wells Fargo to process our ACH transactions, and Wells Fargo partly owns our competitor, eBay Online Payments, formerly known as Billpoint. A joint venture involving First Data currently processes our credit card transactions, and First Data controls our competitor Western Union. If we could not obtain these processing services on acceptable terms from these sources or elsewhere, and if we could not switch to another processor quickly and smoothly, our business could suffer materially.

Changes to card association rules and practices, or excessive charge-backs, could result in a termination of our ability to accept credit cards.

As a merchant of record, we must comply with the operating rules of the Visa and MasterCard credit card associations and NACHA. The associations' member banks set these rules. Some of those banks compete with us. The member banks could adopt operating rules with which we might find it difficult or even impossible to comply. We might even lose our ability to gain access to the credit card associations or NACHA. In late 2000, MasterCard indicated it would terminate PayPal as a merchant if we did not change some of our practices and procedures immediately. We had a series of meetings with MasterCard and have made changes to our system that we believe have resolved MasterCard's concerns. Earlier this year, Visa also indicated that some of our practices violated its operating rules. Although those concerns were resolved to Visa's satisfaction, we cannot assure you that the credit card associations will not take positions in the future that jeopardize our ability to accept credit cards.

Furthermore, in cases of fraud or disputes between senders and recipients, we face charge-backs when cardholders dispute items for which they have been billed. If our charge-backs become excessive, the credit card associations could fine us or terminate our ability to accept credit cards for payments. The termination of our relationship with card associations would limit our ability to provide transaction processing and would affect adversely our transaction volumes and revenue or operating costs.

Increases in credit card processing fees could increase our costs or otherwise limit our operations.

From time to time, Visa and MasterCard increase the interchange fees that they charge for each transaction using their cards. We may decide to accept other credit cards in the future, such as

American Express, which carry even higher interchange fees. Our credit card processors have the right to pass any increases in interchange fees on to us. Competitive pressures could force us to accept some or all of any increases in the future which would increase our operating costs and reduce our profit margins. Furthermore, our credit card processors impose collateral requirements on us with respect to our acceptance of Visa and MasterCard. Should we accept American Express or Discover, these organizations similarly may impose collateral requirements.

The loss of key executives could affect our business adversely.

Our success depends to a significant degree upon the continued contributions of our key management, particularly Peter A. Thiel, our President and Chief Executive Officer, and Max R. Levchin, our Chief Technology Officer. If either of these officers ceased to be active in our management, it could have a material adverse effect on our business, financial condition and results of operations. We do not maintain key-man life insurance on these or any other employees. We do not have employment agreements with any of our executive officers.

Customer complaints or negative publicity could affect use of our product adversely.

Customer complaints or negative publicity about our customer service could diminish severely consumer confidence in and use of our product. Breaches of our customers' privacy and our security measures could have the same effect. Measures we sometimes take to combat risks of fraud and breaches of privacy and security, such as freezing customer funds, can damage relations with our customers. These measures heighten the need for prompt and accurate customer service to resolve irregularities and disputes. We received negative media coverage in the second half of 2000 and the first quarter of 2001, as well as public criticism from the Better Business Bureau, regarding customer disputes. Effective customer service requires significant personnel expense, and this expense, if not managed properly, could impact our profitability significantly. The number of customer service representatives we employed or contracted increased from 296 as of June 30, 2000 to 324 as of June 30, 2001. Any inability by us to manage or train our customer service representatives properly could compromise our ability to handle customer complaints effectively. If we do not handle customer complaints effectively, our reputation may suffer and we may lose our customers' confidence.

If additional state taxes are imposed on transaction processing companies, our operating results and financial condition could suffer.

Transaction processing companies like us may be subject to state taxation of portions of their fees charged to customers for their services. Application of this tax is an ongoing issue, and the states have not adopted uniform guidelines implementing these regulations. If we must pay these taxes and cannot pass this tax expense through to our customers, our operating results and financial condition could suffer.

We have limited experience in managing and accounting accurately for large amounts of customer funds and our funds.

Our ability to manage and account accurately for customer funds requires a high level of internal controls. We have neither an established operating history nor proven management experience in maintaining, over a long term, these internal controls. As our business continues to grow, we must strengthen our internal controls accordingly. Our success requires significant public confidence in our ability to handle large and growing transaction volumes and amounts of customer funds. Any failure to maintain necessary controls or to manage accurately customer funds could diminish customer use of our product severely.

We may experience breakdowns in our payment processing system that could damage customer relations and expose us to liability.

A system outage or data loss could have a material adverse effect on our business, financial condition and results of operations. To operate our business successfully, we must protect our payment processing and other systems from interruption by events beyond our control. Events that could cause system interruptions include:

•: fire;
•: earthquake;
•: terrorist attacks;
•: natural disasters;
•: computer viruses;
•: unauthorized entry;
•: telecommunications failure; and
•: power loss and California rolling blackouts.

We depend on third parties for co-location of our data servers and cannot guarantee the security of our servers. Our primary servers currently reside in facilities in Santa Clara, California. Currently these facilities do not provide the ability to switch instantly to another back-up site in the event of failure of the main server site. This means that an outage at one facility could result in our system being unavailable for at least several hours. This downtime could result in increased costs and lost revenues which would be detrimental to our business. Our primary Internet hosting provider, Exodus, recently filed for protection under Chapter 11 of the U.S. Bankruptcy Code. We cannot predict the effect this may have on its ability to continue to provide reliable service.

We cannot assure you that our infrastructure could handle a larger volume of customer transactions. Any failure to accommodate volume could impair customer satisfaction, lead to a loss of customers, impair our ability to add customers or increase our costs, all of which would harm our business.

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

We rely on our customers for distribution of our product, and this method of distribution may not meet our goals.

We do not expect to spend significant amounts on traditional sales and marketing activities, such as television and radio advertising, and we rely heavily instead on distribution of our product by our customers themselves. Because of the rapidly evolving nature of electronic commerce, we cannot guarantee that our method of distribution will achieve our goals or that we will develop alternative distribution channels. In addition, because we rely primarily on our customers for product distribution, any disruption in our customer service or harm to our reputation could a have material adverse effect on our ability to distribute our product and expand our customer base.

Our inability to manage growth could affect our business adversely.

We have experienced rapid growth in our revenues, from $8.8 million in the three months ended December 31, 2000 to $19.9 million in the three months ended June 30, 2001, and we intend to grow our business significantly. To support our growth plans, we may need to expand significantly our

existing management, operational, financial and human resources, customer service and management information systems and controls. If we cannot manage our growth successfully, this could have a material adverse effect on our business, financial condition and results of operations.

Our quarterly operating results fluctuate and may not predict our future performance accurately.

Although we have grown quickly, our quarterly results will fluctuate in the future as a result of a variety of factors, many of which are beyond our control. These factors include:

•: changes in our costs, including interchange and transaction fees charged by credit card associations, and our transaction losses;
•: changes in our pricing policies or those of our competitors;
•: relative rates of acquisition of new customers;
•: seasonal patterns, including increases during the holiday season;
•: delays in the introduction of new or enhanced services, software and related products by us or our competitors or market acceptance of these products and services; and
•: other changes in operating expenses, personnel and general economic conditions.

As a result, period-to-period comparisons of our operating results may not be meaningful, and you should not rely on them as an indication of our future performance. In addition, our operating results in a future quarter or quarters may fall below expectations of securities analysts or investors and, as a result, the price of our common stock may fluctuate.

Loss of principal in reinvesting customer funds in the PayPal system and loss of principal in the PayPal Money Market Reserve Fund may affect adversely the perception of safety of customer funds.

We reinvest customer funds in the PayPal system in short term money market and money market equivalent securities. Although we invest in high grade securities, the securities may lose value. Customers that opt to invest their money in the PayPal Money Market Reserve Fund may lose the original principal value of their initial investment. If that occurs, customers' perception of the handling of customer funds in the PayPal system may result in decreased participation in the Fund and affect adversely payment volume within our system.

We may not protect our proprietary technology effectively, which would allow competitors to duplicate our products and services.

Our success and ability to compete in our markets depend, in part, upon our proprietary technology. We rely primarily on copyright, trade secret and trademark laws to protect our technology. While we have filed five patent applications, we have not been granted any patents for features of our electronic payment processing system. We cannot assure you that any of our patent applications will be granted or that if they are granted, they will be valid. We also enter into confidentiality and invention assignment agreements with our employees, consultants and vendors and generally control access to and distribution of our software, documentation and other proprietary information. We protect the source code for our proprietary software as a trade secret and as a copyrighted work. Nevertheless, a third party might try to reverse engineer or otherwise obtain and use our technology without our permission. In addition, the laws of some countries in which we sell our product may not protect software and intellectual property rights to the same extent as the laws of the U.S. Unauthorized copying, use or reverse engineering of our products could have a material adverse effect on our business, financial condition and results of operations.

Our product features may infringe claims of third-party patents, which could affect our business and profitability adversely.

We are aware of various patents held by third parties in the area of electronic payment systems. The holders of rights under these patents might assert that we are infringing them. We cannot assure you that our product features do not infringe on patents held by others or that they will not in the future. If any party asserts claims against us, litigation may have a material adverse effect on us even if we defend ourselves successfully. In lieu of expensive litigation, we may seek a patent license but we cannot assure you that we could secure a license on reasonable terms.

We have limited experience competing in international markets. Our international expansion plans will expose us to greater political, intellectual property, regulatory, exchange rate fluctuation and other risks, which could harm our business.

In the six months ended June 30, 2001, we generated 12.0% of our revenue from transactions where we collected fees from senders or recipients that resided outside the U.S. We intend to expand use of our product in selected international markets. If we could not continue our expansion into international markets, our business could suffer. Accordingly, we anticipate devoting significant resources and management attention to expanding international opportunities. Expanding internationally subjects us to a number of risks, including:

•: greater difficulty in managing foreign operations;
•: changes in a specific country's or region's political or economic conditions;
•: expenses associated with localizing our products, including offering customers the ability to transact business in multiple currencies;
•: differing intellectual property laws;
•: laws and business practices that favor local competitors;
•: multiple and changing laws, tax regimes and government regulations; and
•: foreign currency restrictions and exchange rate fluctuations.

Adverse currency fluctuations and foreign exchange controls could reduce revenues we receive from our international operations.

We use the U.S. dollar as the functional currency of our system. Senders outside the U.S. fund their PayPal payments from credit card charges, which they must repay to their card issuers in their local currencies. In addition, for the countries where PayPal customers can withdraw their funds to local bank accounts, we must hold funds in Canadian dollars, British pounds, euros, Australian dollars and New Zealand dollars to fund such withdrawals. Some of the revenues we generate outside the U.S. are subject therefore to unpredictable and indeterminate fluctuations if the values of international currencies change relative to the U.S. dollar. Resulting exchange gains and losses affect our net income. Our risk management activities protect us from adverse changes in the value of only a limited number of currencies. Furthermore, we may become subject to exchange control regulations that might restrict or prohibit the conversion of our revenue currencies into U.S. dollars. Adverse currency fluctuations and foreign exchange controls could reduce revenues we receive from our international operations. Each of these risks could increase if we implement our plans to offer customers the ability to send and receive PayPal payments in multiple currencies.

Risks Related to This Offering

Future sales of our common stock may cause our stock price to decline.

If our stockholders sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decline. Based on shares outstanding as of September 21, 2001, upon completion of this offering we will have shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option. All of the shares of our common stock sold in this offering will be freely tradable, without restriction, in the public market.

In addition, 9,339,560 shares under outstanding options and warrants and 219,867 shares available for grant under our existing stock plans as of September 21, 2001 will become eligible for sale in the public market once permitted by provisions of various vesting agreements, lock-up agreements and Rules 144 and 701 under the Securities Act, as applicable. See "Shares Eligible for Future Sale."

We, our officers and directors, and some of our other stockholders have agreed that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of Salomon Smith Barney, dispose of or hedge any shares of our common stock or any securities convertible into or exchangeable for our common stock. Salomon Smith Barney in its sole discretion may release any of the securities subject to these lock-up agreements at any time without notice.

Our stock price may experience volatility because of changes in securities analysts' estimates, competitive developments and other factors beyond our control, and you may lose all or a part of your investment.

The market prices of stock for technology companies, particularly following an initial public offering, often reach levels that bear no relationship to the past or present operating performance of those companies. These market prices may not be sustainable and may be subject to wide variations. Our stock may be volatile because our shares have not been traded publicly. Following this offering, the market price for our common stock may experience a substantial decline. The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

•: changes in securities analysts' estimates of our financial performance;
•: fluctuations in stock market prices and volumes, particularly among securities of technology companies;
•: discussion of PayPal or our stock price in online investor communities such as chat rooms;
•: changes in market valuations of similar companies;
•: announcements by us or our competitors of significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments;
•: variations in our quarterly operating results;
•: loss of a relationship with a strategic partner; and
•: additions or departures of key personnel.

An active public market for our common stock may not develop or sustain after the offering. We negotiated and determined the initial public offering price with representatives of the underwriters and this price may not be indicative of prices that will prevail in the trading market. As a result, you may not be able to sell your shares of common stock at or above the offering price.

Anti-takeover provisions in our organizational documents and Delaware law make any change in control more difficult.

Our certificate of incorporation and bylaws contain provisions that may delay or prevent a change in control, may discourage bids at a premium over the market price of our common stock and may affect adversely the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions include:

•: the division of our board of directors into three classes serving staggered three-year terms;
•: prohibiting our stockholders from calling a special meeting of stockholders;
•: our ability to issue additional shares of our common stock or preferred stock without stockholder approval;
•: our ability to issue blank-check preferred stock;
•: prohibiting our stockholders from amending our certificate of incorporation or bylaws except with 66²/3% stockholder approval; and
•: advance notice requirements for raising matters of business or making nominations at stockholders' meetings.

We are also subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for five years unless the holder's acquisition of our stock was approved in advance by our board of directors.

We will have broad discretion in how we use the proceeds of this offering, and we may not use these proceeds effectively.

Our management will have considerable discretion in the application of the net proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether we are using the proceeds appropriately. We currently intend to use the net proceeds for collateral requirements to support our transaction processing activities, capital expenditures and other general corporate purposes including continued international expansion and development of additional product functionality. We have not finalized yet the amount of net proceeds that we will use specifically for each of these purposes. We may use the net proceeds for corporate purposes that do not result in our profitability or increase our market value.

As a new investor, you will incur substantial dilution as a result of this offering and future equity issuances.

The initial public offering price will be substantially higher than the pro forma, net tangible book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate dilution of $ per share. This dilution is due in large part to earlier investors in our company having paid substantially less than the initial public offering price when they purchased their shares. The exercise of outstanding options and warrants and future equity issuances, including any additional shares issued in connection with acquisitions, will result in further dilution to investors.

We do not plan to pay dividends in the foreseeable future.

We do not anticipate paying cash dividends to our stockholders in the foreseeable future. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize on their investment. Investors seeking cash dividends should not purchase our common stock.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Result of Operations" and "Business," contains forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include those listed under "Risk Factors" and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

USE OF PROCEEDS

We estimate our net proceeds from the sale of shares of common stock in this offering will total $ million, or $ million if the underwriters exercise their over-allotment option in full, based on an assumed offering price of $ per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses, which are payable by us. We intend to use the net proceeds from this offering as follows:

•: $10.0 to $15.0 million for collateral requirements to support the growth of transaction processing with outside vendors. This processing includes but is not limited to ATM/debit card, credit card and ACH processing;
•: $10.0 to $15.0 million for capital expenditures; and
•: the balance for other general corporate purposes, including continued international expansion and development of additional product features.

The amounts that we actually expend for working capital and other general corporate purposes will vary significantly depending on a number of factors, including future revenue growth, if any, and the amount of cash that we generate from operations. As a result, we will retain broad discretion over the allocation of the net proceeds of this offering. We also may use a portion of the net proceeds for the acquisition of businesses, products and technologies. We have no current agreements or commitments for acquisitions of any businesses, products or technologies. Pending these uses, we will invest the net proceeds of this offering in short-term money market and money market equivalent securities.

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. For accounting purposes, we will treat the issuance of Class A Stock in the third quarter of 2001 as a deemed dividend of $1.4 million.

CAPITALIZATION

The following table sets forth our cash, cash equivalents and short-term investments, restricted cash and capitalization as of June 30, 2001:

•: on an actual basis without any adjustments to reflect subsequent or anticipated events;
•: on a pro forma basis to reflect the conversion of all of the outstanding shares of our convertible preferred stock into 169,070,806 shares of common stock upon the consummation of this offering; and
•: on a pro forma as adjusted basis to give effect to the conversion of all of the outstanding shares of our convertible preferred stock and the receipt of the estimated net proceeds from the sale of shares of common stock in this offering, assuming an initial public offering price of $ per share after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the accompanying notes appearing elsewhere in this prospectus.

				As of June 30, 2001
				Actual			Pro Forma			Pro Forma As Adjusted
				(in thousands, except share data) (unaudited)
Cash, cash equivalents and investment securities				$	161,765		$	161,765		$

Restricted cash				$	6,048		$	6,048		$

Convertible preferred stock, par value $0.001 per share:
		193,284,442 shares authorized, 169,070,806 shares issued and outstanding actual, no shares issued and outstanding pro forma and pro forma as adjusted		$	278,324		$	—		$
Stockholders' equity (deficit):
	Common stock, par value $0.001 per share:
		300,000,000 shares authorized, 38,279,404 shares issued and outstanding, 207,350,210 shares outstanding pro forma and shares outstanding pro forma as adjusted			38			207
	Additional paid in capital				81,287			359,442
	Deferred stock-based compensation				(13,726	)		(13,726	)
	Stockholders' notes				(558	)		(558	)
	Accumulated deficit				(231,033	)		(231,033	)

			Total stockholders' equity (deficit)		(163,992	)		114,332

			Total capitalization	$	282,145		$	282,145		$

This table excludes the following, as of June 30, 2001:

•: 570,414 shares of common stock issuable upon exercise of warrants outstanding at a weighted average exercise price of $0.23 per share;
•: 12,572,659 shares of common stock issuable upon exercise of options outstanding at a weighted average exercise price of $0.24 per share;
•: shares of common stock reserved for issuance under our employee stock purchase plan; and
•: 1,062,298 shares of common stock reserved for future grant under our stock option plans.

DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of common stock upon the completion of this offering.

Our pro forma net tangible book value (deficit) as of June 30, 2001, assuming conversion of all outstanding preferred stock into common stock, equaled approximately ($ ) million or approximately $ per share of common stock. Net tangible book value (deficit) per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. After giving effect to the sale of shares of common stock offered by us in this offering at an assumed initial public offering price of $ per share and after deducting the estimated underwriting discount and offering expenses payable by us, our pro forma net tangible book value as of June 30, 2001, would have equaled approximately $ per share of common stock. This represents an immediate increase in net tangible book value of $ per share to our existing stockholders and an immediate dilution in net tangible book value of $ per share to new investors of common stock in this offering. If the initial public offering price is higher or lower, the dilution to new investors will be greater or less, respectively. The following table summarizes this per share dilution:

Assumed initial public offering price per share					$
	Pro forma net tangible book value (deficit) per share as of June 30, 2001	$	(	)
	Increase per share attributable to this offering

Pro forma net tangible book value per share after this offering

Dilution in pro forma net tangible book value per share to new investors					$

The following table summarizes on a pro forma basis, as of June 30, 2001, the differences between our existing stockholders and new investors with respect to the number of shares of common stock issued by us, the total consideration paid and the average price per share paid:

		Shares Purchased			Total Consideration
		Shares Purchased			Total Consideration			Average Price Per Share
		Number	Percentage		Amount	Percentage		Average Price Per Share
Existing stockholders				%			%	$
New investors

	Total		100	%	$	100	%

We base the foregoing discussions and tables on the number of shares of stock outstanding as of June 30, 2001, and exclude:

•: 570,414 shares of common stock issuable upon exercise of warrants outstanding at a weighted average exercise price of $0.23 per share;
•: 12,572,659 shares of common stock issuable upon exercise of options outstanding at a weighted average exercise price of $0.24 per share;
•: shares of common stock reserved for issuance under our employee stock purchase plan; and
•: 1,062,298 shares of common stock reserved for future grant under our stock option plans.

To the extent outstanding options or warrants are exercised, there will be further dilution to new investors.

SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data in conjunction with the consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

We derived the consolidated statement of operations data for the period from inception, March 8, 1999, to December 31, 1999, and for the year ended December 31, 2000, and consolidated balance sheet data as of December 31, 1999 and 2000 set forth below from our audited consolidated financial statements included elsewhere in this prospectus. We derived the consolidated statement of operations for the six months ended June 30, 2000 and 2001 and the consolidated balance sheet data as of June 30, 2001, from our unaudited interim consolidated financial statements included elsewhere in this prospectus. In management's opinion, these unaudited statements have been prepared on substantially the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the consolidated financial information for the periods presented. The historical results do not necessarily indicate results expected for any future period.

								Six Months Ended June 30,
		Mar. 8, 1999 (inception) to Dec. 31, 1999
					Year Ended Dec. 31, 2000
					Year Ended Dec. 31, 2000			2000			2001
		(in thousands, except per share data)
								(unaudited)
Consolidated Statements of Operations:
Transaction fees		$	—		$	8,454		$	35		$	31,608
Interest on funds held for others			—			2,046			239			2,063
Investment management fees			—			22			—			539
Service agreement revenues			—			3,938			3,072			—

	Total revenues		—			14,460			3,346			34,210
Transaction processing expenses			—			25,093			6,230			19,413
Provision for transaction losses			—			11,028			1,355			5,539
Promotional and marketing			888			21,023			10,675			3,670
Product development			621			5,334			1,547			4,919
General and administrative			2,954			18,623			6,684			12,297
Customer service and operations			296			15,968			4,321			14,898
Amortization of goodwill and other intangibles			123			49,313			16,482			32,831
Service agreement costs and termination expenses			—			41,142			28,218			—

	Total operating expenses		4,882			187,524			75,512			93,567

Loss from operations			(4,882	)		(173,064	)		(72,166	)		(59,357	)
Interest income			264			2,124			152			1,741
Other income (expense), net			(1	)		1,434			1,386			708

Net loss		$	(4,619	)	$	(169,506	)	$	(70,628	)	$	(56,908	)

Basic and diluted net loss per share		$	(1.64	)	$	(7.92	)	$	(5.49	)	$	(2.23	)

Shares used in calculating basic and diluted net loss per share			2,814			21,396			12,875			25,552

Pro forma basic and diluted net loss per share (unaudited)					$	(0.95	)				$	(0.29	)

Shares used in calculating pro forma basic and diluted net loss per share (unaudited)						178,096						194,623

	Dec. 31,
	Dec. 31,						June 30, 2001
	1999			2000			June 30, 2001
							(unaudited)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	8,442		$	120,142		$	134,679
Restricted cash		150			3,976			6,048
Funds receivable		—			11,271			12,456
Non-current investment securities		—			—			27,086
Total assets		12,842			231,797			249,870
Due to customers		—			82,786			108,571
Funds payable		—			6,721			10,852
Reserve for transaction losses		—			4,900			5,686
Convertible preferred stock		15,791			241,641			278,324
Total stockholders' deficit		(4,040	)		(113,454	)		(163,992	)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following commentary in conjunction with the "Selected Consolidated Financial Data" and our consolidated financial statements and the related notes contained elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under "Risk Factors" and elsewhere in this prospectus.

Overview

PayPal enables any business or consumer with email to send and receive online payments securely, conveniently and cost-effectively. Our network builds on the existing financial infrastructure of bank accounts and credit cards to create a global, real-time payment solution. We offer our account-based system to users in 36 countries including the U.S. The PayPal product launched in October 1999; as of June 30, 2001, our network had grown to include 7.1 million personal accounts and 1.7 million business accounts. During the six months ended June 30, 2001, 4.2 million of our accounts sent or received at least one payment. For the six months ended June 30, 2001:

•: our account base grew by an average of 18,000 per day, with virtually no traditional sales or marketing;
•: we processed an average of 158,000 payments per day totaling $7.7 million in average daily volume;
•: our Gross Merchant Sales, or GMS, totaled $1,209.9 million; and
•: our transaction fees equaled 2.3% of total payment volume, compared to our transaction processing expenses of 1.4% of total payment volume.

Merger between X.com Corporation and Confinity, Inc.

We incorporated as X.com Corporation in March 1999 and intended to provide Internet banking services to our customers. On March 30, 2000, X.com merged with Confinity, Inc., with X.com as the surviving entity. By October 2000 we decided to focus our efforts on the PayPal product and to discontinue our Internet banking operations. We formally changed our name to PayPal, Inc. in February 2001. We accounted for the merger under the purchase accounting method. The excess of the purchase price over the fair value of the net assets totaled $131.3 million. We included this amount in goodwill and other intangible assets and amortize it using the straight-line method over a two-year period. Amortization expenses relating to the goodwill and other intangible assets totaled $49.3 million during the year ended December 31, 2000, and $32.8 million for the six months ended June 30, 2001. Purchased technology that had reached technological feasibility and was principally represented by the technology underlying the PayPal product was valued using a replacement cost method. This analysis resulted in an allocation of $0.6 million to existing technology, which was capitalized and is being amortized over two years. Additionally, a replacement cost analysis of the customer base and assembled workforce resulted in $6.3 million and $0.8 million, respectively, being capitalized and amortized over two years. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002, we no longer will amortize goodwill and other intangibles with an indefinite useful life, but will test at least annually for impairment. Prior to the effective date of SFAS No. 142, we expect to amortize an additional $32.8 million of intangibles relating to the merger.

Termination of Internet Banking Service Agreement

In November 1999, we entered into a series of agreements with Community Bankshares, Inc., or CBI. Under the first agreement, we agreed to purchase CBI's wholly owned subsidiary, First Western National Bank, subject to the receipt of regulatory approvals. The second agreement provided for an Internet banking arrangement under which we would solicit customers to apply for First Western accounts and the customers would use our software programs to utilize Internet banking services from First Western. We agreed to reimburse CBI and First Western for their costs incurred in providing the First Western accounts. In December 2000, we discontinued our Internet banking services and terminated the stock purchase agreement with CBI. In December 2000, in accordance with the original agreement, we paid CBI a termination fee of $1.0 million and reimbursed CBI an additional $1.0 million for the net losses resulting from the Internet banking operations.

Sources of Revenue

We earn revenues from three sources: transaction fees, interest on funds held for others and investment management fees. The following describes these revenue streams.

Transaction Fees

We recognize revenue from transaction fees when the transaction completes and no further obligations exist.

Fees on Gross Merchant Sales

We generate revenue primarily from transaction fees on the total dollar volume of payments made to all domestic and international business accounts. We refer to this dollar volume as Gross Merchant Sales, or GMS. We charge these transaction fees only to the payment recipient and not to the sender. Effective as of July 13, 2001, our rates varied according to the following schedule: 2.2% of GMS plus $0.30 per transaction for merchants receiving an average of at least $1,000 per month in payments; 2.9% of GMS plus $0.30 for merchants receiving an average of less than $1,000 per month in payments; and from 3.4% to 3.9% of GMS plus $0.30 for higher risk accounts. For the six months ended June 30, 2001, we charged business accounts a weighted average of 2.3% of GMS. We do not charge transaction fees to personal accounts on payments they receive. During the six months ended June 30, 2001, we processed a total of 28.6 million payments at an average size of $49 per payment.

We automatically deduct the GMS transaction fees from all payments received by business accounts. Thus, we do not need to bill or collect from our customers and we have no accounts receivable in respect of GMS transaction fees. The majority of our business accounts pay our standard rate of 2.9% of GMS plus $0.30 for each payment received. As we have grown our customer base and added features to our product, we have increased the prices charged business accounts with no noticeable decline in volume.

International Funding and Withdrawal Fees

We charge our international senders a fee of 2.6% of the transaction amount plus $0.30 for each payment funded externally, as opposed to payments funded from an existing PayPal balance. For the six months ended June 30, 2001, our international senders paid a weighted average of 3.0% of the transaction amount for these payments. These fees are in addition to the GMS transaction fees paid by business account recipients of international payments. For withdrawals, we charge our international recipients a fee ranging from 1.5% to 2.6% of the amount plus $0.55 to $1.50 for each withdrawal from their PayPal accounts to local bank accounts. In addition, we charge a currency risk spread ranging from 0.8% to 2.9% of the withdrawal amount. For the six months ended June 30, 2001, 8.7% of our

payment volume involved international senders or recipients, and international fees accounted for 12.0% of our total revenues.

Debit Card Interchange Fees

The PayPal ATM/debit card enables selected PayPal users to withdraw money from their PayPal account balances at any ATM connected to the Cirrus or Maestro networks and to make purchases from any merchant that accepts MasterCard. For the six months ended June 30, 2001, we earned a blended revenue rate of 1.6% of the transaction value from customers who used their cards to withdraw cash from ATMs or to make purchases. We currently pay holders of the PayPal ATM/debit card a 1.5% cash-back bonus on all PayPal ATM/debit card purchases if they join the PayPal Preferred Program. This program requires that auction sellers advertise PayPal as their exclusive online payment option. We continue to evaluate this promotion and may change the bonus amounts or requirements in the future. At June 30, 2001, 58.2% of activated PayPal ATM/debit cardholders qualified for the 1.5% cash back on PayPal ATM/debit card purchases as participants in the PayPal Preferred Program. We net these cash back payments against PayPal ATM/debit card revenues for financial reporting purposes. For the six months ended June 30, 2001, our weighted average fee, net of cash back payments, for PayPal ATM/debit card purchases and withdrawals equaled 1.0%.

Interest on Funds Held for Others

We invest the balances in most of our customers' accounts in short-term money market and money market equivalent securities which yielded an average annual return of 5.11% during the six months ended June 30, 2001. As of June 30, 2001, our total amount due to customers equaled $108.6 million. We recognize the interest income on these investments in the period in which we earn it. We expect interest income to fluctuate depending on changes in short-term interest rates and our overall amount of funds held for others. Beginning in October 2001, we plan to deposit all customer funds not transferred to the PayPal Money Market Reserve Fund in bank accounts, which generally bear interest at lower rates than short-term money market and money market equivalent securities.

Investment Management Fees

Our customers have the option of earning income on their PayPal account balances by purchasing shares of our affiliated money market mutual fund, the PayPal Money Market Reserve Fund. The PayPal Money Market Reserve Fund is managed by PayPal Asset Management, a wholly owned subsidiary of PayPal, Inc. and an SEC registered investment management company. An independent broker-dealer distributes the fund's shares.

PayPal Money Market Reserve Fund shareholders have a corresponding amount of their money market fund balances automatically redeemed whenever they initiate PayPal payments.

The Fund pays a variable rate of return. We currently earn a net annual management fee of 1.4% on the average net assets held in the Fund. An expense waiver of 0.4% is currently in place and could be eliminated with reasonable notice to shareholders, although we have no intention of taking such action at this time. At June 30, 2001, approximately 250,000 of our customers chose to invest in the Fund; the aggregate amount of customer funds invested in the Fund at this date totaled $45.2 million. These customers' balances accounted for 29.4% of all money held in the PayPal system as of that date.

Operating Expenses

Transaction Processing Expenses

We incur transaction processing expenses when senders fund payments and when recipients withdraw funds.

Senders fund PayPal payments from three sources:

•: their existing PayPal balances;
•: their bank accounts; or
•: their credit cards.

We bear all costs of funding payments into the PayPal system. We incur no cost on payments funded from existing PayPal balances. For payments funded by bank account transfer, we incur a processing cost of $0.03 per transaction. On credit card-funded payments, we incur a cost of 1.9% of the payment amount plus $0.18 per payment. Credit card funding costs comprise the bulk of our funding costs and include interchange expenses, authorization and settlement expenses and fraud screen expenses. For the six months ended June 30, 2001, credit cards funded 49.7% of our payment volume, bank account transfers funded 27.3% and existing PayPal balances funded 23.0%.

Recipients withdraw funds by:

•: transferring to their bank accounts;
•: withdrawing cash at any ATM connected to the Cirrus or Maestro networks using the PayPal ATM/debit card;
•: purchasing from merchants that accept MasterCard using either the PayPal ATM/debit card or our Shop Anywhere feature; or
•: requesting a check from PayPal.

We bear all costs associated with withdrawals from the PayPal system. On transfers to a recipient's U.S. bank account, we incur a processing cost of $0.03 per transaction. On transfers to a recipient's bank account in Canada, the United Kingdom, the Netherlands, Germany, France, Australia and New Zealand, our processing cost varies based upon withdrawal processing costs for the different countries. Our average processing cost for international bank account withdrawals for the six months ended June 30, 2001 equaled approximately $0.50. For ATM withdrawals and debit card purchases, we incurred a blended average per-transaction cost of approximately $0.55. Finally, we incurred a cost of $0.65 for each paper check we mail to our customers.

Provision for Transaction Losses

We incur transaction losses due to fraud and non-performance of third parties and customers. We establish reserves for these estimated losses. Examples of transaction losses include ACH returns, debit card overdrafts, charge-backs for unauthorized credit card use and merchant-related charge-backs due to non-delivery of goods or services. The reserves represent an accumulation of the estimated amounts necessary to cover all outstanding transaction losses, including losses incurred as of the reporting date but of which we have not yet been notified. We base the reserve estimates on known facts and circumstances, internal factors including our experience with similar cases, historical trends involving loss payment patterns and the mix of transaction and loss types. We reflect additions to the reserve in current operating results, while we make charges to the reserve when we pay losses. We reflect recoveries in the reserve for transaction losses as collected.

Credit card charge-backs comprise our largest source of transaction loss expense. As a percentage of total payment volume, we incurred transaction losses of 0.87% for the year ended December 31, 2000 and 0.40% for the six months ended June 30, 2001. Our transaction loss rate to total payment volume has decreased as a result of:

•: our risk management team's success in preventing losses and recovering fraudulent funds both from unauthorized credit card use and merchant-related fraud;

•: the implementation of front-end tools, risk controls, and proprietary technology to prevent merchant-related and unauthorized transaction losses; and
•: the reduction in the credit card-funded percentage of our total payment volume to 49.7% for the six months ended June 30, 2001, from 68.2% for the year ended December 31, 2000.

The establishment of appropriate reserves is an inherently uncertain process, and ultimate losses may vary from the current estimates. We regularly update our reserve estimates as new facts become known and events occur that may impact the settlement or recovery of losses.

Promotional and Marketing

Promotional and marketing costs include salaries and stock-based compensation for marketing and business development personnel and promotional expenditures, which include new user sign-up and referral bonuses and cost of facilities, computer and communications equipment and support services used in promotional and marketing activities.

We have paid promotional bonuses from $5 to $10 to each qualified customer opening a new PayPal account and $5 to $10 to customers referring new qualified customers. The amounts paid do not and did not depend on whether the customer generates revenue for us. We deposit these amounts into customer accounts and expense them as incurred.

Product Development

Product development expenses include salaries, stock-based compensation for product managers and software engineers, consulting fees, costs of facilities, computers and communications equipment and support services used in product development.

General and Administrative

General and administrative expenses consist primarily of salaries and stock-based compensation for our executive, administrative, legal, finance and human resources personnel, cost of facilities, computer and communications equipment, support services and professional services fees.

Customer Service and Operations

Customer service and operations expenses consist primarily of salaries, stock-based compensation for network administration personnel, customer service and operations personnel, contracting fees for our outsourced email based customer support, computer and communications equipment and cost of facilities.

Stock-Based Compensation

In connection with some employee stock option grants, we recorded deferred stock-based compensation based on the difference between the fair value of the common stock and the stock option exercise price of these stock options at the measurement date, typically the date of grant. We present this amount as a reduction of stockholders' equity and we amortize it over the vesting period of the applicable stock options. For the year ended December 31, 2000 and for the six months ended June 30, 2001, we recorded stock-based compensation expense of $5.8 million and $6.2 million, respectively.

We accelerated the vesting on some outstanding stock awards for four employees we terminated during the year ended December 31, 2000. We recorded $0.5 million in additional stock-based compensation expense related to the acceleration as a result of the difference between the fair value of the awards at the new measurement date and the option exercise price. During the six months ended

June 30, 2001, we accelerated vesting for fourteen employees upon termination of service. We recorded $2.3 million in additional stock-based compensation expense. The table below includes these amounts.

We include stock-based compensation expense in our statement of operations as follows:

		Three Months Ended
		Mar. 31, 2000		June 30, 2000		Sept. 30, 2000		Dec. 31, 2000		Mar. 31, 2001		June 30, 2001
		(in thousands)
Promotional and marketing		$	6	$	5	$	8	$	14	$	12	$	36
Product development			48		64		180		623		383		392
General and administrative			441		164		3,662		397		1,605		3,115
Customer service and operations			23		48		57		84		157		462

	Total	$	518	$	281	$	3,907	$	1,118	$	2,157	$	4,005

We expect to amortize the $13.7 million of deferred stock-based compensation remaining at June 30, 2001 as follows (in thousands):

Six-month period ending December 31, 2001	$	2,094
Year ending December 31, 2002	$	4,189
Year ending December 31, 2003	$	4,145
Year ending December 31, 2004	$	2,908
Year ending December 31, 2005	$	390

These amounts may change due to forfeitures and additional grants of stock options.

In July 2001, we adopted a liquidity program for the benefit of employees, designed to allow participants the opportunity to diversify some of their holdings of PayPal stock. We restricted the program to or for the benefit of employees with more than one year of service as of April 30, 2001 and at least 100,000 options or shares of our restricted stock. We extended a loan to program participants for up to 20% of their number of shares of common stock multiplied by $1.50. The loans accrued interest at a fixed rate of 5.02% per annum with principal and interest repayable in full at the end of four years. The loans were non-recourse and prepayable and, for employees, their maturity accelerated if the individual left our employment. In exchange for the loan, each participant pledged to us restricted stock totaling 20% of his or her equity investment in our stock. The loan agreements include a call feature which gave us the right to repurchase 10% of the participant's total equity investment at the time of the loan, at $3.00 per share. The call feature began one year from the date of the loan agreement and ended with the four-year term of the loan. We expect to record additional stock-based expense during the three months ended September 30, 2001 related to this program.

In September 2001, we entered into amendments to the loan agreements under which the call feature became exercisable on September 4, 2001 and which provided that prepayment of the loan in full would extinguish the call. We exercised our call right and repurchased the total equity investments of participants in the loan program who had not prepaid their loans prior to that date. This resulted in the repurchase of 1,777,510 shares of our common stock.

Amortization of Goodwill and Other Intangibles

Goodwill and other intangibles resulted primarily from the merger between X.com Corporation and Confinity, Inc. in March 2000. We expect to recognize goodwill and other intangible asset amortization charges of $16.4 million per quarter through December 2001. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002, we no longer will amortize goodwill and other intangibles with an indefinite useful life, but will test at least annually for impairment.

Net Operating Loss Carryforwards

As of December 31, 2000, we had federal and state net operating loss carryforwards of $130.6 million and $119.0 million, respectively. These federal and state net operating loss carryforwards will begin to expire in varying amounts beginning in 2019 and 2007, respectively. The amounts of and benefits from net operating loss carryforwards may be limited due to changes in ownership, as defined by Section 382 of the Internal Revenue Code of 1986. Because of the uncertainty surrounding the recovery of the deferred tax assets, we have established a 100% valuation allowance against our net deferred tax assets at December 31, 2000 as we do not expect to receive any immediate benefit from our net operating loss carryforwards and other deferred tax assets.

Seasonality

We do not have a sufficiently long operating history to generalize about seasonality of revenues. Nevertheless, we believe our business exhibits seasonality surrounding the holiday season, with disproportionately higher transaction volumes in the weeks preceding the Christmas holiday season and disproportionately lower transaction volume in the following weeks.

Results of Operations

General

Our historical operations consist primarily of the provision of an online payment product to businesses and consumers. Due to the evolving nature of our business, the termination of our Internet banking service agreement in December 2000, and the short period of time we have been in operation, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied on as an indication of future performance. You should read the following discussion in connection with the audited financial statements, the unaudited interim financial statements, the selected unaudited pro forma condensed combined financial statements and the related notes included elsewhere in this prospectus.

Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30, 2000

Revenues

Transaction Fees. A comparison of transaction fees for the six months ended June 30, 2001 and 2000 follows.

	Six Months Ended
	June 30, 2000		June 30, 2001
	(in thousands)
Transaction fees	$	35	$	31,608
Gross Merchant Sales (GMS)	$	1,873	$	1,209,862
Total payment volume	$	295,063	$	1,389,625

Transaction fees increased to $31.6 million for the six months ended June 30, 2001, from $35,000 for the six months ended June 30, 2000. We attribute the increase in transaction fees primarily to:

•: The increase in fees on Gross Merchant Sales. Gross Merchant Sales increased to $1,209.9 million for the six months ended June 30, 2001 from $1.9 million for the six months ended June 30, 2000. The average price we charged business accounts increased to 2.3% for the six months ended June 30, 2001 from 1.9% for the six months ended June 30, 2000. We began charging fees in June 2000 and have implemented a number of fee adjustments since that date, most recently in July 2001.

•: Our introduction of international access. We launched international capability in November 2000. Revenues from fees assessed on international funding and withdrawals amounted to $2.7 million for the six months ended June 30, 2001.
•: The launch of PayPal ATM/debit cards. We launched our ATM/debit card in late December 2000. Revenues from debit card interchange and ATM fees net of debit card cash-back payments amounted to $0.5 million for the six months ended June 30, 2001.

Interest on Funds Held for Others. Revenues from interest earned on funds held for others increased to $2.1 million for the six months ended June 30, 2001 from $0.2 million for the six months ended June 30, 2000. We attribute this increase primarily to growth in total account funds within the PayPal system, excluding funds transferred into the PayPal Money Market Reserve Fund. We earned a weighted average yield on these funds of 5.79% for the six months ended June 30, 2000 and of 5.11% for the six months ended June 30, 2001.

Investment Management Fees. We launched our Money Market Reserve Fund in November 2000. Revenues from investment management fees amounted to $0.5 million for the six months ended June 30, 2001.

Service Agreement Revenues

The Internet banking services agreement with First Western provided PayPal with 50.0% of any income and 100% of any losses resulting from the operation of the program. Interest income received from investing PayPal's excess cash in overnight investments comprised most of our revenues from this service agreement. We accrue and recognize interest income in the period earned. Service agreement revenues decreased from $3.1 million for the six months ended June 30, 2000 to $0 for the six months ended June 30, 2001 following the termination of this agreement.

Operating Expenses

Transaction Processing Expenses. Transaction processing expenses increased by $13.2 million, or 211.6%, to $19.4 million for the six months ended June 30, 2001 from $6.2 million for the six months ended June 30, 2000. We attribute this increase primarily to the growth of our total payment volume by 371.0% to $1,389.6 million for the six months ended June 30, 2001 from $295.1 million for the six months ended June 30, 2000. As a percentage of total payment volume, total transaction processing expenses decreased to 1.4% from 2.1%. We attribute the decrease mainly to a reduction in the percentage of payment volume funded by credit cards to 49.7% for the six months ended June 30, 2001 from 80.3% for the six months ended June 30, 2000.

Provision for Transaction Losses. Provision for transaction losses increased by $4.1 million, or 308.7%, to $5.5 million for the six months ended June 30, 2001 from $1.4 million for the six months ended June 30, 2000. We attribute this increase primarily to the growth of our total payment volume by 371.0% to $1,389.6 million for the six months ended June 30, 2001 from $295.1 million for the six months ended June 30, 2000. As a percentage of total payment volume, provision for transactions losses decreased to 0.40% for the six months ended June 30, 2001 from 0.46% for the six months ended June 30, 2000. The ratio of our transaction loss rate to total payment volume has decreased as a result of both our increased efforts to control fraud and a reduction in the payment volume funded by credit cards.

Promotional and Marketing. Promotional and marketing expenses decreased by $7.0 million, or 65.6%, to $3.7 million for the six months ended June 30, 2001 from $10.7 million for the six months ended June 30, 2000. We attribute the decrease to the tightening of our requirements to receive sign-up and referral bonuses between the two periods. For each new customer acquired, average promotional bonus expenses decreased to $0.15 for the six months ended June 30, 2001 from $3.95 during the six months ended June 30, 2000. For the six months ended June 30, 2001 and the six months ended June 30, 2000, we expensed as incurred promotion costs of $0.5 million and $8.6 million, respectively.

Product Development. Product development expenses increased by $3.4 million, or 217.9%, to $4.9 million for the six months ended June 30, 2001 from $1.5 million for the six months ended June 30, 2000. As a percentage of revenues, product development expenses totaled 14.4% and 46.2% for the six months ended June 30, 2001 and 2000, respectively. The increase in the absolute expense figure reflects the expansion of our product development and engineering staff and related costs required to support our continued emphasis on product development. We attribute the decrease in product development expenses as a percentage of revenues for the six months ended June 30, 2001 from the six months ended June 30, 2000 mainly to the fact that revenues increased faster than product development expenses in these periods. Product development expenses also include amortization of stock-based compensation of $775,000 and $112,000 for the six months ended June 30, 2001 and 2000, respectively, and depreciation and amortization of fixed assets of $800,000 and $75,000 for the six months ended June 30, 2001 and 2000, respectively.

General and Administrative. General and administrative expenses increased by $5.6 million, or 84.0%, to $12.3 million for the six months ended June 30, 2001 from $6.7 million for the six months ended June 30, 2000. As a percentage of revenues, general and administrative expenses equaled 35.9% and 199.7% for the six months ended June 30, 2001 and 2000, respectively. We attribute the increase in absolute expense primarily to additional staffing levels and related costs required to manage and support our rapidly growing operations. We attribute the decrease in general and administrative expenses as a percentage of revenues for the six months ended June 30, 2001 from the six months ended June 30, 2000 primarily to the fact that revenues increased faster than general and administrative expenses as we enjoyed economies of scale in our corporate infrastructure. General and administrative expenses also include amortization of stock-based compensation of $4.7 million and $0.6 million for the six months ended June 30, 2001 and 2000, respectively.

Customer Service and Operations. A comparison of our customer service and operations expenses for the six months ended June 30, 2001 and 2000 follows.

		Six Months Ended June 30, 2000			Six Months Ended June 30, 2001			Percentage Increase (Decrease)
		(in thousands except for percentage, per payment and per account data)
Total number of payments			6,483			28,582		340.9	%
Average number of accounts in period			1,101			7,158		550.1	%
Customer service operations:
	Expense	$	4,321		$	14,898		244.8	%
	As a percentage of revenues		129.1	%		43.5	%	—
	Per payment		$0.67			$0.52		(22.4	%)
	Per account per month		$0.65			$0.35		(46.2	%)

The absolute expense increased as we hired more employees to support our payment volume growth during the period. In May 2000, we established our customer service and operations center in Omaha, Nebraska, and in February 2001, we engaged a provider of outsourced email customer support in New Delhi, India. We attribute the decrease in customer service and operations expenses as a percentage of revenues for the six months ended June 30, 2001 from the six months ended June 30, 2000 primarily to the fact that our revenues increased at a faster rate as we began to experience

economies of scale in our support infrastructure. We attribute the decrease in our customer service and operations costs on a per payment and per account basis primarily to a combination of a reduction in the rate of customer contacts per payment and improved efficiency. Customer service and operations expenses also include amortization of stock-based compensation of $620,000 and $71,000 for the six months ended June 30, 2001 and 2000, respectively, and depreciation and amortization of fixed assets of $2.0 million and $0.5 million for the six months ended June 30, 2001 and 2000, respectively.

Amortization of Goodwill and Other Intangibles. Our amortization expense increased to $32.8 million for the six months ended June 30, 2001 from $16.5 million for the six months ended June 30, 2000. We attribute this increase to the merger with Confinity, Inc. on March 30, 2000.

Service Agreement Costs and Termination Expenses. Service agreement costs and termination expenses decreased from $28.2 million for the six months ended June 30, 2000 to $0 for the six months ended June 30, 2001 as the result of our termination of the CBI and First Western agreements in 2000.

Loss from Operations. For the six months ended June 30, 2001, our loss from operations totaled $59.4 million. For the six months ended June 30, 2000, our loss from operations totaled $72.2 million. We attribute the decrease in the loss primarily to the increase in our revenues to $34.2 million for the six months ended June 30, 2001 from $3.3 million for the six months ended June 30, 2000, partly offset by an increase in total operating expense to $93.6 million for the six months ended June 30, 2001 from $75.5 million for the six months ended June 30, 2000.

Interest, Other Income and Expenses, Net. Interest, other income and expenses, net increased by $0.9 million, or 59.2%, to $2.5 million for the six months ended June 30, 2001 from $1.5 million for the six months ended June 30, 2000. Interest, other income and expenses, net consist primarily of interest earned on cash, cash equivalents and short-term and long-term investments, the net effect of foreign currency gains and losses, and other miscellaneous income and expenses. We attribute this increase primarily to interest income from higher average cash balances resulting from our preferred stock equity financings.

Net Loss. Net loss decreased by $13.7 million, or 19.4%, to $56.9 million for the six months ended June 30, 2001 from $70.6 million for the six months ended June 30, 2000. For the six months ended June 30, 2000, our net loss totaled $70.6 million. We attribute the decrease in net loss primarily to (1) the increase in our total revenues to $34.2 million for the six months ended June 30, 2001 from $3.3 million for the six months ended June 30, 2000 and (2) the decrease in our total operating expenses as a percentage of payment volume.

Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999

General. We incorporated as X.com in March 1999 and intended to provide Internet banking services to our customers. Towards this goal, in November 1999 we entered into a series of agreements with Community Bankshares, Inc. that among other things allowed us to acquire First Western and to solicit customers for First Western's online banking services. In March 2000, we merged with Confinity, Inc., the creator of PayPal. By December 2000 we decided to focus our efforts on the PayPal product and to discontinue our Internet banking operations. Because we spent much of 1999 building infrastructure for an Internet banking service and, after the Confinity merger, focused our efforts primarily on continuing to build the PayPal product, we believe investors will not find meaningful the period-to-period comparison for the year ended December 31, 2000 and for the period from inception to December 31, 1999.

Revenues. Service agreement revenues increased to $3.9 million for the year ended December 31, 2000 from $0 for the period from inception to December 31, 1999. For the year ended December 31, 2000, transaction fees and interest on funds held for others amounted to $8.5 million and $2.0 million, respectively, all of which relates to the PayPal product we acquired in the March 2000 Confinity

merger. We began charging transaction fees to business account payment recipients in June 2000 and instituted additional price increases during 2000. Investment management fees for the year ended December 31, 2000 amounted to $22,000, reflecting the launch of the PayPal Money Market Reserve Fund in November 2000.

Transaction Processing Expenses. Transaction processing expenses amounted to $25.1 million for the year ended December 31, 2000, reflecting total PayPal payment volume of $1,261.4 million for the year ended December 31, 2000.

Provision for Transaction Losses. Provision for transaction losses amounted to $11.0 million for the year ended December 31, 2000. As a percentage of total payment volume, provision for transaction losses amounted to 0.87% for the year ended December 31, 2000. The loss rate as a percentage of total payment volume increased from 0.54% for the three months ended June 30, 2000, to 1.28% for the three months ended September 30, 2000, and decreased to 0.78% for the three months ended December 31, 2000, as a result of our implementing risk controls and proprietary technology to prevent losses and a reduction during these periods in the percentage of our total payment volume funded by credit cards.

Promotional and Marketing. Promotional and marketing expenses increased to $21.0 million for the year ended December 31, 2000 from $0.9 million for the period from inception to December 31, 1999. Promotional and marketing expenses for 2000 reflect $14.9 million in sign-up and referral bonuses ranging from $5 to $10 paid to new and existing PayPal users to encourage expansion of the PayPal user base following the Confinity merger. Included in the total expense of $21.1 million for the year ended December 31, 2000 is $33,000 related to amortization of stock-based compensation.

Product Development. Product development expenses increased to $5.3 million for the year ended December 31, 2000 from $0.6 million for the period from inception to December 31, 1999. We attribute this increase to a greater number of employees in our engineering and product groups, resulting in higher salaries and stock-based compensation and depreciation expenses associated with fixed assets purchased for product development. In addition, we recognized approximately $623,000 and $20,000 of amortization expenses associated with capitalized software and website development costs, respectively.

General and Administrative. General and administrative expenses increased to $18.6 million for the year ended December 31, 2000 from $3.0 million for the period from inception to December 31, 1999. We attribute this increase primarily to greater professional fees, outside service fees and other corporate expenses. Our general and administative expenses also included $4.7 million of stock-based compensation for our executive, administrative, legal, finance and human resources personnel, compared with $0.1 million for the period ended December 31, 1999.

Customer Service and Operations. Customer service and operations expenses increased to $15.9 million for the year ended December 31, 2000 from $0.3 million for the period from inception to December 31, 1999. We attribute this increase in customer service and operations expenses primarily to greater headcount in customer service and operations and rent and other fixed assets purchased for our establishment of our Omaha, Nebraska customer service and operations center.

Service Agreement Costs and Termination Expenses. Service agreement costs and termination expenses increased to $41.1 million for the year ended December 31, 2000 from $0 for the period from inception to December 31, 1999. We attribute this increase to costs incurred pursuant to the terms of the service agreement to reimburse CBI and First Western for providing internet banking accounts to our users.

Quarterly Results of Operations

The following table sets forth, for the periods presented, data regarding our revenues, operating expenses and net loss. We derived this data from our unaudited consolidated financial statements,

which we believe have been prepared on substantially the same basis as our audited consolidated financial statements. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period.

		Three Months Ended
		Mar. 31, 2000			June 30, 2000			Sept. 30, 2000			Dec. 31, 2000			Mar. 31, 2001			June 30, 2001
		(in thousands, except per share data) (unaudited)
Consolidated Statements of Operations:
Transaction fees		$	—		$	35		$	1,016		$	7,403		$	12,964		$	18,644
Interest on funds held for others			—			240			727			1,079			1,143			920
Investment management fees			—			—			—			22			192			348
Service agreement revenues			1,186			1,886			529			337			—			—

	Total revenues		1,186			2,161			2,272			8,841			14,299			19,912

Transaction processing expenses			—			6,230			9,764			9,098			8,754			10,660
Provision for transaction losses			13			1,343			5,432			4,241			3,103			2,437
Promotional and marketing			758			9,917			7,155			3,194			2,035			1,635
Product development			560			987			1,805			1,982			2,401			2,517
General and administrative			2,816			3,867			7,129			4,810			5,025			7,272
Customer service and operations			547			3,774			5,905			5,741			7,221			7,678
Amortization of goodwill and other intangibles			67			16,415			16,415			16,416			16,415			16,415
Service agreement costs and termination expenses			19,344			8,874			6,648			6,276			—			—

	Total operating expenses		24,105			51,407			60,253			51,758			44,954			48,614

Loss from operations			(22,919	)		(49,246	)		(57,981	)		(42,917	)		(30,655	)		(28,702	)
Interest income			152			—			1,015			957			943			798
Other income (expense), net			(46	)		1,432			(9	)		56			454			254

Net loss		$	(22,813	)	$	(47,814	)	$	(56,975	)	$	(41,904	)	$	(29,258	)	$	(27,650	)

Operating Data:
Gross Merchant Sales		$	—		$	1,873		$	55,621		$	335,691		$	546,848		$	663,014
Total payment volume		$	46,263		$	248,799		$	422,760		$	543,562		$	642,737		$	746,888
Total number of payments			1,026			5,456			9,438			12,325			13,524			15,058
Total number of accounts (at period end)			824			2,190			3,718			5,518			7,200			8,798
	Number of business accounts		—			14			289			800			1,327			1,731

Our operating results have varied on a quarterly basis during our operating history. We expect to experience significant fluctuations in our future operating results due to a variety of factors, many of which we do not control. Factors that may affect our operating results include, among others: the continued growth in our payment volume; our ability to maintain and increase our customer base and our Gross Merchant Sales; our ability to maintain and increase our international usage, debit card usage and user balances in our system; changes in our pricing policies and revenue mix; the announcement or introduction of new or enhanced services by us or our competitors; changes in our cost structure, including transaction losses and credit card funding rates; consumer acceptance of the Internet for a product such as ours; consumer acceptance of the Internet as a medium of commerce; and general economic conditions.

Unfavorable changes in any of the above factors could affect materially and adversely our revenues, results of operations in future periods and the market price of our common stock. As a result, you should not rely upon period-to-period comparisons of our results of operations as an indication of future performance. In addition, the results of any quarterly period do not indicate results to be expected for a full fiscal year. We cannot predict many of the factors outlined above and they may cause significant fluctuations in our operating results. These fluctuations may cause our annual or quarterly results to fall below market expectations, which could affect the market price of our stock materially and adversely.

Liquidity and Capital Resources

Since inception, we have financed our activities primarily through a series of private placements of convertible preferred stock. As of June 30, 2001, we had raised $210.7 million net of issuance costs from the sale of equity securities.

Net cash used by operating activities totaled $4.1 million for the year ended December 31, 1999, $110.3 million for the year ended December 31, 2000 and $16.5 million for the six months ended June 30, 2001. Net cash used by operating activities resulted primarily from our net loss and was offset by non-cash charges for depreciation and amortization.

Net cash used in investing activities totaled $2.9 million for the year ended December 31, 1999, $21.6 million for the year ended December 31, 2000 and $31.0 million for the six months ended June 30, 2001. We primarily used the invested cash in the periods presented for purchases of investment securities and fixed assets.

Net cash provided by financing activities totaled $15.5 million for the year ended December 31, 1999, $231.7 million for the year ended December 31, 2000 and $62.7 million for the six months ended June 30, 2001. Net cash provided by financing activities primarily resulted from the issuance of preferred stock to third parties and increases in amounts due to customers.

For the six months ending December 31, 2001, we expect to make approximately $7.0 million in capital expenditures relating to the establishment of a secondary data center, further upgrading our primary data center, and investment in networking and equipment infrastructure for our head office.

As of June 30, 2001, our total restricted cash holdings of $6.0 million consisted of the following:

•: Transaction processing (e.g., PayPal ATM/debit card and credit card processing): $5.0 million
•: General corporate activities (e.g., lease agreements): $1.0 million

As of June 30, 2001, the following sets forth our minimum lease commitments:

Year Ended December 31,		Capital Leases		Operating Leases
		(in thousands)
2001 (Last six months only)		$	109	$	904
2002			235		1,863
2003			14		1,932
2004			—		1,998
2005 and thereafter			—		4,385

	Total minimum lease commitments	$	358	$	11,082

In addition, we have minimum payments due under service and marketing agreements in the aggregate amount of $0.4 million in 2001 (last six months only), $1.5 million in 2002, $1.9 million in 2003, $3.0 million in 2004 and $2.5 million in 2005.

We believe that, based on current levels of operations and anticipated growth, our cash from operations, together with other available sources of liquidity, without giving effect to the net proceeds from this offering, will suffice to fund our operations for at least the next 24 months. Giving effect to the net proceeds from this offering, our capital resources will suffice to fund our operations for the foreseeable future. Poor financial results, unanticipated expenses or unanticipated opportunities that require financial commitments could give rise to additional financing requirements sooner than we expect. However, we may not secure financing when we need it or we may not secure it on acceptable terms. If we do not raise additional funds when we need them, we might have to delay, scale back or eliminate expenditures for expansion of our product plans and other strategic initiatives.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks related to fluctuations in interest rates on our fixed and variable rate debt. Currently, we do not utilize interest rate swaps, forward or option contracts on foreign currencies or commodities or other types of derivative financial instruments.

We do not believe that the future market risks related to the above securities will have a material adverse impact on our financial position, results of operations or liquidity.

To date, all of our recognized revenue has been denominated in U.S. dollars. For the six months ended June 30, 2001, we earned approximately 12.0% of our revenue from international markets, which in the future may be denominated in various currencies. As a result, our operating results may become subject to significant fluctuations based upon changes in the exchange rates of some currencies in relation to the U.S. dollar and diverging economic conditions in foreign markets. Although we will continue to monitor our exposure to currency fluctuations, and, when appropriate, may use financial hedging techniques to minimize the effect of these fluctuations, we cannot assure you that exchange rate fluctuations will not affect adversely our financial results in the future.

We currently do not invest in, or hold for trading or other purposes, any financial instruments subject to market risk. Our revenue from interest on funds held for others and interest income on our invested corporate capital is sensitive to changes in the general level of U.S. interest rates and any declines of interest rates over time would reduce our revenues and interest income from our portfolio.

Inflation and Foreign Currency Risk

Inflation has not had a significant impact on our operations during the periods covered by the accompanying consolidated financial statements. Additionally, foreign exchange risk does not pose a significant threat to us because we set the dollar-to-local currency conversion rate for international withdrawals at a rate that is designed to cover our intra-day risks of holding foreign currencies. If inflation increases, if foreign currency fluctuations make it less attractive for international customers to make payments in U.S. dollars, or if we do not properly manage our exposure to the foreign currencies that we hold, our business, financial condition and results of operations could suffer. The difficulty of managing our foreign currency exposure will increase if we implement our plans to offer customers the ability to send and receive payments in multiple currencies.

Effect of Recent Accounting Changes

In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities, or SFAS No. 133. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. The adoption of SFAS No. 133 will have no impact on us as we have no derivative instruments and do not perform hedging activities.

In June 2001, the FASB issued SFAS No. 141 Business Combinations, or SFAS No. 141. The standard concludes that all business combinations within the scope of the statement will be accounted for using the purchase method. Previously, the pooling-of-interests method was required whenever certain criteria were met. Because those criteria did not distinguish economically dissimilar transactions, similar business combinations were accounted for using different methods that produced dramatically

different financial statement results. SFAS No. 141 no longer permits the use of pooling-of-interest method of accounting. In addition, the statement also requires separate recognition of intangible assets apart from goodwill if they meet one of two criteria: the contractual-legal criterion or the separability criterion. SFAS No. 141 also requires the disclosure of the primary reasons for a business combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. SFAS No. 141 also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later.

In June 2001 the FASB also issued SFAS No. 142 Goodwill and Other Intangible Assets, or SFAS No. 142. It addressed how intangible assets that are acquired individually or within a group of assets (but not those acquired in business combination) should be accounted for in the financial statements upon their acquisition. SFAS No. 142 adopts a more aggregate view of goodwill and bases the accounting on the units of the combined entity into which an acquired entity is aggregated. SFAS No. 142 also prescribes that goodwill and intangible assets that have indefinite useful lives will not be amortized but rather tested at least annually for impairment. Intangible assets that have definite lives will continue to be amortized over their useful lives, but no longer with the constraint of the 40-year ceiling. SFAS No. 142 provides specific guidance for the testing of goodwill for impairment, which may require re-measurement of the fair value of the reporting unit. Additional ongoing financial statement disclosures are also required. The provisions of the statement are required to be applied starting with fiscal years beginning after December 15, 2001. The statement is required to be applied at the beginning of the fiscal year and applied to all goodwill and other intangible assets recognized in the financials at that date. Impairment losses are to be reported as resulting from a change in accounting principle. We will implement SFAS No. 142 beginning January 1, 2002. We have not yet determined the impact of implementation to our consolidated results of operations.

BUSINESS

Overview

We earn revenues primarily from transaction fees on GMS, from international fees and from fees on our ATM/debit card. For the three months ended June 30, 2001, we generated revenues of $19.9 million, of which GMS fees comprised 81.9%, or $16.3 million. For the same period, our transaction fees equaled 2.5% of total payment volume, compared to our transaction processing expenses of 1.4% of total payment volume.

Industry Overview

Growth of Online Commerce

Forrester projects consumer purchases on the Internet to grow from an estimated $38.8 billion in 2000 to $143.8 billion in 2003. The emergence of auction-based marketplaces, which provide small merchants and consumers access to the global market, contribute significantly to this growth. For example, eBay, the largest online auction site, reported gross merchandise sales of $4.2 billion for the six months ended June 30, 2001, an increase of 73.4% over the comparable period in 2000. Forrester projects continued robust growth in total consumer auction sales—from an estimated $6.1 billion in 2000 to $19.0 billion in 2003.

Legacy Payment Systems

Traditionally, consumers and businesses have effected payments by delivering cash, paper checks or money orders, by instituting wire transfers or by using credit cards. According to The Nilson Report, an estimated $4.9 trillion in consumer payments were made in the U.S. in 1999. Paper checks, the most common method of settling commercial transactions, comprised 46.2% of the total dollar value of commercial payments in 1999. Credit card transactions represented 22.5% of the total. Many small to mid-sized businesses wishing to conduct transactions online may find these traditional payment methods insecure, expensive or inconvenient.

Cash: Cash payments, while effective for face-to-face low-value transactions, do not function effectively for transactions in which the buyer and seller are in different locations.

Checks: Both the sender and the recipient of paper checks can find them costly and inconvenient in terms of printing, mailing, delivering and processing. In addition, checks settle slowly, as even after delivery and deposit checks still can take several days to clear and allow the recipient access to the funds.

Wire Transfer: Individuals sending money overseas and persons without bank accounts primarily use wire transferors and money transmission services. These services often charge high fees, particularly for low-and mid-value payments, and involve inefficient methods of payment notification and receipt.

Credit Cards: Credit cards accounted for approximately 98.5% of payment volume for online transactions in 2000 according to ActivMedia. However, many small and mid-sized businesses may find drawbacks to accepting credit cards for online transactions. In order to obtain a merchant agreement and accept credit cards online, many merchants need to provide a personal guaranty, acquire specialized hardware, prepare a loan application, establish secure Internet connections and encrypt all customer credit card data. In addition, the up-front and monthly fixed costs and the relatively high variable processing costs at low volumes may make credit cards prohibitively expensive for smaller merchants. Fraud poses a major problem for online merchants, which bear responsibility for fraudulent credit card payments. According to Global Industry Analysts, online fraud accounted for approximately 5% of total online transactions in 1999.

Our History

We set out to develop a payment system combining the pervasiveness of email with the existing financial infrastructure—the Automated Clearing House, or ACH, system, the credit card networks and the ATM/debit card networks. We launched our product in October 1999, offering free email-driven, person-to-person payments. In order to encourage growth, we designed our system to allow senders to pay people who did not yet have PayPal accounts. Every time a PayPal user sent money to someone who had not joined the PayPal network, the recipient received an email with a link to open a PayPal account and claim his money. In this way, the user base grew as a direct function of people using the

PayPal system. We augmented this user-driven growth with various promotional bonuses. During the earlier stages of our growth, we offered qualified new users a $5 to $10 sign-up bonus, automatically deposited into their PayPal accounts, to encourage them to send money to others. Additionally, for every new member one of our users brought into the network, we deposited into the original user's PayPal account a $5 to $10 referral bonus. We began the year 2000 with 12,000 users. Just six months later, our account base had grown to 2.2 million users, and as of June 30, 2001, we had 8.8 million users.

Recognizing that much of our payment volume involved businesses, in June 2000 we began charging fees to our higher volume individual and commercial recipients by launching business accounts. Unlike personal accounts, business accounts may send and receive unlimited credit card funded payments and also take advantage of e-commerce-enabling features such as Web Accept, which allows merchants to receive payments directly from their websites. By the end of June 2000, we had 14,000 business accounts. By December 31, 2000, this number grew to over 800,000. Many merchants joined PayPal in part because of the widespread consumer adoption of our payment system. A number of previous attempts to create new payment mechanisms failed largely because of the "chicken and egg" problem—consumers did not adopt the mechanism because merchants did not accept it, and merchants would not accept it because no consumers used it. We solved this problem by making it virtually costless for merchants to sign up for accounts. A business only needed email and an Internet connection. At the same time, our growing customer base encourages merchants to register simply by sending them email payments. As of June 30, 2001, our 8.8 million total accounts included 1.7 million business accounts.

For the three months ended June 30, 2001, we processed an average of 165,000 payments per day, totaling $8.2 million in daily volume. Fee paying business accounts received 88.8% of this payment volume, for a total of $663.0 million in GMS. We have refined our sign-up and referral bonus requirements to encourage our customers to utilize the full range of our product, including the ability to link a bank account and to earn a money market rate of return on their respective PayPal balances. During the three months ended June 30, 2001, we added an average of 18,000 new accounts every day at an average cost of $0.14 in promotional bonuses per new account. As we have grown our customer base and added features to our product, we have increased the prices charged business accounts with no adverse effect on GMS. We believe that our market exhibits network characteristics, meaning that as the number of participants within the PayPal's network grows, the value of joining the network grows as well.

The PayPal Product

PayPal enables any business or consumer with email to send and receive online payments securely, conveniently and cost-effectively. Our email-driven solution builds on the legacy financial infrastructure of bank accounts and credit cards to create a real-time online payment network available to users in 36 countries.

How PayPal Works

Joining the Network. To send or receive a payment, a user first must open a PayPal account. A new recipient opens an account after receiving notification of a payment, and each new sender opens an account in the process of making a payment, either at the PayPal website or at the website of a merchant that has integrated our Web Accept feature. Allowing new users to join the network at the time of making or receiving payments encourages our natural, user-driven growth. Our free, fast and simple account sign-up process asks each new user to register with PayPal his name, street address and email address, which serves as the unique account identifier.

Making Payments. Senders make payments at the PayPal website or at the sites of merchants that have integrated our Web Accept feature. To make a payment at our website, a sender logs on to his account and enters the recipient's email and the dollar amount of the payment. To make a payment through Web Accept, a sender selects an item for purchase, confirms the payment information and enters his email address and password to authorize the payment. In both scenarios, we debit the money from the sender's PayPal balance and instantly credit it to the recipient's PayPal balance. In turn, the recipient can make payments to others or withdraw his funds at any time. We earn revenues when a business account receives a payment.

Funding Payments. Senders fund payments in three ways:

•: from the sender's existing PayPal balance;
•: from the sender's bank account, using the Automated Clearing House, or ACH, network; or
•: from the sender's credit card.

We incur no funding cost on payments made from existing PayPal balances. We incur a cost of $0.03 for each bank account ACH transfer. By contrast, on credit card-funded payments we incur processing and interchange fees of 1.9% of the payment amount plus $0.18. As a result, we encourage our users to make bank account-funded payments. We also encourage our users to maintain PayPal balances by offering a money market rate of return on PayPal account balances placed in our Money Market Reserve Fund. This Fund, which is managed by Barclays Global Fund Advisors, bears a current yield of 2.29% as of September 4, 2001. For the three months ended June 30, 2001, customers funded 22.2% of payment volume through their existing PayPal balances, 27.3% via bank account transfers and 50.5% by credit cards. While we encourage senders to make payments from bank account transfers or existing PayPal balances, we also welcome and encourage senders to register and use credit cards. Many senders prefer to fund transactions using credit cards, and their participation in our user base increases the value of our payment network.

Verification of our Account Holders. In order for senders to fund payments from their bank accounts, they first must become verified PayPal users through our Random Deposit technique for which we have applied for a patent: we make two deposits ranging from 1 to 99 cents to the user's bank account. To verify ownership of the account, the user then enters the two amounts as a 4-digit code at the PayPal website. In addition to allowing funding via bank accounts, verification also removes some spending limits on users' accounts and gives them reputational advantages when transacting with other members of the PayPal community.

	Funding Metrics As of
	Mar. 31, 2000		June 30, 2000		Sept. 30, 2000		Dec. 31, 2000		Mar. 31, 2001		June 30, 2001
	(in millions, except percentages)
Number of verified bank accounts	—		0.04		0.78		1.38		1.97		2.51
Percentage of payment volume funded by credit cards during three months ended	76.2	%	81.0	%	74.1	%	56.9	%	48.8	%	50.5	%

The percentage of our payment volume funded by credit cards increased slightly from 48.8% for the three months ended March 31, 2001 to 50.5% for the three months ended June 30, 2001 partly because a higher proportion of our payment volume during the latter period involved international accounts, which allow external funding only from credit cards, and partly because we increased the initial credit card spending limit from $250 to $1,000 before a user becomes verified.

Withdrawing Money. Each account holder may withdraw money from his PayPal account via an ACH transfer to his bank account or by a mailed check from PayPal. Qualifying PayPal users also can receive a PayPal ATM/debit card, which provides instant liquidity to their respective PayPal account

balances. ATM/debit card holders can withdraw cash from any ATM connected to the Cirrus or Maestro networks and can make purchases at any merchant accepting MasterCard. For the three months ended June 30, 2001, we earned revenues net of cash back payments of approximately 0.9% on PayPal ATM/debit card transactions.

In September 2001, we launched our new virtual debit card feature called Shop Anywhere. Shop Anywhere allows all PayPal users to make purchases using their PayPal balances from merchants accepting MasterCard.

Account Types

Business Accounts. Gross Merchant Sales, or GMS, equals the total dollar volume of payments received by business accounts. Business accounts pay us transaction fees on all GMS. Since July 13, 2001, our per transaction rate varied according to the following schedule: 2.2% of GMS plus $0.30 for merchants receiving an average of at least $1,000 per month in payments; 2.9% of GMS plus $0.30 for merchants receiving an average of less than $1,000 per month in payments; and from 3.4% to 3.9% of GMS plus $0.30 for higher risk accounts.

	For the Three Months Ended
	Mar. 30, 2000		June 30, 2000		Sept. 30, 2000		Dec. 31, 2000		Mar. 31, 2001		June 30, 2001
	(in millions, except percentages)
Gross Merchant Sales (GMS)	$	—	$	1.9	$	55.6	$	335.7	$	546.8	$	663.0
Total payment volume	$	46.3	$	248.8	$	422.8	$	543.6	$	642.7	$	746.9
GMS as a percentage of total payment volume		—		0.8%		13.2%		61.8%		85.1%		88.8%

Business accounts benefit from a number of additional features:

•: the right to receive unlimited credit card-funded payments;
•: the ability to apply for the PayPal ATM/debit card;
•: the right to list on PayPal Shops, a searchable directory of over 20,000 online businesses that accept PayPal;
•: our Web Accept feature, which enables businesses to accept payments directly from their websites;
•: the PayPal shopping cart feature, which allows a business account's customers to purchase multiple items with a single payment; and
•: subscriptions, allowing businesses to receive regularly scheduled payments.

Personal Accounts. PayPal personal accounts allow users to make and receive free online payments, subject to a limit of $100 per month in credit card-funded payments received. Personal accounts can upgrade to business accounts at any time and thereby avail themselves of all the benefits of a business account, including the removal of the $100 limit on the receipt of credit card-funded payments. During the three months ended June 30, 2001, 189,000 customers upgraded from personal to business accounts.

International Accounts. We currently allow residents of 35 foreign countries to open business or personal PayPal accounts. These international senders make payments through credit cards or from their PayPal account balances. International recipients may withdraw money from their PayPal accounts to a U.S. bank account free of charge. In addition, international recipients in seven countries can make electronic funds transfer withdrawals to their local bank accounts for a fee of 1.5% to 2.6% of the withdrawal amount plus $0.55 to $1.50 per withdrawal. We charge international senders a fee of 2.6% plus $0.30 for making payments not funded from an existing PayPal balance. As of June 30, 2001, we

had 495,000 international accounts, compared with 313,000 as of March 31, 2001. We intend to develop multi-currency functionality, which will enable our international users to hold balances in their local currencies.

Security and Privacy

PayPal users choose a unique password to protect their accounts. To make payments, senders need to disclose only their email addresses to recipients. Similarly, to receive payments, recipients need to disclose only their email addresses to senders. Many buyers and sellers wary of disclosing financial information online find this high level of personal privacy attractive.

PayPal account balances, while not FDIC insured, receive protection through an insurance policy issued by Travelers Insurance. This insurance protects account holders from unauthorized withdrawals for amounts up to $100,000.

Our Strategy

We seek to expand upon our market leadership and become the online payment network of choice around the world. To establish PayPal as the online payment standard, we will continue to identify transactions and markets not served adequately by existing payment systems and to develop product features that improve upon those legacy systems. In addition to growing our customer base, our business strategy includes the following:

Expand Small Business Payment Volume. We intend to continue to develop features to spur our growth as a payment vehicle for small businesses. During the past year, we added features such as a PayPal shopping cart, which allows buyers to make a single payment for multiple items from a merchant's website, PayPal Shops, a directory of over 20,000 businesses that accept PayPal, a reputation system to give buyers information on the integrity of businesses, and a subscription feature, allowing recurring payments for digital content.

Strengthen our Position as the Payment Method of Choice on Online Auctions. We have become the leading payment network for online auction websites, including eBay, partially due to the size of our network and widening acceptance of our product. We intend to strengthen our leadership position in the auction business by continuing to add product features important to auction participants. During the past year, we added features such as automated invoicing, bidder notification emails, automatic PayPal logo insertion into auction listings and the ability for auction sellers to accept payments directly from their auction pages.

Expand Recurring Revenue. Our growing installed user base provides us with recurring revenue. We intend to expand this revenue by continuing to enhance the product features we offer customers.

Increase Volume of International Payments. We plan to grow our international volume by adding product features designed to increase international access to our network and enhance its functionality. We intend to expand PayPal's reach beyond the current 36 countries. We plan to increase the number of foreign countries where users can withdraw funds to their local bank accounts. We also are developing a multi-currency platform to enable international users to transact in local currencies.

Maintain Low Variable Costs, Particularly Transaction Losses. Our relatively low variable operating costs and high per transaction revenue create an attractive profit opportunity as we grow our volume. Risk management represents a critical component of maintaining low variable operating costs. Our risk management techniques have reduced our provision for transaction losses from 1.28% for the three months ended September 30, 2000 to 0.33% for the three months ended June 30, 2001.

Grow PayPal ATM/Debit Card Usage. The PayPal ATM/debit card allows selected PayPal account holders to access their account balances from any ATM connected to the Cirrus or Maestro networks and to make purchases from any merchant that accepts MasterCard. We earn a transaction fee whenever our customers make debit card purchases or withdraw money from an ATM using this card. For the three months ended June 30, 2001, 7.4% of the funds leaving the PayPal system were withdrawn using the PayPal ATM/debit card. We intend to increase our ATM/debit card volume by further broadening its distribution to qualified PayPal account holders.

Our Customers

Business Customers

Our business accounts conduct a wide variety of commercial transactions using PayPal, including the sale of goods online such as electronics and household items, the sale of services online such as web design and travel, and the sale of digital content. Offline businesses, including lawyers, contractors and physicians, also increasingly receive payments online through PayPal.

PayPal has emerged as the payment method of choice for small to medium-sized businesses on eBay, the largest online auction community. As of June 30, 2001, 66.4% of all eBay auctions explicitly accepted PayPal.

Personal Customers

Our personal accounts primarily use PayPal to make payments to businesses for goods and services. We also enable "person-to-person" payments, examples of which include roommates sharing living expenses, parents sending money to children, friends sharing travel expenses and purchases from small-scale, infrequent online auction sellers.

	Account Data As of
	Mar. 31, 2000	June 30, 2000	Sept. 30, 2000	Dec. 31, 2000	Mar. 31, 2001	June 30, 2001
	(in thousands, except for percentages)
Business accounts	—	14	289	800	1,327	1,731
Personal accounts	824	2,176	3,429	4,718	5,873	7,067
Total accounts	824	2,190	3,718	5,518	7,200	8,798
Business accounts as a percentage of total accounts	—	0.6%	7.8%	14.5%	18.4%	19.7%

International Customers

As of June 30, 2001, we had 495,000 international accounts, equal to 5.6% of our total account base. By comparison, as of March 31, 2001, we had 313,000 international accounts, equal to 4.3% of our total account base. For the three months ended June 30, 2001, 9.7% of all PayPal payments involved at least one international account, up from 7.5% for the prior quarter. We are developing a multi-currency platform to enable international users to transact in local currencies, initially euros, British pounds and Canadian dollars.

Residents of 36 countries have access to the PayPal network. As of June 30, 2001, our largest markets outside the U.S. included 174,000 accounts in Canada, 106,000 accounts in the United Kingdom, 39,000 accounts in Australia, 29,000 accounts in Germany and 15,000 accounts in Japan.

	International Accounts As of
	Mar. 31, 2000	June 30, 2000	Sept. 30, 2000	Dec. 31, 2000		Mar. 31, 2001		June 30, 2001
	(in thousands, except for percentages)
International accounts	—	—	—	140		313		495
International accounts as a percentage of total accounts	—	—	—	2.5	%	4.3	%	5.6	%

Sales and Marketing

From our launch, we have grown primarily through organic, user-driven means. Each time an existing PayPal customer sends or receives funds to or from someone who has not yet registered with PayPal, the other party must open a PayPal account in order to receive or send the payment. Thus, when a PayPal user makes an email payment to someone who does not yet have a PayPal account, the recipient follows a link in the payment notification email to register with PayPal and gain access to the funds. Similarly, when a consumer who has not yet registered with PayPal visits the website of a merchant that has integrated our Web Accept feature, the consumer opens a PayPal account from the merchant's site in order to make the purchase. We have achieved our growth through this combination of "push"- and "pull"-driven new customer acquisition. Starting with payments made from our 24 employees to their friends in October 1999, our user base grew to 10,000 in December 1999, to 100,000 by early February 2000, to 1,000,000 by mid-April 2000 and to 10,000,000 by September 2001.

We accelerated our natural growth with promotional bonuses, our only significant marketing expenditures. Thus, in late 1999 and early 2000, we offered qualified new users a $5 to $10 sign up bonus, automatically credited to their respective PayPal accounts. Additionally, for each qualified new member one of our users introduced to the network, we credited the original user's PayPal account with a $5 to $10 referral bonus. During the three months ended June 30, 2000, we spent $8.6 million on these promotional bonuses and acquired 1.4 million accounts, for an average cost of $6.30 per account. We have continued to refine the criteria qualifying users for promotional bonuses. During the three months ended June 30, 2001, we spent $0.2 million on promotional bonuses and acquired 1.6 million accounts, for an average cost of $0.14 per account. Our organic, user-driven growth has proven more cost-effective than traditional sales and marketing channels, such as television, radio and print advertising as well as Internet-based promotional methods such as banner ads and directed email campaigns.

Risk Management

Risk management has emerged as one of our key competitive strengths. PayPal's account-centric network enables us to detect and prevent fraud when funds enter the PayPal network, as funds move within the network and when they leave. According to Global Industry Analysts, online fraud accounted for approximately 5% of total online transactions in 1999. In contrast, PayPal's fraud rate as a percentage of payment volume in the three months ended June 30, 2001 equaled 0.33% compared to 0.54% for the three months ended June 30, 2000. Striking the optimal balance between the dual objectives of controlling fraud and providing a user-friendly system will remain a key challenge for PayPal.

Our risk management techniques include the following:

•: Card Evaluation. PayPal deploys rigorous anti-fraud screens for every credit card transaction we process. We use internally developed behavioral scores and third party software, in addition to running Address Verification System, or AVS, and more advanced credit card checks.
•: Proprietary Fraud Detection Software. PayPal's proprietary IGOR system monitors account and transaction patterns in order to control our loss exposure once fraudulent funds enter the PayPal system.
•: Experience. Finally, our experience and cumulative knowledge in dealing with attempted fraud perpetrators represents an additional anti-fraud advantage.

Technology

Our technology assures user access to the PayPal website, both to acquire new customers and to allow existing ones to conduct financial transactions. We focus much of our development efforts on creating specialized software that enhances our Internet-based customer functionality. One of our key challenges remains building and maintaining a scalable and reliable system, capable of handling traffic and transactions for a growing customer base. The major components of our network reside at our corporate headquarters in Palo Alto, California, at an Exodus data center in Santa Clara, California, and at our operations and customer support facility in Omaha, Nebraska. Exodus recently filed for protection under Chapter 11 of the U.S. Bankruptcy Code. We are in the process of establishing a second data center with Equinix in San Jose, California.

Because of the financial nature of the PayPal product, we seek to offer a high level of data security in order to build customer confidence and to protect our customers' private information. We have designed our security infrastructure to protect data from unauthorized access, both physically and over the Internet. Our most sensitive data and hardware reside at our Exodus data center. This data center has redundant connections to the Internet, as well as fault-tolerant power and fire suppression systems. Because of our special security needs, we house our equipment in physically secure data vaults and we tightly control physical access to our systems.

Multiple layers of network security and network intrusion detection devices further enhance the security of our systems. We segment various components of the system logically and physically from each other on our networks. Components of the system communicate with each other via Secure Sockets Layer, or SSL, an industry standard communications security protocol, and require mutual authentication. Access to a system component requires at least two authorized staff members simultaneously to enter secret passphrases. This procedure protects us from the unauthorized use of our infrastructure components. Finally, we store all data we deem private or sensitive only in encrypted form in our database. We decrypt data only on an as-needed basis, using a specially designated component of our system which requires authentication before fulfilling a decryption request.

Customer Service and Operations

Our primary customer service team in Omaha, Nebraska provides email and telephone customer support. As of June 30, 2001, this team consisted of 224 employees. Our outsourced New Delhi, India customer service team provided through Daksh eServices Private Limited, responds to the bulk of our initial email customer inquiries. As of June 30, 2001, this team consisted of 100 dedicated representatives.

We strive to maintain industry-leading standards for customer service. On average, we respond to phone calls from business and premier customers in nine seconds, with only a 1.0% call abandonment rate for the month ended June 30, 2001. We estimate that we resolve 85.0% of all email inquiries within 24 hours and 99.0% within four days. Our customer service needs have not grown as quickly as our user base, and we expect this trend to continue. For example, we have improved efficiency from 7,000 PayPal accounts per customer service representative as of June 30, 2000 to 27,000 accounts per customer service representative as of June 30, 2001.

Our 110-member operations team, also in Omaha, has built expertise in payments industry rules and best practices in Visa and MasterCard, Regulation E, National Automated Clearing House Association and Maestro processing. During the three months ended June 30, 2001, PayPal's operations team supported an average daily volume of 72,000 ACH transactions and an average daily volume of 82,000 Visa/MasterCard transactions.

Vendor Relationships

Chase Merchant Services

Since June 2000, we have processed substantially all of our credit card transactions through Chase Merchant Services. Although we maintain a good working relationship with Chase, we continue to examine all of our options for credit card processing, especially in terms of specialty processing such as international payments. We anticipate processing a small portion of our transactions through another vendor.

Wells Fargo

Since August 2000, we have processed all of our ACH and check transactions through Wells Fargo. Although we maintain a good working relationship with Wells Fargo, we continue to examine all of our options for ACH processing, especially in terms of specialty processing such as international payments.

MasterCard and First Data

In December 2000, we launched the PayPal ATM/debit card to qualifying PayPal members through an arrangement with MasterCard International and First Data Corporation. The PayPal ATM/debit card allows qualified PayPal account holders to access their account balance from any ATM connected to the Cirrus or Maestro networks and at any merchant that accepts MasterCard.

Providian

In February 2001, we entered into a strategic relationship with Providian Financial, currently the fifth largest bank card issuer in the U.S. Under the terms of the agreement, we offer Providian-issued, PayPal-branded Visa cards to our account holders. When a PayPal member funds his account using the PayPal Visa card, Providian reimburses us for most of the credit card processing fees we incur, making the funding less costly for us. Additionally, whenever a customer uses the PayPal Visa card at a merchant other than PayPal, we receive a share of Providian's transaction fee revenue.

Competition

We expect the payments industry to remain highly competitive. The major competitive factors affecting our business include:

•: convenience;
•: size of the network;
•: price;

•: security and privacy;
•: brand recognition; and
•: customer service.

We anticipate continued challenges from current competitors, who may enjoy greater competitive resources, as well as by new entrants into the industry. We compete or potentially compete with a number of companies, both directly in the specific online point-to-point payments market and indirectly in the payments market generally. Direct competitors include, eBay Online Payments, which is owned jointly by eBay and Wells Fargo, Yahoo!'s PayDirect, Citibank's c2it, which has distribution through AOL and Microsoft, the U.S. Postal Service, and Western Union's MoneyZap. Potential direct competitors, should they decide to enter the market, may include CheckFree and American Express. Indirectly, we compete with traditional payment methods such as checks, credit cards and wire transfers, in addition to online wallets such as Microsoft's Passport.

Intellectual Property

We protect our intellectual property rights through a combination of trademark, copyright and trade secrets laws and through the domain name dispute resolution system. In order to limit access to and disclosure of our proprietary information, all of our employees have signed confidentiality and invention assignment arrangements, and we enter into nondisclosure agreements with third parties. We cannot provide assurance that the steps we have taken to protect our intellectual property rights, however, will deter adequately infringement or misappropriation of those rights. Particularly given the international nature of the Internet, the rate of growth of the Internet and the ease of registering new domain names, we may not be able to detect unauthorized use of our intellectual property or take enforcement action.

In particular, we have applied to register the "PayPal" service mark in the U.S. and Canada and we have obtained registration of the PayPal mark in the European Community, Japan and China. We also have applied to register the service marks "X.com," "You've Got Money" and "You've Got Cash" in the U.S. America Online, Inc. has filed an opposition to the latter two applications. We have registered the domain name "www.paypal.com" for ten years and various related domain names for periods ranging from two to ten years and have filed to protect our rights to the PayPal name in the new ".biz" and ".info" top level domains that are scheduled to become operational in Fall 2001.

We have applied in the U.S. and certain other countries for five patents. These patent applications cover our core system of transferring value from point to point between two users of a communications network that are not linked directly, our technology to detect suspicious patterns of transactions, our process of verifying a customer's control of the bank account he has registered with PayPal, our process of enabling merchants to integrate PayPal into their Web sites or online auctions, and our process for obtaining an alternate payment method from the customer if the customer's primary payment method fails. The U.S. Patent and Trademark Office, or PTO, has taken no action to date on these applications and we cannot predict whether the PTO will issue these patents in their requested form or whether these patents will be valid even if issued.

Whether or not the PTO issues us patents, third parties may claim that we have infringed upon their patents or misappropriated or infringed on other proprietary rights. Although no litigation relating to such claims has arisen to date, these claims and any resultant litigation could subject us to significant liability for damages and could result in the invalidation of our patents, if issued. In addition, even if we prevail, the litigation could be time consuming and expensive to defend and could affect our business materially and adversely. Any claims or litigation from third parties may also result in limitations on our ability to use the service marks, trademarks, copyrights, trade secrets and other intellectual property subject to these claims or litigation, unless we enter into license agreements with

the third parties. However, these agreements may be unavailable on commercially reasonable terms, or not available at all.

Regulation

Money Transmitter Laws

More than 40 states in the U.S. regulate bill payers, money transmitters, check sellers, issuers of payment instruments or similar non-bank payment businesses, which we refer to collectively as "money services businesses." The states enacted almost all of these statutes before the Internet emerged as a commercial forum, and the application of these statutes to online payment service providers has not been interpreted by courts or regulatory authorities. Based on the specific provisions of these state statutes, we believe that money services regulations cover our business only in our home state of California. In other states, we believe the nature of our services or our fee structure exclude us from the statutes' licensing requirements and money services regulation.

Our analysis is subject to significant uncertainty, however, and we cannot assure you that state regulators will agree with our interpretations. We have contacted regulatory authorities in the 30 states that we believed were subject to the greatest uncertainty, to describe our service and state the basis for our belief that their current statutes do not apply to our product. Nine states did not reply to our inquiries. Based on the replies we received, without retracting our analysis, we have obtained money transmitter licenses in Oregon and West Virginia, and we have applied or are preparing applications for money transmitter licenses in four other states—Maine, Maryland, Nebraska and Virginia—and in the District of Columbia. We also filed an application in California in July 2000 for a license to operate as a money transmitter. The California Department of Financial Institutions has not acted on our application, and has indicated that it does not expect to act on the application at least until we have addressed questions regarding our potential status as a bank, as described in "Bank Regulation" below. We will need to refile the California application to update information regarding our business.

Even if all of these state license applications are ultimately granted, state regulatory authorities have the ability to impose fines and other penalties for the period of time we provided services without a license to residents of those states that require us to have a license. We have not to date been fined or received notice of fines or other penalties.

Because of the ambiguity in many states' laws and the potential for new legislation or regulatory interpretations, we monitor changes in state law and the regulatory environment to consider whether additional inquiries or licensing are required. Based on our most recent review of state law amendments and enactments in 2001, we currently expect to make new or further inquiries or file applications for money transmitter licenses in Colorado, Lousiana, Minnesota, Texas and Vermont.

Because we have money transmitter licenses in Oregon and West Virginia and expect to obtain other state money services business licenses, we must file periodic reports with state regulators, maintain minimum bonds or levels of capital, ensure that we hold customer funds only in liquid and highly rated investments and provide notice or receive advance approval of any change in control of the company. The minimum bonding or capitalization requirements vary from state to state but do not currently exceed $2.0 million in the aggregate. State money services business regulators examine us for compliance with these laws and as to the safety and soundness of our operations and financial condition.

Bank Regulation

We do not require customers to keep funds in our system in order to use our product. We give U.S.-based customers the option of automatically sweeping any funds in the system into the PayPal Money Market Reserve Fund, as well as moving funds out of the system by electronic funds transfer,

PayPal ATM/debit card or check. Funds held outside the Money Market Reserve Fund do not earn any return. Our user agreement states that we act as an agent and custodian on behalf of our customers in moving monies at their direction, that we must keep customer funds separate from our corporate funds, that we may not lend out customer funds or use customer funds for corporate expenses, and that we will not voluntarily make customer funds available to creditors. We also are seeking to establish a relationship with one or more banks under which PayPal will place all customer funds outside of the Money Market Reserve Fund into bank accounts, and thus we will not have discretion in the management of customer funds.

Regulatory authorities in four states have questioned, in written communications to us, whether we are engaged in a banking business because of our customers' ability to retain a balance for future transfers. Because we are not a licensed as a bank, we are not permitted to engage in a banking business. California banking regulators have asked for our analysis of whether we are accepting deposits and are engaged in a banking business. We have engaged in substantial discussions of this issue with California banking regulators over the past year, and have submitted legal analyses to support our view that we do not take deposits and are not engaged in a banking business. Our discussions with California are continuing. New York regulators have expressed their view that the ability of our customers to leave amounts on account for future transfer represents impermissible banking. Idaho and Louisiana regulators have also expressed concerns about whether the balance feature of our service causes us to engage in a banking business. We wrote a reply letter with supporting legal analysis to Idaho and have received no response. We have not yet responded to Louisiana with legal analysis supporting our position. We understand that New York regulators are waiting for a determination by the State of California before taking any action, but we believe they will defer to the conclusion of the California authorities because our main operations are located in California. We have changed our user agreement as described in the preceding paragraph in an effort to address these states' concerns, and we are also seeking an advisory opinion from the FDIC to the effect that we are not taking deposits. We may not arrive at a final resolution of this issue with California or any other state because, among other reasons, it involves an ambiguous area of the law.

International

We offer our product to customers with a Visa or MasterCard credit card in 35 countries outside the U.S. In seven of these countries, local recipients can withdraw funds from their PayPal account to a local bank account. We offer our product from the U.S., in English, and in U.S. dollars. Our status as a bank, regulated financial institution or other regulated business in foreign countries is unclear. We are working with foreign legal counsel to identify and comply with applicable laws and regulations.

Consumer Protection

We are subject to state and federal consumer protection laws, including laws protecting the privacy of consumer non-public information, prohibiting unfair and deceptive practices, requiring specific disclosures and procedures with respect to formation of electronic contracts such as the PayPal User Agreement, and regarding electronic fund transfers. In particular, under federal and state financial privacy laws and regulations, we must provide notice to consumers of our policies on sharing non-public information with third parties, must provide advance notice of any changes to our policies and, with limited exceptions, must give consumers the right to prevent sharing of their non-public personal information with unaffiliated third parties. Under the Electronic Fund Transfer Act and Regulation E of the Board of Governors of the Federal Reserve Board, we are required to disclose the terms of our electronic fund transfer services to consumers prior to their use of the service, to provide 21 days advance notice of material changes, to establish specific error resolution procedures and timetables and to limit customer liability for transactions that are not authorized by the consumer. We believe we have appropriate procedures in place for compliance with these consumer protection laws, but many issues

regarding delivery of notices and disclosures over the Internet have not yet been addressed by the federal and state agencies charged with interpreting the applicable laws.

In doing business with residents of countries outside the U.S., we also may be subject to consumer protection laws of those countries, including data protection laws that are more restrictive than financial privacy laws in the U.S. We continue to work with foreign legal counsel to identify and comply with applicable laws and regulations.

Money Laundering

As a money services business we are subject to state and federal laws prohibiting the knowing transmission of the proceeds of a criminal transaction. We are subject also to regulations of the Treasury Department's Financial Crimes Enforcement Network, or FinCEN, requiring reporting and record keeping of various transactions. All PayPal transactions are recorded and traceable, and we believe we have appropriate processes in place for compliance with these regulations. However, FinCEN has not issued any specific guidance regarding the application of its regulations to Internet payment services. Even if we comply with these requirements, federal and state law enforcement agencies could seize customer funds in PayPal accounts that are traceable to suspected criminal transactions.

Beginning in 2002, the FinCEN regulations will require money services businesses, such as our business, to register with the Treasury Department and to report suspicious transactions involving a payment or series of related payments of $2,000 or more. During the three months ended June 30, 2001, 0.1% of our transactions and 6.1% of the volume of payments we process represented transactions of $2,000 or more. We have developed and deployed, and continue to develop, proprietary systems and procedures to comply with these regulations.

PayPal Money Market Reserve Fund

The PayPal Money Market Reserve Fund is a series of PayPal Funds, a Delaware business trust which is registered with the Securities and Exchange Commission as an open-end investment company. The PayPal Funds are governed by a Board of Trustees. The investment adviser and transfer agent for the Money Market Reserve Fund is PayPal Asset Management, Inc., or PAMI, a wholly owned subsidiary of PayPal, Inc. For its services, PAMI is paid a fee by PayPal Funds. The PayPal Money Market Reserve Fund currently pursues its investment objectives by investing all of its assets in a Money Market Master Portfolio advised by Barclays Global Fund Advisors.

Our website offers our customers the opportunity to invest in shares of the PayPal Money Market Reserve Fund. In most cases, only a registered broker-dealer is legally permitted to solicit for purchases of securities, such as the shares of this Fund, or otherwise to facilitate securities transactions. We have engaged an independent broker-dealer to be named on our website that formally offers shares of the PayPal Money Market Reserve Fund. That broker-dealer also provides various other services that otherwise could subject us to broker-dealer regulation if we performed them without the involvement of a broker-dealer. If we no longer were able to retain the services of a broker-dealer or if a regulatory authority decides to take action against us because our activities include those required to be performed by a broker-dealer, notwithstanding our use of an independent broker-dealer, we might not be able to offer our customers the PayPal Money Market Reserve Fund.

PAMI is registered with the SEC as a transfer agent and investment adviser. As a result, it is required to comply with detailed regulations intended to ensure, among other things, that the assets of the Money Market Reserve Fund are invested only in securities consistent with the investment criteria of the Fund. We believe that we have appropriate experienced personnel and processes in place for compliance with these requirements and also have subcontracted some administrative services to a company with expertise in mutual fund administration.

Employees

As of August 15, 2001, we had 596 full-time employees: 191 at our Palo Alto, California corporate headquarters, 403 at our operations and customer service center in Omaha, Nebraska, and two at our business development office in London. None of our employees is represented by collective bargaining agreements. We have not experienced any work stoppages and believe our relationship with our employees to be good.

Facilities

We lease our corporate headquarters in Palo Alto, California, which consist of 22,000 square feet. We lease our customer service and operations facilities in Omaha, Nebraska, which consist of 37,000 square feet. We also lease a 1,400 square foot office in London, England. We believe our existing facilities, along with readily available office space in these areas, will suffice for our anticipated future needs.

Legal Proceedings

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this prospectus, we believe that there are no claims or actions pending or threatened against us, the ultimate disposition of which would have a material adverse effect on us. We are currently attempting to settle a contract dispute with a vendor relating to the terminated Internet service banking agreements. We do not believe that the ultimate disposition of this dispute will have a material adverse effect on our business.

MANAGEMENT

Executive Officers, Directors and Key Employees

A list of our executive officers, directors and key employees, as of September 24, 2001, follows:

Name	Age	Position
Peter A. Thiel	33	Chief Executive Officer, President and Chairman of the Board of Directors
Max R. Levchin	26	Chief Technology Officer and Director
David O. Sacks	29	Executive Vice President, Product
Reid G. Hoffman	34	Executive Vice President, Business Development
Roelof F. Botha	28	Chief Financial Officer
Jack R. Selby	27	Senior Vice President, Corporate and International Development
James E. Templeton	27	Senior Vice President, Systems
Sarah B. Imbach	31	Senior Vice President, Customer Service, Operations and Fraud
Todd R. Pearson	37	Senior Vice President, Financial Services
Sandeep Lal	42	Senior Vice President, International
John D. Muller	40	General Counsel
Timothy M. Hurd	31	Director
John A. Malloy	42	Director
Shailesh J. Mehta	52	Director
Michael J. Moritz	47	Director
Elon R. Musk	30	Director

(1): Member of the audit committee.
(2): Member of the compensation committee.

Management

Peter A. Thiel has served as our Chief Executive Officer and President since September 2000 and as Chairman of our board of directors since May 2000. Mr. Thiel has served on our board of directors since March 2000. Mr. Thiel co-founded Confinity, Inc. in December 1998 and served as the Chief Executive Officer and Chairman through March 2000. Since September 1996, Mr. Thiel has been the managing member of Thiel Capital Management, LLC. Previously, Mr. Thiel traded derivatives for CS Financial Products and practiced securities law with Sullivan & Cromwell. Mr. Thiel received a B.A. in Philosophy from Stanford University in 1989 and a J.D. from Stanford Law School in 1992.

Max R. Levchin has served as our Chief Technology Officer and as a director since March 2000. Mr. Levchin co-founded Confinity Inc. in December 1998, and served as the Chief Technology Officer and a Director through March 2000. Mr. Levchin founded NetMeridian Software, a developer of early palm-top security applications, in January 1996, and served as CEO from January 1996 to December 1998. Previously, Mr. Levchin co-founded SponsorNet, a web advertising service, where he led the company's engineering efforts. Mr. Levchin received a B.S. in Computer Science from the University of Illinois, Urbana-Champaign in 1997.

David O. Sacks has served as our Executive Vice President of Product since May 2000. Mr. Sacks joined PayPal in November 1999 and served in a variety of positions, most recently as Senior Vice President of Product. Mr. Sacks worked as a management consultant for McKinsey & Company where he focused on the telecommunications and financial services industries from January 1999 to November 1999. Mr. Sacks received a B.A. in Economics from Stanford University in 1994 and a J.D. from the University of Chicago Law School in 1998.

Reid G. Hoffman has served as our Executive Vice President of Business Development since May 2000. Mr. Hoffman joined PayPal in January 2000 and served in a variety of positions, most recently as Senior Vice President of Business Development and International. Previously, Mr. Hoffman served as a director of Confinity, Inc. from December 1998 to January 2000. Mr. Hoffman co-founded Socialnet.com, an Internet community service company, in August 1997, and served in various capacities from August 1997 to January 2000. Mr. Hoffman worked in product development for Fujitsu from February 1996 to July 1997. Previously, Mr. Hoffman worked in human interface design at Apple Computer. Mr. Hoffman received a B.S. in Symbolic Systems from Stanford University in 1990 and an M.S. in Philosophy from Oxford University in 1993.

Roelof F. Botha has served as our Chief Financial Officer since August 2001. Mr. Botha joined the company in March 2000 and served in a variety of positions, most recently as Vice President of Financial & Risk Management. Mr. Botha worked as a management consultant for McKinsey & Company from August 1996 to July 1998. Mr. Botha, a certified actuary, became a Fellow of the Faculty of Actuaries in 1996, and received a B.S. in Actuarial Science, Economics, and Statistics from the University of Cape Town in 1994 and an M.B.A. from Stanford Business School in 2000.

Jack R. Selby has served as our Senior Vice President of Corporate and International Development since October 2000. Mr. Selby joined PayPal in August 1999 and served in a variety of positions, most recently as the Vice President of Corporate and International Development. Mr. Selby raised capital for a variety of alternative investments at Sasco Hill Securities from June 1998 to June 1999. Mr. Selby worked in a variety of roles at Gesellschaft für Trendanalysen, a financial consulting firm, from May 1996 to May 1998. Mr. Selby received a B.A. in Economics from Hamilton College in 1996.

James E. Templeton has served as our Senior Vice President of Systems since January 2001. Mr. Templeton joined PayPal in June 1999 and served in a variety of positions, most recently as Vice President of Engineering. Mr. Templeton served as an independent consultant in the sale of a retail business, The Manor House, from June 1998 to February 1999. Mr. Templeton invested in high-technology stocks from October 1996 to May 1998 and consulted for Double Impact, an Internet consulting firm, from August 1997 to September 1997. Mr. Templeton received a B.S. in Physics from Bates College in 1996.

Sarah B. Imbach has served as our Senior Vice President of Customer Service, Operations and Fraud since June 2001. Ms. Imbach joined PayPal in February 2000 and served in a variety of positions, most recently as Vice President of Fraud. Ms. Imbach worked in project management for the UCSF-Stanford Health Care merger from December 1997 to February 2000. Ms. Imbach consulted in communications and technology for Stanford University from 1995 to December 1997. Previously, Ms. Imbach worked as a contractor in strategic planning and operations for NASA. Ms. Imbach received a B.S. in Economics and Marketing from The Wharton School of the University of Pennsylvania in 1992.

Todd R. Pearson has served as our Senior Vice President of Financial Services since December 2000. Mr. Pearson joined the company in January 2000 and served in a variety of positions, most recently as Vice President of Cards and Risk Policy. Mr. Pearson worked as a strategy consultant at Andersen Consulting from October 1998 to January 2000 and as a management consultant at Edgar, Dunn & Company in the U.S. and UK, focusing on the payments industry, from 1987 to September

1997. Mr. Pearson received a B.A. in History from the University of California, Berkeley in 1987 and an M.B.A. from the London Business School in 1998.

Sandeep Lal has served as our Senior Vice President of International since June 2001. Mr. Lal joined PayPal in March 2000 and served in a variety of positions, most recently as Senior Vice President of Customer Service and Operations. Previously, Mr. Lal worked in a number of roles at Citibank, N.A., which he joined in 1982. Most recently, Mr. Lal led trading and financial market operations for 12 countries in Asia from November 1996 to February 2000. Mr. Lal also led the derivatives operations for Citibank's New York office from 1995 to November 1996. Previously, Mr. Lal headed Citibank's retail banking operations and customer service group in Japan. Mr. Lal received a B.A. in Economics from Delhi University in 1978 and an M.B.A. from the University of Michigan in 1981.

John D. Muller has served as our General Counsel since October 2000. Prior to joining PayPal, Mr. Muller was a partner at the law firm of Brobeck, Phleger & Harrison, specializing in finance and regulatory compliance, from March 1996 to October 2000. Previously, Mr. Muller practiced law at Shawmut National Corporation, a multi-state bank holding company, and at the law firm of Gibson, Dunn & Crutcher. Mr. Muller serves as the Co-Chair of the American Bar Association Joint Subcommittee on Electronic Financial Services and served as the chair of the California Bar Association Financial Institutions Committee from October 1999 to September 2000. Mr. Muller received a B.A. in English from the University of Virginia in 1983 and a J.D. from Harvard Law School in 1986.

Board of Directors

Timothy M. Hurd has served as a director since March 2000. Mr. Hurd has worked as a managing director at Madison Dearborn Partners since January 2000. Since joining Madison Dearborn in September 1996, Mr. Hurd has concentrated on investments in the financial services sector. Previously, Mr. Hurd worked as an investment banker at Goldman, Sachs & Co. Mr. Hurd received a B.A. from the University of Michigan in 1992 and an M.B.A. from Harvard Business School in 1996.

John A. Malloy has served as a director since March 2000. Mr. Malloy served as a director of Confinity, Inc. from June 1999 to March 2000. Mr. Malloy has worked as a partner at Nokia Ventures Fund since its formation in December 1998 and in business development for Nokia Americas from June 1996 to December 1998. Previously, Mr. Malloy co-founded GO Communications, a PCS start-up company. Earlier, Mr. Malloy held a variety of legal and marketing positions with MCI. Mr. Malloy received a B.A. from Boston College in 1981 and a J.D. from George Mason University School of Law in 1984.

Shailesh J. Mehta has served as a director since February 2001. Mr. Mehta has served as the CEO of Providian Financial Corporation since 1989 and as the chairman of the board of directors of Providian Financial Corporation since May 1988. Mr. Mehta joined Providian in 1986. Previously, Mr. Mehta was an executive vice president of Ameritrust Corporation, now known as KeyCorp. Mr. Mehta received a B.S. in Mechanical Engineering from the Indian Institute of Technology in 1971, and an M.S. and Ph.D. in Operations Research and Computer Science from Case Western Reserve in 1973 and 1975, respectively.

Michael J. Moritz has served as a director since August 1999. Mr. Moritz has worked as a partner at Sequoia Capital since 1986, and has focused on consumer services and information technology investments. Mr. Moritz also serves on the boards of directors of Flextronics, Saba Software and Yahoo!. Mr. Moritz received an M.A. from Oxford in 1976.

Elon R. Musk has served as a director since March 1999. Mr. Musk founded X.com Corporation in March 1999, which merged with Confinity, Inc. in March 2000. Mr. Musk served as the CEO of X.com from March 1999 to December 1999 and as the CEO of PayPal from May 2000 to September 2000.

Mr. Musk co-founded Zip2 Corp. in 1995 where he worked in a number of roles including Chairman, CEO and CTO from 1995 to February 1999. Mr. Musk received a B.S. in Physics from the University of Pennsylvania and a B.S. in Economics from The Wharton School of the University of Pennsylvania in 1995.

Board Composition

Our board of directors currently consists of seven members. All directors hold office until their successors have been elected and qualified or until their earlier death, resignation, disqualification or removal. Effective upon closing of this offering, we will divide the terms of office of the directors into three classes:

•: Class I, whose term will expire at the annual meeting of stockholders to be held in 2002;
•: Class II, whose term will expire at the annual meeting of stockholders to be held in 2003; and
•: Class III, whose term will expire at the annual meeting of stockholders to be held in 2004.

Upon the closing of this offering, Class I shall consist of and ; Class II shall consist of and ; and Class III shall consist of and . At each annual meeting of stockholders after the initial classification or special meeting in lieu thereof, the successors to directors whose terms will then expire serve from the time of election and qualification until the third annual meeting following election or special meeting held in lieu thereof and until their successors are duly elected and qualified. In addition, a resolution of the board of directors or affirmative vote of the holders of at least 66²/3% of the Company's outstanding voting stock may change the authorized number of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one third of the directors. This classification of the board of directors may have the effect of delaying or preventing changes in control or management of our company.

There are no family relationships among any of our directors, executive officers or key employees.

Board Committees

Our board of directors has an audit committee and a compensation committee.

Audit committee. The audit committee of our board of directors recommends the appointment of our independent auditors, reviews our internal accounting procedures and financial statements and consults with and reviews the services provided by our internal and independent auditors, including the results and scope of their audit. The audit committee currently consists of Messrs. , and .

Compensation committee. The compensation committee of our board of directors reviews and recommends to the board the compensation and benefits of all of our executive officers, administers our stock option plans and establishes and reviews general policies relating to compensation and benefits of our employees. The compensation committee currently consists of Messrs. , and .

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee at any time has been one of our officers or employees. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee. Our full board of directors made all compensation decisions prior to the creation of our compensation committee.

Director Compensation

Our directors do not receive any cash compensation for their services as directors or members of committees of the board of directors, but we reimburse them for their reasonable expenses incurred in attending meetings of the board of directors. Our directors may participate in our stock option plans and employee-directors may participate in our employee stock purchase plan.

Executive Compensation

The following table sets forth all compensation paid by us during the fiscal year ended December 31, 2000 to (i) our Chief Executive Officer and (ii) our four most highly compensated officers whose total annual salary and bonus exceeded $100,000 for the fiscal year ended December 31, 2000. It also includes two individuals who acted as CEO during the year ended December 31, 2000 and one individual who would have been one of the most highly compensated except that he was not serving as an executive officer as of December 31, 2000. We refer to these executives as the named executive officers elsewhere in this prospectus.

Summary Compensation Table

		Annual Compensation				Long-Term Compensation
Name and Principal Position	Year	Salary		Other Compensation		Securities Underlying Options	All Other Compensation
Peter A. Thiel, Chief Executive Officer and President(1)	2000	$	147,084		—	—	—
Max R. Levchin, Chief Technology Officer	2000	$	153,125		—	—	—
Reid G. Hoffman, Executive Vice President, Business Development	2000	$	148,756		—	1,414,458	—
Todd R. Pearson, Senior Vice President, Financial Services(2)	2000	$	116,614	$	41,000	300,000	—
Bill H. Harris, former Chief Executive Officer(3)	2000	$	78,125		—	—	—
Elon R. Musk, former Chief Executive Officer(4)	2000	$	164,904		—	—	—
H. David Johnson, former Chief Financial Officer(5)	2000	$	156,250		—	—	—

(1): Mr. Thiel has served as our Chief Executive Officer and President since September 2000.
(2): Mr. Pearson received a hiring bonus of $35,000 and receives an annual medical allowance of $6,000.
(3): Mr. Harris served as our Chief Executive Officer from December 1999 to May 2000.
(4): Mr. Musk served as our Chief Executive Officer from May 2000 through September 2000.
(5): Mr. Johnson served as our Senior Vice President of Financial Services from March 2000 to August 2000 and Chief Financial Officer from August 2000 to August 2001.

Option Grants in Last Fiscal Year

The following table sets forth information regarding stock options we granted during the fiscal year ended December 31, 2000 to the named executive officers.

	Individual Grants
			Percent of Total Options Granted to Employees During the Fiscal Year Ended December 31, 2000(1)					Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
	Number of Securities Underlying Options Granted
Name					Exercise Price Per Share		Expiration Date
Name					Exercise Price Per Share		Expiration Date	5%		10%
Peter A. Thiel	—		—			—	—		—		—
Max R. Levchin	—		—			—	—		—		—
Reid G. Hoffman	1,414,458	(2)	10.1	%	$	0.07	1/31/2010	$	66,034	$	167,342
Todd R. Pearson	200,000		1.4			0.10	1/25/2010		12,578		31,875
	50,000		0.4			0.30	7/11/2010		9,433		23,906
	50,000		0.4			0.30	8/8/2010		9,433		23,906
Bill H. Harris	—		—			—	—		—		—
Elon R. Musk	—		—			—	—		—		—
H. David Johnson	—		—			—	—		—		—

(1): Includes 8,297,827 options issued by PayPal, Inc., formerly known as X.com Corporation, and 5,726,520 options issued by Confinity, Inc. before the merger on a post-conversion basis.
(2): Options granted by Confinity, Inc.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values

The following table sets forth information on options exercised by the named executive officers during the fiscal year ended December 31, 2000 and on unexercised options to purchase our common stock granted to the named executive officers and held by them as of December 31, 2000.

				Number of Securities Underlying Unexercised Options at December 31, 2000		Value of Unexercised In-The-Money Options at December 31, 2000(2)
Name	Shares Acquired on Exercise	Value Realized(1)
Name	Shares Acquired on Exercise	Value Realized(1)		Vested	Unvested	Vested	Unvested
Peter A. Thiel	—		—	—	—	—		—
Max R. Levchin	—		—	—	—	—		—
Reid G. Hoffman	1,414,458	$	0	—	—	—		—
Todd R. Pearson	—		—	—	300,000	—	$	40,000
Bill H. Harris	—		—	—	—	—		—
Elon R. Musk	—		—	—	—	—		—
H. David Johnson	—		—	—	—	—		—

(1): Value realized is the difference between exercise price and market price at the time of exercise.
(2): There was no public trading market for our common stock as of December 31, 2000. Accordingly, these values have been calculated based on our board of directors' determination of the fair market value of the underlying shares as of December 31, 2000 of $0.30 per share, less the applicable exercise price per share, multiplied by the underlying shares.

Employment Contracts and Change of Control Arrangements

We routinely deliver written offer letters containing provisions on salary, bonuses, benefits and stock option grants to prospective members of management and other employees. Pursuant to the terms of an offer letter dated January 2000, we agreed to pay Todd R. Pearson an annual salary of $120,000, a one time bonus of $35,000, and up to $6,000 per year in medical expenses. In addition, we agreed to grant Mr. Pearson an option to purchase 160,000 shares under our 1999 Stock Plan, which shares are subject to standard vesting unless there is a change in control of PayPal, in which case the vesting will accelerate by one year.

We currently have non-competition agreements with Peter A. Thiel, Max R. Levchin, Bill H. Harris and Elon R. Musk. These agreements expire on March 30, 2002.

Restricted Stock Agreements

For a description of the change of control provisions contained in certain restricted stock agreements with our executive officers, see "Certain Transactions."

Class A Stock

For a description of the change of control provisions applicable to the Class A Stock beneficially owned by Peter A. Thiel, see "Certain Transactions."

Stock Plans

1999 Stock Plan

Our board of directors adopted the 1999 Stock Plan in March 1999, and our stockholders approved the plan in May 1999. The plan allows us to issue awards of incentive or nonqualified stock options or restricted stock. Our employees and consultants are eligible to receive awards under the plan, but only employees may receive incentive stock options. We have reserved a total of 18,710,932 shares of our common stock for issuance under the plan. The plan is administered by our board of directors, or a committee of our board appointed by the board to administer the plan. The board of directors or the committee administering the plan selects the participants who will receive awards and determines the terms and conditions of such awards. Restricted stock is generally subject to a repurchase option in favor of PayPal exercisable upon the voluntary or involuntary termination of the employee or consultant's relationship with us for any reason.

In the event of certain corporate transactions, such as a merger or sale of all or substantially all of the assets of our company, the plan provides that each outstanding award will be assumed or replaced with a comparable award by our successor company or its parent. If the successor company or its parent does not assume or replace the awards, all unvested awards will terminate. In connection with a change in control, with respect to unvested options, the plan administrator may also (1) provide that the outstanding awards must be exercised on or before a specified date, after which the awards will terminate or (2) provide for payment to the participant of cash or other property with a fair market value equal to the amount that would have been received upon the exercise or payment of the award had the award been exercised or paid immediately prior to the change in control.

All options granted under our 1999 Stock Plan become subject to accelerated vesting if a change of control of PayPal occurs. In the event of a change of control, the lesser of (1) 25.0% of the total number of shares subject to the option or (2) the remaining unvested options will vest immediately.

Confinity 1999 Stock Plan

In connection with our merger with Confinity in March 2000, we assumed all of the 4,830,471 outstanding options under the Confinity 1999 Stock Plan. These options are now exercisable for shares of our common stock. This plan was adopted by Confinity's board of directors in February 1999 and Confinity's stockholders approved the plan in March 1999. No additional options have been or will be issued under the plan. The plan is administered by our board of directors, or a committee of our board appointed by the board to administer the plan.

If an executive officer's employment is terminated as a result of an involuntary termination other than for cause within 12 months following a change of control, that executive officer's outstanding options will become 100% vested and exercisable immediately. Also in the event of a change of control, all outstanding options issued to our non-employee directors will become 100% vested and exercisable immediately.

To the extent that options accelerate due to a corporate transaction, the restrictions on restricted stock will also lapse.

2001 Equity Incentive Plan

We intend to adopt a 2001 Equity Incentive Plan prior to the completion of the offering. The plan allows us to issue awards of incentive or nonqualified stock options or restricted stock. Our employees, consultants and independent directors are eligible to receive awards under the plan, but only employees may receive incentive stock options. We have reserved a total of shares of our common stock for issuance under the plan. The plan is administered by our board of directors, or a committee of our board appointed by the board to administer the plan. The board of directors or the committee administering the plan selects the participants who will receive awards and determines the terms and conditions of such awards. Restricted stock is generally subject to a repurchase option in favor of PayPal exercisable upon the voluntary or involuntary termination of the employee or consultant's relationship with us for any reason.

In the event of certain corporate transactions, such as a merger or sale of all or substantially all of the assets of our company, the plan provides that each outstanding award will be assumed or replaced with a comparable award by our successor company or its parent. If the successor company or its parent does not assume or replace the awards, outstanding options will become 100% vested and exercisable immediately before the corporate transaction. To the extent that options accelerate due to a corporate transaction, the restrictions on restricted stock awards will also lapse. In the event of such a corporate transaction or a change in capitalization, the board of directors or the committee administering the plan also has the discretion to provide for the repurchase, replacement or termination of options or restricted stock where appropriate in order to prevent dilution or enlargement of the benefits or potential benefits we intend to provide under the plan.

2001 Employee Stock Purchase Plan

We intend to adopt a 2001 Employee Stock Purchase Plan prior to the completion of the offering. The plan will become effective concurrently with the initial public offering of our common stock. The plan is designed to allow our eligible employees and the eligible employees of our participating

subsidiaries to purchase shares of common stock, at semi-annual intervals, with their accumulated payroll deductions.

shares of our common stock will initially be reserved for issuance under the plan. The reserve will automatically increase on each anniversary date of the adoption of the plan by the board of directors during the term of the plan by an amount equal to the lesser of (1) shares, (2) % of the Company's outstanding shares on such date or (3) a lesser amount determined by the board of directors.

The plan will have a series of successive 24-month offering periods. The first offering period will commence on the effective date of this offering.

Individuals scheduled to work more than 20 hours per week for more than five calendar months per year may join an offering period on the first day of the offering period or the beginning of any semi-annual purchase period within that period. Individuals who become eligible employees after the start date of an offering period may join the plan at the beginning of any subsequent semi-annual purchase period.

Participants may contribute up to 20% of their cash earnings through payroll deductions, and the accumulated deductions will be applied to the purchase of shares on each semi-annual purchase date. The purchase price per share will be equal to 85% of the fair market value per share on the participant's entry date into the offering period or, if lower, 85% of the fair market value per share on the semi-annual purchase date.

If the fair market value per share of our common stock on any purchase date is less than the fair market value per share on the start date of the two-year offering period, then that offering period will automatically terminate, and a new 24-month offering period will begin on the next business day. All participants in the terminated offering will be transferred to the new offering period.

In the event of a proposed sale of all or substantially all of our assets, or our merger with or into another company, the outstanding rights under the plan will be assumed or an equivalent right substituted by the successor company or its parent. If the successor company or its parent refuses to assume the outstanding rights or substitute an equivalent right, then all outstanding purchase rights will automatically be exercised prior to the effective date of the transaction. The purchase price will be equal to 85% of the market value per share on the participant's entry date into the offering period in which an acquisition occurs or, if lower, 85% of the fair market value per share on the date the purchase rights are exercised.

The plan will terminate no later than the tenth anniversary of the plan's initial adoption by the board of directors.

Limitation of Liability and Indemnification of Officers and Directors

As permitted by the Delaware General Corporation Law, we have adopted provisions in our certificate of incorporation and bylaws that limit or eliminate the personal liability of our directors for a breach of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonably available to them. Consequently, a director will not be personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for:

•: any breach of the director's duty of loyalty to us or our stockholders;
•: any act or omission not in good faith or that involve intentional misconduct or a knowing violation of law;

•: any act related to unlawful stock repurchases, redemptions or other distributions or payment of dividends; or
•: any transaction from which the director derived an improper personal benefit.

These limitations of liability do not affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation also authorizes us to indemnify our officers, directors and other agents to the full extent permitted under Delaware law.

As permitted by the Delaware General Corporation Law, our bylaws provide that:

•: we may indemnify our directors, officers and employees to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions;
•: we may advance expenses to our directors, officers and employees in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; and
•: the rights provided in our bylaws are not exclusive.

We have entered, and intend to continue to enter, into separate indemnification agreements with each of our directors and officers which may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. These indemnification agreements may require us, among other things, to indemnify our officers and directors against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct. These indemnification agreements also may require us to advance any expenses incurred by the directors or officers as a result of any proceeding against them as to which they could be indemnified and to obtain directors' and officers' insurance if available on reasonable terms.

At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification by us is sought, nor are we aware of any threatened litigation or proceeding that may result in a claim for indemnification.

We have purchased a policy of directors' and officers' liability insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment in some circumstances.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Since our inception, there has not been, nor is there currently planned, any transaction or series of similar transactions to which we were or are a party in which the amount involved exceeds $60,000 and in which any director, executive officer or holder of more than 5% of our capital stock or any member of our immediate family had or will have a direct or indirect material interest other than agreements which are described under the caption "Management" and the transactions described below.

Providian

In February 2001, we entered into a strategic partnership with Providian Financial, the fifth largest bankcard issuer in the U.S. Under the terms of the partnership, we offer Providian-issued, PayPal-branded Visa cards to our account holders. In February 2001, Providian purchased 3,333,333 shares of our Series D Preferred stock for an aggregate purchase price of $10,000,000. Shailesh J. Mehta, the CEO and chairman of the board of directors of Providian, is a member of our board of directors.

Common Stock

In January 1999, Confinity sold 5,200,000 shares of its common stock at a price of $0.001 per share to the following executive officers. These shares were converted into our common stock in connection with our merger with Confinity at the merger exchange ratio. The following table summarizes the shares of common stock purchased by these executive officers as adjusted for the merger exchange ratio:

Name of Officer/Director		Number of Shares of Common Stock
Peter A. Thiel		3,435,112
Max R. Levchin		6,870,225
Reid G. Hoffman		202,065

The shares of common stock issued to Mr. Levchin remain subject to a repurchase option held by us and other restrictions. This repurchase right lapses at a rate of 143,129 shares per month and the shares will be fully vested on December 31, 2003. The repurchase options on the shares issued to Mr. Thiel and Mr. Hoffman have already lapsed.

In March 1999, we sold 5,400,000 shares of our common stock at a price of $0.0033 per share to Elon R. Musk. Mr. Musk is currently a member of our board of directors. The shares of common stock issued to Mr. Musk were subject to a repurchase option held by us and other restrictions. In connection with Mr. Musk's termination of employment as our CEO, we exercised our right to repurchase any unvested shares, as described below under "—Separation Agreements."

In May 1999, we sold 600,000 shares of our common stock at a price of $0.033 per share to Mr. Musk. These shares of common stock were subject to a repurchase option held by us and other restrictions. In connection with Mr. Musk's termination of employment with us, we exercised our right to repurchase any unvested shares, as described below under "—Separation Agreements."

Preferred Stock

In February 1999, Confinity issued and sold an aggregate of 2,500,000 shares of its Series A Preferred Stock to investors for an aggregate consideration of $0.5 million. In June and August 1999, Confinity issued and sold 12,000,000 shares of its Series B Preferred Stock to investors for an aggregate consideration of $4.5 million. In January and February 2000, Confinity issued and sold an aggregate of 9,166,664 shares of its Series C Preferred Stock for an aggregate consideration of $11.0 million. These shares were converted into 5,051,637, 24,247,856 and 18,522,653 shares of Series AA, Series BB and Series CC preferred stock, respectively, in connection with our merger with Confinity in March 2000.

The following table summarizes the shares of preferred stock purchased by Confinity's executive officers, directors and 5% stockholders and persons associated with them, as adjusted for the merger exchange ratio.

Investor	Series AA	Series BB	Series CC
Thiel Capital International, LLC(1)	2,424,785	—	—
Nokia Ventures, L.P.(2)	—	16,165,237	1,683,880
Entities Affiliated with Clearstone Venture Parners(3)	—	—	8,402,555

(1): Mr. Thiel, our Chief Executive Officer and President, is the Managing Member of Thiel Capital Management, LLC, which is the Managing Member of Thiel Capital International, LLC. In private transactions not involving the Company, Thiel Capital International in 2000 transferred all of these shares, and in 2001 has purchased 1,455,133 shares of our Series AA Preferred Stock. Mr. Thiel disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in Thiel Capital International, LLC.
(2): Mr. Malloy, a director of PayPal, is a Partner of NVI, LLC, which is the General Partner of Nokia Ventures, L.P. Nokia Ventures, L.P. owns more than 5% of our outstanding capital stock.
(3): Includes shares held by Clearstone Venture Partners II-A, L.P., formerly idealab! Capital Partners II-A, LP, Clearstone Venture Partners II-B, L.P., formerly idealab! Capital Partners II-B, L.P., and Clearstone Venture Partners II-C, L.P., formerly idealab! Capital Principals Fund, L.P. Entities affiliated with Clearstone Venture Partners own more than 5% of our outstanding capital stock.

In May and June 1999, we issued and sold an aggregate of 38,850,000 shares of Series A Preferred Stock to investors for an aggregate consideration of $12.5 million and the domain name "X.com" valued at $0.5 million. In December 1999 and January 2000, we issued and sold 27,104,970 shares of Series B Preferred Stock to investors for an aggregate consideration of $12.9 million. In March and April 2000, we issued and sold an aggregate of 36,363,367 shares of Series C Preferred Stock to investors for an aggregate consideration of $100.0 million. From August 2000 through February 2001, we issued and sold an aggregate of 28,747,828 shares of our Series D Preferred Stock to investors for an aggregate consideration of $86.2 million. The following table summarizes the shares of preferred stock purchased by our executive officers, directors and 5% stockholders and persons associated with them.

Investor	Series A	Series B	Series C	Series D
Elon R. Musk(1)	36,000,000	—	181,818	333,333
Entities Affiliated with Sequoia Capital(2)	—	6,000,000	363,636	—
Bill H. Harris(3)	—	21,000,000	—	—
Entities Affiliated with Madison Dearborn Capital Partners(4)	—	—	10,909,091	—
Nokia Ventures, L.P.(5)	—	—	363,636	—
Entities Affiliated with Clearstone Venture Partners (6)	—	—	181,818	—
Providian Bancorp Services(7)	—	—	—	3,333,333

(1): Mr. Musk served as our Chief Executive Officer and President from March 1999 to December 1999 and from May 2000 to September 2000. Mr. Musk is currently a member of our board of directors. Includes 200,000 shares purchased by members of Mr. Musk's family.
(2): Includes shares held by Sequoia Capital IX, Sequoia Capital IX Principals Fund and Sequoia Capital Entrepreneurs Fund. Mr. Moritz, a director of PayPal, is a managing member of SC IX

Management, LLC, the general partner of Sequoia Capital IX, Sequoia Capital IX Principals Fund, and the Sequoia Capital Entrepreneurs Fund.

(3): Mr. Harris served as our President and Chief Operating Officer from November 1999 to January 2000 and our Chief Executive Officer from December 1999 to March 2000.
(4): Includes shares held by Madison Dearborn Capital Partners III, L.P., Madison Dearborn Special Equity III, L.P. and Special Advisors Fund I, LLC. Timothy Hurd, a director of PayPal, is a Managing Director at Madison Dearborn Partners, LLC. Madison Dearborn LLC is the general partner of Madison Dearborn Partners L.P., the sole general partner of Madison Dearborn Capital Partners III, L.P., Madison Dearborn Special Equity III, L.P. and is the managing member of Special Advisors Fund I, LLC, which is the manager of the Madison Dearborn Capital Partners III, L.P. fund, the Madison Dearborn Special Equity III, L.P. fund and the Special Advisors Fund I, LLC.
(5): Mr. Malloy, a director of PayPal, is a Partner of NVI, LLC, which is the General Partner of Nokia Ventures, L.P.
(6): Includes shares held by Clearstone Venture Partners II-A, L.P., formerly idealab! Capital Partners II-A, LP, Clearstone Venture Partners II-B, L.P., formerly idealab! Capital Partners II-B, L.P., and Clearstone Venture Partners II-C, L.P., formerly idealab! Capital Principals Fund, L.P. Entities affiliated with Clearstone Venture Partners own more than 5% of our outstanding capital stock.
(7): Mr. Mehta, a director of PayPal, is the chairman of the board of directors and chief executive officer of Providian Financial Corporation, the parent company of Providian Bancorp Services.

In August 1999, various entities affiliated with Sequoia Capital purchased 15,000,000 shares of Series A Preferred Stock from Elon R. Musk for a total purchase price of $5 million. Michael J. Moritz, a director of PayPal, is a managing member of SC IX Management, LLC, the general partner of Sequoia Capital IX, Sequoia Capital IX Principals Fund, and the Sequoia Capital Entrepreneurs Fund.

Some holders of our preferred stock are entitled to registration rights with respect to the shares of common stock that they will hold following this offering. See "Description of Capital Stock—Registration Rights."

In August and September 2001, we issued an aggregate of 4,500,000 shares of non-voting Class A Stock for an aggregate purchase price of $1,350,000. Peter A. Thiel, our Chief Executive Officer, received a beneficial interest in these 4,500,000 shares. These shares of Class A Stock are subject to a repurchase option held by us and other restrictions. As to 1,687,500 of those shares, 750,000 shares were released from the repurchase option on August 30, 2001. We have a right to repurchase up to all 937,500 remaining shares of those 1,687,500 shares at any time, for an amount equal to the price paid for the shares. This repurchase right lapses at a rate of 93,750 shares per month commencing in September 2001, expiring completely in June 2002. In the event of a change of control, any of such 937,500 shares which are then still subject to repurchase restrictions will be released from the repurchase restrictions. With respect to the other 2,812,500 shares, commencing in June 2002 the repurchase right will lapse at a rate of 93,750 shares per month, expiring completely in January 2005. In the event Mr. Thiel's employment relationship with us is involuntarily terminated or terminated without cause within one year following a change of control, then all of the 2,812,500 shares which are then still subject to repurchase restrictions will be released from the repurchase restrictions. As of November 1, 2001, Mr. Thiel will beneficially own approximately 1,031,250 shares of Class A Stock free of these repurchase restrictions. Upon the closing of this offering, all shares of Class A Stock will automatically convert into shares of our common stock.

In connection with his purchase of the shares of Class A Stock, we made a full recourse loan to Mr. Thiel in the amount of $1,350,000 at an interest rate of 8.0% per annum. Mr. Thiel used $843,750 of this loan to purchase 2,812,500 shares of Class A Stock, and these shares were pledged by Mr. Thiel as collateral for the repayment of the loan. The purchase price for the remaining shares was paid with cash. The loan matures on September 10, 2005 and becomes payable immediately upon the termination of Mr. Thiel's employment for any reason, including death or disability.

Warrants

At the time of the merger with Confinity, we assumed the obligations under warrants issued to two investors during January 2000 by Confinity, in connection with its Series C Preferred Stock financing. Nokia Ventures, L.P., one of our 5% stockholders, was issued a warrant to purchase 833,333 shares of Confinity Series C Preferred Stock at an exercise price of $2.40 per share. Various entities affiliated with Clearstone Venture Partners, one of our 5% stockholders, were issued warrants to purchase 4,166,666 shares of Confinity Series C Preferred Stock at an exercise price of $2.40 per share. These warrants were fully vested and exercisable at grant. In March 2000, upon the merger of Confinity and X.com Corporation, these warrants became warrants to purchase 1,683,880 and 8,419,393 shares, respectively, of our Series CC Preferred Stock, at an exercise price of $1.19. In June 2000, upon the receipt of funding for our Series D Preferred Stock offering at a price of $3.00 per shares, these warrants were exercised on a net basis by these investors for 1,017,212 and 5,086,058 shares of our Series CC preferred stock, respectively.

Other Transactions

In May 2001, we entered into a separation agreement with Elon R. Musk, our former President and Chief Executive Officer. Pursuant to the separation agreement, we provided for the accelerated lapsing of our repurchase right on 1,000,000 shares of our common stock owned by Mr. Musk. We then repurchased 2,000,000 shares of common stock from Mr. Musk for a total purchase price of $12,666. We also repurchased 90,909 shares of our Series C Preferred Stock owned by Mr. Musk for a total purchase price of $250,000, which is the price he paid for those shares, and 166,667 shares of our Series D Preferred Stock owned by Mr. Musk for a total purchase price of $500,000, which is the price he paid for those shares. The separation agreement with Mr. Musk provides that, in the event we breach certain agreements with Mr. Musk relating to the identification of the Company's founders, Mr. Musk will have the right to require us to purchase from him an additional 90,909 shares of Series C Preferred Stock for a purchase price of $2.75 per share and 166,667 shares of Series D Preferred Stock for a purchase price of $3.00 per share, for a total purchase price of $750,000.

In July 2000, in connection with the termination of employment of Bill H. Harris, our former Chief Executive Officer and President and a former member of our board of directors, we repurchased 5,375,000 shares of common stock owned by Mr. Harris from him for a total purchase price of $179,000, which is the price he originally paid for those shares. In addition, pursuant to the purchase agreement under which Mr. Harris acquired 21,000,000 shares of our Series B Preferred Stock in January 2000, we had the right to repurchase 18,812,500 shares at his original purchase price of $0.48 per share as a result of the termination of his employment in May 2000. In July 2000, we repurchased 15,663,445 shares of Series B Preferred Stock owned by Mr. Harris from him for a total purchase price of $7.1 million. In addition, we assigned our right to repurchase 3,149,055 shares of the Series B Preferred Stock owned by Mr. Harris to Elon R. Musk. Under Mr. Harris' purchase agreement, in order for this assignment to be effective, Mr. Musk had to pay us any excess between the fair market value of the Series B Preferred Stock per share and the $0.48 per share purchase price. The board of directors determined that the fair market value of the Series B Preferred Stock was $0.60 per share. Mr. Musk paid us this excess amount by issuing to us a promissory note in the principal amount of approximately $389,000. This note bears interest at a rate of 6.6% and matures on July 11, 2004.

However, we have agreed to forgive all amounts due to us under this note upon the successful completion of this offering.

In August 2001, in connection with the termination of employment of H. David Johnson, our former Chief Financial Officer, we paid to him a one time severance payment of $75,000. Mr. Johnson executed a separation agreement that provided for the accelerated lapsing of our repurchase right on 168,750 shares of the common stock owned by Mr. Johnson. We then repurchased 590,625 shares of common stock from Mr. Johnson for a total purchase price of $19,687.

In July 2001, we made loans to or for the benefit of certain employees. Each loan was non-recourse, secured in part by a pledge of shares of its common stock owned by each participant and had a four-year term. In connection with each loan, each participant granted to us the right to purchase a portion of the shares of its common stock owned by such participant at a price of $3 per share. We exercised our right to purchase these shares in September 2001 and purchased 1,777,510 common shares for an aggregate consideration of $5,332,530. The participants used the proceeds to repay promissory notes issued in July 2001, and all of these notes have been repaid. The following executive officers participated in the liquidity program, received loans and had shares purchased by us on the terms described above: David O. Sacks, Reid G. Hoffman, Roelof F. Botha, Jack R. Selby, James E. Templeton, Sarah B. Imbach, Todd R. Pearson, and Sandeep Lal. In addition, H. David Johnson, our former Chief Financial Officer, participated in the program.

In April 2000, we assumed a loan payable by Roelof F. Botha, our Chief Financial Officer, to his former employer. Mr. Botha has agreed to repay this loan as a single payment in June 2004 or at such time as he ceases to be our employee, if sooner. We forgave 25.0% of the loan in June 2001 and have agreed to forgive the remainder in 25.0% increments in June 2002, June 2003 and June 2004.

In December 1998, Thiel Capital International, LLC issued a bridge loan to Confinity in the amount of $100,000, bearing interest at a rate of 4.3% compounded annually. Peter A. Thiel, our Chief Executive Officer and President, is the Managing Member of Thiel Capital Management, LLC, which is the Managing Member of Thiel Capital International, LLC. In 1999, the entire amount of the bridge loan was converted into 500,000 shares of Confinity Series A Preferred Stock. These shares were transferred by Thiel Capital International in 1999 and 2000 in private transactions not involving Confinity or X.com, and were converted to 1,010,327 shares of our Series AA Preferred Stock.

In June 1999, we issued and sold to Kimbal Musk 300,000 shares of our Series A Preferred Stock for aggregate consideration of $100,000. Mr. Musk is the brother of Elon R. Musk, a member of our board of directors.

From time to time, we have granted stock options to our executive officers and directors.

We have entered into indemnification agreements with each of our directors and executive officers that are described under "Management—Limitations of Liability and Indemnification Matters."

PRINCIPAL STOCKHOLDERS

The following table presents information concerning the beneficial ownership of the shares of our common stock as of September 21, 2001 and as adjusted to reflect the sale of shares of common stock offered by this prospectus, by:

•: each person we know to be the beneficial owner of 5% of more of our outstanding shares of common stock;
•: each of our named executive officers;
•: each of our directors; and
•: all of the executive officers and directors as a group.

The information set forth in the table gives effect to the conversion of all of our preferred stock.

Beneficial ownership is determined under the rules of the Securities and Exchange Commission and generally includes voting or investment power over securities. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder. Percentage of beneficial ownership is based on 200,022,465 shares of common stock outstanding as of September 21, 2001 and shares of common stock outstanding after the completion of this offering. Shares of common stock subject to options that are currently exercisable or exercisable within 60 days of September 21, 2001, are considered outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless indicated below, the address of each individual listed below is c/o PayPal, Inc., 1840 Embarcadero Road, Palo Alto, California 94303.

		Percentage of Shares Outstanding
Name and Address of Beneficial Owner	Number of Shares Beneficially Owned	Prior to the Offering		After the Offering
Peter A. Thiel(1)	11,107,800	5.6	%
Max R. Levchin(2)	5,152,668	2.6	%
Reid G. Hoffman(3)	1,396,278	*
Todd R. Pearson(4)	400,000	*
Bill H. Harris	2,812,500	1.4	%
H. David Johnson	759,375	*
Entities Affiliated with Sequoia Capital(5) 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025	21,363,636	10.7	%
Nokia Ventures, L.P. 545 Middlefield Road, Suite 210 Menlo Park, CA 94025	19,229,965	9.6	%
Entities Affiliated with Clearstone Venture Partners(6) 2500 Sand Hill Road, Suite 205 Menlo Park, CA 94025	13,670,431	6.9	%

Entities Affiliated with Madison Dearborn Partners(7) Three First National Plaza, Suite 3800 Chicago, IL 60602	10,909,091	5.5	%
Elon R. Musk	28,406,630	14.2	%
Michael J. Moritz(8)	21,363,636	10.7	%
John A. Malloy(9)	19,229,965	9.6	%
Timothy M. Hurd(10)	10,909,091	5.5	%
Shailesh J. Mehta(11)	3,333,333	1.7	%
All directors, officers and key employees as a group (18 persons)	109,794,906	54.4	%

*: Less than 1%.
(1): Includes 5,071,802 shares of restricted stock subject to repurchase as of November 20, 2001. Also includes 1,455,133 shares of common stock held of record by Thiel Capital International, LLC. Mr. Thiel is the managing member of Thiel Capital Management, LLC, which is the managing member of Thiel Capital International, LLC. Mr. Thiel disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in the fund.
(2): Includes 1,603,053 shares of restricted stock subject to repurchase as of November 20, 2001.
(3): Includes 117,872 shares of restricted stock subject to repurchase as of November 20, 2001.
(4): Includes 275,001 shares of restricted stock subject to repurchase as of November 20, 2001.
(5): Represents 15,960,636 shares of common stock held of record by Sequoia Capital IX, 2,946,045 shares of common stock held of record by Sequoia Capital IX Principals Fund and 2,456,818 shares of common stock held of record by Sequoia Capital Entrepreneurs Fund.
(6): Represents 12,009,475 shares of common stock held by Clearstone Venture Partners II-A, L.P., formerly idealab! Capital Partners II-A, LP, 410,112 shares of common stock held by Clearstone Venture Partners II-B, L.P., formerly idealab! Capital Partners II-B, L.P., and 235,782 shares of common stock held by Clearstone Venture Partners II-C, L.P., formerly idealab! Capital Principals Fund, L.P.
(7): Represents 10,618,764 shares of common stock held by Madison Dearborn Capital Partners III, L.P., 235,782 shares of common stock held by Madison Dearborn Special Equity III, L.P. and 54,545 shares of common stock held by Special Advisors Fund I, LLC.
(8): Consists of the shares listed in footnote 5 above. Mr. Moritz is a managing member of SC IX Management, LLC, the general partner of Sequoia Capital IX, Sequoia Capital IX Principals Fund, and the Sequoia Capital Entrepreneurs Fund. Mr. Moritz disclaims beneficial ownership of these shares, except to the extent of his pecuniary interest in the named funds.
(9): Represents 19,229,965 shares of common stock held of record by Nokia Ventures, L.P. Mr. Malloy is a partner of NVI, LLC, which is the general partner of Nokia Ventures, L.P., a Delaware limited partnership. Mr. Malloy disclaims beneficial ownership of these shares, except to the extent of his pecuniary interest in the named fund.
(10): Consists of the shares listed in footnote 7 above. Mr. Hurd is a managing director at Madison Dearborn Partners, LLC. Madison Dearborn LLC is the general partner of Madison Dearborn Partners L.P., the sole general partner of Madison Dearborn Capital Partners III, L.P., and of Madison Dearborn Special Equity III, L.P., and is the managing member of Special Advisors Fund I, LLC. Mr. Hurd disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in the named funds.
(11): Represents 3,333,333 shares of common stock held of record by Providian Bancorp Services. Mr. Mehta is the CEO of Providian Bancorp Services, which owns all of the stock and exercises voting control of these shares. Mr. Mehta disclaims beneficial ownership of these shares.

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, our authorized capital stock will consist of shares of common stock, $0.001 par value per share, and shares of preferred stock, $0.001 par value per share.

The following is a summary of the rights of our common stock and preferred stock. This summary is not complete. For more detailed information, please see our certificate of incorporation which is filed as an exhibit to the registration statement of which this prospectus is a part.

Common Stock

As of September 21, 2001, and assuming the conversion of all outstanding preferred stock into common stock upon the closing of this offering, there were 200,022,465 shares of common stock outstanding held by 431 stockholders and options outstanding to purchase 8,769,146 shares of common stock under our stock option plans and other options or warrants outstanding to purchase 570,414 shares of common stock.

Dividend Rights. Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our board of directors may from time to time determine.

Voting Rights. Each common stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in our certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election.

No Preemptive or Similar Rights. Our common stock is not entitled to preemptive rights and is not subject to conversion or redemption.

Right to Receive Liquidation Distributions. Upon our liquidation, dissolution or winding-up, the assets legally available for distribution to our stockholders are distributable ratably among the holders of our common stock and any participating preferred stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding preferred stock and payment of other claims of creditors. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable.

Preferred Stock

Upon the closing of this offering, each outstanding share of our preferred stock outstanding will be converted into one share of common stock.

Following the offering, we will be authorized, subject to the limits imposed by the Delaware General Corporation Law, to issue shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations, restrictions. Our board of directors can also increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, without any further vote or action by our stockholders.

Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that affect adversely the voting power or other rights of our common stockholders. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of delaying, deferring or preventing our change in control

and may cause the market price of our common stock to decline or impair the voting and other rights of the holders of our common stock. We have no current plans to issue any shares of preferred stock.

Registration Rights

The holders of approximately 171,837,219 shares of common stock and holders of warrants to purchase 30,000 shares of common stock have the right to require us to register their shares with the SEC so that those shares may be publicly resold or to include their shares in any registration statement we file.

Demand Registration Rights. At any time six months after the closing of this offering the holders of at least 25% of the shares having registration rights have the right to demand that we file one registration statement. If we are eligible to file a registration statement on Form S-3, the holders of at least 10% of the shares having registration rights have the right to demand that we file a registration statement on Form S-3 so long as the aggregate amount of securities to be sold under the registration statement on Form S-3 exceeds $10 million.

Piggyback Registration Rights. If we register any securities for public sale, stockholders with registration rights will have the right to include their shares in the registration statement. The underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to be included in the registration statement, but not below 10% of the total number of shares included in the registration statement, except for this initial public offering in which the underwriters have excluded any sales by existing investors. No securities held by Elon R. Musk, Peter A. Thiel or Max R. Levchin will be included in the registration statement if any securities held by any other holder of registration rights are excluded from such registration statement.

Expenses of Registration. We will pay all expenses relating to any demand or piggyback registration other than underwriting discounts and commissions. However, we will not pay for the expenses of any demand registration if the request is subsequently withdrawn by the holders of a majority of the shares having registration rights, subject to very limited exceptions.

Expiration of Registration Rights. The registration rights described above will expire two years after this offering is completed. The registration rights will terminate earlier (i) for a particular stockholder if that holder, following this offering, holds less than one percent of our common stock and such holder can resell all of its securities in a three-month period under Rule 144 of the Securities Act and (ii) upon a change of control.

Antitakeover Effects of Delaware Law and Provisions of Our Certificate of Incorporation and Bylaws

Delaware Takeover Statute

We are subject to Section 203 of the Delaware General Corporation Law. This statute regulating corporate takeovers prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for three years following the date that the stockholder became an interested stockholder, unless:

•: prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;
•: the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (a) shares owned by persons who are directors and also officers and (b) shares owned by employee stock plans in which employee participants do not have the right

to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

•: on or subsequent to the date of the transaction, the business combination is approved by the board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66²/3% of the outstanding voting stock which is not owned by the interested stockholder.

Section 203 defines a business combination to include:

•: any merger or consolidation involving the corporation and the interested stockholder;
•: any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation;
•: subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; or
•: the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person.

Certificate of Incorporation and Bylaw Provisions

Provisions of our certificate of incorporation and bylaws which will become effective upon the closing of this offering may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of our company. These provisions could cause the price of our common stock to decrease. Some of these provisions allow us to issue preferred stock without any vote or further action by the stockholders, eliminate the right of stockholders to act by written consent without a meeting and eliminate cumulative voting in the election of directors. These provisions may make it more difficult for stockholders to take specific corporate actions and could have the effect of delaying or preventing a change in our control. The amendment of any of these provisions would require approval by holders of at least two-thirds of the outstanding common stock.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company.

Nasdaq Listing

We have applied to list our common stock for quotation on the Nasdaq National Market.

SHARES ELIGIBLE FOR FUTURE SALE

Immediately prior to this offering, there was no public market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect the market price of our common stock.

Upon completion of this offering, we will have outstanding shares of common stock, including the issuance of shares of common stock offered by us and no exercise of options outstanding after September 21, 2001. All of the shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act.

Of the remaining shares of common stock, shares were issued and sold by us in reliance on exemptions from the registration requirements of the Securities Act. All these shares will be subject to lock-up agreements, described below, on the date of this prospectus. Upon expiration of the lock-up agreements, shares will become eligible for sale pursuant to Rule 144(k), Rule 144 and Rule 701. Thereafter, shares will become eligible for sale pursuant to Rule 144.

Relevant Dates		Approximate Number of Shares Eligible for Future Sale		Comment
On the date of this prospectus				Freely tradeable shares sold in this offering
180 days after the date of this prospectus				All shares subject to lock-up agreements released; shares saleable under Rules 144, 144(k) and 701
Thereafter				Shares saleable under Rule 144

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of:

•: 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering, or
•: the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

Sales under Rule 144 are also subject to other requirements regarding the manner of sale, notice filing and the availability of current public information about us.

Rule 144(k)

Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell such shares without complying with the manner of sale, notice filing, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. The Securities Act defines affiliates to be persons that directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, PayPal. These persons typically include our executive officers and directors.

Rule 701

In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchases shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering is entitled to resell such shares 90 days after the effective date of this offering, without having to comply with the holding period requirements or other restrictions contained in Rule 144.

The Securities and Exchange Commission has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Securities Exchange Act, along with the shares acquired upon exercise of such options, including exercises after the date of this prospectus. Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this prospectus, may be sold by persons other than "affiliates," as defined in Rule 144, subject only to the manner of sale provisions of Rule 144 and by "affiliates" under Rule 144 without compliance with its one-year minimum holding period requirement.

Registration Rights

Beginning six months after the date of this offering, the holders of 171,837,219 shares of common stock and the holders of warrants to purchase 30,000 shares of common stock will be entitled to certain rights with respect to the registration of these shares for sale in the public market. See "Description of Capital Stock—Registration Rights." Registration of these shares under the Securities Act would result in these shares becoming freely tradable in the public market without restriction.

Warrants

As of September 21, 2001, there were a total of 570,414 shares of common stock subject to outstanding warrants, all of which are subject to lock-up agreements similar to those described below. These shares will become eligible for sale on various dates upon expiration or release of the 180-day lock-up agreements.

Stock Options

As of September 21, 2001, there were a total of 8,769,146 shares of common stock subject to outstanding options under our stock option plans, all of which are subject to lock-up agreements similar to those described below. Immediately after the completion of the offering, we intend to file registration statements on Form S-8 under the Securities Act to register all of the shares of common stock issued or reserved for future issuance under our stock option plans. After the effective dates of these registration statements, shares purchased upon exercise of options granted under our stock option plans will be available for resale in the public market.

Lock-up Agreements

UNDERWRITING

Salomon Smith Barney Inc., Robertson Stephens, Inc. and William Blair & Company, L.L.C. are acting as representatives of the underwriters named below. Subject to the terms and conditions stated in the underwriting agreement dated the date of this prospectus, each underwriter named below has agreed to purchase, and we have agreed to sell to that underwriter, the number of shares set forth opposite the underwriter's name.

Underwriter			Number of Shares
Salomon Smith Barney Inc.
Robertson Stephens, Inc.
William Blair & Company, L.L.C.


	Total

The underwriting agreement provides that the obligations of the underwriters to purchase the shares included in this offering are subject to approval of legal matters by counsel and to other conditions. The underwriters are obligated to purchase all the shares (other than those covered by the over-allotment option described below) if they purchase any of the shares.

The underwriters propose to offer some of the shares directly to the public at the public offering price set forth on the cover page of this prospectus and some of the shares to dealers at the public offering price less a concession not to exceed $ per share. The underwriters may allow, and dealers may reallow, a concession not to exceed $ per share on sales to other dealers. If all of the shares are not sold at the initial offering price, the representatives may change the public offering price and the other selling terms. The representatives have advised us that the underwriters do not intend to confirm any sales to any accounts over which they exercise discretionary authority.

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to additional shares of common stock at the public offering price less the underwriting discount. The underwriters may exercise the option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent the option is exercised, each underwriter must purchase a number of additional shares approximately proportionate to that underwriter's initial purchase commitment.

At our request, the underwriters have reserved up to % of the shares of common stock for sale at the initial public offering price to persons who are directors, officers or employees, or who are otherwise associated with us through a directed share program. The number of shares of common stock available for sale to the general public will be reduced by the number of directed shares purchased by participants in the program. Any directed shares not purchased will be offered by the underwriters to the general public on the same basis as all other shares of common stock offered. We have agreed to indemnify the underwriters against certain liabilities and expenses, including liabilities under the Securities Act, in connection with the sales of the directed shares.

Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the shares was determined by negotiations between us and the

representatives. Among the factors considered in determining the initial public offering price will be our record of operations, our current financial condition, our future prospects, our markets, the economic conditions in and future prospects for the industry in which we compete, our management, and currently prevailing general conditions in the equity securities markets, including current market valuations of publicly traded companies considered comparable to our company. We cannot assure you, however, that the prices at which the shares will sell in the public market after this offering will not be lower than the initial public offering price or that an active trading market in our common stock will develop and continue after this offering.

We have applied to have our common stock included for quotation on the Nasdaq National Market under the symbol "PYPL".

The following table shows the underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of common stock.

	Paid by PayPal, Inc.
	No Exercise	Full Exercise
Per Share	$	$
Total	$	$

In connection with the offering, Salomon Smith Barney, on behalf of the underwriters, may purchase and sell shares of common stock in the open market. These transactions may include short sales, syndicate covering transactions and stabilizing transactions. Short sales involve syndicate sales of common stock in excess of the number of shares to be purchased by the underwriters in the offering, which creates a syndicate short position. "Covered" short sales are sales of shares made in an amount up to the number of shares represented by the underwriters' over-allotment option. In determining the source of shares to close out the covered syndicate short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Transactions to close out the covered syndicate short involve either purchases of the common stock in the open market after the distribution has been completed or the exercise of the over-allotment option. The underwriters may also make "naked" short sales of shares in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares of common stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of bids for or purchases of shares in the open market while the offering is in progress.

The underwriters also may impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when Salomon Smith Barney repurchases shares originally sold by that syndicate member in order to cover syndicate short positions or make stabilizing purchases.

Any of these activities may have the effect of preventing or retarding a decline in the market price of the common stock. They may also cause the price of the common stock to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriters may conduct these transactions on the Nasdaq National Market or in the over-the-counter market, or otherwise. If underwriters commence any of these transactions, they may discontinue them at any time.

We estimate that our portion of the total expenses of this offering will be $ .

Travelers Insurance, an affiliate of Salomon Smith Barney Inc., is the issuer of an insurance policy we purchased to protect our account holders from unauthorized withdrawals. In addition, on March 31, 2000, affiliates of Robertson Stephens, Inc. purchased a total of 109,091 shares of our Series C Preferred shares.

A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters. The representatives may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. The representatives will allocate shares to underwriters that may make Internet distributions on the same basis as other allocations. In addition, shares may be sold by the underwriters to securities dealers who resell shares to online brokerage account holders.

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make because of any of those liabilities.

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for us by Latham & Watkins, Menlo Park, California. Various legal matters relating to the offering will be passed upon for the underwriters by Davis Polk & Wardwell, Menlo Park, California.

EXPERTS

The consolidated financial statements of PayPal, Inc. as of December 31, 2000 and 1999 and for the year ended December 31, 2000 and for the period from March 8, 1999 (inception) to December 31, 1999 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing.

The financial statements of Confinity, Inc. as of December 31, 1999 and 1998 and for the year ended December 31, 1999 and for the period from December 3, 1998 (inception) to December 31, 1998 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act that registers the shares of our common stock to be sold in this offering. The registration statement, including the attached exhibits and schedules, contain additional relevant information about us and our capital stock. The rules and regulations of the SEC allow us to omit various information included in the registration statement from this document.

In addition, upon completion of this offering, we will become subject to the reporting and information requirements of the Exchange Act and, as a result, will file periodic reports, proxy statements and other information with the SEC. You may read and copy this information at the public reference room of the SEC at 450 Fifth Street, N.W., Room 1024, Washington, DC 20549. You may also obtain copies of this information by mail from the public reference section of the SEC, 450 Fifth St., N.W. Room 1024, Washington, DC 20549, at prescribed rates. You may obtain information on the operation of the public reference rooms by calling the SEC at (800) SEC-0330.

The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers like us who file electronically with the SEC. The address of that website is http://www.sec.gov.

We intend to furnish our stockholders with annual reports containing audited financial statements and to make available to our stockholders quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information.

PAYPAL, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PayPal, Inc.
	Report of PricewaterhouseCoopers LLP, independent accountants	F-2
	Consolidated balance sheets at December 31, 1999 and 2000, at June 30, 2001 (unaudited) and pro forma at June 30, 2001 (unaudited)	F-3
	Consolidated statements of operations for March 8, 1999 (inception) to December 31, 1999, the year ended December 31, 2000, and the six months ended June 30, 2000 and 2001 (unaudited)	F-4
	Consolidated statements of convertible preferred stock and stockholders' deficit for March 8, 1999 (inception) to December 31, 1999, the year ended December 31, 2000, and the six months ended June 30, 2001 (unaudited)	F-5
	Consolidated statements of cash flows for March 8, 1999 (inception) to December 31, 1999, the year ended December 31, 2000, and the six months ended June 30, 2000 and 2001 (unaudited)	F-6
	Notes to consolidated financial statements	F-8
	Unaudited pro forma combined financial statements for the year ended December 31, 2000	F-31
Confinity, Inc. (a development stage company)
	Report of PricewaterhouseCoopers LLP, independent accountants	F-33
	Balance sheets at December 31, 1998 and 1999, and at March 30, 2000 (unaudited)	F-34
	Statements of operations for December 3, 1998 (inception) to December 31, 1998, the year ended December 31, 1999, the three months ended March 30, 2000 (unaudited) and for December 3, 1998 (inception) to March 30, 2000 (unaudited)	F-35
	Statements of convertible preferred stock and stockholders' equity/(deficit) for December 3, 1998 (inception) to December 31, 1998, the year ended December 31, 1999, and the three months ended March 30, 2000 (unaudited)	F-36
	Statements of cash flows for December 3, 1998 (inception) to December 31, 1998, the year ended December 31, 1999, the three months ended March 30, 2000 (unaudited) and December 3, 1998 (inception) to March 30, 2000 (unaudited)	F-37
	Notes to financial statements	F-38

F–1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
PayPal, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of convertible preferred stock and stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of PayPal, Inc. (the "Company") and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for the year ended December 31, 2000 and for the period from March 8, 1999 (inception) to December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the 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 our opinion.

/s/ PricewaterhouseCoopers LLP

San Francisco, California
March 12, 2001

F–2

PAYPAL, INC

CONSOLIDATED BALANCE SHEETS

			December 31,
			December 31,						June 30, 2001			Pro Forma June 30, 2001
			1999			2000			June 30, 2001			Pro Forma June 30, 2001
									(unaudited)			(unaudited) (Note 1)
ASSETS
Cash and cash equivalents			$	8,441,864		$	108,279,795		$	123,411,059
Short-term investment securities				—			11,861,996			11,268,034
Restricted cash				150,020			3,975,611			6,048,090
Funds receivable				—			11,271,164			12,456,153
Other receivables				208,542			2,483,388			5,158,698
Prepaid expenses and other current assets				626,643			909,652			2,039,512

		Total current assets		9,427,069			138,781,606			160,381,546

Non-current investment securities				—			—			27,086,102
Investment in common stock				2,000,000			—			—
Fixed assets, net				743,439			10,397,712			12,481,658
Goodwill and other intangibles, net				492,894			82,087,261			49,246,356
Other assets				178,260			530,268			674,327

		Total assets	$	12,841,662		$	231,796,847		$	249,869,989

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Due to customers			$	—		$	82,786,438		$	108,571,398
Funds payable				—			6,720,967			10,852,507
Reserve for transaction losses				—			4,900,000			5,686,097
Accounts payable and accrued liabilities				1,090,122			8,799,280			8,396,913
Other liabilities				—			173,385			1,897,681

		Total current liabilities		1,090,122			103,380,070			135,404,596
Long-term capital leases				—			229,605			133,530

		Total liabilities	$	1,090,122		$	103,609,675		$	135,538,126

Convertible preferred stock, par value $0.001: 68,850,000, 193,284,442, 193,284,442 shares authorized at December 31, 1999 and 2000 and June 30, 2001, respectively; 44,954,970, 156,700,049, 169,070,806 shares issued and outstanding at December 31, 1999 and 2000 and June 30, 2001, respectively.				15,791,084			241,640,791			278,323,940		$	—
Commitments and contingencies (Note 17)
Stockholders' equity (deficit):
Common stock, par value $0.001: 300,000,000 shares authorized; 17,584,131, 37,313,887 and 38,279,404 issued and outstanding at December 31, 1999 and 2000 and June 30, 2001; and 207,350,210 pro forma issued and outstanding at June 30, 2001				17,584			37,314			38,279			207,350
Additional paid in capital				3,740,309			69,797,517			81,287,148			359,442,016
Deferred stock-based compensation				(3,038,864	)		(8,597,400	)		(13,726,592	)		(13,726,592	)
Stockholder notes				(139,275	)		(566,108	)		(558,214	)		(558,214	)
Accumulated deficit				(4,619,298	)		(174,124,942	)		(231,032,698	)		(231,032,698	)

	Total stockholders' equity (deficit)			(4,039,544	)		(113,453,619	)		(163,992,077	)		114,331,862

		Total liabilities, convertible preferred stock and stockholders' equity (deficit)	$	12,841,662		$	231,796,847		$	249,869,989		$	249,869,989

The accompanying notes are an integral part of these consolidated financial statements

F–3

PAYPAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

									Six Months Ended June 30,
			March 8, 1999 (inception) to December 31, 1999
						Year Ended December 31, 2000
						Year Ended December 31, 2000			2000			2001
									(unaudited)
Transaction fees			$	—		$	8,454,523		$	35,121		$	31,608,481
Interest on funds held for others				—			2,045,815			239,571			2,062,562
Investment management fees				—			21,854			—			539,289
Service agreement revenues				—			3,937,762			3,071,741			—

	Total revenues			—			14,459,954			3,346,433			34,210,332

Transaction processing expenses				—			25,092,759			6,230,348			19,413,235
Provision for transaction losses				—			11,028,000			1,355,262			5,539,483
Promotional and marketing				887,618			21,023,269			10,674,769			3,670,037
Product development				621,083			5,334,162			1,547,371			4,918,524
General and administrative				2,953,998			18,623,079			6,683,969			12,296,584
Customer service and operations				295,696			15,967,338			4,321,103			14,898,498
Amortization of goodwill and other intangibles				123,736			49,312,984			16,482,082			32,830,903
Service agreement costs and termination expenses				—			41,142,126			28,217,750			—

		Total operating expenses		4,882,131			187,523,717			75,512,654			93,567,264

Loss from operations				(4,882,131	)		(173,063,763	)		(72,166,221	)		(59,356,932	)
Interest income				264,342			2,124,417			152,250			1,740,608
Other income (expense), net				(1,509	)		1,433,702			1,385,809			708,568

Net loss			$	(4,619,298	)	$	(169,505,644	)	$	(70,628,162	)	$	(56,907,756	)

Basic and diluted net loss per share			$	(1.64	)	$	(7.92	)	$	(5.49	)	$	(2.23	)

Shares used in calculating basic and diluted net loss per share				2,814,034			21,396,312			12,875,461			25,552,284

Pro forma basic and diluted net loss per share (unaudited)						$	(0.95	)				$	(0.29	)

Shares used in calculating pro forma basic and diluted net loss per share (unaudited)							178,096,395						194,622,791

F–4

PAYPAL, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT

							Stockholders' Deficit
		Convertible Preferred Stock					Stockholders' Deficit
							Common Stock
							Common Stock					Additional Paid-In Capital			Deferred Stock-based Compensation			Stockholder Notes			Accumulated Deficit			Total Stockholder's (Deficit)
		Shares		Amount			Shares		Amount			Additional Paid-In Capital			Deferred Stock-based Compensation			Stockholder Notes			Accumulated Deficit			Total Stockholder's (Deficit)
Date of Inception
Issuance of Series A convertible preferred stock for cash and intangible assets, net of issuance costs of $50,636		38,850,000		$	12,899,364		—		$	—		$	—		$	—		$	—		$	—		$	—
Issuance of Series B convertible preferred stock, net of issuance costs of $15,138		6,104,970			2,891,720		—			—			—			—			—			—			—
Issuance of restricted common stock to employees at below fair value		—			—		18,625,440			18,625			3,019,402			(2,745,485	)		—			—			292,542
Amortization of deferred stock-based compensation from sales of restricted common stock to employees		—			—		—			—			—			147,342			—			—			147,342
Issuance of restricted common stock to non-employees in exchange for services		—			—		523,695			524			64,868			(62,779	)		—			—			2,613
Amortization of deferred stock-based compensation associated with deferred stock-based compensation from sales of restricted common stock to non-employees		—			—		—			—			—			62,779			—			—			62,779
Repurchase of restricted common stock from an officer		—			—		(11,000,004	)		(11,000	)		(58,663	)		—			—			—			(69,663	)
Issuance of stock options to employees at below fair value		—			—		—			—			499,244			(499,244	)		—			—			—
Amortization of deferred stock-based compensation associated with stock options to employees at below fair value		—			—		—			—			—			58,956			—			—			58,956
Issuance of stock options to non-employees in exchange for services		—			—		—			—			533			(533	)		—			—			—
Amortization of deferred stock-based compensation associated with stock options to non-employees in exchange for services		—			—		—			—			—			100			—			—			100
Issuance of warrants in exchange for services		—			—		—			—			85,085			(85,085	)		—			—			—
Amortization of warrants issued in exchange for services		—			—		—			—			—			85,085						—			85,085
Stockholder notes issued for restricted common stock		—			—		9,435,000			9,435			129,840			—			(139,275	)		—			—
Net loss		—			—		—			—			—			—			—			(4,619,298	)		(4,619,298	)

Balance at December 31, 1999		44,954,970			15,791,084		17,584,131			17,584			3,740,309			(3,038,864	)		(139,275	)		(4,619,298	)		(4,039,544	)
Issuance of Series B convertible preferred stock		21,000,000			10,002,993		—			—			—			—			—			—			—
Issuance of Series C convertible preferred stock, net of issuance costs of $95,586		36,363,637			99,904,416		—			—			—			—			—			—			—
Issuance of Series D convertible preferred stock, net of issuance costs of $781,606		16,119,495			47,576,879		—			—			—			—			—			—			—
Issuance of equity pursuant to merger:
	Series AA convertible preferred stock	5,051,627			7,729,976		—			—			—			—			—			—			—
	Series BB convertible preferred stock	24,247,842			37,452,161		—			—			—			—			—			—			—
	Series CC convertible preferred stock	18,522,653			30,248,704		—			—			—			—			—			—			—
	Common stock	—			—		25,489,478			25,489			38,588,750			—			—			—			38,614,239
	Warrants assumed	—			—		—			—			8,479,614			—			—			—			8,479,614
	Options assumed	—			—		—			—			7,182,310			—			—			—			7,182,310
Issuance of restricted common stock to employees at below fair value		—			—		—			—			218,369			(218,369	)		—			—			—
Amortization of deferred stock-based compensation from sales of restricted common stock to employees		—			—		—			—			—			343,627			—			—			343,627
Issuance of stock options to employees at below fair value		—			—		—			—			11,078,921			(9,508,407	)		—			—			1,570,514
Amortization of deferred stock-based compensation associated with stock options to employees at below fair value		—			—		—			—			—			1,904,262			—			—			1,904,262
Issuance of stock options to non-employees in exchange for services		—			—		—			—			206,782			(206,782	)		—			—			—
Amortization of deferred stock-based compensation associated with stock options to non-employees in exchange for services		—			—		—			—			—			207,215			—			—			207,215
Repurchase of restricted Series B convertible preferred stock from an officer		(18,812,500	)		(8,960,958	)	—			—			—			—			—			—
Reassignment of rights to Series B convertible preferred stock to an officer		3,149,055			1,889,433		—			—			3,369,488			(3,369,488	)		(389,433	)		—			(389,433	)
Amortization of deferred stock-based compensation associated with rights to purchase Series B convertible preferred stock		—			—		—			—			—			3,369,488			—			—			3,369,488
Repurchase of restricted common stock from an officer		—			—		(6,461,386	)		(6,461	)		(3,083,376	)		1,919,918			—			—			(1,169,919	)
Exercise of stock options		—			—		701,664			702			22,453			—			—			—			23,155
Exercise of warrants		6,103,270			6,103		—			—			(6,103	)		—			—			—			(6,103	)
Stockholders' notes assumed in merger		—			—		—			—			—			—			(37,400	)		—			(37,400	)
Net loss		—			—		—			—			—			—			—			(169,505,644	)		(169,505,644	)

Balance at December 31, 2000		156,700,049			241,640,791		37,313,887			37,314			69,797,517			(8,597,400	)		(566,108	)		(174,124,942	)		(113,453,619	)
Issuance of Series D convertible preferred stock, net of issuance costs of $450,838		12,628,333			37,433,149		—			—			—			—			—			—			—
Repurchase of restricted Series C convertible preferred stock from an officer		(90,909	)		(249,999	)	—			—			—			—			—			—			—
Repurchase of restricted Series D convertible preferred stock from an officer		(166,667	)		(500,001	)	—			—			—			—			—			—			—
Repurchase of restricted common stock from an officer		—			—		(2,000,000	)		(2,000	)		(10,667	)		15,333			12,667			—			15,333
Issuance of stock options to employees at below fair market value		—			—		—			—			10,742,161			(11,106,409	)		—			—			(364,248	)
Amortization of deferred stock-based compensation associated with stock options to employees at below fair value		—			—		—			—			—			5,894,075			—			—			5,894,075
Amortization of deferred stock-based compensation from sales of restricted common stock to employees		—			—		—			—			—			72,268			—			—			72,268
Issuance of stock options to non-employees in exchange for services		—			—		—			—			199,905			(199,905	)		—			—			—
Amortization of deferred stock-based compensation associated with stock options to non-employees in exchange for services		—			—		—			—			—			195,446			—			—			195,446
Exercise of stock options		—			—		2,965,517			2,965			546,088			—			(4,773	)		—			544,280
Issuance of warrants in exchange for services		—			—		—			—			12,144			(12,144	)		—			—			—
Amortization of warrants issued in exchange for services		—			—		—			—			—			12,144			—			—			12,144
Net loss		—			—		—			—			—			—			—			(56,907,756	)		(56,907,756	)

Balance at June 30, 2001 (unaudited)		169,070,806		$	278,323,940		38,279,404		$	38,279		$	81,287,148		$	(13,726,592	)	$	(558,214	)	$	(231,032,698	)	$	(163,992,077	)

F–5

PAYPAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

										Six Months Ended June 30,
				March 8, 1999 (inception) to December 31, 1999
							Year Ended December 31, 2000
							Year Ended December 31, 2000			2000			2001
										(unaudited)
Cash flows from operating activities
	Net loss			$	(4,619,298	)	$	(169,505,644	)	$	(70,628,162	)	$	(56,907,756	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Provision for transaction losses			—			11,028,000			2,796,658			5,539,483
		Depreciation and amortization of fixed assets			77,733			2,351,720			331,758			2,492,437
		Amortization of goodwill and other intangibles			123,736			49,312,984			16,482,082			32,830,903
		Amortization of stock-based compensation			354,262			5,824,592			799,574			6,161,789
		Changes in operating assets and liabilities:
			Restricted cash		(150,020	)		(3,825,591	)		(962,181	)		(2,072,479	)
			Funds receivable and other current receivables		(208,542	)		(13,546,010	)		(7,841,606	)		(3,860,299	)
			Prepaid expenses and other assets		(804,903	)		(635,017	)		(1,586,409	)		(1,273,919	)
			Charge-offs and recoveries to provision for transaction losses		—			(6,128,000	)		—			(4,753,386	)
			Accounts payable and accrued liabilities		1,090,122			7,709,159			13,594,672			(402,367	)
			Funds payable and other liabilities		—			7,123,957			642,315			5,759,760

			Net cash used in operating activities		(4,136,995	)		(110,289,850	)		(46,371,299	)		(16,485,834	)

Cash flows from investing activities
	Investments in Community BancShares, Inc. common stock				(2,000,000	)		2,000,000			(300,000	)		—
	Purchase of investment securities				—			(11,861,996	)		—			(26,492,139	)
	Purchase of fixed assets				(821,172	)		(11,743,740	)		(7,351,445	)		(4,554,237	)
	Purchase of domain names and licenses				(116,630	)		—			—			—
	Acquistion of cash through business combination				—			—			—			—

			Cash used in investing activities		(2,937,802	)		(21,605,736	)		(7,651,445	)		(31,046,376	)

Cash flows from financing activities
	Due to customers				—			82,786,438			33,505,879			25,784,960
	Proceeds from issuance of preferred stock, net				15,791,084			157,484,288			109,907,409			37,433,149
	Proceeds from issuance of restricted stock to employees				292,542			1,570,514			—			—
	Proceeds from issuance of restricted stock to non-employees				2,613			—			—			—
	Proceeds from exercise of stock options							23,155			10,303			544,280
	Proceeds from exercise of warrants				—			—			—			—
	Payments to repurchase common stock				—			—			—			(364,248	)
	Payments to repurchase restricted common stock				(69,663	)		(1,169,919	)		—			15,333
	Payments to repurchase preferred stock							(8,960,958	)		(6,103	)		(750,000	)
	Payments under capital lease				—			—			—			—

			Cash provided by financing activities		15,516,661			231,733,517			143,417,488			62,663,475

			Net increase in cash		8,441,864			99,837,931			89,394,744			15,131,265
Cash and cash equivalents at beginning of period					—			8,441,864			8,441,864			108,279,795

	Cash and cash equivalents at end of period			$	8,441,864		$	108,279,795		$	97,836,608		$	123,411,059

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Noncash investing and financing activities:
	Issuance of Series A convertible preferred stock in exchange for domain name	$	500,000	$	—	$	—	$	—

	Issuance of stock for merger of Confinity	$	—	$	129,707,003	$	129,707,003	$	—

	Issuance of stock options to employees	$	499,244	$	9,508,407	$	413,153	$	11,106,409

	Issuance of stock options to non-employees	$	533	$	206,782	$	206,782	$	199,905

	Issuance of restricted common stock to employees	$	2,745,485	$	218,369	$	218,369	$	—

	Issuance of restricted common stock to non-employees in exchange for services	$	62,779	$	—	$	—	$	—

	Stockholder notes issued for restricted common stock	$	139,275	$	—	$	—	$	4,773

	Issuance of warrants in connection in exchange for services and an equipment loan	$	85,085	$	—	$	—	$	12,144

	Reduction of notes receivable in conjunction with repurchase of common stock	$	—	$	—	$	—	$	12,667

	Reassignment of rights to Series B convertible preferred stock		—	$	3,369,488	$	—	$	—

	Issuance of notes receivable in exchange for Series B convertible preferred stock	$	—	$	389,433	$	—	$	—

	Notes receivable assumed in merger	$	—	$	37,400	$	—	$	—

	Assets acquired under capital lease	$	—	$	587,802	$	—	$	—

Supplemental disclosure of cash flow information:
	Cash paid for interest	$	5,786	$	65,040	$	33,935	$	25,533

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PAYPAL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

PayPal, Inc., previously known as X.com Corporation (the "Company"), was incorporated as a Delaware corporation in March 1999 and began substantive operations in November 1999. The Company's initial focus was offering Internet banking services, which consisted of accepting deposits, payment services and limited extension of credit, provided through an agreement with First Western National Bank ("First Western"). In the second half of 2000, the Company focused on on-line payments and discontinued offering Internet banking services. The Company formally changed its name to PayPal, Inc. in February 2001. The PayPal product allows customers to transfer money to anyone with an email address. Customers create and fund their accounts through the Company's website (www.paypal.com). Accounts are funded using a credit card, a bank account, or funds received from other customers. Customers can use the PayPal product to send payments to other customers as well as non-customers (who receive an email that alerts them that funds have been set aside in their name, and provides them with instructions on opening an account in order to claim the funds).

Principles of consolidation

The accompanying consolidated financial statements include the results of operations of the Company and its wholly owned subsidiary, PayPal Asset Management Inc. All significant intercompany transactions have been eliminated.

Stock split

In January 2000, the Board of Directors approved a three-for-one stock split. Accordingly, all share amounts have been restated retroactively to reflect this split.

Use of estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Interim financial information

The interim consolidated financial statements as of June 30, 2001 and for the six-month periods ended June 30, 2000 and 2001, together with the financial data and other information for those periods disclosed in these notes to the financial statements, are unaudited. In the opinion of management, the interim financial statements have been prepared on the same basis as the audited financial statements and reflect all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the interim results. The results of operations for the interim periods are not necessarily indicative of the results to be expected for any future periods.

Risk and uncertainties

The Company's future results of operations involve a number of risk and uncertainties. Factors that could affect the Company's future operating results and cause actual results to differ materially from expectations include, but are not limited to: customer adoption of the PayPal product, continued

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use of PayPal for on-line auction transactions, competition, changes to credit card association rules and practices, the Company's ability to manage fraud, application of laws and regulations to the Company's business, rates at which users fund payments using credit cards and the Company's ability to manage growth.

The Company has incurred substantial losses and negative cash flows from operations since inception. For the year ended December 31, 2000 and for the six months ending June 30, 2001, the Company incurred a loss from operations of $169,505,644 and $56,907,756 and negative cash flows from operations of $109,873,587 and $16,485,834, respectively. As of December 31, 2000 and June 30, 2001, the Company had an accumulated deficit of $174,124,942 and $231,032,698, respectively. The Company raised private equity financing of $173,275,372, net of issuance costs during 1999 and 2000. The Company raised an additional $37,433,149, net of issuance costs in the first six months of 2001. Management believes, based on current levels of operations and anticipated growth, its cash from operations, without giving effect to net proceeds from their offering, will suffice to fund their operations through at least December 31, 2001.

Concentration of business volume

The Company processes a majority of its transactions for customers conducting business using the services of one major Internet auction company. Although the Company's relationships lie directly with PayPal customers, the Internet auction company's ability to continue attracting customers and generating volume could have a significant impact on the Company.

Concentration of credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash equivalents, receivables, and investment securities. The Company invests its cash primarily in money market securities and in the PayPal Money Market Reserve Fund ("the Fund"), which are uninsured. As part of its cash management process, the Company performs periodic evaluations of the relative credit standing of these financial institutions.

Provision for transaction losses

The Company is exposed to transaction losses due to fraud, as well as non-performance of third parties and customers. The Company establishes reserves for estimated losses arising from processing customer transactions. These reserves represent the estimated amounts necessary to provide for transaction losses incurred as of the reporting date, including those to which the Company has not yet been notified.

The reserves are based on known facts and circumstances, internal factors including the Company's experience with similar cases, historical trends involving loss payment patterns and the mix of transaction and loss types. Additions to the reserve are reflected in current operating results, while charges to the reserve are made when losses are paid. Recoveries are reflected as collected in the reserve for transaction losses.

The establishment of appropriate reserves for transaction losses is an inherently uncertain process, and ultimate losses may vary from the current estimates. The Company regularly updates its reserve

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estimates as new facts become known and events occur that may impact the settlement or recovery of losses.

Segment reporting

Statement of Financial Accounting Standard, SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. The method for determining what information to report is based upon the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance.

The Company's chief operating decision-maker is considered to be the Chief Executive Officer (CEO). The CEO reviews financial information for purposes of making operational decisions and assessing financial performance. This financial information is consistent with the information presented in the accompanying statements of operations. For the years ended December 31, 1999 and 2000, the Company had no significant foreign operations. For the six-month period ended June 30, 2001, revenues from customers located outside the U.S. totaled $4,115,898, or approximately 12% of total revenue. There were no long-lived assets outside the U.S. during any period presented.

Fair value of financial instruments

The carrying amount of the Company's financial instruments, including cash and cash equivalents, investment securities and receivables, approximated fair value as of December 31, 1999 and 2000.

Comprehensive income

The Company classifies items of other comprehensive income, such as unrealized gains and losses on investment securities, by their nature in the financial statements and displays the accumulated other comprehensive income separately from retained earnings in the equity section of the balance sheet. As of December 31, 1999 and 2000 and June 30, 2001, the Company had no such items.

Cash and cash equivalents

The Company considers all highly liquid investments with maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include money market accounts, commercial paper and various deposit accounts. The carrying amount of cash equivalents approximates fair value due to the short-term maturity of those investments.

Investment securities

All of the Company's investment securities are classified as held to maturity and are reported at amortized cost. Those investments with maturities greater than three months and less than twelve months at the date of acquisition are considered short-term investments and those with maturities greater than twelve months are considered long-term investments.

A decline in the fair value of any security below cost that is deemed other than temporary results in a charge to earnings and the corresponding establishment of a new cost basis for the security.

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Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income is recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

Investment in common stock

As discussed in Note 3, in November 1999, the Company entered into an agreement with Community Bancshares Inc (CBI), in which the Company purchased a minority interest in CBI for $2,000,000. The investment was accounted for under the cost method. In August 2000, the Company exercised its put agreement requiring the then current CEO of CBI to repurchase the shares of CBI common stock from the Company for the original purchase price of $2,000,000.

Fixed assets

Furniture and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization is computed over the estimated useful life using the straight-line method. Depreciation and amortization periods are generally three years for computer equipment, two years for software and five years for furniture and fixtures. Maintenance and repairs are expensed as incurred.

Capitalized software

Cost of internal use software and website development costs are accounted for in accordance with Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and Emerging Issues Task Force (EITF) 00-02, Accounting for Website Development Costs, which require that the Company expense computer software and website development costs as they are incurred during the preliminary project stage. Once the capitalization criteria of SOP 98-1 and EITF 00-02 have been met, external direct costs of materials and services consumed in developing or obtaining internal-use computer software, including website development, and the payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use computer software, are capitalized. Capitalized costs are amortized over approximately two years on a straight-line basis. As of December 31, 1999 and 2000 and June 30, 2001, the Company had capitalized approximately $197,500, $1,330,200 and $2,063,200 respectively, in internally developed software costs and recognized approximately $19,700, $567,100 and $530,200, respectively, of amortization expense.

Goodwill and other intangibles

Goodwill and other intangibles are carried at cost less accumulated amortization. The cost of goodwill and other identified intangibles are being amortized on a straight-line basis over two years. Other intangibles include purchased domain names, licenses, and identifiable intangibles acquired in business combination.

Impairment of long-lived assets, including goodwill and other intangibles

The Company assesses the impairment of its long-lived assets and other identifiable intangibles and related goodwill periodically in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived

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Assets to be Disposed of. The Company also assesses the impairment of enterprise level goodwill periodically in accordance with the provision of Accounting Principles Board Opinion (APB) No. 17, Intangible Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which could result in an impairment review include but are not limited to, significant underperformance relative to expected historical or projected future operating results, undiscounted cash flows are less than the carrying value, significant changes in the manner of use of the acquired assets or the strategy for the Company's overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, and the Company's market capitalization relative to net book value. If the Company determines that the carrying value of goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company will measure any impairment based on the projected discounted cash flow method using a discount rate commensurate with the risk inherent to the Company's current business model. As of June 30, 2001, the Company has not identified any such impairment.

The Company purchased domain names and licenses related to the Internet banking operations and capitalized the related cost. Upon termination of this business in December 2000 (see Note 17), the Company wrote-off the unamortized balance of $492,894.

Due to customers

Customers utilize the Company's services to transfer money via the Internet. Any stored value remaining from transactions in a customer's account represents a liability of the Company to the customer. Customer balances are insured against unauthorized transactions by a third party insurance company up to $100,000. Customers can elect to sweep their account balances into the mutual fund to earn a rate of return; otherwise, no interest is paid on customer account balances.

Stock-based compensation

The Company accounts for stock-based employee compensation using the minimum-value method of APB Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees and related Interpretations, and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. The Company adopted FASB Interpretation No. 44 ("FIN 44") Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB 25 as of July 1, 2000. FIN 44 provides guidance on the application of APB 25 for stock-based compensation to employees. Under APB No. 25, compensation expense is based on the excess of the fair value of the Company's stock over the exercise price, if any, on the date of the grant and is recorded on a straight-line basis over the vesting period of the options, which is generally four years.

The Company accounts for stock-based compensation issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF No. 96-18, Accounting for Equity Investments That Are Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services.

Unaudited pro forma net loss per share

Pro forma net loss per share for the year ended December 31, 2000 and for the six months ended June 30, 2001 is computed using the weighted average number of shares outstanding, including the conversion of the Company's convertible preferred stock into shares of the Company's common stock

F–12

effective upon the closing of the Company's initial public offering (IPO), as if such conversion occurred at January 1, 2000, or at the date of issuance, if later. The unaudited pro forma adjustment increased the weighted average shares used to compute basic and diluted net loss per share of $0.95 and $0.29 for the year ended December 31, 2000 and for the six months ended June 30, 2001, respectively. The calculation of pro forma diluted net loss per share excludes incremental common stock issuable upon the exercise of stock options and warrants, as the effect would be antidilutive.

Unaudited pro forma information

Upon the closing of an IPO, each of the outstanding shares of convertible preferred stock will automatically convert into one share of common stock. The pro forma balance sheet presents the Company's balance sheet as if the conversion had occurred at June 30, 2001.

Revenue recognition

The Company earns transaction fees from processing transactions for selected customers. Revenue resulting from these transactions is recognized as transactions are completed. A transaction fee is charged to customers meeting certain criteria (such as account type and volume of payments received per month) for funds they receive.

The Company also recognizes investment management fees pursuant to a contractual agreement based upon the average net assets of the Fund. Investment management fees are recognized over the period that assets are under management. As of December 31, 2000 and June 30, 2001, customer funds invested in the Fund under management totaled approximately $17.2 million and $45.2 million, respectively. As of December 31, 2000 and June 30, 2001 the Company's cash and cash equivalents included approximately $58.2 million and $54.0 million invested in these funds, respectively.

As part of its cash management process, the Company earns interest on funds held on behalf of others by investing the stored value remaining in the customer accounts in money market and money market equivalent securities overnight. The interest income received on these investments is accrued and recognized as income in the period in which it is earned.

In accordance with its Internet banking service agreement (see Note 17), the Company was entitled to earn 50% of any income and reimbursed First Western all losses resulting from the operation of the program. Revenues from this service agreement consisted primarily of interest income received from investing the Company's excess cash in overnight investments.

Transaction processing expenses

Transaction processing expenses consist primarily of third party transaction fees, such as Automatic Clearing House (ACH) and check processing, credit card processing and debit card processing expenses.

Advertising expenses

The cost of advertising is expensed as incurred. For the years ended December 31, 1999 and 2000, advertising cost totaled $329,910 and $126,536, respectively. For the six months ended June 30, 2001, advertising expenses totaled $45,175.

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Customer acquisition costs

At times, the Company has paid an acquisition cost ranging from $5 to $10 to each customer opening a new PayPal account and an additional $5 to $10 to those customers who refer another new account holder to the Company. The amounts paid are not dependent on whether the customer generates revenue for the Company. These amounts are deposited into the customer's account after certain requirements are met. During the years ended December 31, 1999 and 2000 and the six months ended June 30, 2001, acquisition costs of $488,026, $15,355,017, and $480,196, respectively, have been expensed as incurred and are included in promotional and marketing expense.

Income taxes

The Company accounts for income taxes using the liability method. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

Recent accounting pronouncements

Business Combinations

In June 2001, the Financial Accounting Standard Board (FASB) issued SFAS No. 141, Business Combinations ("SFAS No. 141"). This standard concludes that all business combinations within the scope of the statement will be accounted for using the purchase method. Previously, the pooling-of-interests method was required whenever certain criteria were met. SFAS No. 141 requires separate recognition of intangible assets apart from goodwill if they meet one of two criteria: the contractual-legal criterion or the separability criterion. SFAS No. 141 also requires the disclosure of the primary reasons for a business combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption.

The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. SFAS No. 141 also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. The Company does not expect the adoption of this standard to have a significant impact on the cash flows or statement of operations.

Goodwill and Other Intangibles

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). It addressed how intangible assets that are acquired individually or within a group of assets (but not those acquired in business combination) should be accounted for in the financial statements upon their acquisition. SFAS No. 142 adopts a more aggregate view of goodwill and bases the accounting on the units of the combined entity into which an acquired entity is aggregated. SFAS No. 142 also prescribes that goodwill and other intangibles that have indefinite useful lives will not be amortized but rather tested at least annually for impairment. Intangible assets that have definite lives will continue to be amortized over their useful lives, but no longer with the constraint of the 40-year ceiling. SFAS No. 142 provides specific guidance for the testing of goodwill for impairment, which may

F–14

require remeasurement of the fair value of the reporting unit. Additional ongoing financial statement disclosures are also required.

The provisions of this statement are required to be applied starting with fiscal years beginning after December 15, 2001. This statement is required to be applied at the beginning of the fiscal year and applied to all goodwill and other intangibles recognized in the financials at that date. Impairment losses are to be reported as resulting from a change in accounting principle. The impact on the Company of the adoption of this standard has not yet been determined.

2. BUSINESS COMBINATION

On March 30, 2000, the Company merged with Confinity, Inc. which developed the PayPal product. X.com was the surviving entity in the merger. The Company formally changed its name to PayPal, Inc. in February 2001. Under the terms of the agreement, the Company issued 25,489,478 shares of common stock and 5,051,627, 24,247,842 and 18,522,653 shares of Series AA, Series BB and Series CC preferred stock, respectively, in exchange for all of the outstanding common and preferred stock of Confinity. Additionally, the Company assumed Confinity's options and warrants outstanding into options and warrants to purchase the Company's common and Series CC preferred stock. As a result of the merger, the former stockholders of Confinity owned approximately 50% of the total outstanding voting interest of the Company immediately following the merger.

The merger has been accounted for under the purchase accounting method. The purchase price was allocated among the identifiable tangible and intangible assets based on the fair market value of those assets. The excess of the purchase price over the fair value of net assets acquired totaled $131,323,614. This amount has been included in intangible assets and is being amortized using the straight-line method over a two-year period. Amortization expense relating to these intangible assets totaled $49,312,984 during the year ended December 31, 2000 and $32,830,903 for the six months ended June 30, 2001. Purchased technology that had reached technological feasibility and was principally represented by the technology underlying the PayPal product was valued using a replacement cost method. This analysis resulted in an allocation of $620,000 to existing technology, which was capitalized and is being amortized over two years. Additionally, a replacement cost analysis of the customer base and assembled workforce resulted in $6,290,000 and $790,000, respectively, being capitalized and amortized over two years.

The consolidated financial statements include the results of Confinity since March 31, 2000. The following unaudited pro forma consolidated financial information presents the combined results of the Company and Confinity as if the merger had occurred at the beginning of the years presented below, after giving effect to certain adjustments, principally amortization of goodwill and other intangible assets.

	Years Ended December 31,
	1999			2000
Revenue	$	350,004		$	14,544,820
Net loss	$	(72,944,439	)	$	(201,554,542	)
Basic and diluted net loss per share	$	(5.87	)	$	(9.42	)

F–15

3. CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of the following:

		December 31,
		1999		2000
Cash		$	27,000	$	3,330,088
Cash equivalents			8,414,864		104,949,707

	Cash and cash equivalents	$	8,441,864	$	108,279,795

4. RESTRICTED CASH

In connection with processing transactions with financial institutions, the Company pledges cash in the form of certificates of deposits. The Company uses restricted cash to secure letters of credits with banks to provide collateral to other financial institutions for actual or contingent liabilities arising from potential charge-backs, adjustments, fees or other charges due to or incurred by the Company. At December 31, 2000 and June 30, 2001, the Company had pledged certificates of deposit totaling $3,013,451 and $5,085,930, respectively, pursuant to these agreements.

Additionally, in accordance with the lease agreement, the Company has an irrevocable standby letter of credit with a financial institution and has pledged cash, in the form of a certificate of deposit, in the amount of $962,160 as of December 31, 2000 and June 30, 2001 to secure the letter of credit.

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5. INVESTMENT SECURITIES

The Company held no investment securities as of December 31, 1999. As of December 31, 2000 and June 30, 2001, the amortized cost and estimated fair value of investment securities consist of the following:

December 31, 2000

			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Current investments:
	Asset backed securities		$	6,830,800	$	21,715	$	(313	)	$	6,852,202
	U.S. government agencies			5,031,196		20,034		—			5,051,230

		Total securities	$	11,861,996	$	41,749	$	(313	)	$	11,903,432

June 30, 2001 (unaudited)

			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Current investments:
	U.S. government agencies		$	11,268,034	$	69,286	$	—		$	11,337,320

				11,268,034		69,286		—			11,337,320

Non-current investments:
	Asset backed securities			2,312,110		7,673		(925	)		2,318,858
	U.S. government agencies			24,773,992		54,814		(41,548	)		24,787,258

				27,086,102		62,487		(42,473	)		27,106,116

		Total securities	$	38,354,136	$	131,773	$	(42,473	)	$	38,443,436

6. FIXED ASSETS, NET

Fixed assets consist of the following:

		December 31,
		1999			2000
Internally developed software		$	197,471		$	1,330,243
Computer equipment			462,384			6,116,586
Purchased computer software			146,067			2,005,845
Furniture and fixtures			15,250			3,374,491

			821,172			12,827,165
Less: accumulated depreciation and amortization			(77,733	)		(2,429,453	)

	Fixed assets, net	$	743,439		$	10,397,712

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Depreciation and amortization expenses for the years ended December 31, 1999 and 2000 totaled $77,733 and $2,351,720, respectively. For the six-month period ending June 30, 2001, depreciation and amortization expenses totaled $2,492,437.

7. GOODWILL AND OTHER INTANGIBLES, NET

The components of goodwill and other intangibles are as follows:

		December 31,
		1999			2000
Goodwill		$	—		$	123,623,614
Existing technology			—			620,000
Customer base			—			6,290,000
Assembled workforce			—			790,000
Purchased domain names			606,630			—
Licenses			10,000			10,000
Less: accumulated amortization			(123,736	)		(49,246,353	)

	Goodwill and other intangibles, net	$	492,894		$	82,087,261

Amortization expense for the years ended December 31, 1999 and 2000 totaled $123,736 and $49,312,984, respectively. For the six-month period ending June 30, 2001, amortization expense totaled $32,830,903.

In May 1999, the Company acquired the X.com domain name in exchange for 1,500,000 shares of the Company's Series A convertible preferred stock at an aggregate value of $500,000.

8. RESERVE FOR TRANSACTION LOSSES

The following summarizes the activity in the reserve for transaction losses for the years ended December 31, 1999 and 2000, and for the six-months ending June 30, 2001.

Balance at December 31, 1999	$	—
Provision for transaction losses		11,028,000
Charge-offs		(9,773,000	)
Recoveries		3,645,000

Balance at December 31, 2000		4,900,000
Provision for transaction losses		5,539,483
Charge-offs		(8,582,538	)
Recoveries		3,829,152

Balance at June 30, 2001	$	5,686,097

9. FEDERAL AND STATE TAXES

For the years ended December 31, 1999 and 2000, and for the six months ended June 30, 2001, no provision for federal or state income taxes has been recorded as the Company incurred net operating

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losses. Temporary differences, which give rise to significant components of the deferred tax assets, are as follows:

			December 31,
			1999			2000
Deferred tax assets
	Net operating loss and credit carryforwards		$	1,786,159		$	51,573,778
	Reserves for transaction losses			—			1,960,000
	Capitalized start-up			—			1,032,192
	Accrued vacation			—			386,376

		Total deferred tax assets		1,786,159			54,952,346

Deferred tax liabilities
	Fixed assets and capitalized software costs			(41,771	)		(204,295	)
	Acquired identifiable intangibles, net			—			(1,925,000	)

		Total deferred tax liabilities		(41,771	)		(2,129,295	)

Valuation allowance				(1,744,388	)		(52,823,051	)

Net deferred tax assets			$	—		$	—

Increase in deferred tax asset valuation allowance			$	1,744,388		$	51,078,663

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. The Company has established a 100% valuation allowance against its net deferred tax assets at December 31, 1999 and 2000, as no immediate benefit is expected to be received due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. As of December 31, 2000, the Company had federal and state net operating loss carryforwards of approximately $130,570,000 and $118,970,000, respectively. These federal and state net operating loss carryforwards will begin to expire in varying amounts beginning in 2019 and 2007, respectively. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforward may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to a cumulative ownership change of more than 50% over a three-year period, as defined in Section 382 of the Internal Revenue Code. Such limitation, if any, has not yet been determined by the Company.

F–19

The following table reconciles the statutory federal tax rate to the effective income tax rate for the years ended December 31, 1999 and 2000:

		1999		2000
Statutory federal tax rate		34.00	%	34.00	%
California franchise tax expense, net of federeral income tax benefit		5.35	%	5.35	%
Amortization of stock-based compensation		(5.71	%)	(1.10	%)
Non-deductible intangible amortization		(0.00	%)	(9.88	%)
Valuation allowance		(34.03	%)	(27.05	%)
Other, net		0.39	%	(1.32	%)

	Effective income tax rate	0.00	%	0.00	%

10. CONVERTIBLE PREFERRED STOCK

At December 31, 1999, convertible preferred stock consisted of the following:

	Shares
	Shares		Liquidation Amount		Value of Stock Issued, Net of Issuance Costs
	Authorized	Outstanding	Liquidation Amount		Value of Stock Issued, Net of Issuance Costs
Series A	38,850,000	38,850,000	$	12,948,705	$	12,899,364
Series B	30,000,000	6,104,970		2,907,797		2,891,720

	68,850,000	44,954,970	$	15,856,502	$	15,791,084

At December 31, 2000, convertible preferred stock consisted of the following:

	Shares
	Shares		Liquidation Amount		Value of Stock Issued, Net of Issuance Costs
	Authorized	Outstanding	Liquidation Amount		Value of Stock Issued, Net of Issuance Costs
Series A	38,850,000	38,850,000	$	12,948,705	$	12,899,364
Series B	27,104,970	11,441,525		5,449,598		5,823,188
Series C	36,363,637	36,363,637		100,000,002		99,904,416
Series D	33,000,000	16,119,495		48,358,485		47,576,879
Series AA (Issued pursuant to merger)	5,051,637	5,051,627		500,054		7,729,976
Series BB (Issued pursuant to merger)	24,247,856	24,247,842		4,500,414		37,452,161
Series CC (Issued pursuant to merger)	28,666,342	24,625,923		14,625,336		30,248,704

	193,284,442	156,700,049	$	186,382,594	$	241,634,688

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At June 30, 2001, convertible preferred stock consisted of the following:

	Shares
	Shares		Liquidation Amount		Value of Stock Issued, Net of Issuance Costs
	Authorized	Outstanding	Liquidation Amount		Value of Stock Issued, Net of Issuance Costs
Series A	38,850,000	38,850,000	$	12,948,705	$	12,899,364
Series B	27,104,970	11,441,525		5,449,598		5,823,188
Series C	36,363,637	36,272,728		99,750,002		99,654,417
Series D	33,000,000	28,581,161		85,743,483		84,516,130
Series AA (Issued pursuant to merger)	5,051,637	5,051,627		500,054		7,729,976
Series BB (Issued pursuant to merger)	24,247,856	24,247,842		4,500,414		37,452,161
Series CC (Issued pursuant to merger)	28,666,342	24,625,923		14,625,336		30,248,704

	193,284,442	169,070,806	$	223,517,592	$	278,323,940

Liquidation preference

In the event of any liquidation or dissolution of the Company, either voluntary or involuntary, the holders of convertible preferred stock retain liquidation preference over common stockholders. The liquidation preference amounts are $0.3333 per share of Series A, $0.0990 per share of Series AA, $0.4763 per share of Series B, $0.1856 per share of Series BB, $2.75 per share of Series C, $0.5939 per share of Series CC and $3.00 per share of Series D.

The remaining assets and funds of the Company available for distribution will be distributed ratably among all holders of common stock pro rata based on the number of shares of common stock held by each holder.

Redemption

The merger or consolidation of the Company into another entity or any transactions in which more than 50% of the voting power of the Company is disposed of or the sale, transfer or disposition of substantially all of the property or business of the Company is deemed a liquidation, dissolution, or winding up of the Company. These liquidation characteristics require classification of the convertible preferred stock outside of the equity section. The convertible preferred stock is not redeemable in any other circumstances.

Voting rights

Holders of convertible preferred stock are entitled to vote together with holders of common stock. The number of votes granted to convertible preferred stockholders equals the number of full shares of common stock into which each share of convertible preferred stock could be converted as described in the Company's Certificate of Incorporation.

Conversion

Each share of convertible preferred stock is convertible at any time into one share of common stock (subject to certain adjustments). Each share of convertible preferred stock shall convert at the option of the holder or automatically upon the occurrence of the earlier of a closing of a firm commitment underwritten public offering of the Company's common stock with aggregate net cash

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proceeds to the Company of not less than $25.0 million or the date specified by written consent or agreement of the holders of a majority of the then outstanding shares of convertible preferred stock.

Dividends

The holders of convertible preferred stock are entitled to receive when, and if, declared by the Board of Directors, dividends at the rate of $0.0167 per share of Series A, $0.0049 per share of Series AA, $0.0238 per share of Series B, $0.0093 per share of Series BB, $0.1375 per share of Series C, $0.0297 per share of Series CC and $0.15 per share of Series D, respectively, per year, payable in preference to any payment of any dividend on common stock. The dividends are non-cumulative.

As of December 31, 1999 and 2000 and June 30, 2001, no dividends had been declared on any series of the Company's preferred or common stock.

11. RESTRICTED STOCK

During the year ended December 31, 1999, the Company issued 28,060,440 shares of restricted common stock for cash proceeds of $292,626 and a note in the amount of $139,275 to certain employees, directors and officers of the Company under Restricted Stock Purchase Agreements (RSPA). The issuance prices of the restricted common stock awarded ranged from $0.003 to $0.05 per share and the repurchase rights associated with these grants lapse at a rate of ¹/48 per month. In some cases, the issuance price was below the deemed fair value of the common stock and resulted in deferred stock-based compensation for 1999 of $2,745,485, which was equal to the difference between the fair value of the common stock at the measurement date and the consideration received for these shares. The amortization of deferred stock-based compensation is being amortized over the vesting period of the shares. For the years ended December 31, 1999 and 2000 and the six months ended June 30, 2001 the amortization of deferred stock-based compensation associated with these restricted stock awards was $147,342, $343,627 and $72,268, respectively.

During the years ended December 31, 1999 and 2000, the Company repurchased 11,000,004 and 6,461,386 shares of restricted common stock, respectively, from certain employees, directors and officers of the Company, pursuant to the repurchase provisions of the RSPA. During the six months ended June 30, 2001, in connection with termination of service, the Company repurchased 2,000,000 shares of restricted common stock from a former officer of the Company. All repurchases were made at the issuance price paid for the shares when granted.

During the year ended December 31, 1999, the Company granted 523,695 shares of restricted common stock for aggregate proceeds of $2,613, to non-employees of the company in connection with consulting agreements. The issuance prices of the restricted common stock awarded ranged from $0.003 to $0.033 per share. One award of 13,695 shares was fully vested at the date of grant. The issuance price was below the fair value of the common stock and resulted in a deferred compensation of $62,779 which was equal to the difference between the fair value of the common stock and the consideration received for the shares. The amortization of deferred compensation is being recognized in full during 1999 as consulting expense as the shares were fully vested upon grant. The remaining awards of 510,000 shares vest at a rate of ¹/48 per month in accordance with the terms of the RSPA. There was no deferred compensation relating to these shares as the fair value was equal to the consideration received.

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During the year ended December 31, 2000 the Company issued 21,000,000 shares of Series B preferred stock at a price of $0.47633 per share to a principal stockholder and officer of the Company, under an RSPA. During August 2000, the Company exercised its right to repurchase 18,812,500 shares of the Series B preferred stock at the issuance price. Simultaneously, the Company reassigned a portion of this repurchase right to another principal stockholder and officer of the Company to purchase 3,149,055 shares of the 18,812,500 shares of Series B preferred stock at $0.60 per share. The shares were fully vested upon purchase. On the date of reassignment and purchase, the Company recorded $3,369,488 in stock-based compensation expense. The amount recorded represented the difference between the fair value of the Series B preferred stock at the date of reassignment and purchase and the price paid for the shares.

12. STOCKHOLDER NOTES RECEIVABLE

During the year ended December 31, 1999, the Company issued 9,435,000 shares of restricted common stock in exchange for full-recourse promissory notes totaling $139,275. In addition, in conjunction with the merger with Confinity, the Company assumed a stockholder note receivable in the amount of $37,400. The principal and accrued interest are due three years from the date of issuance. These notes accrue interest in a range of 5.15%-8% per annum.

During the year ended December 31, 2000, the Company issued 3,149,055 shares of Series B convertible preferred stock to a principal stockholder of the Company in exchange for a full recourse note in the amount of $389,433. This note accrues interest at 6.62% per annum. Under the terms of the note, interest is compounded semiannually and added to the principal balance. The principal and accrued interest are due four years from the date of issuance.

13. STOCK OPTION PLAN

As of December 31, 2000, the Company had reserved up to 14,136,073 shares of common stock issuable upon exercise of options issued to certain employees, directors, advisors, and consultants pursuant to the Company's 1999 Stock Plan (the "Plan"). Options granted under the Plan may be either incentive stock options or nonqualified stock options. Incentive stock options ("ISO") may only be granted to Company employees (including officers and directors who are also employees). Nonqualified Stock Options ("NSO") may be granted to both Company employees and consultants. Options under the Plan may be granted 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 (1) the exercise price of an ISO and NSO shall not be less than 100% and 85% of the estimated fair value of the shares on the date of grant, respectively, and (2) the exercise price of an ISO and NSO granted to a 10% stockholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. Such options are exercisable at prices established at the date of grant, and have a term not to exceed ten years. Options granted under the Plan are exercisable according to the terms of each option; however, in the event of a change in control or merger as defined in the Plan, 12 months of options shall immediately become vested and exercisable in full. Options granted generally vest at a rate of 25% of the option shares upon the optionee's completion of one year of service measured from the vesting commencement date. The balance will vest in equal successive monthly installments of ¹/48 of the total grant upon the optionee's completion of each of the next 36 months of service. If an option holder ceases to be employed by the Company, exercisable and vested options held at the date of termination may be exercised within the earlier of three months and termination of the option. Options

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under the plan may be either Incentive Stock Options, as defined under Section 422 of the Internal Revenue Code, or Nonstatutory Options.

During December 2000 and March 2001, the Company amended the Plan to permit option holders who hold more than 100,000 and 10,000 outstanding options, respectively to exercise their options in advance of vesting. All outstanding options held by former employees of Confinity assumed at the time of the merger can be exercised in advance of vesting, as was permitted under the former Confinity Stock Option Plan. All options exercised in advance of vesting are recorded as both issued and outstanding stock from the date of exercise. In the event that the employee fails to satisfy the required conditions for vesting of the option, as established in the original option award, the Company maintains the right to repurchase any non-vested shares at such time. Such options are repurchased at a price equal to the exercise price paid.

Options granted to employees during the years ended December 31, 1999 and 2000 and the six months ended June 30, 2001 resulted in deferred stock-based compensation of $499,244, $9,508,407 and $11,106,409 respectively. The amounts recorded represent the difference between the exercise price and the fair value of the Company's common stock subject to the options granted. The deferred stock-based compensation is being amortized over the vesting period of the options granted. For the years ended December 31, 1999 and 2000, the amortization of deferred stock-based compensation was $58,956 and $1,904,262, respectively. For the six months ended June 30, 2001, the amortization of deferred stock-based compensation was $5,894,075.

The Company granted options to purchase 139,440, 131,066 and 130,695 shares of common stock to non-employees for consulting services during the years ended December 31, 1999 and 2000, and the six months ended June 30, 2001, resulting in deferred compensation of $533, $206,782 and $199,905, respectively. The fair value of the options granted during 2000 was determined at the date of grant using the Black-Scholes option pricing model. Amortization of the deferred compensation is being recorded over the vesting period of the options. For the years ended December 31, 1999 and 2000 the amortization of deferred compensation related to these options were $100 and $207,215, respectively. For the six months ended June 30, 2001 the amortization of deferred compensation related to these options was $195,446.

Upon termination of service for four employees of the Company during the year ended December 31, 2000, the Company accelerated the vesting on certain of their outstanding stock awards at termination. The acceleration of these awards triggered a re-measurement date for the grants and accordingly, the Company recorded $529,669 in additional compensation. During the six months ended June 30, 2001, the Company accelerated vesting for fourteen employees upon termination of service and recorded $2,324,992 in additional stock-based compensation expense.

F–24

A summary of the status of the Company's stock option plan and changes during those periods is presented below:

	Years Ended December 31,
	Years Ended December 31,								Six Months Ended June 30, 2001 (unaudited)
	1999				2000				Six Months Ended June 30, 2001 (unaudited)
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Outstanding at beginning of year	—		$	—	1,642,440		$	0.03	12,479,395		$	0.17
Granted	2,092,440			0.03	8,213,784			0.25	7,384,966			0.30
Assumed in merger	—			—	4,830,476			0.04	—			—
Exercised	—			—	(734,433	)		0.03	(4,667,446	)		0.14
Terminated/forfeited	(450,000	)		0.03	(1,472,872	)		0.08	(1,590,982	)		0.26

Outstanding, at end of year	1,642,440		$	0.03	12,479,395		$	0.17	13,605,933		$	0.24

Options exercisable at end of year	—		$	0.03	4,325,697		$	0.05	12,081,591		$	0.24

The following table summarizes information about stock options outstanding at June 30, 2001:

	Options Outstanding				Options Exercisable
Exercise Price Range	Number Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Number Exercisable	Weighted Average Exercise Price
$0.01 - $0.03	1,295,622	$	0.02	8.31	1,295,622	$	0.02
$0.03 - $0.05	319,441		0.03	8.23	313,816		0.03
$0.07 - $0.10	1,478,738		0.08	8.69	1,470,862		0.08
$0.30	10,512,132		0.30	9.47	9,001,291		0.30

$0.01 - $0.30	13,605,933	$	0.24	9.25	12,081,591	$	0.24

Fair value disclosures

The following information concerning the Company's stock option plan is provided in accordance with the disclosure requirements of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). As permitted by SFAS 123, the Company accounted for options granted to employees in accordance with APB No. 25 and related interpretations. The fair value of each stock option granted to employees was estimated on the date of grant using the minimum value method with the following weighted average assumptions:

	Years Ended December 31,
	1999		2000
Expected stock price volatility	—		—
Risk-free interest rate	6.5	%	6	%
Expected life of options (years)	4		4

F–25

As a result of the above assumptions, the weighted average fair value of options granted during the years ended December 31, 1999 and 2000 was $0.33 and $1.47 respectively.

Had compensation expense for the Plan been determined based on the fair value at grant date for options granted during the years ended December 31, 1999 and 2000 consistent with the provisions of SFAS 123, the Company's net loss would have increased to the pro forma amounts reported below:

		Years Ended December 31,
		1999			2000
Net loss—as reported		$	(4,619,298	)	$	(169,505,644	)

Net loss—pro forma		$	(4,638,039	)	$	(169,596,183	)

Net loss per share basic and diluted
	As reported	$	(1.64	)	$	(7.92	)

	Pro forma	$	(1.65	)	$	(7.93	)

14. WARRANTS

During November 1999, the Company issued warrants to purchase 500,001 shares of common stock at an exercise price of $0.0333 per share issued to a third party in connection with a contract for professional recruiting services previously provided. These warrants have a seven-year term and were fully exercisable from the date of grant. In addition, the Company issued warrants to purchase 60,000 shares of common stock at an exercise price of $0.40 per share to a third party in connection with an equipment loan. These warrants have a ten-year term and were fully exercisable from the date of grant. The fair values of these warrants were determined at the date of grant using the Black-Scholes option pricing model. The calculated fair values of $41,335 and $43,750 were attributable to professional fees and interest expense, respectively, during 1999. As of June 30, 2001, these warrants remained outstanding and fully exercisable.

Pursuant to the merger with Confinity, the Company assumed the obligations under warrants issued to investors during January 2000 by Confinity in connection with a preferred stock financing. These warrants were issued to purchase 4,999,999 shares of Series CC preferred stock at an exercise price of $2.40 per share and were fully exercisable from the date of grant. As of the date of the merger with Confinity, the warrants were amended to provide for the purchase 10,103,273 shares of Series CC preferred stock at an exercise price of $1.19 per share. In August 2000, these warrants were net exercised by the holder in exchange for 6,103,270 shares of the Company's series CC preferred stock.

During April 2001, the Company issued warrants to purchase 30,000 shares of the Company's Series D preferred stock at an exercise price of $3.00 per share to a third party in connection with an equipment loan. The warrant has a five-year term and is fully exercisable upon grant. The fair value of the warrant was determined at the date of grant using the Black-Scholes option pricing model. The calculated fair value was $12,144 and was expensed in full as interest expense. As of June 30, 2001 the warrant remains outstanding and fully exercisable.

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15. 401(k) SAVINGS PLAN

During 2000, the Company adopted a 401(k) tax deferred savings plan under which eligible employees may elect to defer a portion of their salary (up to 15%) as a contribution to the plan. The Company did not match employee contributions during the year ended December 31, 2000 or during the six months ended June 30, 2001.

16. COMMITMENTS AND CONTINGENCIES

Leases

The Company has entered into capital lease agreements for certain furniture and fixtures, computer equipment and software.

The Company leases its facilities under non-cancelable operating leases. Under the terms of the leases, the Company is responsible for its share of common area and operating expenses.

As of December 31, 2000, minimum lease commitments required under all leases are as follows:

		Capital Leases			Operating Leases
2001		$	218,478		$	1,791,929
2002			234,750			1,863,115
2003			13,555			1,931,712
2004			—			1,997,753
2005 and thereafter			—			4,385,191

	Total minimum lease commitments	$	466,783		$	11,969,700

Less: Amount representing interest			(63,793	)

Present value of minimum lease payments			402,990
Less: Current portion of capital lease obligation			(173,385	)

Long-term portion of capital lease obligation		$	229,605

For the years ended December 31, 1999 and 2000, rent expense under the operating leases amounted to $90,944 and $1,663,579, respectively. Rent expense under operating leases for the six months ended June 30, 2001 was $1,009,281. The terms of the facility lease provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid.

In April 2001, the Company entered into a capital lease with a financial institution that provides for advances not to exceed $3 million. As of June 30, 2001, the outstanding balance was $1.7 million. These funds were used to purchase furniture and fixtures, computer equipment and software. The Company also granted warrants to purchase 30,000 shares of Series D preferred stock in conjunction with this agreement (see Note 14).

Legal

In the normal course of business, the Company is at times subject to pending and threatened legal actions and proceedings. Management believes that the outcome of such actions or proceedings is not expected to have a material effect on the financial position or results of operation of the Company.

F–27

Commitments under service and marketing agreements

The Company has entered into service and marketing agreements under which minimum payments are due as follows:

Year Ended December 31,		(in millions)
2001 (last six months only)		$	0.4
2002			1.5
2003			1.9
2004			3.0
2005			1.5

	Total commitments under service and marketing agreements	$	8.3

17. SERVICE AGREEMENT COSTS AND TERMINATION EXPENSES

In November 1999, the Company entered into a series of agreements with CBI. Under the first agreement, the Company was to purchase CBI's wholly owned subsidiary, First Western, subject to the receipt of regulatory approvals. The second agreement provided for an Internet banking agreement under which the Company would solicit customers to apply for First Western accounts and the customers would use the Company's software programs to utilize Internet banking services from First Western. The Company was to reimburse CBI and First Western for their costs incurred in servicing the First Western accounts. At the same time, the Company and CBI entered into an agreement under which the Company purchased CBI common stock for $2 million (see Note 1). In connection with this agreement, the Company also entered into a put agreement requiring the Chief Executive Officer of CBI to repurchase the shares of CBI's common stock from the Company at the price paid upon termination of the internet banking arrangement.

In August 2000, the Company terminated its stock purchase agreement and in December 2000 cancelled its Internet banking services agreement with CBI. In December 2000, in accordance with the original agreement, the Company paid CBI a termination fee of $1 million and reimbursed CBI an additional $1 million for the net losses resulting from the Internet banking operations. In addition, the Company exercised its put agreement requiring the Chief Executive Officer of CBI to repurchase the common shares of CBI for $2 million.

18. NET LOSS PER SHARE

Basic net income (loss) per common share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares, composed of common shares issuable upon the exercise of stock options and warrants, are included in the diluted net income (loss) per common share calculation to the extent

F–28

these shares are dilutive. A reconciliation of the numerator and denominator used in the calculation of basic and dilutive net income (loss) per share available to common stockholders is as follows:

		March 8, 1999 (inception) to December 31, 1999						Six Months Ended June 30,
					Year Ended December 31, 2000			Six Months Ended June 30,
					Year Ended December 31, 2000			2000			2001
								(unaudited)
Numerator
	Net loss for common share	$	(4,619,298	)	$	(169,505,644	)	$	(70,628,162	)	$	(56,907,756	)

Denominator
	Weighted average common shares		7,788,929			49,282,336			43,160,143			50,087,058
	Weighted average unvested common shares subject to repurchase		(4,974,895	)		(27,886,024	)		(30,284,683	)		(24,534,774	)

Denominator for basic and diluted calculation			2,814,034			21,396,312			12,875,461			25,552,284

Basic and diluted net loss per share		$	(1.64	)	$	(7.92	)	$	(5.49	)	$	(2.23	)

The following table summarizes common equivalent shares that are not included in the denominator used in the diluted net loss per share available to common stockholders calculation above because to do so would be antidilutive for the periods indicated:

		March 8, 1999 (inception) to December 31, 1999		Six Months Ended June 30,
			Year Ended December 31, 2000	Six Months Ended June 30,
			Year Ended December 31, 2000	2000	2001
				(unaudited)
Effect of common equivalent shares:
	Stock options to purchase common stock	1,719,294	10,607,021	9,906,515	14,371,053
	Warrrants to purchase convertible preferred stock and common stock	61,644	2,691,289	4,842,163	553,747
	Unvested common shares subject to repurchase agreements	4,974,895	27,886,024	30,284,683	24,534,774

		6,755,833	41,184,334	45,033,361	39,459,574

19. RELATED PARTY TRANSACTIONS

In February 2001, the Company entered into a strategic partnership with Providian Financial (Providian). Under the terms of the partnership, the Company offers Providian-issued, PayPal-branded Visa cards to the Company's account holders. Simultaneously, Providian purchased 3,333,333 shares of the Company's Series D preferred stock financing at the same price per share as was paid by the other investors in the Series D preferred stock. The Chief Executive Officer of Providian is a member of the Company's board of directors.

In April 2000, the Company assumed a loan payable by its Chief Financial Officer to his former employer. The loan is due in June 2004 or at such time he is no longer employed by the Company. The

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Company forgave 25% of this loan in June 2001 which is reflected in employee compensation expense as of June 30, 2001. The remainder of the loan will be forgiven in 25% increments per year.

20. SUBSEQUENT EVENTS

In July 2001, the Company made loans to or for the benefit of certain employees. Each loan was non-recourse, secured in part by a pledge of shares of its common stock owned by each participant and had a four-year term. In connection with each loan, each participant granted to the Company the right to purchase a portion of the shares of its common stock owned by such participant at a price of $3 per share. The Company exercised its right to purchase these shares in September 2001 and purchased 1,777,510 common shares for an aggregate consideration of $5,332,530. The participants used the proceeds to repay promissory notes issued in July 2001, and all of these notes have been repaid.

In August and September 2001, the Company issued 4,500,000 non-voting shares of a new class of convertible preferred stock ("Class A"). An executive officer received a beneficial interest in these shares which had a purchase price of $.30 per share. The Class A stock has a liquidation preference of $3.00 per share and can be converted at any time, at the option of the holders, into common stock at a conversion ratio of 1:1. In addition, the Class A stock will automatically convert to common stock at the conversion ratio in the event of an IPO raising at least $25 million. The shares of Class A Stock are subject to a repurchase option held by the Company and other restrictions. As to 1,687,500 of those shares, 750,000 shares were released from the repurchase option on August 30, 2001. The Company has a right to repurchase up to all 937,500 remaining shares of those 1,687,500 shares at any time, for an amount equal to the price paid for the shares. This repurchase right lapses at a rate of 93,750 shares per month commencing in September 2001, expiring completely in June 2002. In the event of a change of control, any of the 937,500 shares which are then still subject to repurchase restrictions, will be released from the repurchase restrictions. With respect to the other 2,812,500 shares, commencing in June 2002, the repurchase right will lapse at a rate of 93,750 shares per month expiring completely in January 2005. In the event the executive officer's employment relationship with the Company is involuntarily terminated or terminated without cause within one year following a change of control, then all of the 2,812,500 shares which are then still subject to repurchase restrictions will be released from the repurchase restrictions. The Company also retains a call over 4,500,000 shares of the Class A stock, which can be exercised at a fixed price of $3.00 per share between July 2002 and 2005. At issuance, the convertible instrument was deemed to have an embedded beneficial conversion feature which is limited to the amount of the proceeds of $1,135,000.

In connection with the purchase of the shares of Class A stock by the executive officer, the Company made a full recourse loan in the amount of $1,350,000, at an interest rate of 8% per annum. The executive officer used $843,750 of this loan to purchase 2,812,500 shares of the Class A stock, and these shares were pledged as collateral for the loan. The purchase price for the remaining shares was paid in cash. The loan, including accrued interest, matures on September 10, 2005 and becomes payable immediately upon termination of the executive's employment for any reason.

F–30

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma financial statements have been prepared to give effect to the merger between the Company and Confinity, Inc. as if it had occurred at the beginning of the period presented. This transaction was accounted for using the purchase method of accounting.

The unaudited pro forma combined statement of operations for the year ended December 31, 2000 combines the historical consolidated statement of operations of the Company with the historical statement of operations of Confinity for the same period.

On March 30, 2000, the Company merged with Confinity, Inc, which developed the PayPal product. The Company was the surviving entity. Under the terms of the merger agreement, the Company issued 25,489,478 shares of common stock and 5,051,627, 24,247,842 and 18,522,653 shares of Series AA, Series BB and Series CC preferred stock, respectively, in exchange for all of the outstanding common and preferred stock of Confinity. Additionally, the Company converted Confinity's 2,390,550 options and 5,020,001 warrants outstanding into options and warrants to purchase 4,830,474 and 10,143,689 shares of the Company's common and Series CC preferred stock, respectively. As a result of the merger, the former stockholders of Confinity own approximately 50% of the total outstanding voting interest of the Company following the merger. The purchase price was allocated among the identifiable tangible and intangible assets based on the fair market value of those assets. The intangible assets are being amortized using the straight-line method over a two-year period.

Existing technology		$0.6 million
Assembled workforce		$0.8 million
Customer base		$6.3 million
Goodwill		$123.6 million

Unaudited pro forma combined financial information is presented for illustrative purposes only and is not necessarily indicative of the combined financial position or results of operations of future periods or results that actually would have been realized had the entities been a single entity during this period. The unaudited pro forma combined financials are based upon the respective historical consolidated financial statements of the Company and Confinity and notes thereto, included elsewhere in this prospectus and should be read in conjunction with those statements and the related notes.

F–31

UNAUDITED PROFORMA COMBINED STATEMENTS OF OPERATIONS

				Year ended December 31, 2000
				The Company			Confinity, Inc.			Pro Forma Adjustments(A)(B)			Pro Forma Combined
Revenues				$	14,459,954		$	84,866		$	—		$	14,544,820
	Operating expenses:
		Transaction processing expenses			25,092,759			1,503,284			—			26,596,043
		Provision for transaction losses			11,028,000			575,238			—			11,603,238
		Promotional and marketing			21,023,269			10,522,009			—			31,545,278
		Product development			5,334,162			759,204			—			6,093,366
		General and administrative			18,623,079			1,787,115			—			20,410,194
		Customer service and operations			15,967,338			498,107			—			16,465,445
		Amortization of goodwill and other intangibles			49,312,984			57,486			16,415,451			65,785,921
		Service agreement costs and termination expenses			41,142,126			—			—			41,142,126

			Total operating expenses		187,523,717			15,702,443			16,415,451			219,641,611

Loss from operations					(173,063,763	)		(15,617,577	)		(16,415,451	)		(205,096,791	)
Interest income					2,124,417			—			—			2,124,417
Other income and expenses, net					1,433,702			(15,870	)		—			1,417,832

Net loss				$	(169,505,644	)	$	(15,633,447	)	$	(16,415,451	)	$	(201,554,542	)

(A): Reflects pro forma amortization of the $131,323,614 in intangible assets acquired in the merger for the period from January 1, 2000 through March 29, 2000.
(B): The Company will implement SFAS No. 142, Goodwill and Other Intangible Assets, beginning January 1, 2002 and will cease amortizing any remaining goodwill. If the Company had implemented this pronouncement on January 1, 2000, the anticipated impact to the consolidated results of operations for the year ended December 31, 2000 will be a reduction of the pro forma amortization expense of approximately $65.8 million.

F–32

Report of Independent Accountants

To the Board of Directors and Stockholders of
Confinity, Inc.:

In our opinion, the accompanying balance sheets and the related statements of operations, of convertible preferred stock and stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Confinity, Inc, (a development stage company), (the Company) at December 31, 1999 and 1998, and the results of its operations and its cash flows for the year ended December 31, 1999 and for the period December 3, 1998 (inception) to December 31, 1998, in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the 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.

/s/ PricewaterhouseCoopers LLP

San Francisco, California
November 28, 2000

F–33

CONFINITY, INC.
(a development stage company)

BALANCE SHEETS

				December 3, 1998 (inception) to December 31, 1998		Year Ended December 31, 1999			March 30, 2000
									(unaudited)
ASSETS
Cash and cash equivalents				$	100,007	$	2,362,257		$	—
Funds receivable					—		—			4,845,100
Receivables					—		127,378			20,000
Prepaid expenses					—		15,211			22,207

		Total current assets			100,007		2,504,846			4,887,307

Furniture and equipment, net					—		837,449			1,527,374
Intangible assets, net					—		3,675			3,675
Deposits					—		116,000			7,442,352

		Total assets		$	100,007	$	3,461,970		$	13,860,708

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY/(DEFICIT)
Overdraft payable				$	—	$	—		$	1,780,535
Due to customers					—		253,933			11,444,478
Accrued liabilities and accounts payable					—		176,272			1,232,799
Reserve for transaction losses					—		—			493,908
Current portion of obligations under capital lease					—		127,374			—
Due to founder					100,000		—			—
Other liabilities					—		—			505,159

		Total current liabilities			100,000		557,579			15,456,879

Obligations under capital lease					—		331,164			—

		Total liabilities			100,000		888,743			15,456,879

Convertible preferred stock, no par value: 0, 14,500,000 and 24,602,718 shares authorized at December 31, 1998 and 1999 and March 30, 2000; 0, 14,500,000 and 23,666,664 shares issued and outstanding at December 31, 1998, 1999 and March 30, 2000					—		4,978,454			15,880,941
Commitments and contingencies (Notes 11 and 12)
Stockholders' equity (deficit):
	Common stock: no par value: 50,000,000 shares authorized; 0, 10,426,200, 12,605,450 issued and outstanding at December 31, 1998 and 1999 and March 30, 2000				—		88,224			256,008
	Additional paid in capital				—		1,176,625			5,106,648
	Deferred stock-based compensation				—		(969,348	)		(4,505,593	)
	Due from shareholder				—		(37,400	)		(37,400	)
	Deficit accumulated during development stage				7		(2,663,328	)		(18,296,775	)

		Total stockholders' equity (deficit)			7		(2,405,227	)		(17,477,112	)

			Total liabilities convertible preferred stock and stockholders' equity (deficit)	$	100,007	$	3,461,970		$	13,860,708

The accompanying notes are an integral part of these financial statements.

F–34

CONFINITY, INC.
(a development stage company)

STATEMENTS OF OPERATIONS

		Period From December 3, 1998 (inception) to December 31, 1998		Year Ended December 31, 1999			Three Months Ended March 30, 2000			Period From Inception to March 30, 2000
							(unaudited)			(unaudited)
Revenues
Interest on funds held for others		$	7	$	85,662		$	84,866		$	170,535
Operating expenses
Transaction processing expenses			—		9,673			1,503,284			1,512,957
Provision for transaction losses			—		—			575,238			575,238
Promotion and marketing			—		494,763			10,522,009			11,016,772
Product development			—		632,556			759,204			1,391,760
General and administrative			—		1,395,371			1,787,115			3,182,486
Customer service and operations			—		208,372			498,107			706,479
Amortization of intangibles			—		1,260			57,486			58,746

	Income (loss) from operations		7		(2,656,333	)		(15,617,577	)		(18,273,903	)

Interest income (expense)			—		(7,002	)		(15,870	)		(22,872	)

Net income (loss)		$	7	$	(2,663,335	)	$	(15,633,447	)	$	(18,296,775	)

Basic and diluted net loss per share				$	(0.36	)	$	(1.63	)

Shares used in calculating basic and diluted net loss per share					7,312,002			9,605,263

The accompanying notes are an integral part of these financial statements.

F–35

CONFINITY, INC. (a development stage company)
STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY/(DEFICIT)

	Convertible Preferred Stock
					Common Stock
					Common Stock				Additional Paid-In Capital		Deferred Stock-based Compensation			Stockholder's Notes			Accumulated Deficit			Total Stockholders' (Deficit)
	Shares		Amount		Shares		Amount		Additional Paid-In Capital		Deferred Stock-based Compensation			Stockholder's Notes			Accumulated Deficit			Total Stockholders' (Deficit)
Date of inception
Net income	$	—	$	—	$	—	$	—	$	—	$	—		$	—		$	7		$	7

Balance at December 31, 1998		—		—		—		—		—		—			—			7			7
Issuance of Series A convertible preferred stock at $0.20 per share, net of issuance costs of $7,500, in February of 1999		2,500,000		492,500		—		—		—		—			—			—			—
Issuance of Series B convertible preferred stock at $0.375 per share, net of issuance costs of $14,046 in June of 1999		12,000,000		4,485,954		—		—		—		—			—			—			—
Issuance of restricted common stock to employees at below fair value		—		—		9,804,615		82,460		554,090		(554,090	)		—			—			82,460
Amortization of restricted common stock to employees		—		—		—		—		—		47,218			—			—			47,218
Issuance of stock options to employees at below fair value		—		—		—		—		372,113		(372,113	)		—			—			—
Amortization of stock options to employees at below fair value		—		—		—		—		—		41,068			—			—			41,068
Issuance of stock options to non-employees in exchange for services		—		—		—		—		217,862		(217,862	)		—			—			—
Amortization of stock options to non-employees in exchange for services		—		—		—		—		—		86,431			—			—			86,431
Exercise of stock options		—		—		46,200		924		—		—			—			—			924
Stockholders' notes issued for common stock		—		—		575,385		4,840		32,560		—			(37,400	)		—			—
Net loss																		(2,663,335	)		(2,663,335	)

Balance at December 31, 1999		14,500,000		4,978,454		10,426,200		88,224		1,176,625		(969,348	)		(37,400	)		(2,663,328	)		(2,405,227	)
Issuance of Series C convertible preferred stock at $1.20 per share, net of issuance costs of $97,510 in March of 2000		9,166,664		10,902,487		—		—		—		—			—			—			—
Issuance of stock options to employees at below fair value		—		—		—		—		3,283,978		(3,283,978	)		—			—			—
Amortization of stock options to employees at below fair value		—		—		—		—		—		283,363			—			—			283,363
Issuance of stock options to non-employees in exchange for services		—		—		—		—		38,955		(38,955	)		—			—			—
Amortization of stock options to non-employees in exchange for services		—		—		—		—		—		10,197			—			—			10,197
Issuance of restricted common stock to employees at below fair value		—		—		—		—		—		—			—			—			—
Amortization of restricted common stock to employees at below fair value		—		—		—		—		—		79,778			—			—			79,778
Exercise of Stock Options		—		—		2,179,250		167,784		607,090		(586,650	)		—			—			188,224
Net loss		—		—		—		—		—		—			—			(15,633,447	)		(15,633,447	)

Balance at March 30, 2000 (unaudited)		23,666,664	$	15,880,941		12,605,450	$	256,008	$	5,106,648	$	(4,505,593	)	$	(37,400	)	$	(18,296,775	)	$	(17,477,112	)

F–36

CONFINITY, INC.
(a development stage company)

STATEMENTS OF CASH FLOWS

				December 3, (inception) to December 31, 1998		Year Ended December 31, 1999			January 1 to March 30, 2000			For the Period Inception to March 30, 2000
									(unaudited)			(unaudited)
Cash flows from operating activities
	Net income (loss)			$	7	$	(2,663,335	)	$	(15,633,447	)	$	(18,296,775	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Provision for transaction losses			—		—			575,238			575,238
		Depreciation and amortization			—		118,911			117,112			236,023
		Amortization of stock-based compensation			—		174,717			373,338			548,055
	Changes in operating assets and liabilities:
		Receivables			—		(127,378	)		(4,737,722	)		(4,865,100	)
		Prepaid expenses and other assets			—		(131,211	)		(7,333,348	)		(7,464,559	)
		Accrued liabilities and accounts payable			—		176,272			1,103,148			1,279,420
		Overdraft payable			—		—			1,780,535			1,780,535
		Recoveries and charge off; net			—		—			(81,330	)		(81,330	)

			Net cash provided by operating activities		7		(2,452,024	)		(23,836,476	)		(26,288,493	)

Cash flows from investing activities
	Purchase of fixed assets				—		(956,360	)		(807,037	)		(1,763,396	)
	Puchase of intangible assets				—		(3,675	)		—			(3,675	)

			Cash used in investing activities		—		(960,035	)		(807,037	)		(1,767,071	)
Cash flows from financing activities
	Due to customers				—		253,933			11,190,545			11,444,478
	Proceeds from issuance of preferred stock, net				—		4,878,454			10,902,487			15,780,941
	Proceeds from issuance of common stock, net				—		82,460			—			82,460
	Proceeds from issuance of notes due to founder				100,000		—			—			100,000
	Repayments of notes due to founder				—		—			—			—
	Proceeds from exercise of stock options				—		924			188,224			189,147
	Payments under capital leases				—		458,538			—			458,538

			Cash provided by financing activities		100,000		5,674,309			22,281,256			28,055,564
			Net increase in cash		100,007		2,262,250			(2,362,257	)		—
Cash and cash equivalents at beginning of period					—		100,007			2,362,257			2,462,264

Cash and cash equivalents at end of period				$	100,007	$	2,362,257		$	—		$	2,462,264

Noncash investing and financing activities:
	Issuance of common stock in exchange for stockholder notes			$	—	$	37,400		$	—		$	37,400

	Issuance of restricted stock to employees			$	—	$	554,090		$	—		$	554,090

	Issuance of stock options to employees			$	—	$	372,113		$	3,283,978		$	3,656,091

	Issuance of stock options to non-employees			$	—	$	217,862		$	38,955		$	3,912,908

	Conversion of note due to founder into convertible preferred stock			$	—	$	500,000		$	—		$	500,000

The accompanying notes are an integral part of these financial statements.

F–37

CONFINITY, INC.

(a development stage company)

NOTES TO THE FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Confinity, Inc. (the "Company") was incorporated in California on December 3, 1998 under the name FieldLink, Inc. On March 23, 1999, the Company's name was changed to Confinity, Inc.

Through the Company's PayPal product users can send money to anyone with an email address. PayPal is available through devices capable of sending email including computers, Palm organizers and other wireless devices.

As the company activities have consisted primarily of providing free of charge, a product for sending money securely through email and no significant revenue have been generated, the Company is classified as a development stage entity as of March 30, 2000.

On March 1, 2000 the Company agreed to merge with X.com Corporation. Under the terms of the agreement Confinity shareholders received approximately 2.02 shares of X.com stock for each share of Confinity stock. Immediately following the transaction the shareholders of Confinity owned approximately 50% of the combined company. The transaction was completed on March 30, 2000.

Interim financial information

The interim consolidated financial statements as of March 30, 2000 and for the three-month period ended March 30, 2000, together with the financial data and other information for that period disclosed in these notes to the financial statements, are unaudited. In the opinion of management, the interim financial statements have been prepared on the same basis as the audited financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the interim results. The results of operations for the interim periods are not necessarily indicative of the results to be expected for any future periods.

Use of estimates in the preparation of financial statements

The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Company to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates.

Fair value of financial instruments

The carrying amount of the Company's financial instruments, which include cash equivalents, investment securities and receivables, approximated fair value at December 31, 1998 and 1999.

Comprehensive income

The Company classifies items of other comprehensive income by their nature in the financial statements and displays the accumulated other comprehensive income separately from retained earnings in the equity section of the balance sheet. As of December 31, 1999, the Company had no such items.

F–38

Cash and cash equivalents

The Company considers all highly-liquid investments purchased with maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include money market accounts, commercial paper and various deposit accounts. The carrying amount of cash equivalents approximates fair value due to the short-term maturity of those investments.

Furniture and equipment

Capitalized software

Cost of internal use software and website development cost are accounted for in accordance with Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use and Emerging Issues Task Force (EITF) 00-02, Accounting for Website Development Costs, which requires that the Company expense computer software and website development costs as they are incurred during the preliminary project stage. Once the capitalization criteria of SOP 98-1 and EITF 00-02 have been met, external direct costs of materials and services consumed in developing or obtaining internal-use computer software, including website development, and the payroll and payroll related costs for employees who are directly associated with and who devote time to the internal-use computer software are capitalized. Capitalized costs are amortized over one to three years on a straight-line basis. As of December 31, 1998 and 1999, the Company had capitalized approximately $0 and $210,781 in internally developed software costs and recognized $0 and $38,324 of amortization expense, respectively.

Intangible assets

Intangible assets consist of purchased internet domain names and are carried at cost less accumulated amortization. Amortization of these assets is computed on a straight-line basis over the estimated useful lives of 3 years.

Impairment of long-lived assets

The Company reviews for the potential impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company has not identified any such impairment losses.

F–39

Advertising expenses

Advertising costs are expensed as incurred. The amount expensed for the year ended December 31, 1998 and 1999, and the three months ended March 30, 2000 was $0, $217,130 and $498,105 respectively.

Customer acquisition costs

At times, the Company paid an acquisition cost of $10 to customers opening a new account and another $10 if these customers refer another new account holder to the Company. These amounts are deposited into the customer accounts as earned. At December 31, 1999, there were no restrictions for earning these fees. During 1999, acquisition costs of $77,235 have been expensed as incurred.

Due to customers

Customers utilize the Company's PayPal product to transfer money via the internet. Any stored value remaining from transactions in a customer's account represents a liability of the Company to the customer. The Company does not pay interest on PayPal customer accounts.

Income taxes

Stock-based compensation

The Company accounts for stock-based employee compensation using the minimum-value method of APB Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees and related Interpretations, and complies with the disclosure provisions of SFAS No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation. Under APB No. 25, compensation expense is based on the excess of the deemed fair value of the Company's stock over the exercise price, if any, on the date of the grant and is recorded on a straight-line basis over the vesting period of the options, which is generally four years.

The Company accounts for stock based compensation issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF No. 96-18, Accounting for Equity Investments That Are Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services.

2. STOCKHOLDER NOTES RECEIVABLE

In 1999 the Company accepted a full recourse note from an officer in connection with the issuance of common stock. Under the terms of the note, interest of 8.0% is compounded semiannually and added to the principal balance. The notes and accrued interest are due 3 years from the issuance of the

F–40

note. At December 31, 1999 the principal and unpaid interest on notes accepted from the sale of stock was $37,400.

3. DUE TO FOUNDER

In December 1998, a limited liability company (LLC) controlled by a founder issued a bridge loan to the Company in the amount of $100,000 bearing interest at a rate of 4.33% compounded annually. In 1999 the LLC converted the entire amount of the bridge loan into 500,000 shares of Series A preferred stock. A total of $700 in interest was paid in cash and expensed by the Company at the time the loan was converted into Series A shares.

4. FURNITURE AND EQUIPMENT

Furniture and equipment consist of the following:

	December 31, 1999			March 30, 2000
				(unaudited)
Internally developed software	$	210,781		$	210,781
Computer equipment		484,138			1,152,822
Computer software purchased from third parties		245,476			289,615
Office equipment		—			102,896
Telecommunications equipment		—			7,283
Furniture and fixtures		15,965			—

		956,360			1,763,397
Accumulated depreciation and amortization		(118,911	)		(236,023	)

	$	837,449		$	1,527,374

Depreciation and amortization expense for the period ended December 31, 1999 and the three months ended March 30, 2000 was $118,911 and $117,112, respectively.

5. INTANGIBLE ASSETS

The components of intangible assets are as follows:

	December 31, 1999			March 30, 2000
				(unaudited)
Purchased domain names	$	3,780		$	3,780
Less: accumulated amortization		(105	)		(105	)

	$	3,675		$	3,675

Amortization expense for the year ended December 31, 1999 and the three months ended March 30, 2000 was $105, and $0, respectively.

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6. FEDERAL AND STATE TAXES

For the years ended December 31, 1998 and 1999, no provision for federal or state income taxes has been recorded as the Company incurred net operating losses.

As of December 31, 1999, the Company had a net deferred tax asset of $975,063 relating primarily to the capitalized startup costs. Due to the uncertainty surrounding the realization of the deferred tax assets, the Company has recorded a valuation allowance at December 31, 1999. At such time as it is determined that it is more likely than not that the deferred tax asset will be realizable, the valuation allowance will be reduced.

The following table reconciles the statutory federal tax rate to the effective income tax rate for the year ended December 31, 1999:

Statutory federal tax rate		34.00	%
State taxes		5.58
Amortization of stock-based compensation		(2.12	)
Valuation allowance		(37.22	)
Other		(0.24	)

	Effective tax rate	0.00	%

7. CONVERTIBLE PREFERRED STOCK

December 31, 1999, convertible preferred stock consists of the following:

	Shares
	Shares		Liquidation Amount		Proceeds Net of Issuance Costs
	Authorized	Outstanding	Liquidation Amount		Proceeds Net of Issuance Costs
Series A	2,500,000	2,500,000	$	500,000	$	492,500
Series B	12,000,000	12,000,000	$	4,500,000	$	4,485,954

	14,500,000	14,500,000		5,000,000		4,978,454

Balance at March 30, 2000, convertible preferred stock consists of the following:

	Shares
	Shares		Liquidation Amount		Proceeds Net of Issuance Costs
	Authorized	Outstanding	Liquidation Amount		Proceeds Net of Issuance Costs
Series A	2,500,000	2,500,000	$	500,000	$	492,500
Series B	12,000,000	12,000,000	$	4,500,000	$	4,485,954
Series C	9,166,664	9,166,664	$	3,788,519	$	10,902,487

	23,666,664	23,666,664		8,788,519		15,880,941

Redemption

The merger or consolidation of the Company into another entity or any transactions in which more than 50% of the voting power of the Company is disposed of or the sale, transfer or disposition of

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substantially all of the property or business of the company shall be deemed a liquidation, dissolution, or winding up of the Company. These liquidation characteristics require classification of the convertible preferred stock outside of the equity section. There are no other redemption features.

Liquidation preference

In the event of any liquidation or dissolution of the Company, either voluntary or involuntary, the holders of convertible preferred stock retain liquidation preference over common stockholders. The liquidation preference amounts are $0.20 per share of Series A and $0.375 per share of Series B and $0.375 per share of Series C.

The remaining assets and funds of the Company available for distribution will be distributed among all holders of common stock pro rata based on the number of shares of common stock held by each holder.

Voting rights

Holders of convertible preferred stock are entitled to vote together with holders of common stock. The number of votes granted to convertible preferred shareholders equals the number of full shares of common stock into which each share of convertible preferred stock could be converted as described in the Company's Articles of Incorporation.

Conversion

At the option of the holder, each share of convertible preferred stock is convertible at any time into one share of common stock (subject to certain adjustments). Each share of preferred stock shall automatically be converted into common stock upon majority consent of the outstanding shares of preferred stock or closing of a firm commitment underwritten public offering of common stock with aggregate gross proceeds to the Company of not less than $15.0 million.

Dividends

The holders of Series A, B and C convertible preferred stock are entitled to receive non-cumulative dividends as, when and if declared by the Board of Directors.

For all periods presented, no dividends were declared on any series of the Company's convertible preferred stock.

Warrants

In 1999, the Company issued warrants to purchase up to 20,000 shares of common stock at an exercise price of $1.20 per share to a third party as additional consideration on the capital lease (see Note 11). The third party has the right to exercise the warrants for ten years from the date of issue. The Company has not allocated a portion of the proceeds from the capital lease to the warrants, based upon their relative fair values, as the amount is deemed immaterial.

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In January 2000, in connection with the preferred stock financing, pursuant to the merger with X.com Corporation, the Company issued two warrants to investors to purchase up to 4,166,666 and 833,333 shares of Series C preferred stock at a exercise price of $2.40 per share. These warrants were fully vested and exercisable at grant. The warrants expire at the earlier of three years from the date of grant, an initial public offering of the Company's common stock or a merger/consolidation. The fair value of the warrants was determined to be $2,709,333 and was recorded as a cost of raising preferred stock financing. As of March 30, 2000, the warrants were amended to exercise at the earlier of the above terms and a preferred stock financing by the Company to close at no less than $3.00 per share. In conjunction with the merger with X.com Corporation (see Note 1), all warrants were outstanding and were assumed in the merger.

8. RESTRICTED STOCK

During the year ended December 31, 1999, the Company issued 10,380,000 shares of common stock for aggregate cash of $82,460 and a note of $37,400 to certain employees of the Company in connection with their employment. In some cases, the issuance price was below the fair value of the common stock and resulted in deferred stock-based compensation of $554,090 which was equal to the difference between the fair value of the common stock and the consideration paid for these shares. The deferred stock-based compensation is being amortized over the vesting period of the shares. For the year ended December 31, 1999 and for the three months ended March 31, 2000, the amortization of deferred stock-based compensation was $47,218 and $79,778, respectively.

A portion of the shares granted to employees is subject to repurchase by the Company, at the Company's option at the original price issued. The Company's right of repurchase lapses over a period of time determined by the Board of Directors on a case by case basis.

9. STOCK OPTIONS

As of December 31, 1999, the Company had reserved up to 6,000,000 shares of common stock issuable upon exercise of options issued to certain employees, directors, advisors, and consultants pursuant to the Company's 1999 Stock Plan. Such options were exercisable at prices established at the date of grant, and have a term not to exceed ten years. Options that are granted to other than officers, directors or consultants vest and become exercisable at a rate of not less than 20% per year over the five years following the date of grant. If an option holder ceases to be employed by the Company, exercisable and vested options held at the date of termination may be exercised within the earlier of three months and termination of the option. Options under the plan may be either incentive stock options, as defined under Section 422 of the Internal Revenue Code, or nonstatutory options. During the year ended December 31, 1999, 1,791,000 options had been granted and 4,209,000 options were still available for grant under the Company's stock option plan as of December 31, 1999.

Options granted to employees with exercise prices below the deemed fair value of the stock during the year ended December 31, 1999 and the three months ended March 30, 2000 resulted in deferred stock-based compensation of $372,113 and $3,283,978, respectively. Amortization of the deferred stock-based compensation is being charged to operations as the respective options vest. For the period ended December 31, 1999 and the three months ended March 30, 2000 the amortization of deferred stock-based compensation related to these stock options was $47,218 and $283,363, respectively.

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A summary of the status of the Company's stock option plan and changes during those periods is presented below:

	Period Ended December 31, 1999
	Number of Shares		Weighted Average Exercise Price Per Share
Outstanding at beginning of year	—		$	—
Granted	1,891,000			0.033
Exercised	(46,200	)		0.02
Terminated/forfeited	(100,000	)		0.02

Outstanding, at end of year	1,744,800		$	0.034

Options exercisable at end of year	164,106		$	0.028

The following table summarizes information about stock options outstanding at December 31, 1999:

	Options Outstanding
	Options Outstanding				Options Exercisable
				Weighted Average Remaining Contractual Life	Options Exercisable
Exercise Price	Number Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Number Exercisable	Weighted Average Exercise Price
$.02 - $.04	1,744,800	$	.034	9.52	164,106	$	.028

Had compensation expense for the Plan been determined based on the fair value at the grant date for options granted in 1999 consistent with the provisions of SFAS 123, the pro forma net loss would be reported as follows:

	December 31, 1999
Net loss:
As reported	$	(2,663,335	)

Pro forma	$	(2,706,701	)

Options to Non-Employees

Options granted to non-employees for consulting services during the year ended December 31, 1999 and the three months ended March 30, 2000 resulted in deferred stock-based compensation of $217,862 and $38,955, respectively. The fair value of these options was determined at the date of the grant using the Black-Scholes option pricing model. For the year ended December 31, 1999 the amortization of deferred stock-based compensation related to these options was $86,431. For the three months ended March 30, 2000 the amortization of deferred stock-based compensation related to these options was $10,197.

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10. 401(k) SAVINGS PLAN

In 1999, the Company adopted a 401(k) tax deferred savings plan under which eligible employees may elect to defer a portion of their salary (up to 15%) as a contribution to the plan. The Company did not match employee contributions during the year ended December 31, 1999 or during the three months ended March 30, 2000.

11. OPERATING AND CAPITAL LEASES

During the year ended December 31, 1999, the Company entered into two operating lease agreements for office space. In September 1999, one of the leases was terminated after 9 months of the 34-month lease agreement. The Company did not pay a penalty as a result of terminating the lease agreement. For the period ended December 31, 1998 the Company was not obligated under any operating lease agreements.

On August 23, 1999 the Company entered into a capital lease agreement with a financial institution. Under the terms of the lease the Company purchases equipment and submits invoices to the financial institution for reimbursement. Computer equipment, software, furniture and other equipment is eligible for reimbursement up to a maximum lease amount of $600,000. Once the Company has been reimbursed, the lease begins for a term of 36 months at an interest rate matching term treasuries plus 3%. At the end of the lease term the Company will purchase the equipment for 10% of the purchase price of the equipment. For the period ended December 31, 1998, the Company was not obligated under any capital lease agreements.

Following is an analysis of the assets under capital lease by major class at December 31, 1999:

		December 31, 1999			March 30, 2000
					(unaudited)
Computer equipment		$	379,463		$	482,579
Software			89,258			89,258
Office equipment			15,966			15,966

			484,687			587,803
	Less accumulated amortization		(28,362	)		(74,481	)

		$	456,325		$	513,322

Depreciation of assets under capital lease was $28,362 and $46,119 for the period ended December 31, 1998, the year ended December 31, 1999 and the three months ended March 30, 2000, respectively.

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As of December 31, 1999, future minimum lease payments under capital leases, including the 10% buy out mentioned above and future minimum rental payments required under operating leases are as follows:

Year Ending Leases	Capital			Operating
2000	$	182,921		$	304,000
2001		182,921			316,160
2002		199,280			328,806
2003		—			341,959
2004 and thereafter		—			233,972

		565,122		$	1,524,897

Less amount representing interest		(106,584	)

Present value of net minimum lease payments		458,538
Less current maturities		(127,374	)

Long-term portion	$	331,164

For the period ended December 31, 1998, the year ended December 31, 1999, and the three months ended March 30, 2000, rent expense was $0, $133,225 and $116,925, respectively. The terms of the facility lease provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid.

12. LEGAL PROCEEDINGS

In the normal course of business, the Company is at times subject to pending and threatened legal actions and proceedings. After reviewing pending and threatened actions and proceedings with counsel, management believes that the outcome of such actions or proceedings is not expected to have a material effect on the financial position or results of operation of the Company.

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Shares

PayPal, Inc.

Common Stock

P R O S P E C T U S

, 2001

Salomon Smith Barney

Robertson Stephens

William Blair & Company

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS.

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth all costs and expenses, other than the underwriting discounts and commissions payable by the Registrant in connection with the sale and distribution of the common stock being registered. All amounts shown are estimates except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market application fee.

Securities and Exchange Commission registration fee		$	20,125
NASD filing fee			8,550
Nasdaq National Market application fee			80,000
Blue sky qualification fees and expenses			7,500
Printing and engraving expenses			200,000
Legal fees and expenses			800,000
Accounting fees and expenses			750,000
Transfer agent and registrar fees			5,000
Miscellaneous expenses			128,825

	Total	$	2,000,000

Item 14. Indemnification of Directors and Officers.

Section 102 of the Delaware General Law, or DGCL, as amended, allows a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except where the director breached the duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit.

Section 145 of the DGCL provides, among other things, that we may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding—other than an action by or in the right of PayPal, Inc.—by reason of the fact that the person is or was a director, officer, agent, or employee of PayPal, Inc., or is or was serving at our request as a director, officer, agent or employee of another corporation, partnership, joint venture, trust or other enterprise against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding. The power to indemnify applies (a) if such person is successful on the merits or otherwise in defense of any action, suit or proceeding or (b) if such person acting in good faith and in a manner he reasonably believed to be in the best interest, or not opposed to the best interest, of PayPal, Inc., and with respect to any criminal action or proceeding had no reasonable cause to believe his or her conduct was unlawful. The power to indemnify applies to actions brought by or in the right of PayPal, Inc. as well but only to the extent of defense expenses, including attorneys' fees but excluding amounts paid in settlement, actually and reasonably incurred and not to any satisfaction of judgment or settlement of the claim itself, and with the further limitation that in such actions no indemnification shall be made in the event of any adjudication of liability to PayPal, Inc., unless the court believes that in light of all the circumstances indemnification should apply.

Section 174 of the DGCL provides, among other things, that a director, who willfully or negligently approves of an unlawful payment of dividends or an unlawful stock purchase or redemption, may be held liable for such actions. A director who was either absent when the unlawful actions were approved or dissented at the time, may avoid liability by causing his or her dissent to such actions to be entered

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in the books containing minutes of the meetings of the board of directors at the time such action occurred or immediately after such absent director receives notice of the unlawful acts.

Our Certificate of Incorporation, attached as Exhibit 3.1 hereto, and Bylaws, attached as Exhibit 3.2 hereto, provide that we shall indemnify our directors, officers, employees and agents to the maximum extent permitted by Delaware Law, including in circumstances in which indemnification is otherwise discretionary under Delaware Law. In addition, we intend to enter into separate indemnification agreements, attached as Exhibit 10.1 hereto, with our directors and officers which would require us, among other things, to indemnify them against certain liabilities which may arise by reason of their status or service other than liabilities arising from willful misconduct of a culpable nature. We also intend to maintain director and officer liability insurance, if available on reasonable terms. These indemnification provisions and the indemnification agreements may be sufficiently broad to permit indemnification of our officers and directors for liabilities, including reimbursement of expenses incurred, arising under the Securities Act of 1933, as amended, which we refer to as the Securities Act.

The Underwriting Agreement, attached as Exhibit 1.1 hereto, provides for indemnification by the Underwriters of us and our officers and directors for certain liabilities, including matters arising under the Securities Act.

Item 15. Recent Sales of Unregistered Securities.

(a): Since our inception, we have issued and sold the following unregistered securities:

(1) In May and June 1999, we issued and sold an aggregate of 38,850,000 shares of Series A Preferred Stock to investors for an aggregate consideration of $12.5 million and the domain name "X.com" valued at $500,000.

(2) In February 1999, Confinity, Inc. issued and sold an aggregate of 2,500,000 shares of its Series A Preferred Stock to investors for an aggregate consideration of $0.5 million.

(3) In December 1999 and January 2000, we issued and sold 27,104,970 shares of Series B Preferred Stock to investors for an aggregate consideration of $12.9 million.

(4) In June and August 1999, Confinity, Inc. issued and sold 10,666,667 shares its Series B Preferred Stock to investors for an aggregate consideration of $4.0 million.

(5) In January and February 2000, Confinity, Inc. issued and sold an aggregate of 9,166,664 shares of its Series C Preferred Stock to investors and granted to certain of the investors warrants to purchase 5,000,001 shares of its Series C Preferred Stock at an exercise price of $2.40 per share, for an aggregate consideration of $10.0 million.

(6) In March and April 2000, we issued and sold an aggregate of 36,363,637 shares of Series C Preferred Stock to investors for an aggregate consideration of $100.0 million.

(7) On March 30, 2000, we merged with Confinity, Inc. Under the terms of the merger, we issued 25,489,478 shares of common stock and 5,051,627, 24,247,842 and 18,522,653 shares of Series AA, Series BB and Series CC Preferred Stock, respectively, in exchange for all of the outstanding common and preferred stock of Confinity. Additionally, we converted Confinity's 2,390,550 options and 5,020,001 warrants outstanding into options and warrants to purchase 4,830,474 and 10,143,689 shares of our common and Series CC Preferred Stock, respectively.

(8) In August 2000 through February 2001, we issued and sold an aggregate of 28,581,161 shares of our Series D Preferred Stock to investors for an aggregate consideration of $86.2 million.

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(9) In August and September 2001, we issued and sold 4,500,000 shares of Class A Stock to or for the benefit of an executive officer for consideration of $0.5 million in cash and a promissory note for $0.8 million.

(10) Since our inception and as of September 21, 2001, we have granted options to purchase shares of common stock (including options to purchase 4,830,471 shares of common stock assumed by us when X.com merged with Confinity, Inc.) to employees, directors and consultants under our 1999 Stock Plan at exercise prices ranging from $0.003333 to $0.30 per share. Of the options granted, 8,769,146 remain outstanding, 10,305,624 shares of common stock have been purchased pursuant to exercises of stock options and 1,785,833 shares have been cancelled and returned to the 1999 Stock Plan option pool as of September 21, 2001.

(11) In November 1999, we issued a warrant to purchase 500,001 shares of our common stock at an exercise price of $0.03 per share to Heidrick & Struggles, Inc.

(12) In September 1999, Confinity, Inc. issued a warrant to purchase 20,000 shares of its Series C Preferred Stock at an exercise price of $1.20 to Silicon Valley Bank. Upon the merger of X.com and Confinity, this warrant was converted into a warrant to purchase 40,413 shares of our Series CC Preferred Stock at an exercise price of $0.59.

(13) In April 2001, we issued a warrant to purchase 30,000 shares of our Series D Preferred Stock at an exercise price of $3.00 per share to Comerica Bank-California.

The issuances of securities in the transactions described above were deemed exempt from registration under the Securities Act in reliance on Section 4(2), Regulation D or Rule 701 promulgated thereunder as transactions pursuant to compensatory benefit plans and contracts relating to compensation. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.

There were no underwriters employed in connection with any of the transactions set forth in this Item 15.

Item 16. Exhibits and Financial Statement Schedules.

(a): Exhibits.

Exhibit Number		Description of Document
1.1	*	Form of Underwriting Agreement
2.1		Agreement and Plan of Merger dated as of March 1, 2000 by and between the registrant, Confinity, Inc. and Confinity Acquisition Corp.
3.1	*	Form of Amended and Restated Certificate of Incorporation of the registrant to be in effect upon closing of this offering
3.2	*	Bylaws of the registrant
4.1	*	Specimen Common Stock Certificate
4.2		Amended and Restated Investors' Rights Agreement of X.com Corporation, dated as of August 7, 2000
4.3	*	Warrant issued by the registrant to Comerica Bank-California
5.1	*	Opinion of Latham & Watkins
10.1	*	Form of Indemnification Agreement between the registrant and each officer and director
10.2		2001 Equity Incentive Plan
10.3	*	2001 Employee Stock Purchase Plan

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10.4		X.com Corporation 1999 Stock Plan
10.5		Confinity, Inc. 1999 Stock Plan
10.6		Form of Loan, Pledge and Option Agreement, as amended, between the registrant and certain executive officers
10.7		Form of Promissory Note issued in connection with the Loan, Pledge and Option Agreement, as amended, between the registrant and certain executive officers
10.8		Employment offer letter from the registrant to Todd R. Pearson
10.9		Restricted Stock Purchase Agreements for Class A Stock
10.10		Loan and Pledge Agreement, dated as of September 10, 2001, between the registrant and Peter A. Thiel
10.11		Full Recourse Promissory Note issued by Peter A. Thiel in favor of the registrant
10.12	*	Lease Agreement, dated as of March 10, 2000, between the registrant and Harbor Investment Partners, including the Lease Amendment Agreement dated as of June 25, 2000, for office space in Palo Alto, California
10.13	*	Lease Agreement, dated April 25, 2000, between the registrant and Metro-Omaha Associates, including the Lease Amendment Agreement, dated as of June 25, 2000, for office space in Omaha, Nebraska
10.14	*	Sublease, dated as of April 25, 2000, between the registrant and ConAgra, Inc, including the Sublease Amendment Agreement dated July 18, 2000, for office space in Omaha, Nebraska
10.15		Separation Agreement and Mutual Release, dated as of May 4, 2001, between the registrant and Elon R. Musk
10.16		Settlement Agreement and Mutual Release of Claims, dated as of August 27, 2001, between the registrant and H. David Johnson
10.17	*†	Credit Card Alliance Agreement, dated as of February 1, 2001, between the registrant and Providian Bancorp Services
10.18	*†	Service Agreement, dated as of September 25, 2000, between the registrant and First Data Resources
10.19	*†	Merchant Services Bankcard Agreement, dated as of December 13, 1999, among registrant, The Chase Manhattan Bank and Chase Merchant Services, L.L.C., including Amendment to Merchant Services Bankcard Agreement, dated as of October 2000
10.20	*†	Interactive Support Services Agreement, dated as of December 29, 2000, between the registrant and Daksh.Com eServices Private Limited
10.21	*†	Application and Agreement for Cash Management Services, between the registrant and Wells Fargo Bank, National Association
21.1		List of Subsidiaries of the Registrant
23.1		Consent of PricewaterhouseCoopers LLP, independent auditors, relating to financial statements of Confinity, Inc.
23.2		Consent of PricewaterhouseCoopers LLP, independent auditors, relating to registrant's financial statements
23.3	*	Consent of Latham & Watkins (included in Exhibit 5.1)
24.1		Power of Attorney (included on signature page)

*: To be filed by amendment.
†: Confidential treatment to be requested.
(b): Financial Statement Schedules.

No financial statement schedules are provided because the information required to be set forth therein is not required or is shown either in the consolidated financial statements or the notes thereto.

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Item 17. Undertakings

The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act, and is therefore unenforceable. In the event that a claim for indemnification against such liabilities—other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding—is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and

(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof.

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SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Palo Alto, State of California, on September 28, 2001.

		PAYPAL, INC.
		By:		/s/ PETER A. THIEL Peter A. Thiel Chief Executive Officer and President

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Peter A. Thiel, Roelof F. Botha and John D. Muller and each of them acting individually, as his true and lawful attorneys-in-fact and agents, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement, including post-effective amendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) increasing the number of securities for which registration is sought, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:

Signature	Title	Date

/s/ PETER A. THIEL Peter A. Thiel	Chief Executive Officer, President and Chairman of the Board (Principal Executive Officer)	September 28, 2001
/s/ ROELOF F. BOTHA Roelof F. Botha	Chief Financial Officer (Principal Financial and Accounting Officer)	September 28, 2001
/s/ MAX R. LEVCHIN Max R. Levchin	Director	September 28, 2001
/s/ TIMOTHY M. HURD Timothy M. Hurd	Director	September 28, 2001
/s/ JOHN A. MALLOY John A. Malloy	Director	September 28, 2001
/s/ SHAILESH J. MEHTA Shailesh J. Mehta	Director	September 28, 2001
/s/ MICHAEL J. MORITZ Michael J. Moritz	Director	September 28, 2001
/s/ ELON R. MUSK Elon R. Musk	Director	September 28, 2001

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PAYPAL

EXHIBIT INDEX

Exhibit Number		Description of Document
1.1	*	Form of Underwriting Agreement
2.1		Agreement and Plan of Merger dated as of March 1, 2000 by and between the registrant, Confinity, Inc. and Confinity Acquisition Corp.
3.1	*	Form of Amended and Restated Certificate of Incorporation of the registrant to be in effect upon closing of this offering
3.2	*	Bylaws of the registrant
4.1	*	Specimen Common Stock Certificate
4.2		Amended and Restated Investors' Rights Agreement of X.com Corporation, dated as of August 7, 2000
4.3	*	Warrant issued by the registrant to Comerica Bank-California
5.1	*	Opinion of Latham & Watkins
10.1	*	Form of Indemnification Agreement between the registrant and each officer and director
10.2		2001 Equity Incentive Plan
10.3	*	2001 Employee Stock Purchase Plan
10.4		X.com Corporation 1999 Stock Plan
10.5		Confinity, Inc. 1999 Stock Plan
10.6		Form of Loan, Pledge and Option Agreement, as amended, between the registrant and certain executive officers
10.7		Form of Promissory Note issued in connection with the Loan, Pledge and Option Agreement, as amended, between the registrant and certain executive officers
10.8		Employment offer letter from the registrant to Todd R. Pearson
10.9		Restricted Stock Purchase Agreements for Class A Stock
10.10		Loan and Pledge Agreement, dated as of September 10, 2001, between the registrant and Peter A. Thiel
10.11		Full Recourse Promissory Note issued by Peter A. Thiel in favor of the registrant
10.12	*	Lease Agreement, dated as of March 10, 2000, between the registrant and Harbor Investment Partners, including the Lease Amendment Agreement dated as of June 25, 2000, for office space in Palo Alto, California
10.13	*	Lease Agreement, dated April 25, 2000, between the registrant and Metro-Omaha Associates, including the Lease Amendment Agreement, dated as of June 25, 2000, for office space in Omaha, Nebraska
10.14	*	Sublease, dated as of April 25, 2000, between the registrant and ConAgra, Inc, including the Sublease Amendment Agreement dated July 18, 2000, for office space in Omaha, Nebraska
10.15		Separation Agreement and Mutual Release, dated as of May 4, 2001, between the registrant and Elon R. Musk
10.16		Settlement Agreement and Mutual Release of Claims, dated as of August 27, 2001, between the registrant and H. David Johnson
10.17	*†	Credit Card Alliance Agreement, dated as of February 1, 2001, between the registrant and Providian Bancorp Services
10.18	*†	Service Agreement, dated as of September 25, 2000, between the registrant and First Data Resources
10.19	*†	Merchant Services Bankcard Agreement, dated as of December 13, 1999, among registrant, The Chase Manhattan Bank and Chase Merchant Services, L.L.C., including Amendment to Merchant Services Bankcard Agreement, dated as of October 2000
10.20	*†	Interactive Support Services Agreement, dated as of December 29, 2000, between the registrant and Daksh.Com eServices Private Limited
10.21	*†	Application and Agreement for Cash Management Services, between the registrant and Wells Fargo Bank, National Association
21.1		List of Subsidiaries of the Registrant
23.1		Consent of PricewaterhouseCoopers LLP, independent auditors, relating to financial statements of Confinity, Inc.
23.2		Consent of PricewaterhouseCoopers LLP, independent auditors, relating to registrant's financial statements

23.3	*	Consent of Latham & Watkins (included in Exhibit 5.1)
24.1		Power of Attorney (included on signature page)

*: To be filed by amendment.
†: Confidential treatment to be requested.

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CONFINITY, INC. (a development stage company) STATEMENTS OF CASH FLOWS
PART II INFORMATION NOT REQUIRED IN PROSPECTUS.
SIGNATURES
POWER OF ATTORNEY
PAYPAL EXHIBIT INDEX
EX-2.1 3 a2059025zex-2_1.htm EXHIBIT 2.1 Prepared by MERRILL CORPORATION
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Exhibit 2.1

AGREEMENT AND PLAN OF MERGER

dated as of March 1, 2000

among

X.COM CORPORATION,

CONFINITY ACQUISITION CORP.

and

CONFINITY, INC.

TABLE OF CONTENTS

				Page
SECTION ONE				1
	1.	The Merger		1
		1.1	The Merger	1
		1.2	Closing; Effective Time	1
		1.3	Effect of the Merger	2
		1.4	Articles of Incorporation; Bylaws	2
		1.5	Directors and Officers	2
		1.6	Effect on Capital Stock	2
		1.7	Surrender of Certificates	5
		1.8	No Further Ownership Rights in Target Capital Stock	6
		1.9	Tax and Accounting Consequences	6
		1.10	Taking of Necessary Action; Further Action	7
		1.11	Withholding	7
		1.12	Lost, Stolen or Destroyed Certificates	7
SECTION TWO				7
	2.	Representations and Warranties of Target		7
		2.1	Organization, Standing and Power	7
		2.2	Articles of Incorporation and Bylaws	8
		2.3	Capital Structure	8
		2.4	Authority	9
		2.5	No Conflicts; Required Filings and Consents	9
		2.6	Financial Statements	10
		2.7	Absence of Undisclosed Liabilities	10
		2.8	Absence of Certain Changes	10
		2.9	Litigation	11
		2.10	Restrictions on Business Activities	11
		2.11	Permits	12
		2.12	Title to Property	12
		2.13	Intellectual Property	12
		2.14	Taxes	15
		2.15	Employee Benefit Plans	17
		2.16	Certain Agreements Affected by the Merger	18
		2.17	Employee Matters	19
		2.18	Material Contracts	19
		2.19	Interested Party Transactions	20
		2.20	Insurance	20
		2.21	Compliance With Laws	21
		2.22	Minute Books	21
		2.23	Complete Copies of Materials	21
		2.24	Brokers' and Finders' Fees	21
		2.25	Voting Agreements	21
		2.26	Board Approval	21
		2.27	Customers and Suppliers	21
		2.28	Third Party Consents	22
		2.29	No Commitments Regarding Future Products	22
		2.30	Governmental Authorization	22
		2.31	Representations Complete	22

SECTION THREE				22
	3.	Representations and Warranties of Acquiror and Merger Sub		22
		3.1	Organization, Standing and Power	22
		3.2	Certificate of Incorporation and Bylaws	23
		3.3	Capital Structure	23
		3.4	Authority	23
		3.5	No Conflict; Required Filings and Consents	24
		3.6	Financial Statements	24
		3.7	Absence of Undisclosed Liabilities	24
		3.8	Absence of Certain Changes	25
		3.9	Litigation	26
		3.10	Restrictions on Business Activities	26
		3.11	Permits	26
		3.12	Title to Property	27
		3.13	Intellectual Property	27
		3.14	Taxes	29
		3.15	Employee Benefit Plans	30
		3.16	Employee Matters	31
		3.17	Material Contracts	32
		3.18	Interested Party Transactions	33
		3.19	Insurance	33
		3.20	Compliance With Laws	33
		3.21	Minute Books	34
		3.22	Complete Copies of Materials	34
		3.23	Brokers' and Finders' Fees	34
		3.24	Voting Agreements	34
		3.25	Board Approval	34
		3.26	Customers and Suppliers	34
		3.27	Third Party Consents	34
		3.28	No Commitments Regarding Future Products	34
		3.29	Governmental Authorization	35
		3.30	Certain Agreements Affected by the Merger	35
		3.31	Representations Complete	35
SECTION FOUR				35
	4.	Conduct Prior to the Effective Time		35
		4.1	Conduct of Business	35
		4.2	No Solicitation	37
SECTION FIVE				39
	5.	Additional Agreements		39
		5.1	Best Efforts and Further Assurances	39
		5.2	Consents; Cooperation	39
		5.3	Access to Information	40
		5.4	Confidentiality	40
		5.5	Public Disclosure	40
		5.6	FIRPTA	40
		5.7	State Statutes	41
		5.8	Blue Sky Laws	41
		5.9	Affiliate Agreements	41
		5.10	Stockholder Approval	41

		5.11	Maintenance of Target Indemnification Obligations	42
		5.12	Non-Competition Agreements	42
		5.13	Registration Rights	42
		5.14	Termination of Target 401(k) Plan	42
		5.15	Venture Loans	42
SECTION SIX				42
	6.	Conditions to the Merger		42
		6.1	Conditions to Obligations of Each Party to Effect the Merger	42
		6.2	Additional Conditions to Obligations of Target	43
		6.3	Additional Conditions to the Obligations of Acquiror and Merger Sub	44
SECTION SEVEN				45
	7.	Termination, Amendment and Waiver		45
		7.1	Termination	45
		7.2	Effect of Termination	46
		7.3	Expenses and Termination Fees	46
		7.4	Amendment	46
		7.5	Extension; Waiver	46
SECTION EIGHT				46
	8.	General Provisions		46
		8.1	Survival of Representations and Warranties	46
		8.2	Notices	46
		8.3	Interpretation	47
		8.4	Counterparts	47
		8.5	Entire Agreement; Nonassignability; Parties in Interest	48
		8.6	Severability	48
		8.7	Remedies Cumulative	48
		8.8	Governing Law	48
		8.9	Rules of Construction	48
		8.10	Amendments and Waivers	48

iii

AGREEMENT AND PLAN OF MERGER

This Agreement and Plan of Merger (the "Agreement") is made and entered into as of March 1, 2000, by and among X.com Corporation, a Delaware corporation ("Acquiror"), Confinity Acquisition Corp., a Delaware corporation ("Merger Sub") and wholly owned subsidiary of Acquiror, and Confinity, Inc., a California corporation ("Target").

RECITALS

A. The Boards of Directors of Target, Acquiror and Merger Sub believe it is in the best interests of their respective companies and the stockholders and shareholders of their respective companies that Target and Merger Sub combine into a single company through the merger of Merger Sub and Target (the "Merger") and, in furtherance thereof, have approved the Merger. Pursuant to the Merger and at the rates set forth herein, (i) the outstanding shares of Common Stock of Target (the "Target Common Stock") shall be converted into Common Stock of Acquiror (the "Acquiror Common Stock"), (ii) the outstanding shares of Series A, B and C Preferred Stock of Target (the "Target Preferred Stock") shall be converted into shares of Series AA, BB and CC Preferred Stock of Acquiror, respectively (the "Acquiror Preferred Stock"), (iii) the outstanding options to purchase shares of Target Common Stock (the "Target Options") shall be converted into options to purchase shares of Acquiror Common Stock, and (iv) the outstanding warrants to purchase equity securities of Target (the "Target Warrants") shall be converted into warrants to purchase shares of Acquiror Series CC Preferred Stock. In this Agreement, the terms "Target Common Stock" and "Target Preferred Stock" are sometimes referred to collectively as "Target Capital Stock," and the terms "Acquiror Common Stock" and "Acquiror Preferred Stock" are sometimes referred to collectively as "Acquiror Capital Stock."

B. Target, Acquiror and Merger Sub desire to make certain representations and warranties and other agreements in connection with the Merger.

C. The parties intend, by executing this Agreement, to adopt a plan of reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"), and to cause the Merger to qualify as a reorganization under the provisions of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code.

AGREEMENT

The parties hereby agree as follows:

SECTION ONE

1. The Merger.

1.1 The Merger At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and conditions of this Agreement, the Certificate of Merger attached hereto as Exhibit A (the "Certificate of Merger"), the Agreement of Merger attached hereto as Exhibit B (the "Agreement of Merger") and the applicable provisions of the Delaware General Corporation Law ("Delaware Law") and the California Corporations Code ("California Law"), Merger Sub shall be merged with and into Target, the separate corporate existence of Merger Sub shall cease and Target shall continue as the surviving corporation of the Merger. Target as the surviving corporation after the Merger is hereinafter sometimes referred to as the "Surviving Corporation."

1.2 Closing; Effective Time. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place as soon as practicable, and in no event later than three (3) business days after the satisfaction or waiver of each of the conditions set forth in Section 4 below, or at such other time as the parties agree (the "Closing Date"). In connection with the

Closing, the parties shall cause the Merger to be consummated by filing the Certificate of Merger (together with the required officers' certificates) with the Secretary of State of the State of Delaware and the filing of the Agreement of Merger (together with the required officers' certificates) with the Secretary of State of the State of California (the time of the later of such filings being the "Effective Time"). The Closing shall take place at the offices of Venture Law Group, 2800 Sand Hill Road, Menlo Park, California, or at such other location as the parties agree.

1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger, the Agreement of Merger and the applicable provisions of California and Delaware Law. At the Effective Time, all the property, rights, privileges, powers and franchises of Target and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of Target and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation.

1.4 Articles of Incorporation; Bylaws.

(a) At the Effective Time, the Articles of Incorporation of Target, as in effect immediately prior to the Effective Time, shall be the Articles of Incorporation of the Surviving Corporation until thereafter amended as provided by California Law and such Articles of Incorporation.

(b) At the Effective Time, the Bylaws of Target, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation until thereafter amended as provided by law, the Articles of Incorporation of the Surviving Corporation and such Bylaws.

1.5 Directors and Officers.

(a) Acquiror. At the Effective Time, the Board of Directors of Acquiror shall be comprised of Elon Musk, William Harris, Michael Moritz, Peter Thiel, Max Levchin and John Malloy. At the Effective Time, the officers of Acquiror shall be William Harris (President and CEO), Elon Musk (Chairman and Chief Product Officer), Peter Thiel (Executive Vice President), John T. Story (Executive Vice President), Reid Hoffman (Senior Vice President), David Johnson (Senior Vice President Finance & Administration), David Jaques (Chief Financial Officer), Max Levchin (Chief Technical Officer), Sanjay Bhargava (Vice President of ePayments), Kathleen Donovan (Chief Credit Officer), Mark Sullivan (Vice President of Operations) and Edmund S. Ruffin, Jr. (Secretary).

(b) Surviving Corporation. At the Effective Time, the directors of Merger Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation, and the officers of Merger Sub immediately prior to the Effective Time, shall be the officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified.

1.6 Effect on Capital Stock. By virtue of the Merger and without any action on the part of Merger Sub, Target or any of their respective stockholders, the following shall occur at the Effective Time:

(a) Conversion of Target Capital Stock. The shares of Target Capital Stock shall be converted into shares of Acquiror Capital Stock as set forth in Sections 1.6(a)(i)-(iii) below. All shares of Target Capital Stock, when so converted, shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate representing any such shares of Target Capital Stock shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration therefor upon the surrender of such certificate in accordance with Section 1.7, without interest.

(i) All shares of Target Common Stock issued and outstanding as of the date of Closing (other than shares to be cancelled pursuant to Section 1.6(b) and shares, if any, held by persons who have not voted such shares for approval of the Merger and with respect to which such persons shall become entitled to exercise dissenters' rights in accordance with Chapter 13 of California Law. ("Dissenting Shares")) shall be converted and exchanged for that number of shares of Acquiror Common Stock as shall be determined by multiplying such number of shares of Target Common Stock by the Exchange Ratio set forth on Exhibit C attached hereto (the "Exchange Ratio");

(ii) All shares of Target Series A Preferred Stock issued and outstanding immediately prior to the Effective Time (other than shares to be cancelled pursuant to Section 1.6(b) and Dissenting Shares) shall be converted and exchanged for that number of shares of Acquiror Series AA Preferred Stock as shall be determined by multiplying such number of shares of Target Series A Preferred Stock by the Exchange Ratio. All shares of Target Series B Preferred Stock issued and outstanding immediately prior to the Effective Time (other than shares to be cancelled pursuant to Section 1.6(b) and Dissenting Shares) shall be converted and exchanged for that number of shares of Acquiror Series BB Preferred Stock as shall be determined by multiplying such number of Target Series B Preferred Stock by the Exchange Ratio. All shares of Target Series C Preferred Stock issued and outstanding immediately prior to the Effective Time (other than shares to be cancelled pursuant to Section 1.6(b) and Dissenting Shares) shall be converted and exchanged for that number of shares of Acquiror Series CC Preferred Stock as shall be determined by multiplying such number of Target Series C Preferred Stock by the Exchange Ratio. The Acquiror Series AA, BB and CC Preferred Stock shall have the rights, preferences and privileges as set forth in the Amended and Restated Certificate of Incorporation of Acquiror attached as Exhibit D (the "Restated Certificate").

(b) Cancellation of Target Capital Stock Owned by Acquiror or Target. At the Effective Time, all shares of Target Capital Stock that are owned by Target as treasury stock, each share of Target Capital Stock owned by Acquiror or any direct or indirect wholly owned subsidiary of Acquiror or of Target immediately prior to the Effective Time shall be cancelled and extinguished without any conversion thereof.

(i) Outstanding Target Options.

(A) All Target Options issued and outstanding (whether or not exercisable, whether or not vested, and whether or not performance-based) under Target's 1999 Stock Plan (the "Target Stock Plan"), shall remain outstanding following the Effective Time.

(B) At the Effective Time, the Target Options shall, by virtue of the Merger and without any further action on the part of the Company or the holder thereof, be assumed by Acquiror in accordance with this Section 1.6(c). Each such Target Option so assumed by Acquiror under this Agreement shall continue to have, and be subject to, the same terms and conditions set forth in the Target Stock Plan (and any other collateral agreement(s) between the optionee and Target in connection with such grant) immediately prior to the Effective Time, except that (i) such Target Option will be exercisable for that number of whole shares of Acquiror Common Stock equal to the product of the number of shares of Target Common Stock that were issuable upon exercise of such Target Option immediately prior to the Effective Time multiplied by the Exchange Ratio and rounded down to the nearest whole number of shares of Acquiror Common Stock, and (ii) the per share exercise price for the

shares of Acquiror Common Stock issuable upon exercise of such assumed option will be equal to the quotient determined by dividing the exercise price per share of Target Common Stock at which such Target Option was exercisable immediately prior to the Effective Time by the Exchange Ratio and rounded up to the nearest whole cent.

(C) Target has not taken, and shall not take, any action that would result in the accelerated vesting, exercisability or payment of Target Options as a consequence of the execution of, or consummation of the transactions contemplated by, this Agreement. Consistent with the terms of the Target Stock Plan and the documents governing the outstanding options under such Plan, the Merger will not terminate any of the outstanding Target Options or accelerate the vesting, exercisability or payment of such Target Options or the shares of Acquiror Common Stock which will be subject to those options upon the Acquiror's assumption of the Target Options in the Merger.

(D) It is the intention of the parties that the Target Options assumed by Acquiror qualify following the Effective Time as incentive stock options as defined in Section 422 of the Code to the extent such Target Options qualified as incentive stock options prior to the Effective Time. As soon as practicable after the Effective Time, Acquiror will issue to each person who, immediately prior to the Effective Time was a holder of a Target Option under the Target Stock Plan, a written document evidencing the foregoing assumption of such option by Acquiror.

(ii) Target Warrants. Effective immediately prior to the Effective Time and contingent upon consummation of the Merger, all outstanding Target Warrants shall continue to have, and be subject to, the same terms and conditions as may be set forth in any applicable warrant agreement or substantially similar agreement, except that (i) such Target Warrant will be exercisable for that number of whole shares of Acquiror Series CC Preferred Stock equal to the product of the number of shares of Target Series C Preferred Stock that were issuable upon exercise of such Target Warrant immediately prior to the Effective Time multiplied by the Exchange Ratio and rounded down to the nearest whole number of shares of Acquiror Series CC Preferred Stock, and (ii) the per share exercise price for the shares of Acquiror Series CC Preferred Stock issuable upon exercise of such assumed warrant will be equal to the quotient determined by dividing the exercise price per share of Target Series C Preferred Stock at which such Target Warrant was exercisable immediately prior to the Effective Time by the Exchange Ratio and rounded up to the nearest whole cent. Prior to Closing, Target will execute with certain holders of Target Warrants a warrant amendment in substantially the form attached hereto as Exhibit E (the "Amendment to Warrant").

(d) Capital Stock of Merger Sub. At the Effective Time, each share of Common Stock of Merger Sub ("Merger Sub Common Stock") issued and outstanding immediately prior to the Effective Time shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of Common Stock of the Surviving Corporation. Each stock certificate of Merger Sub evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation.

(e) Adjustments. The Exchange Ratio shall be adjusted to reflect fully the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Acquiror Capital Stock or Target Capital Stock), reorganization, recapitalization or other like change with respect to Acquiror Capital Stock or Target Capital Stock occurring after the date of this Agreement and prior to the Effective Time.

(f) Dissenters' Rights. Any Dissenting Shares shall not be converted into Acquiror Capital Stock but shall instead be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to California Law. Target agrees that, except with the prior written consent of Acquiror, or as required under California Law, it will not voluntarily make any payment with respect to, or settle or offer to settle, any such purchase demand. Each holder of Dissenting Shares who, pursuant to the provisions of California Law, becomes entitled to payment of the fair value for shares of Target Capital Stock shall receive payment therefor (but only after such value shall have been agreed upon or finally determined pursuant to such provisions). If, after the Effective Time, any Dissenting Shares shall lose their status as Dissenting Shares, Acquiror shall issue and deliver, upon surrender by such holder of certificate or certificates representing shares of Target Capital Stock, the number of shares of Acquiror Capital Stock to which such holder would otherwise be entitled under this Section 1.6 and the Certificate of Merger and Agreement of Merger.

(g) Fractional Shares. No fraction of a share of Acquiror Capital Stock (nor any option therefor) will be issued, but in lieu thereof each holder of shares of Target Capital Stock or Target Options who would otherwise be entitled to a fraction of a share of Acquiror Capital Stock (or an option therefor) (after aggregating all fractional shares of Acquiror Capital Stock to be received by such holder) shall receive from Acquiror an amount of cash (rounded to the nearest whole cent) equal to the product of (i) such fraction, multiplied by (ii) the fair market value of a share of Acquiror Common Stock or Acquiror Preferred Stock, as the case may be, immediately prior to the Effective Time, as determined in good faith by Acquiror's Board of Directors.

1.7 Surrender of Certificates.

(a) Exchange Agent. Venture Law Group shall act as exchange agent (the "Exchange Agent") in the Merger.

(b) Acquiror to Provide Capital and Cash. Promptly after the Effective Time, Acquiror shall make available to the Exchange Agent for exchange in accordance with this Section 1, through such reasonable procedures as Acquiror may adopt, (i) the shares of Acquiror Capital Stock issuable pursuant to Section 1.6(a) and (ii) cash in an amount sufficient to permit payment of cash in lieu of fractional shares pursuant to Section 1.6(g).

(c) Exchange Procedures. Promptly after the Effective Time, the Surviving Corporation shall cause to be mailed to each holder of record of a certificate or certificates (the "Certificates") which immediately prior to the Effective Time represented outstanding shares of Target Capital Stock, whose shares were converted into the right to receive shares of Acquiror Capital Stock pursuant to Section 1.6, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon receipt of the Certificates by the Exchange Agent, and shall be in such form and have such other provisions as Acquiror may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Acquiror Capital Stock (and cash in lieu of fractional shares). Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Acquiror, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing the number of whole shares of Acquiror Common Stock or Acquiror Preferred Stock, as the case may be, and payment in lieu of fractional shares which such holder has the right to receive pursuant to Section 1.6, and the Certificate so surrendered shall forthwith be cancelled. Until so surrendered, each Certificate

will be deemed from and after the Effective Time, for all corporate purposes to evidence the ownership of the number of full shares of Acquiror Capital Stock into which such shares of Target Capital Stock shall have been so converted and the right to receive an amount in cash in lieu of the issuance of any fractional shares in accordance with Section 1.6.

(d) No Liability. Notwithstanding anything to the contrary in this Section 1.7, none of the Exchange Agent, the Surviving Corporation or any party hereto shall be liable to any person for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law.

(e) Dissenting Shares. The provisions of this Section 1.7 shall also apply to Dissenting Shares that lose their status as such, except that the obligations of Acquiror under this Section 1.7 shall commence on the date of loss of such status and the holder of such shares shall be entitled to receive in exchange for such shares the number of shares of Acquiror Capital Stock to which such holder is entitled pursuant to Section 1.6 hereof.

(f) Distributions With Respect to Unexchanged Shares. No dividends or other distributions with respect to Acquiror Capital Stock with a record date after the Effective Time will be paid to the holder of any unsurrendered Certificate with respect to the shares of Acquiror Capital Stock represented thereby until the holder of record of such Certificate shall surrender such Certificate. Subject to applicable law, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of Acquiror Capital Stock issued in exchange therefor, without interest, at the time of such surrender, the amount of any such dividends or other distributions with a record date after the Effective Time payable (but for the provisions of this Section 1.7(f)) with respect to such shares of Acquiror Capital Stock.

(g) Transfers of Ownership. If any certificate for shares of Acquiror Capital Stock is to be issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it will be a condition of such issuance that the Certificate so surrendered will be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange will have paid to Acquiror or any agent designated by it any transfer or other taxes required by reason of the issuance of a certificate for shares of Acquiror Capital Stock in any name other than that of the registered holder of the Certificate surrendered, or established to the satisfaction of Acquiror or any agent designated by it that such tax has been paid or is not payable.

1.8 No Further Ownership Rights in Target Capital Stock. All shares of Target Capital Stock, when so converted pursuant to Section 1.6, shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate representing any such shares of Target Capital Stock shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration therefor upon the surrender of such certificate in accordance with Section 1.7, without interest. All shares of Acquiror Capital Stock issued upon the surrender for exchange of shares of Target Capital Stock in accordance with the terms hereof (including any cash paid in lieu of fractional shares) shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Target Capital Stock, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Target Capital Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be cancelled and exchanged as provided in this Section 1.

1.9 Tax and Accounting Consequences. It is intended by the parties that the Merger shall constitute a reorganization within the meaning of Section 368 of the Code.

1.10 Taking of Necessary Action; Further Action. If at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of Target and Merger Sub, the officers and directors of Target and Merger Sub are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action, so long as such action is not inconsistent with this Agreement.

1.11 Withholding. Each of the Surviving Corporation and Acquiror shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Target Capital Stock such amounts as it is required to deduct and withhold with respect to the making of such payment under the Code or any provision of applicable state, local or foreign tax laws. To the extent that amounts are so withheld by the Surviving Corporation or Acquiror, as the case may be, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to such holder in respect of which such deduction and withholding was made by the Surviving Corporation or Acquiror, as the case may be.

1.12 Lost, Stolen or Destroyed Certificates. In the event any Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof, such shares of Acquiror Capital Stock (and cash in lieu of fractional shares) as may be required pursuant to Section 1.6; provided, however, that Acquiror may, in its discretion and as a condition precedent to such issuance, require the owner of such lost, stolen or destroyed Certificates to deliver a bond in such sum as Acquiror may reasonably direct as indemnity against any claim that may be made against Acquiror, the Surviving Corporation or the Exchange Agent with respect to the Certificates alleged to have been lost, stolen or destroyed; provided, however, that Acquiror will only require such bond if its Board of Directors determines that a failure to obtain such bond would result in a reasonably certain risk of loss or liability on the part of Acquiror.

SECTION TWO

2. Representations and Warranties of Target.

In this Agreement, any reference to a "Material Adverse Effect" with respect to any entity or group of entities means any event, change or effect that, when taken individually or together with all other adverse changes and effects, is or is reasonably likely to be materially adverse to the condition (financial or otherwise), properties, assets, liabilities, business, operations, results of operations or prospects of such entity and its subsidiaries, taken as a whole, or to prevent or materially delay consummation of the Merger or otherwise to prevent such entity and its subsidiaries from performing their obligations under this Agreement.

In this Agreement, any reference to a party's "knowledge" means such party's actual knowledge after due and diligent inquiry of officers, directors and other employees of such party reasonably believed by any officers of the party to have knowledge of the matter in questions.

Except as disclosed in a document dated as of the date of this Agreement and delivered by Target to Acquiror prior to the execution and delivery of this Agreement and referring to the representations and warranties in this Agreement (the "Target Disclosure Schedule"), Target represents and warrants to Acquiror and Merger Sub as of the date of this Agreement as follows:

2.1 Organization, Standing and Power. Target is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Target has the requisite corporate power and authority and all necessary government approvals to own, lease and operate its properties and to carry on its business as now being conducted and as proposed to be

conducted, except where the failure to have such power, authority and governmental approvals would not, individually or in the aggregate, have a Material Adverse Effect on Target. Target is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except for such failures to be so qualified or licensed and in good standing that would not, individually or in the aggregate, have a Material Adverse Effect on Target. Target does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, limited liability company, joint venture or other business association or entity.

2.2 Articles of Incorporation and Bylaws. Target has delivered a true and correct copy of the Articles of Incorporation and Bylaws or other charter documents, as applicable, of Target, each as amended to date, to Acquiror. Target is not in violation of any of the provisions of its Articles of Incorporation or Bylaws or equivalent organizational documents.

2.3 Capital Structure. As of the date of this Agreement and except as set forth in the Disclosure Schedules, the capital structure of Target is as follows:

(a) The authorized capital stock of Target consists of (i) 76,066,666 shares of Common Stock, of which 75,000,000 shares are designated voting Common Stock (7,500,000 shares of which are issued and outstanding) and of which 1,066,666 shares of designated non-voting Common Stock (none of which are issued and outstanding) and (ii) 29,753,332 shares of Preferred Stock, of which 2,500,000 shares are designated Series A Preferred Stock (the "Series A Preferred") (all of which are issued and outstanding), of which 12,000,000 shares are designated Series B Preferred Stock (the "Series B Preferred") (all of which are issued and outstanding), of which 1,066,660 shares are designated non-voting Series B Preferred Stock (none of which are issued and outstanding), and of which 14,186,666 shares are designated Series C Preferred Stock (the "Series C Preferred") (9,166,665 shares of which are issued and outstanding). All outstanding shares are duly authorized, validly issued, fully paid and non-assessable and are free of any liens or encumbrances other than any liens or encumbrances created by or imposed upon the holders thereof, and are not subject to preemptive rights or rights of first refusal created by statute, the Articles of Incorporation or Bylaws of Target or any agreement to which Target is a party or by which it is bound. All outstanding shares were issued in compliance with all applicable federal and state securities laws.

(b) Target has reserved (i) 29,753,332 shares of Common Stock for issuance upon conversion of the Series A Preferred, Series B Preferred and Series C Preferred and (ii) 7,500,000 shares of Common Stock for issuance to employees and consultants pursuant to the Target Stock Plan, of which 2,935,200 shares have been issued pursuant to option exercises, 3,694,800 shares are subject to outstanding, unexercised options, and 870,000 shares are subject to options which remain available for issuance.

(c) Except for (i) warrants to purchase 5,020,001 shares of Series C Preferred, (ii) options described in Section 2.3(b), (iii) rights created pursuant to this Agreement and (iv) Target's right to repurchase any unvested shares under the Target Stock Plan, there are no options, warrants, calls, rights, commitments, agreements or arrangements of any character to which Target is a party or by which Target is bound relating to the issued or unissued capital stock of Target or obligating Target to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of capital stock of Target or obligating Target to grant, extend, accelerate the vesting of, change the price of, or otherwise amend or enter into any such option, warrant, call, right, commitment or agreement.

(d) There are no contracts, commitments or agreements relating to voting, purchase or sale of Target's capital stock (i) between or among Target and any of its shareholders and (ii) to Target's knowledge, between or among any of Target's shareholders, except for the shareholders delivering Voting Agreements (as defined below). The terms of the Target Stock Plan permit the assumption or substitution of options to purchase Acquiror Common Stock as provided in this Agreement, without the consent or approval of the holders of such securities, the Target shareholders, or otherwise and without any acceleration of the exercise schedule or vesting provisions in effect for those options. True and complete copies of all agreements and instruments relating to or issued under the Target Stock Plan have been made available to Acquiror and such agreements and instruments have not been amended, modified or supplemented, and there are no agreements to amend, modify or supplement such agreements or instruments in any case from the form made available to Acquiror.

(e) Schedule 2.3(e) is a true and complete list of all shareholders of Target and all holders of Target Options and Target Warrants, including (i) the name and address of the holder, (ii) the number of shares or options to purchase shares, (iii) price per share or exercise price and (iv) any vesting or repurchase schedule.

2.4 Authority. Target has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Target, subject only to the approval of the Merger by Target's shareholders as contemplated by Section 6.1(a). Target's Board of Directors has unanimously approved the Merger and this Agreement. This Agreement has been duly executed and delivered by Target and assuming due authorization, execution and delivery by Parent and Merger Sub, constitutes the valid and binding obligation of Target enforceable against Target in accordance with its terms.

2.5 No Conflicts; Required Filings and Consents.

(a) The execution and delivery of this Agreement by Target does not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (i) any provision of the Articles of Incorporation or Bylaws of Target, as amended, or (ii) any material mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Target or any of their properties or assets.

(b) No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality ("Governmental Entity") is required by or with respect to Target in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of the Certificate of Merger and Agreement of Merger, together with the required officers' certificates, as provided in Section 1.2, (ii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of 1933, as amended (the "Securities Act"), applicable state securities laws and the securities laws of any foreign country; and (iii) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not have a Material Adverse Effect on Target and would not prevent, or materially alter or delay any of the transactions contemplated by this Agreement.

2.6 Financial Statements. Schedule 2.6 of the Target Disclosure Schedule includes a true, correct and complete copy of Target's unaudited financial statements (balance sheet, statement of operations and statement of cash flows) for the period ended January 31, 2000 (collectively, the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles (except that the unaudited financial statements do not have notes thereto) applied on a consistent basis throughout the periods indicated and with each other. The Financial Statements accurately set out and describe the financial condition and operating results of Target as of the dates, and for the periods, indicated therein, subject to normal year-end audit adjustments. Target maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles.

2.7 Absence of Undisclosed Liabilities. Target has no material obligations or liabilities of any nature (matured or unmatured, fixed or contingent) other than (i) those set forth or adequately provided for in the Balance Sheet for the period ended January 31, 2000 (the "Target Balance Sheet"), (ii) those incurred in the ordinary course of business and not required to be set forth in the Target Balance Sheet under generally accepted accounting principles, (iii) those incurred in the ordinary course of business since the date of the Target Balance Sheet and consistent with past practice, and (iv) those incurred in connection with the execution of this Agreement.

2.8 Absence of Certain Changes. Since January 31, 2000 (the "Target Balance Sheet Date") there has not been, occurred or arisen any:

(a) transaction by Target except in the ordinary course of business as conducted on that date and consistent with past practices;

(b) amendments or changes to the Articles of Incorporation or Bylaws of Target;

(c) capital expenditure or commitment by Target, in any individual amount exceeding $25,000, or in the aggregate, exceeding $50,000;

(d) destruction of, damage to, or loss of any assets (including, without limitation, intangible assets), business or customer of Target (whether or not covered by insurance) which would constitute a Material Adverse Effect;

(e) labor trouble or claim of wrongful discharge or other unlawful labor practice or action;

(f) change in accounting methods or practices (including any change in depreciation or amortization policies or rates, any change in policies in making or reversing accruals, or any change in capitalization of software development costs) by Target or any revaluation by Target of any of its assets;

(g) revaluation by the Target of any of its assets;

(h) declaration, setting aside, or payment of a dividend or other distribution in respect to the capital stock of Target, or any direct or indirect redemption, purchase or other acquisition by Target of any of its capital stock, except repurchases of Target Common Stock from terminated Target employees at the original per share purchase price of such shares;

(i) increase in the salary or other compensation payable or to become payable by Target to any officers, directors, employees or advisors of Target, except in the ordinary course of business consistent with past practice, or the declaration, payment, or commitment or obligation of any kind for the payment by Target of a bonus or other additional salary or compensation to any such person except as otherwise contemplated by this Agreement, the establishment of any bonus, insurance, deferred compensation, pension, retirement, profit

sharing, stock option (including without limitation, the granting of stock options, stock appreciation rights, performance awards), stock purchase or other employee benefit plan;

(j) sale, lease, license of other disposition of any of the assets or properties of Target, except in the ordinary course of business and not in excess of $25,000 in the aggregate;

(k) termination or material amendment of any material contract, agreement or license (including any distribution agreement) to which Target is a party or by which it is bound;

(l) loan by Target to any person or entity, or guaranty by Target of any loan, except for (x) travel or similar advances made to employees in connection with their employment duties in the ordinary course of business, consistent with past practices and (y) trade payables not in excess of $25,000 in the aggregate and in the ordinary course of business, consistent with past practices;

(m) waiver or release of any right or claim of Target, including any write-off or other compromise of any account receivable of Target;

(n) the commencement or notice or threat of commencement of any lawsuit or proceeding against or, to the Target's or Target's officers' or directors' knowledge, investigation of Target or its affairs;

(o) notice of any claim of ownership by a third party of Target's Intellectual Property (as defined in Section 2.13 below) or of infringement by Target of any third party's Intellectual Property rights;

(p) issuance or sale by Target of any of its shares of capital stock, or securities exchangeable, convertible or exercisable therefor, or of any other of its securities;

(q) change in pricing or royalties set or charged by Target to its customers or licensees or in pricing or royalties set or charged by persons who have licensed Intellectual Property to Target;

(r) event or condition of any character that has or could reasonably be expected to have a Material Adverse Effect on the Target; or

(s) agreement by Target or any officer or employee of Target on behalf of such entity to do any of the things described in the preceding clauses (a) through (r) (other than negotiations with Acquiror and its representatives regarding the transactions contemplated by this Agreement).

2.9 Litigation. There is no private or governmental action, suit, proceeding, claim, arbitration or investigation pending before any agency, court or tribunal, foreign or domestic, or, to the knowledge of Target, threatened against Target or any of its properties or any of its respective officers or directors (in their capacities as such). There is no judgment, decree or order against Target or, to the knowledge of Target, any of their respective directors or officers (in their capacities as such), that could prevent, enjoin, or materially alter or delay any of the transactions contemplated by this Agreement, or that could reasonably be expected to have a Material Adverse Effect on Target. All litigation to which Target is a party (or, to the knowledge of Target, threatened to become a party) is disclosed in the Target Disclosure Schedule.

2.10 Restrictions on Business Activities. There is no agreement, judgment, injunction, order or decree binding upon Target which has or could reasonably be expected to have the effect of prohibiting or materially impairing any current or future business practice of Target, any acquisition of property by Target or the overall conduct of business by Target as currently conducted or as proposed to be conducted by Target. Target has entered into no agreement under which Target is restricted from selling, licensing or otherwise distributing any of its products to any

class of customers, in any geographic area, during any period of time or in any segment of the market.

2.11 Permits. Target is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exceptions, consents, certificates, approvals and orders necessary for Target to own, lease and operate its properties or to carry on its business as it is now being conducted (the "Target Authorizations") and no suspension or cancellation of any Target Authorization is pending or, to Target's knowledge, threatened, except where the failure to have, or the suspension or cancellation of, any Target Authorization would not have a Material Adverse Effect on Target. Target is not in conflict with, or in default or violation of, (i) any laws applicable to Target or by which any property or asset of Target is bound or affected, (ii) any Target Authorization, or (iii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Target is a party or by which Target or any property or asset of Target is bound or affected, except for any such conflict, default or violation that would not, individually or in the aggregate, have a Material Adverse Effect on Target.

2.12 Title to Property.

(a) Target has good and marketable title to all of its respective properties, interests in properties and assets, real and personal, reflected in the Target Balance Sheet or acquired after the Target Balance Sheet Date (except properties, interests in properties and assets sold or otherwise disposed of since the Target Balance Sheet Date in the ordinary course of business), or with respect to leased properties and assets, valid leasehold interests in, free and clear of all mortgages, liens, pledges, charges or encumbrances of any kind or character, except (i) the lien of current taxes not yet due and payable, (ii) such imperfections of title, liens and easements as do not and will not materially detract from or interfere with the use of the properties subject thereto or affected thereby, or otherwise materially impair business operations involving such properties, and (iii) liens securing debt which is reflected on the Target Balance Sheet. The plants, property and equipment of Target that are used in the operations of its business are in good operating condition and repair. All properties used in the operations of Target are reflected in the Target Balance Sheet to the extent United States generally accepted accounting principles require the same to be reflected. Schedule 2.12(a) of the Target Disclosure Schedule sets forth a true, correct and complete list of all real property owned or leased by Target, the name of the lessor, the date of the lease and each amendment thereto and the aggregate annual rental and other fees payable under such lease. Such leases are in good standing, are valid and effective in accordance with their respective terms, and there is not under any such leases any existing default or event of default (or event which with notice or lapse of time, or both, would constitute a default).

(b) Schedule 2.12(b) of the Target Disclosure Schedule also sets forth a true, correct and complete list of all equipment (the "Equipment") owned or leased by Target, and such Equipment is, taken as a whole, (i) adequate for the conduct of Target's business, consistent with its past practice, and (ii) in good operating condition (except for ordinary wear and tear).

2.13 Intellectual Property.

(a) Target owns, or is licensed or otherwise possesses legally enforceable rights to use all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, service marks, copyrights, and any applications for any of the foregoing, maskworks, net lists, schematics, industrial models, inventions, technology, know-how, trade secrets, inventory, ideas, algorithms, processes, computer software programs or applications (in both source code and object code form), and tangible or intangible proprietary information or material

("Intellectual Property") that are used or proposed to be used in the business of Target as currently conducted or as proposed to be conducted by Target.

(b) Schedule 2.13 of the Target Disclosure Schedule lists (i) all patents and patent applications and all registered and unregistered trademarks, trade names and service marks, registered and unregistered copyrights, and maskworks, included in the Intellectual Property, including the jurisdictions in which each such Intellectual Property right has been issued or registered or in which any application for such issuance and registration has been filed, (ii) all licenses, sublicenses and other agreements as to which Target is a party and pursuant to which any person is authorized to use any Intellectual Property, and (iii) all licenses, sublicenses and other agreements as to which Target is a party and pursuant to which Target is authorized to use any third party patents, trademarks or copyrights, including software ("Third Party Intellectual Property Rights") which are incorporated in, are, or form a part of any Target product that is material to its business. Target is not in violation of any license, sublicense or agreement described in Schedule 2.13 of the Target Disclosure Schedule. The execution and delivery of this Agreement by Target and the consummation of the transactions contemplated hereby, will neither cause Target to be in violation or default under any such license, sublicense or agreement, nor entitle any other party to any such license, sublicense or agreement to terminate or modify such license, sublicense or agreement. Target is the sole and exclusive owner or licensee of, with all right, title and interest in and to (free and clear of any liens), the Intellectual Property, and has sole and exclusive rights (and is not contractually obligated to pay any compensation to any third party in respect thereof) to the use thereof or the material covered thereby in connection with the services or products in respect of which Intellectual Property is being used.

(c) To the knowledge of Target, there is no unauthorized use, disclosure, infringement or misappropriation of any Intellectual Property rights of Target, any trade secret material to Target or any Intellectual Property right of any third party to the extent licensed by or through Target, by any third party, including any employee or former employee of Target. Target has not entered into any agreement to indemnify any other person against any charge of infringement of any Intellectual Property, other than indemnification provisions contained in purchase orders arising in the ordinary course of business.

(d) Target is not currently, nor will not be as a result of the execution and delivery of this Agreement or the performance of its obligations under this Agreement, in breach of any license, sublicense or other agreement relating to the Intellectual Property or Third Party Intellectual Property Rights.

(e) All patents, registered trademarks, service marks and copyrights held by Target are valid and existing and there is no assertion or claim (or basis therefor) challenging the validity of any Intellectual Property of Target. Target has not been sued in any suit, action or proceeding which involves a claim of infringement of any patents, trademarks, service marks, copyrights or violation of any trade secret or other proprietary right of any third party. To the knowledge of Target, neither the conduct of the business of Target as currently conducted or contemplated nor the manufacture, sale, licensing or use of any of the products of Target as now manufactured, sold or licensed or used, nor the use in any way of the Intellectual Property in the manufacture, use, sale or licensing by Target of any products currently proposed, infringes on or will infringe or conflict with, in any way, any license, trademark, trademark right, trade name, trade name right, patent, patent right, industrial model, invention, service mark or copyright of any third party. All registered trademarks, service marks and copyrights held by Target are valid and existing. To Target's knowledge, no third party is challenging the ownership by Target, or the validity or effectiveness of, any of the Intellectual Property. Target has not brought any action, suit or proceeding for infringement of

Intellectual Property or breach of any license or agreement involving Intellectual Property against any third party. There are no pending, or to Target's knowledge, threatened interference, re-examinations, oppositions or nullities involving any patents, patent rights or applications therefor of Target, except such as may have been commenced by Target. There is no breach or violation of or threatened or actual loss of rights under any license agreement to which Target is a party.

(f) Target has secured valid written assignments from all consultants and employees who contributed to the creation or development of Intellectual Property of the rights to such contributions that Target does not already own by operation of law.

(g) Target has taken all necessary and appropriate steps to protect and preserve the confidentiality of all Intellectual Property not otherwise protected by patents, patent applications or copyright ("Confidential Information"). Target has a policy requiring each employee, consultant and independent contractor to execute proprietary information and confidentiality agreements substantially in Target's standard forms and all current and former employees, consultant and independent contractors of Target have executed such an agreement. All use, disclosure or appropriation of Confidential Information owned by Target by or to a third party has been pursuant to the terms of a written agreement between Target and such third party. All use, disclosure or appropriation of Confidential Information not owned by Target has been pursuant to the terms of a written agreement between Target and the owner of such Confidential Information, or is otherwise lawful.

2.14 Taxes.

(a) For purposes of this Section 2.14 and other provisions of this Agreement relating to Taxes, the following definitions shall apply:

(i) The term "Taxes" shall mean all taxes, however denominated, including any interest, penalties or other additions to tax that may become payable in respect thereof, (A) imposed by any federal, territorial, state, local or foreign government or any agency or political subdivision of any such government, which taxes shall include, without limiting the generality of the foregoing, all income or profits taxes (including but not limited to, federal, state and foreign income taxes), payroll and employee withholding taxes, unemployment insurance contributions, social security taxes, sales and use taxes, ad valorem taxes, excise taxes, franchise taxes, gross receipts taxes, withholding taxes, business license taxes, occupation taxes, real and personal property taxes, stamp taxes, environmental taxes, transfer taxes, workers' compensation, Pension Benefit Guaranty Corporation premiums and other governmental charges, and other obligations of the same or of a similar nature to any of the foregoing, which are required to be paid, withheld or collected, (B) any liability for the payment of amounts referred to in (A) as a result of being a member of any affiliated, consolidated, combined or unitary group, or (C) any liability for amounts referred to in (A) or (B) as a result of any obligations to indemnify another person.

(ii) The term "Returns" shall mean all reports, estimates, declarations of estimated tax, information statements and returns required to be filed in connection with any Taxes, including information returns with respect to backup withholding and other payments to third parties.

(b) All Returns required to be filed by or on behalf of Target have been duly filed on a timely basis and such Returns are true, complete and correct. All Taxes shown to be payable on such Returns or on subsequent assessments with respect thereto, and all payments of estimated Taxes required to be made by or on behalf of Target under Section 6655 of the

Code or comparable provisions of state, local or foreign law, have been paid in full on a timely basis, and no other Taxes are payable by Target with respect to items or periods covered by such Returns (whether or not shown on or reportable on such Returns). Target has withheld and paid over all Taxes required to have been withheld and paid over, and complied with all information reporting and backup withholding in connection with amounts paid or owing to any employee, creditor, independent contractor, or other third party. There are no liens on any of the assets of Target with respect to Taxes, other than liens for Taxes not yet due and payable or for Taxes that Target is contesting in good faith through appropriate proceedings. Target has not been at any time a member of an affiliated group of corporations filing consolidated, combined or unitary income or franchise tax returns for a period for which the statute of limitations for any Tax potentially applicable as a result of such membership has not expired.

(c) The amount of Target's liabilities for unpaid Taxes for all periods through the date of the Financial Statements do not, in the aggregate, exceed the amount of the current liability accruals for Taxes reflected on the Financial Statements, and the Financial Statements properly accrue in accordance with generally accepted accounting principles ("GAAP") all liabilities for Taxes of Target payable after the date of the Financial Statements attributable to transactions and events occurring prior to such date. No liability for Taxes of Target has been incurred (or prior to Closing will be incurred) since such date other than in the ordinary course of business.

(d) Acquiror has been furnished by Target true and complete copies of (i) relevant portions of income tax audit reports, statements of deficiencies, closing or other agreements received by or on behalf of Target relating to Taxes, and (ii) all federal, state and foreign income or franchise tax returns and state sales and use tax Returns for or including Target for all periods since Target's inception.

(e) No audit of the Returns of or including Target by a government or taxing authority is in process, threatened or, to Target's knowledge, pending (either in writing or orally, formally or informally). No deficiencies exist or have been asserted (either in writing or orally, formally or informally) or are expected to be asserted with respect to Taxes of Target, and Target has not received notice (either in writing or orally, formally or informally) nor does it expect to receive notice that it has not filed a Return or paid Taxis required to be filed or paid. Target is not a party to any action or proceeding for assessment or collection of Taxes, nor has such event been asserted or threatened (either in writing or orally, formally or informally) against Target or any of its assets. No waiver or extension of any statute of limitations is in effect with respect to Taxes or Returns of Target. Target has disclosed on its federal and state income and franchise tax returns all positions taken therein that could give rise to a substantial understatement penalty within the meaning of Code Section 6662 or comparable provisions of applicable state tax laws.

(f) Target is not (nor has it ever been) a party to any tax sharing agreement.

(g) Target is not, nor has it been, a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. Target is not a "consenting corporation" under Section 341(f) of the Code. Target has not entered into any compensatory agreements with respect to the performance of services which payment thereunder would result in a nondeductible expense to Target pursuant to Section 280G of the Code or an excise tax to the recipient of such payment pursuant to Section 4999 of the Code. Target has not agreed to, nor is it required to make, other than by reason of the Merger, any adjustment under Code Section 481(a) by reason of, a change in accounting method, and Target will not otherwise

have any income reportable for a period ending after the Closing Date attributable to a transaction or other event (e.g., an installment sale) occurring prior to the Closing Date with respect to which Target received the economic benefit prior to the Closing Date. Target is not, nor has it been, a "reporting corporation" subject to the information reporting and record maintenance requirements of Section 6038A and the regulations thereunder.

(h) The Target Disclosure Schedule contains accurate and complete information regarding Target's net operating losses for federal and each state tax purposes. Target has no net operating losses and credit carryovers or other tax attributes currently subject to limitation under Sections 382, 383, or 384 of the Code.

2.15 Employee Benefit Plans.

(a) Schedule 2.15 lists, with respect to Target and any trade or business (whether or not incorporated) which is treated as a single employer with Target (an "ERISA Affiliate") within the meaning of Section 414(b), (c), (m) or (o) of the Code, (i) all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), (ii) each loan to a non-officer employee, officer or director and any stock option, stock purchase, phantom stock, stock appreciation right, supplemental retirement, severance, sabbatical, medical, dental, vision care, disability, employee relocation, cafeteria benefit (Code Section 125) or dependent care (Code Section 129), life insurance or accident insurance plans, programs or arrangements, (iii) all contracts and agreements relating to employment and all severance agreements, with any of the directors, officers or employees of Target (other than any such contract or agreement that is terminable by the Company at will or without penalty or other adverse consequence in excess of $10,000), (iv) all bonus, pension, profit sharing, savings, deferred compensation or incentive plans, programs or arrangements, (v) other fringe or employee benefit plans, programs or arrangements that apply to senior management of Target and that do not generally apply to all employees, and (vi) any current or former employment or executive compensation or severance agreements, written or otherwise, as to which unsatisfied obligations of Target remain for the benefit of, or relating to, any present or former employee, consultant or director of Target (together, the "Target Employee P1ans").

(b) Target has furnished to Acquiror a copy of each of the Target Employee Plans and related plan documents (including trust documents, insurance policies or contracts, employee booklets, summary plan descriptions and other authorizing documents, and, to the extent still in its possession, any material employee communications relating thereto) and has, with respect to each Target Employee Plan which is subject to ERISA reporting requirements, provided copies of the Form 5500 reports filed for the last three plan years. Any Target Employee Plan intended to be qualified under Section 401(a) of the Code has either obtained from the Internal Revenue Service a favorable determination letter as to its qualified status under the Code, including all amendments to the Code effected by the Tax Reform Act of 1986 and subsequent legislation, or has applied to (or has time remaining to apply to) the Internal Revenue Service for such a determination letter prior to the expiration of the requisite period under applicable Treasury Regulations or Internal Revenue Service pronouncements in which to apply for such determination letter and to make any amendments necessary to obtain a favorable determination as to its qualified status from the date of adoption. Target has also furnished Acquiror with the most recent Internal Revenue Service determination letter issued with respect to each such Target Employee Plan, if any, and nothing has occurred since the issuance of each such letter which could reasonably be expected to cause the loss of the tax-qualified status of any Target Employee Plan subject to Code Section 401(a).

(c) Except as set forth in Schedule 2.15(c) of the Target Disclosure Schedule, (i) none of the Target Employee Plans promises or provides retiree medical or other retiree welfare or life insurance benefits to any person; (ii) there has been no "prohibited transaction," as such term is defined in Section 406 of ERISA and Section 4975 of the Code, with respect to any Target Employee Plan, that is not exempt under Section 408 of ERISA or Section 4975(d) of the Code which could reasonably be expected to have, in the aggregate, a Material Adverse Effect; (iii) each Target Employee Plan has been administered in accordance with its terms and in compliance with the requirements prescribed by any and all statutes, rules and regulations (including ERISA and the Code), except as would not have, in the aggregate, a Material Adverse Effect, and Target or any ERISA Affiliate has performed all obligations required to be performed by it under, is not in any material respect in default under or violation of, and has no knowledge of any material default or violation by any other party to, any of the Target Employee Plans; (iv) neither Target nor any ERISA Affiliate is subject to any liability or penalty under Sections 4976 through 4980 of the Code or Title I of ERISA with respect to any of the Target Employee Plans; (v) all material contributions required to be made by Target or any ERISA Affiliate to any Target Employee Plan have been made on or before their due dates and a reasonable amount has been accrued for contributions to each Target Employee Plan for the current plan years; and (vi) no Target Employee Plan is subject to Title IV of ERISA.

(d) With respect to each Target Employee Plan subject to ERISA as either an employee pension plan within the meaning of Section 3(2) of ERISA or an employee welfare benefit plan within the meaning of Section 3(1) of ERISA, Target has prepared in good faith and timely filed all requisite governmental reports (which were true and correct as of the date filed) and has properly and timely filed and distributed or posted all notices and reports to employees required to be filed, distributed or posted with respect to each such Target Employee Plan, except to the extent that failure to comply with such reporting and disclosure obligations would not, in the aggregate, have a Material Adverse Effect. No suit, administrative proceeding, action or other litigation has been brought, or to the knowledge of Target is threatened, against or with respect to any such Target Employee Plan, including any audit or inquiry by the IRS or United States Department of Labor. Neither Target nor any ERISA Affiliate is a party to, or has made any contribution to or otherwise incurred any obligation under, any "multiemployer plan" as defined in Section 3(37) of ERISA.

(e) With respect to each Target Employee Plan, Target has complied with (i) the applicable health care continuation and notice provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") or similar applicable state law and the proposed regulations thereunder and (ii) the applicable requirements of the Family Leave Act of 1993 or similar applicable state law and the regulations thereunder, except to the extent that such failure to comply would not, in the aggregate, have a Material Adverse Effect. Target has no material obligations under COBRA or similar applicable state law with respect to any former employees or qualifying beneficiaries thereunder.

(f) There has been no amendment to, written interpretation or announcement (whether or not written) by Target or other ERISA Affiliate relating to, or change in participation or coverage under, any Target Employee Plan which would materially increase the expense of maintaining such Plan above the level of expense incurred with respect to that Plan for the most recent fiscal year included in Target's financial statements.

2.16 Certain Agreements Affected by the Merger. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute, bonus or otherwise) becoming due to any director or employee of Target, (ii) materially increase

any benefits otherwise payable by Target, or (iii) result in the acceleration of the time of payment or vesting of any such benefits.

2.17 Employee Matters. Target is in compliance in all material respects with all currently applicable federal, state, local and foreign laws and regulations respecting employment, discrimination in employment, terms and conditions of employment, wages, hours and occupational safety and health and employment practices, except to the extent that such failure to comply would not, in the aggregate, have a Material Adverse Effect, and Target is not engaged in any unfair labor practice. There are no pending claims against Target under any workers compensation plan or policy or for long term disability, except to the extent that such claims would not, in the aggregate, have a Material Adverse Effect. There are no controversies pending or, to the knowledge of Target, threatened, between Target and any of its respective employees. Target is not a party to any collective bargaining agreement or other labor unions contract nor does Target know of any activities or proceedings of any labor union or other group to organize any such employees. Schedule 2.17 of the Target Disclosure Schedule lists each employee who is currently on a leave of absence with respect to which reinstatement is guaranteed by contract or applicable law, together with the position to which such employee is entitled to reinstatement. No employee has requested or been promised a leave of absence with guaranteed reinstatement rights to commence at a future date.

2.18 Material Contracts.

(a) Schedule 2.18(a) of the Target Disclosure Schedule contain a list of all contracts and agreements to which Target is a party and that are material to the business, results of operations, or condition (financial or otherwise), of Target taken as a whole (such contracts, agreements and arrangements as are required to be set forth in Schedule 2.18(a) of the Target Disclosure Schedule being referred to herein collectively as the "Material Contracts"). Material Contracts shall include, without limitation, the following and shall be categorized in the Target Disclosure Schedule as follows:

(i) each contract and agreement (other than routine purchase orders and pricing quotes in the ordinary course of business covering a period of less than 1 year) for the purchase of inventory, spare parts, other materials or personal property with any supplier or for the furnishing of services to Target under the terms of which Target: (A) paid or otherwise gave consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 1999, (B) is likely to pay or otherwise give consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 2000, (C) is likely to pay or otherwise give consideration of more than $25,000 in the aggregate over the remaining term of such contract or (D) cannot be cancelled by Target without penalty or further payment of less than $10,000;

(ii) each customer contract and agreement (other than routine purchase orders, pricing quotes with open acceptance and other tender bids, in each case, entered into in the ordinary course of business and covering a period of less than one year) to which Target is a party which (A) involved consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 1999, (B) is likely to involve consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 2000, (C) is likely to involve consideration of more than $25,000 in the aggregate over the remaining term of the contract or (D) cannot be cancelled by Target without penalty or further payment of less than, $10,000;

(iii) (A) all distributor, manufacturer's representative, broker, franchise, agency and dealer contracts and agreements to which Target is a party (specifying on a matrix, in the case of distributor agreements, the name of the distributor, product, territory, termination

date and exclusivity provisions) and (B) all sales promotion, market research, marketing and advertising contracts and agreements to which Target is a party which: (1) involved consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 1999, (2) are likely to involve consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 2000 or (3) are likely to involve consideration of more than $25,000 in the aggregate over the remaining term of the contract;

(iv) all management contracts with independent contractors or consultants (or similar arrangements) to which Target is a party and which (A) involved consideration or more than $25,000 in the aggregate during the calendar year ended December 31, 1999, (B) are likely to involve consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 2000 or (C) are likely to involve consideration of more than $25,000 in the aggregate over the remaining term of the contract;

(v) all contracts and agreements (excluding routine checking account overdraft agreements involving petty cash amounts) under which Target has created, incurred, assumed or guaranteed (or may create, incur, assume or guarantee) indebtedness or under which Target has imposed (or may impose) a security interest or lien an any of their respective assets, whether tangible or intangible, to secure indebtedness;

(vi) all contracts and agreements that limit the ability of Target or, after the Effective Time, Acquiror or any of its affiliates, to compete in any line of business or with any person or in any geographic area or during any period of time, or to solicit any customer or client;

(vii) all contracts and agreements between or among Target, on the one hand, and any affiliate of Target, on the other hand:

(viii) all contracts and agreements to which Target is a party under which it has agreed to supply products to a customer at specified prices, whether directly or through a specific distributor, manufacturer's representative or dealer; and

(ix) all other contracts or agreements (A) which are material to Target or the conduct of their respective businesses, (B) the absence of which would have a Material Adverse Effect on Target, or (C) which are believed by Target to be of unique value even though not material to the business of Target.

(b) Each Target license and Material Contract is a legal, valid and binding agreement, and none of the Target licenses or Material Contracts is in default by its terms or has been cancelled by the other party; Target is not in receipt of any claim of default under any such agreement; and Target does not anticipate any termination or change to, or receipt of a proposal with respect to, any such agreement as a result of the Merger or otherwise. Target has furnished Acquiror with true and complete copies of all such agreements together with all amendments, waivers or other changes thereto.

2.19 Interested Party Transactions. Target is not indebted to any director, officer, employee or agent of Target (except for amounts due as normal salaries and bonuses and in reimbursement of ordinary expenses), and no such person is indebted to Target.

2.20 Insurance. Schedule 2.20 lists all insurance policies of Target. Target has policies of insurance and bonds of the type and in amounts customarily carried by persons conducting businesses or owning assets similar to those of Target. There is no material claim pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and

bonds have been paid and Target is otherwise in compliance with the terms of such policies and bonds. Target has no knowledge of any threatened termination of, or material premium increase with respect to, any of such policies.

2.21 Compliance With Laws. Target has complied with, is not in violation of, and have not received any notices of violation with respect to, any federal, state, local or foreign statute, law or regulation with respect to the conduct of its business, or the ownership or operation of its business, except for such violations or failures to comply as could not reasonably be expected to have a Material Adverse Effect on Target.

2.22 Minute Books. The minute books of Target made available to Acquiror contain a complete summary of all meetings of directors and stockholders or actions by written consent since the time of incorporation of Target through the date of this Agreement, and reflect all transactions referred to in such minutes accurately in all material respects.

2.23 Complete Copies of Materials. Target has delivered or made available true and copies of each document which has been requested by Acquiror or its counsel in connection with their legal and accounting review of Target.

2.24 Brokers' and Finders' Fees. Target has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or investment bankers' fees or any similar charges in connection with this Agreement or any transaction contemplated hereby.

2.25 Voting Agreements. Target shareholders holding the number of shares of Common Stock and Preferred Stock of Target required to approve the Merger have executed the Voting Agreement attached hereto as Exhibit F (the "Voting Agreement"). The affirmative vote of the Target shareholders executing the Voting Agreement is the only vote of the holders of any of Target Capital Stock necessary to approve this Agreement and the transactions contemplated hereby.

2.26 Board Approval. The Board of Directors of Target has unanimously (i) approved this Agreement and the Merger, (ii) determined that the Merger is in the best interests of the shareholders of Target and is on terms that are fair to such shareholders and (iii) recommended that the shareholders of Target approve this Agreement and the Merger.

2.27 Customers and Suppliers. As of the date hereof, no customer which individually accounted for more than 2% of Target's gross revenues during the 12-month period preceding the date hereof, and no supplier of Target, has cancelled or otherwise terminated, or made any written threat to Target to cancel or otherwise terminate its relationship with Target, or has at any time on or after December 31, 1999 decreased materially its services or supplies to Target in the case of any such supplier, or its usage of the services or products of Target in the case of such customer, and to Target's knowledge, no such supplier or customer intends to cancel or otherwise terminate its relationship with Target or to decrease materially its services or supplies to Target or its usage of the services or products of Target, as the case may be. From and after the date hereof, no customer which individually accounted for more than 2% of Target's gross revenues during the 12 month period preceding the Closing Date, has cancelled or otherwise terminated, or made any written threat to Target to cancel or otherwise terminate, for any reason, including without limitation the consummation of the transactions contemplated hereby, its relationship with Target, and to Target's knowledge, no such customer intends to cancel or otherwise terminate its relationship with Target or to decrease materially its usage of the services or products of Target. Target has not knowingly breached, so as to provide a benefit to Target that was not intended by the parties, any agreement with, or engaged in any fraudulent conduct with respect to, any customer or supplier of Target.

2.28 Third Party Consents. Except as set forth in Schedule 2.28 of the Target Disclosure Schedule, no consent or approval is needed from any third party in order to effect the Merger, this Agreement or any of the transactions contemplated hereby.

2.29 No Commitments Regarding Future Products. Target has made no sales to customers that are contingent upon providing future enhancements of existing products, to add features not presently available on existing products or to otherwise enhance the performance of its existing products (other than beta or similar arrangements pursuant to which Target's customers from time to time test or evaluate products). The products Target has delivered to customers substantially comply with published specifications for such products and Target has not received material complaints from customers about its products that remain unresolved. Schedule 2.29 of the Target Disclosure Schedule accurately sets forth a complete list of products in development (exclusive of mere enhancements to and additional features for existing products).

2.30 Governmental Authorization. Target has obtained each federal, state, county, local or foreign governmental consent, license, permit, grant, or other authorization of a Governmental Entity that is required for the operation of Target's business ("Target Authorizations"), and all of such Target Authorizations are in full force and effect, except where the failure to obtain or have any of such Target Authorizations could not reasonably be expected to have a Material Adverse Effect on Target.

2.31 Representations Complete. None of the representations or warranties made by Target herein or in any Schedule hereto, including the Target Disclosure Schedule, or certificate furnished by Target pursuant to this Agreement, when all such documents are read together in their entirety, contains or will contain at the Effective Time any untrue statement of a material fact, or omits or will omit at the Effective Time to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading.

SECTION THREE

3. Representations and Warranties of Acquiror and Merger Sub.

Except as disclosed in a document dated as of the date of this Agreement and delivered by Acquiror to Target prior to the execution and delivery of this Agreement and referring to the representations and warranties in this Agreement (the "Acquiror Disclosure Schedule"), Acquiror and Merger Sub hereby jointly and severally represent and warrant to Target as of the date of this Agreement as follows:

3.1 Organization, Standing and Power. Each of Acquiror and Merger Sub is a corporation duly organized, validly existing, and in good standing under the laws of its jurisdiction of organization. Each of Acquiror and Merger Sub has the requisite corporate power and authority and all necessary government approvals to own, lease and operate its properties and to carry on its business as now being conducted and as proposed to be conducted, except where the failure to have such power, authority and governmental approvals would not, individually or in the aggregate, have a Material Adverse Effect on Acquiror. Each of Acquiror and Merger Sub is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except for such failures to be so qualified or licensed and in good standing that would not, individually or in the aggregate, have a Material Adverse Effect on Acquiror. Acquiror does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, limited liability company, joint venture or other business association or entity.

3.2 Certificate of Incorporation and Bylaws. Acquiror has delivered a true and correct copy of the Certificate of Incorporation and Bylaws or other charter documents, as applicable, of Acquiror and Merger Sub, each as amended to date, to Target. Neither Acquiror nor any of its subsidiaries is in violation of any material provisions of its Certificate of Incorporation or Bylaws or equivalent organizational documents.

3.3 Capital Structure. As of the date of this Agreement and except as set forth in the Disclosure Schedules, the capital structure of Acquiror is as follows:

(a) The authorized capital stock of Acquiror consists of (i) 111,150,000 shares of Common Stock (17,584,133 shares of which are issued and outstanding) and (ii) 68,850,000 shares of Preferred Stock, of which 38,850,000 shares are designated Series A Preferred Stock (the "Series A Preferred") (all of which are issued and outstanding), and of which 30,000,000 shares are designated Series B Preferred Stock (the "Series B Preferred") (27,104,970 shares of which are issued and outstanding). All outstanding shares are duly authorized, validly issued, fully paid and nonassessable and are free of any liens or encumbrances other than any liens or encumbrances created by or imposed upon the holders thereof, and are not subject to preemptive rights or rights of first refusal created by statute, the Certificate of Incorporation or Bylaws of Acquiror or any agreement to which Acquiror is a party or by which it is bound. All outstanding shares were issued in compliance with all applicable federal and state securities laws. The shares of Acquiror Capital Stock to be issued pursuant to the Merger will be duly authorized, validly issued, fully paid, and nonassessable.

(b) The authorized capital stock of Merger Sub consists of 1000 shares of Common Stock, all of which are issued and outstanding and are held by Acquiror. All outstanding shares of Merger Sub have been duly authorized, validly issued, fully paid and are nonassessable and free of any liens or encumbrances other than any liens or encumbrances created by or imposed upon the holders thereof.

(c) Acquiror has reserved (i) 68,850,000 shares of Common Stock for issuance upon conversion of the Series A Preferred and Series B Preferred and (ii) 13,550,004 shares of Common Stock for issuance to employees and consultants pursuant to Acquiror's 1999 Stock Plan ("Acquiror Stock Plan"), of which no shares have been issued pursuant to option exercises, 1,869,500 shares are subject to outstanding, unexercised options, 7,696,369 shares are subject to options which remain available for issuance, and 3,984,135 shares have been issued pursuant to restricted stock purchase rights.

(d) Except for (i) options described in Section 3.3(c), (ii) rights created pursuant to this Agreement and (iii) Acquiror's right to repurchase any unvested shares under the Acquiror Stock Plan, there are no options, warrants, calls, rights, commitments, agreements or arrangements of any character to which Acquiror or Merger Sub is a party or by which Acquiror or Merger Sub is bound relating to the issued or unissued capital stock of Acquiror or Merger Sub or obligating Acquiror or Merger Sub to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of capital stock of Acquiror or Merger Sub or obligating Acquiror or Merger Sub to grant, extend, accelerate the vesting of, change the price of, or otherwise amend or enter into any such option, warrant, call, right, commitment or agreement.

(e) There are no contracts, commitments or agreements relating to voting, purchase or sale of Acquiror's capital stock (i) between or among Acquiror and any of its stockholders and (ii) to Acquiror's knowledge, between or among any of Acquiror's stockholders.

3.4 Authority. Acquiror and Merger Sub have all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The

execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Acquiror and Merger Sub (other than, with respect to the Merger, the filing and recordation of appropriate merger documents as required by California and Delaware law). This Agreement has been duly executed and delivered by Acquiror and Merger Sub and constitutes the valid and binding obligations of Acquiror and Merger Sub.

3.5 No Conflict; Required Filings and Consents.

(a) The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a benefit under (i) any provision of the Certificate of Incorporation or Bylaws of Acquiror or Merger Sub, as amended, or (ii) any material mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Acquiror or Merger Sub or their properties or assets.

(b) No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity, is required by or with respect to Acquiror or Merger Sub in connection with the execution and delivery of this Agreement by Acquiror and Merger Sub or the consummation by Acquiror and Merger Sub of the transactions contemplated hereby, except for (i) the filing of appropriate merger documents as required by California and Delaware Law, (ii) any filings as may be required under applicable state securities laws and the securities laws of any foreign country, and (iii) such other consents, authorizations, filings, approvals, and registrations which, if not obtained or made, would not have a Material Adverse Effect on Acquiror and would not prevent, materially alter or delay any the transactions contemplated by this Agreement.

3.6 Financial Statements. Schedule 3.6 of the Acquiror Disclosure Schedule includes a true, correct and complete copy of Acquiror's unaudited financial statements (balance sheet, statement of operations and statement of cash flows) for the period ended January 31, 2000 (collectively, the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles (except that the unaudited financial statements do not have notes thereto) applied on a consistent basis throughout the periods indicated and with each other. The Financial Statements accurately set out and describe the financial condition and operating results of Acquiror as of the dates, and for the periods, indicated therein, subject to normal year-end audit adjustments. Acquiror maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles.

3.7 Absence of Undisclosed Liabilities. Acquiror has no material obligations or liabilities of any nature (matured or unmatured, fixed or contingent) other than (i) those set forth or adequately provided for in the Balance Sheet heretofore provided to Target for the period ended January 31, 2000 (the "Acquiror Balance Sheet"), (ii) those incurred in the ordinary course of business and not required to be set forth in the Acquiror Balance Sheet under United States generally accepted accounting principles, and (iii) those incurred in the ordinary course of business since the Acquiror Balance Sheet Date and consistent with past practice.

3.8 Absence of Certain Changes. Since January 31, 2000 (the "Acquiror Balance Sheet Date") there has not been, occurred or arisen any:

(a) transaction by Acquiror except in the ordinary course of business as conducted on that date and consistent with past practices;

(b) amendments or changes to the Certificate of Incorporation or Bylaws of Acquiror;

(c) capital expenditure or commitment by Acquiror, in any individual amount exceeding $25,000, or in the aggregate, exceeding $50,000;

(d) destruction of, damage to, or loss of any assets (including, without limitation, intangible assets), business or customer of Acquiror (whether or not covered by insurance) which would constitute a Material Adverse Effect;

(e) labor trouble or claim of wrongful discharge or other unlawful labor practice or action;

(f) change in accounting methods or practices (including any change in depreciation or amortization policies or rates, any change in policies in making or reversing accruals, or any change in capitalization of software development costs) by Acquiror or any revaluation by Acquiror of any of its assets;

(g) revaluation by Acquiror of any of its assets;

(h) declaration, setting aside, or payment of a dividend or other distribution in respect to the capital stock of Acquiror, or any direct or indirect redemption, purchase or other acquisition by Acquiror of any of its capital stock, except repurchases of Acquiror Common Stock from terminated Acquiror employees at the original per share purchase price of such shares;

(i) increase in the salary or other compensation payable or to become payable by Acquiror to any officers, directors, employees or advisors of Acquiror, except in the ordinary course of business consistent with past practice, or the declaration, payment, or commitment or obligation of any kind for the payment by Acquiror of a bonus or other additional salary or compensation to any such person except as otherwise contemplated by this Agreement, the establishment of any bonus, insurance, deferred compensation, pension, retirement, profit sharing, stock option (including without limitation, the granting of stock options, stock appreciation rights, performance awards), stock purchase or other employee benefit plan;

(j) sale, lease, license of other disposition of any of the assets or properties of Acquiror, except in the ordinary course of business and not in excess of $25,000 in the aggregate;

(k) termination or material amendment of any material contract, agreement or license (including any distribution agreement) to which Acquiror is a party or by which it is bound;

(l) loan by Acquiror to any person or entity, or guaranty by Acquiror of any loan, except for (x) travel or similar advances made to employees in connection with their employment duties in the ordinary course of business, consistent with past practices and (y) trade payables not in excess of $25,000 in the aggregate and in the ordinary course of business, consistent with past practices;

(m) waiver or release of any right or claim of Acquiror, including any write-off or other compromise of any account receivable of Acquiror;

(n) the commencement or notice or threat of commencement of any lawsuit or proceeding against or, to the Acquiror's or Acquiror's officers' or directors' knowledge, investigation of Acquiror or its affairs;

(o) notice of any claim of ownership by a third party of Acquiror's Intellectual Property (as defined in Section 3.13 below) or of infringement by Acquiror of any third party's Intellectual Property rights;

(p) issuance or sale by Acquiror of any of its shares of capital stock, or securities exchangeable, convertible or exercisable therefor, or of any other of its securities;

(q) change in pricing or royalties set or charged by Acquiror to its customers or licensees or in pricing or royalties set or charged by persons who have licensed Intellectual Property to Acquiror;

(r) event or condition of any character that has or could reasonably be expected to have a Material Adverse Effect on the Acquiror; or

(s) agreement by Acquiror or any officer or employee of Acquiror on behalf of such entity to do any of the things described in the preceding clauses (a) through (r) (other than negotiations with Target and its representatives regarding the transactions contemplated by this Agreement).

3.9 Litigation. There is no private or governmental action, suit, proceeding, claim, arbitration or investigation pending before any agency, court or tribunal, foreign or domestic, or, to the knowledge of Acquiror or any of its subsidiaries, threatened against Acquiror or any of its subsidiaries or any of their respective properties or any of their respective officers or directors (in their capacities as such) that individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect on Acquiror. There is no judgment, decree or order against Acquiror or any of its subsidiaries or, to the knowledge of Acquiror or any of its subsidiaries, any of their respective directors or officers (in their capacities as such) that could prevent, enjoin, or materially alter or delay any of the transactions contemplated by this Agreement, or that could reasonably be expected to have a Material Adverse Effect on Acquiror.

3.10 Restrictions on Business Activities. There is no agreement, judgment, injunction, order or decree binding upon Acquiror which has or could reasonably be expected to have the effect of prohibiting or materially impairing any current or future business practice of Acquiror, any acquisition of property by Acquiror or the overall conduct of business by Acquiror as currently conducted or as proposed to be conducted by Acquiror. Acquiror has entered into no agreement under which Acquiror is restricted from selling, licensing or otherwise distributing any of its products to any class of customers, in any geographic area, during any period of time or in any segment of the market.

3.11 Permits. Acquiror is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exceptions, consents, certificates, approvals and orders necessary for Acquiror to own, lease and operate its properties or to carry on its business as it is now being conducted (the "Acquiror Authorizations") and no suspension or cancellation of any Acquiror Authorization is pending or, to Acquiror's knowledge, threatened, except where the failure to have, or the suspension or cancellation of, any Acquiror Authorization would not have a Material Adverse Effect on Acquiror. Acquiror is not in conflict with, or in default or violation of, (i) any laws applicable to Acquiror or by which any property or asset of Acquiror is bound or affected, (ii) any Acquiror Authorization, or (iii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Acquiror is a party or by which Acquiror or any property or asset of Acquiror is bound or affected, except for any such conflict, default or violation that would not, individually or in the aggregate, have a Material Adverse Effect on Acquiror.

3.12 Title to Property.

(a) Acquiror has good and marketable title to all of its respective properties, interests in properties and assets, real and personal, reflected in the Acquiror Balance Sheet or acquired after the Acquiror Balance Sheet Date (except properties, interests in properties and assets sold or otherwise disposed of since the Acquiror Balance Sheet Date in the ordinary course of business), or with respect to leased properties and assets, valid leasehold interests in, free and clear of all mortgages, liens, pledges, charges or encumbrances of any kind or character, except (i) the lien of current taxes not yet due and payable, (ii) such imperfections of title, liens and easements as do not and will not materially detract from or interfere with the use of the properties subject thereto or affected thereby, or otherwise materially impair business operations involving such properties, and (iii) liens securing debt which is reflected on the Acquiror Balance Sheet. The plants, property and equipment of Acquiror that are used in the operations of its business are in good operating condition and repair. All properties used in the operations of Acquiror are reflected in the Acquiror Balance Sheet to the extent United States generally accepted accounting principles require the same to be reflected. Schedule 3.12(a) of the Acquiror Disclosure Schedule sets forth a true, correct and complete list of all real property owned or leased by Acquiror, the name of the lessor, the date of the lease and each amendment thereto and the aggregate annual rental and other fees payable under such lease. Such leases are in good standing, are valid and effective in accordance with their respective terms, and there is not under any such leases any existing default or event of default (or event which with notice or lapse of time, or both, would constitute a default).

(b) Schedule 3.12(b) of the Acquiror Disclosure Schedule also sets forth a true, correct and complete list of all equipment (the "Equipment") owned or leased by Acquirer, and such Equipment is, taken as a whole, (i) adequate for the conduct of Acquiror's business, consistent with its past practice, and (ii) in good operating condition (except for ordinary wear and tear).

3.13 Intellectual Property.

(a) Acquiror owns, or is licensed or otherwise possesses legally enforceable rights to use all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, service marks, copyrights, and any applications for any of the foregoing, maskworks, net lists, schematics, industrial models, inventions, technology, know-how, trade secrets, inventory, ideas, algorithms, processes, computer software programs or applications (in both source code and object code form), and tangible or intangible proprietary information or material ("Intellectual Property") that are used or proposed to be used in the business of Acquiror as currently conducted or as proposed to be conducted by Acquiror.

(b) Schedule 3.13 of the Acquiror Disclosure Schedule lists (i) all patents and patent applications and all registered and unregistered trademarks, trade names and service marks, registered and unregistered copyrights, and maskworks, included in the Intellectual Property, including the jurisdictions in which each such Intellectual Property right has been issued or registered or in which any application for such issuance and registration has been filed, (ii) all licenses, sublicenses and other agreements as to which Acquiror is a party and pursuant to which any person is authorized to use any Intellectual Property, and (iii) all licenses, sublicenses and other agreements as to which Acquiror is a party and pursuant to which Acquiror is authorized to use any third party patents, trademarks or copyrights, including software ("Third Party Intellectual Property Rights") which are incorporated in, are, or form a part of any Acquiror product that is material to its business. Acquiror is not in violation of any license, sublicense or agreement described in Schedule 3.13 of the Acquiror Disclosure Schedule. The execution and delivery of this Agreement by Acquiror and the consummation of the transactions contemplated hereby, will neither cause Acquiror to be in violation or

default under any such license, sublicense or agreement, nor, entitle any other party to any such license, sublicense or agreement to terminate or modify such license, sublicense or agreement. Acquiror is the sole and exclusive owner or licensee of, with all right, title and interest in and to (free and clear of any liens), the Intellectual Property, and has sole and exclusive rights (and is not contractually obligated to pay any compensation to any third party in respect thereof) to the use thereof or the material covered thereby in connection with the services or products in respect of which Intellectual Property is being used.

(c) To the knowledge of Acquiror, there is no unauthorized use, disclosure, infringement or misappropriation of any Intellectual Property rights of Acquiror, any trade secret material to Acquiror or any Intellectual Property right of any third party to the extent licensed by or through Acquiror, by any third party, including any employee or former employee of Acquiror. Acquiror has not entered into any agreement to indemnify any other person against any charge of infringement of any Intellectual Property, other than indemnification provisions contained in purchase orders arising in the ordinary course of business.

(d) Acquiror is not currently, nor will not be as a result of the execution and delivery of this Agreement or the performance of its obligations under this Agreement, in breach of any license, sublicense or other agreement relating to the Intellectual Property or Third Party Intellectual Property Rights.

(e) All patents, registered trademarks, service marks and copyrights held by Acquiror are valid and existing and there is no assertion or claim (or basis therefor) challenging the validity of any Intellectual Property of Acquiror. Acquiror has not been sued in any suit, action or proceeding which involves a claim of infringement of any patents, trademarks, service marks, copyrights or violation of any trade secret or other proprietary right of any third party. To the knowledge of Acquiror, neither the conduct of the business of Acquiror as currently conducted or contemplated nor the manufacture, sale, licensing or use of any of the products of Acquiror as now manufactured, sold or licensed or used, nor the use in any way of the Intellectual Property in the manufacture, use, sale or licensing by Acquiror of any products currently proposed, infringes on or will infringe or conflict with, in any way, any license, trademark, trademark right, trade name, trade name right, patent, patent right, industrial model, invention, service mark or copyright of any third party. All registered trademarks, service marks and copyrights held by Acquiror are valid and existing. To Acquiror's knowledge, no third party is challenging the ownership by Acquiror, or the validity or effectiveness of, any of the Intellectual Property. Acquiror has not brought any action, suit or proceeding for infringement of Intellectual Property or breach of any license or agreement involving Intellectual Property against any third party. There are no pending, or to Acquiror's knowledge, threatened interference, re-examinations, oppositions or nullities involving any patents, patent rights or applications therefor of Acquiror, except such as may have been commenced by Acquiror. There is no breach or violation of or threatened or actual loss of rights under any license agreement to which Acquiror is a party.

(f) Acquiror has secured valid written assignments from all consultants and employees who contributed to the creation or development of Intellectual Property of the rights to such contributions that Acquiror does not already own by operation of law.

(g) Acquiror has taken all necessary and appropriate steps to protect and preserve the confidentiality of all Intellectual Property not otherwise protected by patents, patent applications or copyright ("Confidential Information"). Acquiror has a policy requiring each employee, consultant and independent contractor to execute proprietary information and confidentiality agreements substantially in Acquiror's standard forms and all current and former employees, consultant and independent contractors of Acquiror have executed such an agreement. All use, disclosure or appropriation of Confidential Information owned by Acquiror by or to a third party has been pursuant to the terms of a written agreement between Acquiror and such third party. All use, disclosure or appropriation of Confidential Information not owned by Acquiror has been pursuant to the terms of a written agreement between Acquiror and the owner of such Confidential Information, or is otherwise lawful.

3.14 Taxes.

(a) For purposes of this Section 3.14 and other provisions of this Agreement relating to Taxes, the following definitions shall apply:

(b) All Returns required to be filed by or on behalf of Acquiror have been duly filed on a timely basis and such Returns are true, complete and correct. All Taxes shown to be payable on such Returns or on subsequent assessments with respect thereto, and all payments of estimated Taxes required to be made by or on behalf of Acquiror under Section 6655 of the Code or comparable provisions of state, local or foreign law, have been paid in full on a timely basis, and no other Taxes are payable by Acquiror with respect to items or periods covered by such Returns (whether or not shown on or reportable on such Returns). Acquiror has withheld and paid over all Taxes required to have been withheld and paid over, and complied with all information reporting and backup withholding in connection with amounts paid or owing to any employee, creditor, independent contractor, or other third party. There are no liens on any of the assets of Acquiror with respect to Taxes, other than liens for Taxes not yet due and payable or for Taxes that Acquiror is contesting in good faith through appropriate proceedings. Acquiror has not been at any time a member of an affiliated group of corporations filing consolidated, combined or unitary income or franchise tax returns for a

period for which the statute of limitations for any Tax potentially applicable as a result of such membership has not expired.

(c) The amount of Acquiror's liabilities for unpaid Taxes for all periods through the date of the Financial Statements do not, in the aggregate, exceed the amount of the current liability accruals for Taxes reflected on the Financial Statements, and the Financial Statements properly accrue in accordance with GAAP all liabilities for Taxes of Acquiror payable after the date of the Financial Statements attributable to transactions and events occurring prior to such date. No liability for Taxes of Acquiror has been incurred (or prior to Closing will be incurred) since such date other than in the ordinary course of business.

3.15 Employee Benefit Plans.

(a) Schedule 3.15 of the Acquiror Disclosure Schedule lists, with respect to Acquiror and any trade or business (whether or not incorporated) which is treated as a single employer with Acquiror (an "ERISA Affiliate") within the meaning of Section 414(b), (c), (m) or (o) of the Code, (i) all employee benefit plans (as defined in Section 3(3) of ERISA), (ii) each loan to a non-officer employee, officer or director and any stock option, stock purchase, phantom stock, stock appreciation right, supplemental retirement, severance, sabbatical, medical, dental, vision care, disability, employee relocation, cafeteria benefit (Code Section 125) or dependent care (Code Section 129), life insurance or accident insurance plans, programs or arrangements, (iii) all contracts and agreements relating to employment and all severance agreements, with any of the directors, officers or employees of Acquiror (other than any such contract or agreement that is terminable by the Company at will or without penalty or other adverse consequence in excess of $10,000), (iv) all bonus, pension, profit sharing, savings, deferred compensation or incentive plans, programs or arrangements, (v) other fringe or employee benefit plans, programs or arrangements that apply to senior management of Acquiror and that do not generally apply to all employees, and (vi) any current or former employment or executive compensation or severance agreements, written or otherwise, as to which unsatisfied obligations of Acquiror remain for the benefit of, or relating to, any present or former employee, consultant or director of Acquiror (together, the "Acquiror Employee Plans").

(b) Acquiror has furnished to Target a copy of each of the Acquiror Employee Plans and related plan documents (including trust documents, insurance policies or contracts, employee booklets, summary plan descriptions and other authorizing documents, and, to the extent still in its possession, any material employee communications relating thereto) and has, with respect to each Acquiror Employee Plan which is subject to ERISA reporting requirements, provided copies of the Form 5500 reports filed for the last three plan years. Any Acquiror Employee Plan intended to be qualified under Section 401(a) of the Code has either obtained from the Internal Revenue Service a favorable determination letter as to its qualified status under the Code, including all amendments to the Code effected by the Tax Reform Act of 1986 and subsequent legislation, or has applied to (or has time remaining to apply to) the Internal Revenue Service for such a determination letter prior to the expiration of the requisite period under applicable Treasury Regulations or Internal Revenue Service pronouncements in which to apply for such determination letter and to make any amendments necessary to obtain a favorable determination as to its qualified status from the date of adoption. Acquiror has also furnished Target with the most recent Internal Revenue Service determination letter issued with respect to each such Acquiror Employee Plan, if any, and nothing has occurred since the issuance of each such letter which could reasonably be expected to cause the loss of the tax-qualified status of any Acquiror Employee Plan subject to Code Section 401(a).

(c) Except as set forth in Schedule 3.15(c) of the Acquiror Disclosure Schedule, (i) none of the Acquiror Employee Plans promises or provides retiree medical or other retiree welfare or life insurance benefits to any person; (ii) there has been no "prohibited transaction," as such term is defined in Section 406 of ERISA and Section 4975 of the Code, with respect to any Acquiror Employee Plan, that is not exempt under Section 408 of ERISA or Section 4975(d) of the Code which could reasonably be expected to have, in the aggregate, a Material Adverse Effect; (iii) each Acquiror Employee Plan has been administered in accordance with its terms and in compliance with the requirements prescribed by any and all statutes, rules and regulations (including ERISA and the Code), except as would not have, in the aggregate, a Material Adverse Effect, and Acquiror or any ERISA Affiliate has performed all obligations required to be performed by it under, is not in any material respect in default under or violation of, and has no knowledge of any material default or violation by any other party to, any of the Acquiror Employee Plans; (iv) neither Acquiror nor any ERISA Affiliate is subject to any liability or penalty under Sections 4976 through 4980 of the Code or Title I of ERISA with respect to any of the Acquiror Employee Plans; (v) all material contributions required to be made by Acquiror or any ERISA Affiliate to any Acquiror Employee Plan have been made on or before their due dates and a reasonable amount has been accrued for contributions to each Acquiror Employee Plan for the current plan years; and (vi) no Acquiror Employee Plan is subject to Title IV of ERISA.

(d) With respect to each Acquiror Employee Plan subject to ERISA as either an employee pension plan within the meaning of Section 3(2) of ERISA or an employee welfare benefit plan within the meaning of Section 3(1) of ERISA, Acquiror has prepared in good faith and timely filed all requisite governmental reports (which were true and correct as of the date filed) and has properly and timely filed and distributed or posted all notices and reports to employees required to be filed, distributed or posted with respect to each such Acquiror Employee Plan, except to the extent that failure to comply with such reporting and disclosure obligations would not, in the aggregate, have a Material Adverse Effect. No suit, administrative proceeding, action or other litigation has been brought, or to the knowledge of Acquiror is threatened, against or with respect to any such Acquiror Employee Plan, including any audit or inquiry by the IRS or United States Department of Labor. Neither Acquiror nor any ERISA Affiliate is a party to, or has made any contribution to or otherwise incurred any obligation under, any "multiemployer plan" as defined in Section 3(37) of ERISA.

(e) With respect to each Acquiror Employee Plan, Acquiror has complied with (i) the applicable health care continuation and notice provisions of COBRA or similar applicable state law and the proposed regulations thereunder and (ii) the applicable requirements of the Family Leave Act of 1993 or similar applicable state law and the regulations thereunder, except to the extent that such failure to comply would not, in the aggregate, have a Material Adverse Effect. Acquiror has no material obligations under COBRA or similar applicable state law with respect to any former employees or qualifying beneficiaries thereunder.

(f) There has been no amendment to, written interpretation or announcement (whether or not written) by Acquiror or other ERISA Affiliate relating to, or change in participation or coverage under, any Acquiror Employee Plan which would materially increase the expense of maintaining such Plan above the level of expense incurred with respect to that Plan for the most recent fiscal year included in Acquiror's financial statements.

3.16 Employee Matters. Acquiror is in compliance in all material respects with all currently applicable federal, state, local and foreign laws and regulations respecting employment, discrimination in employment, terms and conditions of employment, wages, hours and occupational safety and health and employment practices, except to the extent that such failure to comply would not, in the aggregate, have a Material Adverse Effect and Acquiror is not engaged in any unfair

labor practice. There are no pending claims against Acquiror under any workers compensation plan or policy or for long term disability, except to the extent that such claims would not, in the aggregate, have a Material Adverse Effect. There are no controversies pending or, to the knowledge of Acquiror, threatened, between Acquiror and any of its respective employees. Acquiror is not a party to any collective bargaining agreement or other labor unions contract nor does Acquiror know of any activities or proceedings of any labor union or other group to organize any such employees. Schedule 3.16 of the Acquiror Disclosure Schedule lists each employee who is currently on a leave of absence with respect to which reinstatement is guaranteed by contract or applicable law, together with the position to which such employee is entitled to reinstatement. No employee has requested or been promised a leave of absence with guaranteed reinstatement rights to commence at a future date.

3.17 Material Contracts.

(a) Schedule 3.17(a) of the Acquiror Disclosure Schedule contain a list of all contracts and agreements to which Acquiror is a party and that are material to the business, results of operations, or condition (financial or otherwise), of Acquiror taken as a whole (such contracts, agreements and arrangements as are required to be set forth in Schedule 3.17(a) of the Acquiror Disclosure Schedule being referred to herein collectively as the "Material Contracts"). Material Contracts shall include, without limitation, the following and shall be categorized in the Acquiror Disclosure Schedule as follows:

(i) each contract and agreement (other than routine purchase orders and pricing quotes in the ordinary course of business covering a period of less than 1 year) for the purchase of inventory, spare parts, other materials or personal property with any supplier or for the furnishing of services to Acquiror under the terms of which Acquiror: (A) paid or otherwise gave consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 1999, (B) is likely to pay or otherwise give consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 2000, (C) is likely to pay or otherwise give consideration of more than $25,000 in the aggregate over the remaining term of such contract or (D) cannot be cancelled by Acquiror without penalty or further payment of less than $10,000;

(ii) each customer contract and agreement (other than routine purchase orders, pricing quotes with open acceptance and other tender bids, in each case, entered into in the ordinary course of business and covering a period of less than one year) to which Acquiror is a party which (A) involved consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 1999, (B) is likely to involve consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 2000, (C) is likely to involve consideration of more than $25,000 in the aggregate over the remaining term of the contract or (D) cannot be cancelled by Acquiror without penalty or further payment of less than $10,000;

(iii) (A) all distributor, manufacturer's representative, broker, franchise, agency and dealer contracts and agreements to which Acquiror is a party (specifying on a matrix, in the case of distributor agreements, the name of the distributor, product, territory, termination date and exclusivity provisions) and (B) all sales promotion, market research, marketing and advertising contracts and agreements to which Acquiror is a party which: (1) involved consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 1999, (2) are likely to involve consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 2000 or (3) are likely to involve consideration of more than $25,000 in the aggregate over the remaining term of the contract;

(iv) all management contracts with independent contractors or consultants (or similar arrangements) to which Acquiror is a party and which (A) involved consideration or more than $25,000 in the aggregate during the calendar year ended December 31, 1999, (B) are likely to involve consideration of more than $25,000 in the aggregate during the calendar year ended December 31, 2000 or (C) are likely to involve consideration of more than $25,000 in the aggregate over the remaining term of the contract;

(v) all contracts and agreements (excluding routine checking account overdraft agreements involving petty cash amounts) under which Acquiror has created, incurred, assumed or guaranteed (or may create, incur, assume or guarantee) indebtedness or under which Acquiror has imposed (or may impose) a security interest or lien on any of their respective assets, whether tangible or intangible, to secure indebtedness;

(vi) all contracts and agreements that limit the ability of Acquiror or, after the Effective Time, Acquiror or any of its affiliates, to compete in any line of business or with any person or in any geographic area or during any period of time, or to solicit any customer or client;

(vii) all contracts and agreements between or among Acquiror, on the one hand, and any affiliate of Acquiror, on the other hand:

(viii) all contracts and agreements to which Acquiror is a party under which it has agreed to supply products to a customer at specified prices, whether directly or through a specific distributor, manufacturer's representative or dealer; and

(ix) all other contracts or agreements (A) which are material to Acquiror or the conduct of their respective businesses, (B) the absence of which would have a Material Adverse Effect on Acquiror, or (C) which are believed by Acquiror to be of unique value even though not material to the business of Acquiror.

(b) Each Acquiror license and Material Contract is a legal, valid and binding agreement, and none of the Acquiror licenses or Material Contracts is in default by its terms or has been cancelled by the other party; Acquiror is not in receipt of any claim of default under any such agreement; and Acquiror does not anticipate any termination or change to, or receipt of a proposal with respect to, any such agreement as a result of the Merger or otherwise. Acquiror has furnished Acquiror with true and complete copies of all such agreements together with all amendments, waivers or other changes thereto.

3.18 Interested Party Transactions. Acquiror is not indebted to any director, officer, employee or agent of Acquiror (except for amounts due as normal salaries and bonuses and in reimbursement of ordinary expenses), and no such person is indebted to Acquiror.

3.19 Insurance. Acquiror has policies of insurance and bonds of the type and in amounts customarily carried by persons conducting businesses or owning assets similar to those of Acquiror. There is no material claim pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and Acquiror is otherwise in compliance with the terms of such policies and bonds. Acquiror has no knowledge of any threatened termination of, or material premium increase with respect to, any of such policies.

3.20 Compliance With Laws. Each of Acquiror and its subsidiaries has complied with, are not in violation of, and have not received any notices of violation with respect to, any federal, state, local or foreign statute, law or regulation with respect to the conduct of its business, or the ownership or operation of its business, except for such violations or failures to comply as could not reasonably be expected to have a Material Adverse Effect on Acquiror.

3.21 Minute Books. The minute books of Acquiror made available to Target contain a complete summary of all meetings of directors and stockholders or actions by written consent since the time of incorporation of Acquiror through the date of this Agreement, and reflect all transactions referred to in such minutes accurately in all material respects.

3.22 Complete Copies of Materials. Acquiror has delivered or made available true and copies of each document which has been requested by Target or its counsel in connection with their legal and accounting review of Acquiror.

3.23 Brokers' and Finders' Fees. Acquiror has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or investment bankers' fees or any similar charges in connection with this Agreement or any transaction contemplated hereby.

3.24 Voting Agreements. Acquiror stockholders holding the number of shares of Common Stock and Preferred Stock of Acquiror required to approve the Merger have executed the Voting Agreement. The affirmative vote of the Acquiror stockholders executing the Voting Agreement is the only vote of the holders of any of Acquiror Capital Stock necessary to approve this Agreement and the transactions contemplated hereby.

3.25 Board Approval. The Board of Directors of Acquiror has unanimously (i) approved this Agreement and the Merger, (ii) determined that the Merger is in the best interests of the stockholders of Acquiror and is on terms that are fair to such stockholders and (iii) recommended that the shareholders of Acquiror approve this Agreement and the Merger.

3.26 Customers and Suppliers. As of the date hereof, no customer which individually accounted for more than 2% of Acquiror's gross revenues during the 12-month period preceding the date hereof, and no supplier of Acquiror, has cancelled or otherwise terminated, or made any written threat to Acquiror to cancel or otherwise terminate its relationship with Acquiror, or has at any time on or after December 31, 1999 decreased materially its services or supplies to Acquiror in the case of any such supplier, or its usage of the services or products of Acquiror in the case of such customer, and to Acquiror's knowledge, no such supplier or customer intends to cancel or otherwise terminate its relationship with Acquiror or to decrease materially its services or supplies to Acquiror or its usage of the services or products of Acquiror, as the case may be. From and after the date hereof, no customer which individually accounted for more than 2% of Acquiror's gross revenues during the 12-month period preceding the Closing Date, has cancelled or otherwise terminated, or made any written threat to Acquiror to cancel or otherwise terminate, for any reason, including without limitation the consummation of the transactions contemplated hereby, its relationship with Acquiror, and to Acquiror's knowledge, no such customer intends to cancel or otherwise terminate its relationship with Acquiror or to decrease materially its usage of the services or products of Acquiror. Acquiror has not knowingly breached, so as to provide a benefit to Acquiror that was not intended by the parties, any agreement with, or engaged in any fraudulent conduct with respect to, any customer or supplier of Acquiror.

3.27 Third Party Consents. Except as set forth in Schedule 3.27 of the Acquiror Disclosure Schedule, no consent or approval is needed from any third party in order to effect the Merger, this Agreement or any of the transactions contemplated hereby.

3.28 No Commitments Regarding Future Products. Acquiror has made no sales to customers that are contingent upon providing future enhancements of existing products, to add features not presently available on existing products or to otherwise enhance the performance of its existing products (other than beta or similar arrangements pursuant to which Acquiror's customers from time to time test or evaluate products). The products Acquiror has delivered to customers substantially comply with published specifications for such products and Acquiror has not received

material complaints from customers about its products that remain unresolved. Schedule 3.28 of the Acquiror Disclosure Schedule accurately sets forth a complete list of products in development (exclusive of mere enhancements to and additional features for existing products).

3.29 Governmental Authorization. Each of Acquiror and its subsidiaries has obtained each federal, state, county, local or foreign governmental consent, license, permit, grant, or other authorization of a Governmental Entity that is required for the operation of Acquiror's or any of its subsidiaries' business ("Acquiror Authorizations"), and all of such Acquiror Authorizations are in full force and effect, except where the failure to obtain or have any of such Acquiror Authorizations could not reasonably be expected to have a Material Adverse Effect on Acquiror.

3.30 Certain Agreements Affected by the Merger. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute, bonus or otherwise) becoming due to any director or employee of Acquiror, (ii) materially increase any benefits otherwise payable by Acquiror, or (iii) result in the acceleration of the time of payment or vesting of any such benefits.

3.31 Representations Complete. None of the representations or warranties made by Acquiror herein or in any Schedule hereto, including the Acquiror Disclosure Schedule, or certificate furnished by Acquiror pursuant to this Agreement, when all such documents are read together in their entirety, contains or will contain at the Effective Time any untrue statement of a material fact, or omits or will omit at the Effective Time to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading.

SECTION FOUR

4. Conduct Prior to the Effective Time.

4.1 Conduct of Business. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, each of Target and Acquiror shall (except to the extent expressly contemplated by this Agreement or as consented to in writing by the other party) carry on its business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, to pay debts and Taxes when due subject (i) to good faith disputes over such debts or Taxes and (ii) in the case of Taxes, to the other party's consent to the filing of material Tax Returns if applicable, to pay or perform other obligations when due, and to use its reasonable best efforts to preserve intact its present business organization, keep available the services of its officers and employees and preserve its relationships with customers, suppliers, distributors, licensors, licensees, and others having business dealings with it, to the end that its goodwill and ongoing businesses shall be unimpaired at the Effective Time. Target shall promptly notify Acquiror and Acquiror shall promptly notify Target of any event or occurrence not in the ordinary course of business, and of any event which could have a Material Adverse Effect. Without limiting the foregoing, except as expressly contemplated by this Agreement, neither party shall do, cause or permit any of the following without the prior written consent of the other party:

(a) Charter Documents. Cause or permit any amendments to its Articles of Incorporation or Bylaws;

(b) Dividends; Changes in Capital Stock. Declare or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or

repurchase or otherwise acquire, directly or indirectly, any shares of its capital stock except from former employees, directors and consultants in accordance with agreements providing for the repurchase of shares in connection with any termination of service to it or its subsidiaries;

(c) Stock Option Plans, Etc. Accelerate, amend or change the period of exercisability or vesting of options or other rights granted under its stock plans or authorize cash payments in exchange for any options or other rights granted under any of such plans;

(d) Material Contracts. Enter into any material contract or commitment, or violate, amend or otherwise modify or waive any of the terms of any of its Material Contracts, other than in the ordinary course of business consistent with past practice;

(e) Issuance of Securities. Issue, deliver or sell or authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock or securities convertible into, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities, other than the issuance of shares of its Common Stock pursuant to the exercise of stock options, warrants or other rights therefor outstanding as of the date of this Agreement; provided, however, that (i) Target may, in the ordinary course of business consistent with past practice, grant options for the purchase of shares of its common stock not to exceed an aggregate of 500,000 shares and (ii) Acquiror may, in the ordinary course of business consistent with past practice, grant options for the purchase of shares of its common stock not to exceed an aggregate of 1,000,000 shares.

(f) Intellectual Property. Transfer to any person or entity any rights to its Intellectual Property except for the grant of non-exclusive licenses to third parties in the ordinary course of business;

(g) Exclusive Rights. Enter into or amend any agreements pursuant to which any other party is granted exclusive marketing or other exclusive rights of any type or scope with respect to any of its products or technology;

(h) Dispositions. Sell, lease, license or otherwise dispose of or encumber any of its properties or assets which are material, individually or in the aggregate, to its business, taken as a whole, except in the ordinary course of business consistent with past practice;

(i) Indebtedness. Incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or guarantee any debt securities of others;

(j) Leases. Enter into operating lease in excess of $10,000;

(k) Payment of Obligations. Pay, discharge or satisfy in an amount in excess of $10,000 in any one case or $25,000 in the aggregate, any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise) arising other than in the ordinary course of business, other than the payment, discharge or satisfaction of liabilities reflected or reserved against in the Target Financial Statements or Acquiror Financial Statements, as the case may be;

(l) Capital Expenditures. Make any capital expenditures, capital additions or capital improvements, except in the ordinary course of business and consistent with past practice;

(m) Insurance. Materially reduce the amount of any material insurance coverage provided by existing insurance policies;

(n) Termination or Waiver. Terminate or waive any right of substantial value, other than in the ordinary course of business;

(o) Employee Benefit Plans; New Hires; Pay Increases. Adopt or amend any employee benefit (except as required by law) or stock purchase or option plan, or hire any new director level or officer level employee (except that it may hire a replacement for any current director level or officer level employee if it first provides Acquiror advance notice regarding such hiring decision), pay any special bonus or special remuneration to any employee or director, or increase the salaries or wage rates of its employees;

(p) Severance Arrangement. Grant any severance or termination pay (i) to any director or officer or (ii) to any other employee except (A) payments made pursuant to standard written agreements outstanding on the date of this Agreement or (B) grants which are made in the ordinary course of business in accordance with its standard past practice;

(q) Lawsuits. Commence a lawsuit other than (i) for the routine collection of bills, (ii) in such cases where it in good faith determines that failure to commence suit would result in the material impairment of a valuable aspect of its business, provided that it consults with Acquiror prior to the filing of such a suit, or (iii) for a breach of this Agreement;

(r) Acquisitions. Acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to its business;

(s) Taxes. Other than in the ordinary course of business. make or change any material election in respect of Taxes, adopt or change any accounting method in respect of Taxes, file any material Tax Return or any amendment to a material Tax Return, enter into any closing agreement, settle any claim or assessment in respect of Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes;

(t) Notices. Target shall give all notices and other information required to be given to the employees of Target, any collective bargaining unit representing any group of employees of Target, and any applicable government authority under the WARN Act, the National Labor Relations Act, the Internal Revenue Code, COBRA, and other applicable law in connection with the transactions provided for in this Agreement;

(u) Revaluation. Revalue any of assets, including without limitation writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business; or

(v) Other. Take or agree in writing or otherwise to take, any of the actions described in Sections 4. 1 (a) through (u) above, or any action which would make any of its representations or warranties contained in this Agreement untrue or incorrect or prevent it from performing or cause it not to perform its covenants hereunder.

4.2 No Solicitation.

(a) Target. Target and the officers, directors, employees or other agents of Target will not, directly or indirectly, (i) take any action to solicit, initiate or encourage any Target Takeover Proposal (as defined below) or (ii) subject to the terms of the immediately following sentence, engage in negotiations with, or disclose any nonpublic information relating to Target to, or afford access to the properties, books or records of Target to, any person that has advised Target that it may be considering making, or that has made, a Target Takeover Proposal. Notwithstanding the immediately preceding sentence, if an unsolicited Target Takeover Proposal, or an unsolicited written expression of interest that can reasonably be expected to lead to a Target Takeover Proposal, shall be received by the Board of Directors of

Target, then, to the extent the Board of Directors of Target believes in good faith that such Target Takeover Proposal would, if consummated, result in a transaction more favorable to Target's shareholders from a financial point of view than the transaction contemplated by the Agreement (any such more favorable Target Takeover Proposal being referred to in this Agreement as a "Superior Proposal") and the Board of Directors of Target determines in good faith after consultation with outside legal counsel that it is necessary for the Board of Directors of Target to comply with its fiduciary duties to shareholders under applicable law, Target and its officers, directors, employees, investment bankers, attorneys, accountants and other representatives retained by it may furnish in connection therewith information and take such other actions as are consistent with the fiduciary obligations of Target's Board of Directors, and such actions shall not be considered a breach of this Section 4.2(a) or any other provisions of this Agreement. Target will promptly notify Acquiror after receipt of any Target Takeover Proposal or any notice that any person is considering making a Target Takeover Proposal or any request for nonpublic information relating to Target or for access to the properties, books or records of Target by any person that has advised Target that it may be considering making, or that has made, a Target Takeover Proposal and will keep Acquiror fully informed of the status and details of any such Target Takeover Proposal notice or request. For purposes of this Agreement, "Target Takeover Proposal" means any offer or proposal for, or any indication of interest in, a merger or other business combination involving Target or the acquisition of any significant equity interest in, or a significant portion of the assets of, Target, other than the transactions contemplated by this Agreement.

(b) Acquiror. Acquiror and the officers, directors, employees or other agents of Acquiror will not, directly or indirectly, (i) take any action to solicit, initiate or encourage any Acquiror Takeover Proposal (as defined below) or (ii) subject to the terms of the immediately following sentence, engage in negotiations with, or disclose any nonpublic information relating to Acquiror to, or afford access to the properties, books or records of Acquiror to, any person that has advised Acquiror that it may be considering making, or that has made, a Acquiror Takeover Proposal. Notwithstanding the immediately preceding sentence, if an unsolicited Acquiror Takeover Proposal, or an unsolicited written expression of interest that can reasonably be expected to lead to a Acquiror Takeover Proposal, shall be received by the Board of Directors of Acquiror, then, to the extent the Board of Directors of Acquiror believes in good faith that such Acquiror Takeover Proposal would, if consummated, result in a transaction more favorable to Acquiror's shareholders from a financial point of view than the transaction contemplated by the Agreement (any such more favorable Acquiror Takeover Proposal being referred to in this Agreement as a "Superior Proposal") and the Board of Directors of Acquiror determines in good faith after consultation with outside legal counsel that it is necessary for the Board of Directors of Acquiror to comply with its fiduciary duties to shareholders under applicable law, Acquiror and its officers, directors, employees, investment bankers, attorneys, accountants and other representatives retained by it may furnish in connection therewith information and take such other actions as are consistent with the fiduciary obligations of Acquiror's Board of Directors, and such actions shall not be considered a breach of this Section 4.2(b) or my other provisions of this Agreement. Acquiror will promptly notify Target after receipt of any Acquiror Takeover Proposal or any notice that any person is considering making a Acquiror Takeover Proposal or any request for nonpublic information relating to Acquiror or for access to the properties, books or records of Acquiror by any person that has advised Acquiror that it may be considering making, or that has made, a Acquiror Takeover Proposal and will keep Target fully informed of the status and details of any such Acquiror Takeover Proposal notice or request. For purposes of this Agreement, "Acquiror Takeover Proposal" means any offer or proposal for, or any indication of interest in, a merger or other business combination involving Acquiror or the acquisition of any

significant equity interest in, or a significant portion of the assets of, Acquiror, other than the transactions contemplated by this Agreement.

SECTION FIVE

5. Additional Agreements.

5.1 Best Efforts and Further Assurances. Each of the parties to this Agreement shall use its best efforts to effectuate the transactions contemplated hereby and to fulfill and cause to be fulfilled the conditions to closing under this Agreement. Each party hereto, at the reasonable request of another party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby.

5.2 Consents; Cooperation.

(a) Each of Acquiror and Target shall use its reasonable efforts to promptly (i) obtain from any Governmental Entity any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by Acquiror or Target or any of their subsidiaries in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated hereunder and (ii) make all necessary filings, and thereafter make any other required submissions, with respect to this Agreement and the Merger required under the Securities Act and the Exchange Act and any other applicable federal, state or foreign securities laws.

(b) From the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement, each party shall promptly notify the other party in writing of any pending or, to the knowledge of such party, threatened action, proceeding or investigation by any Governmental Entity or any other person (i) challenging or seeking material damages in connection with this Agreement or the transactions contemplated hereunder or (ii) seeking to restrain or prohibit the consummation of the Merger or the transactions contemplated hereunder or otherwise limit the right of Acquiror or its subsidiaries to own or operate all or any portion of the businesses or assets of Target.

(c) Each of Acquiror and Target shall give or cause to be given any required notices to third parties, and use its reasonable best efforts to obtain all consents, waivers and approvals from third parties (i) necessary, proper or advisable to consummate the transactions contemplated hereunder, (ii) disclosed or required to be disclosed in the Target Disclosure Schedule or the Acquiror Disclosure Schedule, or (iii) required to prevent a Material Adverse Effect on Target or Acquiror from occurring prior or after the Effective Time. In the event that Acquiror or Target shall fail to obtain any third party consent, waiver or approval described in this Section 5.2(c), it shall use its reasonable best efforts, and shall take any such actions reasonably requested by the other party, to minimize any adverse effect upon Acquiror and Target, their respective subsidiaries and their respective businesses resulting (or which could reasonably be expected to result after the Effective Time) from the failure to obtain such consent, waiver or approval.

(d) Each of Acquiror and Target will, and will cause their respective subsidiaries to, take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on them with respect to the consummation of the transactions contemplated by this Agreement and will promptly cooperate with and furnish information to any party hereto necessary in connection with any such requirements imposed upon such other party in connection with the consummation of the transactions contemplated by this Agreement and will take all reasonable actions necessary to obtain (and will cooperate with the other parties

hereto in obtaining) any consent, approval, order or authorization of, or any registration, declaration or filing with, any Governmental Entity or other person, required to be obtained or made in connection with the taking of any action contemplated by this Agreement.

5.3 Access to Information.

(a) Target shall afford Acquiror and its accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Effective Time to (i) all of Target's properties, books, contracts, commitments and records, and (ii) all other information concerning the business, properties and personnel of Target as Acquiror may reasonably request. Target agrees to provide to Acquiror and its accountants, counsel and other representatives copies of internal financial statements promptly upon request. Acquiror shall afford Target and its accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Effective Time to (i) all of Acquiror's and its subsidiaries' properties, books, contracts, commitments and records, and (ii) all other information concerning the business, properties and personnel of Acquiror and its subsidiaries as Target may reasonably request. Acquiror agrees to provide to Target and its accountants, counsel and other representatives copies of internal financial statements promptly upon request.

(b) Subject to compliance with applicable law, from the date hereof until the Effective Time, each of Acquiror and Target shall confer on a regular and frequent basis with one or more representatives of the other party to report operational matters of materiality and the general status of ongoing operations.

(c) No information or knowledge obtained in any investigation pursuant to this Section 5.3 shall affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Merger,

5.4 Confidentiality. The parties acknowledge that Acquiror and Target have previously executed a non-disclosure agreement (the "Confidentiality Agreement"), which Confidentiality Agreement shall continue in full force and effect in accordance with its terms.

5.5 Public Disclosure. During the period prior to the Effective Time, Acquiror and Target shall consult with each other before issuing any press release or otherwise making any public statement or making any other public (or non-confidential) disclosure (whether or not in response to an inquiry) regarding the terms of this Agreement and the transactions contemplated hereby, and neither shall issue any such press release or make any such statement or disclosure without the prior approval of the other (which approval shall not be unreasonably withheld), except as may be required by law.

5.6 FIRPTA. Target shall, prior to the Closing Date, provide Acquiror with a properly executed Foreign Investment and Real Property Tax Act of 1980 ("FIRPTA") Notification Letter, which shall state that shares of capital stock of Target do not constitute "United States real property interests" under Section 897(c) of the Code, for purposes of satisfying Acquiror's obligations under Treasury Regulation Section 1.1445-2(c)(3). In addition, simultaneously with delivery of such Notification Letter, Target shall have provided to Acquiror, as agent for Target, a form of notice to the Internal Revenue Service in accordance with the requirements of Treasury Regulation Section 1.897-2(h)(2) along with written authorization for Acquiror to deliver such notice form to the Internal Revenue Service on behalf of Target upon the Closing of the Merger.

5.7 State Statutes. If any state takeover law shall become applicable to the transactions contemplated by this Agreement, Acquiror and its Board of Directors or Target and its Board of Directors, as the case may be, shall use their reasonable best efforts to grant such approvals and take such actions as are necessary so that the transactions contemplated by this Agreement may be consummated as promptly as practicable on the terms contemplated by this Agreement and otherwise to minimize the effects of such state takeover law on the transactions contemplated by this Agreement.

5.8 Blue Sky Laws. Acquiror shall take such steps as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable to the issuance of the Acquiror Capital Stock in connection with the Merger. Target shall use its best efforts to assist Acquiror as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable "in connection with the issuance of Acquiror Capital Stock in connection with the Merger.

5.9 Affiliate Agreements. Schedule 5.9 sets forth those persons who may be deemed "Affiliates" of Target within the meaning of Rule 145 promulgated under the Securities Act ("Rule 145"). Target shall provide Acquiror such information and documents as Acquiror shall reasonably request for purposes of reviewing such list. Target shall use its best efforts to deliver or cause to be delivered to Acquiror, concurrently with the execution of this Agreement (and in each case prior to the Effective Time) from each of the Affiliates of Target, an executed Affiliate Agreement in the form attached hereto as Exhibit G (the "Affiliate Agreement"). Acquiror and Merger Sub shall be entitled to place appropriate legends on the certificates evidencing any Acquiror Capital Stock to be received by such Affiliates of Target pursuant to the terms of this Agreement, and to issue appropriate stop transfer instructions to the transfer agent for Acquiror Capital Stock, consistent with the terms of such Affiliate Agreement.

5.10 Shareholder Approvals.

(a) As soon as practicable after the execution of this Agreement, Acquiror shall seek stockholder approval of this Agreement, the Restated Certificate and the transactions contemplated hereby and thereby.

(b) As soon as practicable after the execution of this Agreement, Target shall prepare, with the cooperation of Acquiror, an Information Statement (the "Information Statement") for the shareholders of Target to approve this Agreement, the Agreement of Merger and the transactions contemplated hereby and thereby. The Information Statement shall constitute a disclosure document for the offer and issuance of the shares of Acquiror Capital Stock to be received by the holders of the capital stock of Target in the Merger. Target shall use its best efforts to cause the Information Statement to comply with applicable federal and state securities laws requirements.

(c) Each of Acquiror and Target agrees to provide promptly to the other such information concerning its business and financial statements and affairs as, in the reasonable judgment of the providing party or its counsel, may be required or appropriate for inclusion in the Information Statement, or in any amendments or supplements thereto, and to cause its counsel and auditors to cooperate with the other's counsel and auditors in the preparation of the Information Statement The information supplied by each of Acquiror and Target for inclusion in the Information Statement shall not, at (i) the time the Information Statement is first mailed to the holders of capital stock of Target, and (ii) the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. Target will promptly advise Acquiror, and Acquiror will promptly advise Target, in writing if at any time prior to the Effective Time either Target or Acquiror shall obtain knowledge of any facts that

might make it necessary or appropriate to amend or supplement the Information Statement in order to make the statements contained or incorporated by reference therein not misleading or to comply with applicable law.

(d) Subject to Section 4.2, the information Statement shall contain the unanimous recommendation of the Board of Directors of Target that the Target shareholders approve the Merger and this Agreement and the conclusion of the Board of Directors that the terms and conditions of the Merger are fair and reasonable to the shareholders of Target. Anything to the contrary contained herein notwithstanding, Target shall not include in the Information Statement any non-public information with respect to Acquiror or its affiliates or associates, the form and content of which information shall not have been approved by Acquiror prior to such inclusion.

5.11 Maintenance of Target Indemnification Obligations. Subject to and following the Effective Time, the Surviving Corporation shall, and Acquiror shall cause the Surviving Corporation to, indemnify and hold harmless the Indemnified Target Parties (as defined below) to the extent provided in the Bylaws or Articles of Incorporation of Target, in each case as in effect as of the date of this Agreement. The Surviving Corporation shall, and Acquiror shall cause the Surviving Corporation to, keep in effect such provisions, which shall not be amended except as required by applicable law or to make changes permitted by California Law that would enlarge the rights to indemnification available to the Indemnified Target Parties and changes to provide for exculpation of director and officer liability to the fullest extent permitted by California Law. For purposes of this Section 5.11, "Indemnified Target Parties" shall mean the individuals who were officers, directors, employees and agents of Target on or prior to the Effective Time. The Provisions of this Section 5.11 shall be in addition to any other rights available to the Indemnified Target Parties, shall survive the Effective Time of the Merger, and are expressly intended for the benefit of the Indemnified Target Parties.

5.12 Non-Competition Agreements. Prior to the Closing Date, the parties will cause the following employees of Acquiror and Target to execute and deliver to Acquiror Non-Competition Agreements substantially in the form of Exhibit H attached hereto (the "Non-Competition Agreements"): Elon Musk, William Harris, Peter Thiel and Max Levchin.

5.13 Registration Rights. In connection with the exchange procedures set forth in Section 1.7, Acquiror shall cause the Amended and Restated Investors' Rights Agreement attached as Exhibit I hereto to be distributed to all holders of Target Preferred Stock and take any and all actions reasonably necessary to permit such holders to become a party thereto.

5.14 Termination of Target 401(k) Plan. Target's Board of Directors shall by resolution prior to the Closing Date terminate any Target Employee Plan intended to meet the requirements of Section 401 (k) of the Code, effective as of the day prior to the Closing Date.

5.15 Venture Loans. In connection with Acquiror's next equity financing, Acquiror will use commercially reasonable best efforts to facilitate the execution of venture loans between Target shareholders and investors in such financing relating to shares of Acquiror Common Stock held by such shareholders in individual amounts not to exceed 25% of each shareholder's total Acquiror Common Stock and an aggregate amount not to exceed 25% of the total proceeds of such financing.

SECTION SIX

6. Conditions to the Merger

6.1 Conditions to Obligations of Each Party to Effect the Merger. The respective obligations of each party to this Agreement to consummate and effect this Agreement and the transactions

contemplated hereby shall be subject to the satisfaction on or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, by agreement of all the parties hereto:

(a) Shareholder Approval. This Agreement and the Merger shall have been duly approved and adopted by the shareholders of Target and the stockholders of Acquiror.

(b) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or prohibition preventing the consummation of the Merger shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending; nor shall there be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, which makes the consummation of the Merger illegal. In the event an injunction or other order shall have been issued, each party agrees to use its reasonable diligent efforts to have such injunction or other order lifted.

(c) Governmental Approval. Acquiror, Target and Merger Sub and their respective subsidiaries shall have timely obtained from each Governmental Entity all approvals, waivers and consents, if any, necessary for consummation of or in connection with the Merger and the several transactions contemplated hereby, including, without limitation, such approvals, waivers and consents as may be required under the Securities Act and under any state securities laws.

6.2 Additional Conditions to Obligations of Target. The obligations of Target to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, by Target:

(a) Representations, Warranties and Covenants (i) Each of the representations and warranties of Acquiror and Merger Sub in this Agreement that is expressly qualified by a reference to materiality shall be true in all respects as so qualified, and each of the representations and warranties of Acquiror and Merger Sub in this Agreement that is not so qualified shall be true and correct in all material respects, on and as of the Effective Time as though such representation or warranty had been made on and as of such time (except that those representations and warranties which address matters only as of a particular date shall remain true and correct as of such date), and (ii) Acquiror and Merger Sub shall have performed and complied in all material respects with all covenants, obligations and conditions of this Agreement required to be performed and complied with by them as of the Effective Time.

(b) Certificates of Acquiror.

(i) Compliance Certificate of Acquiror. Target shall have been provided with a certificate executed on behalf of Acquiror by its President or its Chief Financial Officer to the effect that, as of the Effective Time, each of the conditions set forth in Section 6.2(a) above has been satisfied with respect to Acquiror.

(ii) Certificate of Secretary of Acquiror. Target shall have been provided with a certificate executed by the Secretary or Assistant Secretary of Acquiror certifying:

(A) Resolutions duly adopted by the Board of Directors and stockholders of Acquiror approving the Merger and the Restated Certificate, and authorizing the execution of this Agreement and the execution, performance and delivery of all agreements, documents and transactions contemplated hereby; and

(B) The Restated Certificate and Bylaws of Acquiror as in effect immediately prior to the Effective Time, including all amendments thereto.

(i) Compliance Certificate of Merger Sub. Target shall have been provided with a certificate executed on behalf of Merger Sub by its President or its Chief Financial Officer to the effect that, as of the Effective Time, each of the conditions set forth in Section 6.2(a) above has been satisfied with respect to Merger Sub.

(ii) Certificate of Secretary of Merger Sub. Target shall have been provided with a certificate executed by the Secretary or Assistant Secretary of Merger Sub certifying resolutions duly adopted by the Sole Director and the sole stockholder of Merger Sub authorizing the execution of this Agreement and the execution, performance and delivery of all agreements, documents and transactions contemplated hereby.

(d) Legal Opinion. Target shall have received a legal opinion from Acquiror's legal counsel substantially in the form of Exhibit J hereto.

(e) Certificate of Incorporation. Acquiror's Restated Certificate attached as Exhibit D shall have been duly filed by Acquiror with the Delaware Secretary of State.

(f) Board of Directors. Acquiror's Board of Directors shall be comprised of the following six directors: Elon Musk, William Harris, Michael Moritz, Peter Thiel, Max Levchin, and John Malloy.

(g) Non-Competition Agreements. Each of the persons set forth in Section 5.12 above shall have executed the Non-Competition Agreement.

6.3 Additional Conditions to the Obligations of Acquiror and Merger Sub. The obligations of Acquiror and Merger Sub to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, by Acquiror:

(a) Representations, Warranties and Covenants. (i) Each of the representations and warranties of Target in this Agreement that is expressly qualified by a reference to materiality shall be true in all respects as so qualified, and each of the representations and warranties of Target in this Agreement that is not so qualified shall be true and correct in all material respects, on and as of the Effective Time as though such representation or warranty had been made on and as of such time (except that those representations and warranties which address matters only as of a particular date shall remain true and correct as of such date), and (ii) Target shall have performed and complied in all material respects with all covenants, obligations and conditions of this Agreement required to be performed and complied with by it as of the Effective Time.

(b) Certificates of Target.

(i) Compliance Certificate of Target. Acquiror and Merger Sub shall have been provided with a certificate executed on behalf of Target by its President or its Chief Financial Officer to the effect that, as of the Effective Time, each of the conditions set forth in Section 6.3(a) above has been satisfied.

(ii) Certificate of Secretary of Target. Acquiror and Merger Sub shall have been provided with a certificate executed by the Secretary of Target certifying:

(A) Resolutions duly adopted by the Board of Directors and the shareholders of Target approving the Merger and authorizing the execution of this Agreement and

the execution, performance and delivery of all agreements, documents and transactions contemplated hereby; and

(B) The Articles of Incorporation and Bylaws of Target, as in effect immediately prior to the Effective Time, including all amendments thereto.

(c) Third Party Consents. Acquiror shall have been furnished with evidence satisfactory to it that Target has obtained those consents, waivers, approvals or authorizations of those Governmental Entities and third parties whose consent or approval are required in connection with the Merger as set forth in Section 5.2(a).

(d) Legal Opinion. Acquiror shall have received a legal opinion from Target's legal counsel, in substantially the form of Exhibit K.

(e) Affiliate Agreement. Acquiror shall have received from each of the Affiliates of Target an executed Affiliate Agreement.

(f) FIRPTA Certificate. Target shall, prior to the Closing Date, provide Acquiror with a properly executed FIRPTA Notification Letter and a form of notice to the Internal Revenue Service in accordance with the requirements of Treasury Regulation Section 1.897-2(h)(2) along with written authorization for Acquiror to deliver such notice form to the Internal Revenue Service on behalf of Target upon the Closing of the Merger, as set forth in Section 5.6 above.

(g) Consent of Shareholders. In excess of 90% of the combined voting power of the Target Capital Stock shall have irrevocably consented in writing to the Merger pursuant to California law.

(h) Resignation of Directors and Officers. Acquiror shall have received letters of resignation from each of the directors and officers of Target in office immediately prior to the Effective Time, which resignations in each case shall be effective as of the Effective Time.

(i) Non-Competition Agreements. Each of the persons set forth in Section 5.12 above shall have executed the Non-Competition Agreement.

SECTION SEVEN

7. Termination, Amendment and Waiver.

7.1 Termination. At any time prior to the Effective Time, whether before or after approval of the matters presented in connection with the Merger by the shareholders of Target, this Agreement may be terminated and the Merger may be abandoned:

(a) by mutual consent duly authorized by the Boards of Directors of each of Acquiror and Target;

(b) by either Acquiror or Target, if, without fault of the terminating party,

(i) the Effective Time shall not have occurred on or before March 31, 2000 (or such later date as may be agreed upon in writing by the parties); or

(ii) there shall be any applicable federal or state law that makes consummation of the Merger illegal or otherwise prohibited or if any court of competent jurisdiction or Governmental Entity shall have issued an order, decree, ruling or taken any other action restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and nonappealable.

(c) by Acquiror, if Target shall materially breach any of its representations, warranties or obligations hereunder and such breach shall not have been cured within ten calendar business days of receipt by Target of written notice of such breach, provided that Acquiror is not in material breach of any of its representations, warranties or obligations hereunder, and provided further, that no cure period shall be required for a breach which by its nature cannot be cured.

(d) by Target, if Acquiror shall materially breach any of its representations, warranties or obligations hereunder and such breach shall not have been cured within ten calendar days following receipt by Acquiror of written notice of such breach, provided that Target is not in material breach of any of its representations, warranties or obligations hereunder, and provided further, that no cure period shall be required for a breach which by its nature cannot be cured.

7.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 7. 1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Acquiror, Merger Sub or Target or their respective officers, directors, stockholders or affiliates, except to the extent that such termination results from the breach by a party hereto of any of its representations, warranties or covenants set forth in this Agreement; provided that, the provisions of Section 5.4 (Confidentiality), Section 7.3 (Expenses) and this Section 7.2 shall remain in full force and effect and survive any termination of this Agreement.

7.3 Expenses and Termination Fees. All costs and expenses incurred in connection with this Agreement and the transactions contemplated including, without limitation, filing fees and the fees and expenses of advisors, accountants, legal counsel and financial printers, shall be paid by the party incurring such expense.

7.4 Amendment. The boards of directors of the parties may cause this Agreement to be amended at any time by execution of an instrument in writing signed on behalf of each of the parties; provided that an amendment made subsequent to adoption of the Agreement by the stockholders of Target or Merger Sub shall not (i) alter or change the amount or kind of consideration to be received on conversion of the Target Capital Stock, (ii) alter or change any term of the Articles of Incorporation of the Surviving Corporation to be effected by the Merger, or (iii) alter or change any of the terms and conditions of the Agreement if such alteration or change would adversely affect the stockholders of Target or Merger Sub.

7.5 Extension; Waiver. At any time prior to the Effective Time any party may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party.

SECTION EIGHT

8. General Provisions.

8.1 Survival of Representations and Warranties. All covenants to be performed prior to the Effective Time, and all representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall terminate as the Effective Time. All covenants to be performed after the Effective Time shall continue indefinitely.

8.2 Notices. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon receipt, when delivered personally or by courier, overnight delivery

service or confirmed facsimile, or 48 hours after being deposited in the regular mail as certified or registered mail (airmail if sent internationally) with postage prepaid, if such notice is addressed to the party to be notified at such party's address or facsimile number as set forth below, or as subsequently modified by written notice,

(a)	if to Acquiror or Merger Sub, to: William H. Harris, Jr. President and CEO X.Com Corporation 394 University Avenue #202 Palo Alto, CA 94301 Facsimile No.: (650) 833-5470 Telephone No.: (650) 833-5460
	with a copy to:
	Edmund S. Ruffin, Jr. Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Facsimile No.: (650) 233-8386 Telephone No.: (650) 233-8305
(b)	if to Target, to: Peter Thiel Chairman and CEO Confinity, Inc. 165 University Ave. Palo Alto, CA 94301 Facsimile No.: (650) 566-3646 Telephone No.: (650) 566-3645
	with a copy to:
	Eric Wright Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304 Facsimile No.: (650) 493-6811 Telephone No.: (650) 496-4368

8.3 Interpretation. When a reference is made in this Agreement to Exhibits or Schedules, such reference shall be to an Exhibit or Schedule to this Agreement unless otherwise indicated. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. The phrases "the date of this Agreement," "the date hereof" and terms of similar import, unless the context otherwise requires, shall be deemed to refer to March 1, 2000. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

8.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument.

8.5 Entire Agreement; Nonassignability; Parties in Interest. This Agreement and the documents and instruments and other agreements specifically referred to herein or delivered pursuant hereto, including the Exhibits, the Schedules, including the Target Disclosure Schedule and the Acquiror Disclosure Schedule (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, except for the Confidentiality Agreement, which shall continue in full force and effect, and shall survive any termination of this Agreement or the Closing, in accordance with its terms; (b) are not intended to confer upon any other person any rights or remedies hereunder, except as set forth in Sections 1.6(a)-(d), 1.7, 1.8, 1.12; and (c) shall not be assigned by operation of law or otherwise except as otherwise specifically provided.

8.6 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith, in order to maintain the economic position enjoyed by each party as close as possible to that under the provision rendered unenforceable. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms.

8.7 Remedies Cumulative. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy.

8.8 Governing Law. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. Each of the parties to this Agreement consents to the exclusive jurisdiction and venue of the courts of the state and federal courts of San Mateo County, California.

8.9 Rules of Construction. The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.

8.10 Amendments and Waivers. Any term of this Agreement may be amended or waived only with the written consent of the parties or their respective successors and assigns. Any amendment or waiver effected in accordance with this Section 8. 10 shall be binding upon the parties and their respective successors and assigns.

[Signature Page Follows]

Target, Acquiror and Merger Sub have executed this Agreement as of the date first written above.

		TARGET
		CONFINITY, INC.
		By:		/s/ PETER THIEL Peter Thiel, Chairman and CEO

		Address:		165 University Avenue Palo Alto, CA 94301
		Telephone:		(650) 566-3645
		Facsimile No.:		(650) 566-3646

		ACQUIROR
		X.COM CORPORATION
		By:		/s/ WILLIAM H. HARRIS, JR. William H. Harris, Jr., President and CEO

		Address:		394 University Avenue #202 Palo Alto, CA 94301
		Telephone No.:		(650) 833-5460
		Facsimile No.:		(650) 833-5470

		MERGER SUB
		CONFINITY ACQUISITION CORP.
		By:		/s/ WILLIAM H. HARRIS, JR. William H. Harris, Jr., President

		Address:		394 University Avenue #202 Palo Alto, CA 94301
		Telephone No.:		(650) 833-5460
		Facsimile No.:		(650) 833-5470

SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER

EXHIBITS

Exhibit A—		Certificate of Merger
Exhibit B—		Agreement of Merger
Exhibit C—		Exchange Ratio
Exhibit D—		Acquiror Amended and Restated Certificate of Incorporation
Exhibit E—		Form of Amendment to Warrant
Exhibit F—		Voting Agreement
Exhibit G—		Affiliate Agreement
Exhibit H—		Non-Competition Agreement
Exhibit I—		Acquiror Amended and Restated Investors' Rights Agreement
Exhibit J—		Legal Opinion from Acquiror's Counsel
Exhibit K—		Legal Opinion from Target's Counsel

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AGREEMENT AND PLAN OF MERGER
TABLE OF CONTENTS
AGREEMENT AND PLAN OF MERGER
RECITALS
AGREEMENT
SECTION ONE
SECTION TWO
SECTION THREE
SECTION FOUR
SECTION FIVE
SECTION SIX
SECTION SEVEN
SECTION EIGHT
EXHIBITS
EX-4.2 4 a2059025zex-4_2.htm EXHIBIT 4.2 Prepared by MERRILL CORPORATION
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EXHIBIT 4.2

X.COM CORPORATION

AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT

August 7, 2000

X.COM CORPORATION

AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT

This Amended and Restated Investors' Rights Agreement (the "Rights Agreement") is made as of this 7th day of August, 2000, by and among X.com Corporation, a Delaware corporation (the "Company"), the holders of the Company's Series A Preferred Stock (the "Series A Holders"), the holders of the Company's Series AA Preferred Stock (the "Series AA Holders"), the holders of the Company's Series B Preferred Stock (the "Series B Holders"), the holders of the Company's Series BB Preferred Stock (the "Series BB Holders"), the holders of the Company's Series C Preferred Stock (the "Series C Holders"), the holders of the Company's Series CC Preferred Stock (the "Series CC Holders"), and the holders of the Company's Series D Preferred Stock (the "Series D Holders"). The Series A Holders, Series AA Holders, Series B Holders, Series BB Holders, Series C Holders, Series CC Holders and Series D Holders are listed on Exhibit A and are referred to together as "Investors" and individually as an "Investor".

RECITALS

A. The Company, the Series A Holders, the Series AA Holders, the Series B Holders, the Series BB Holders, the Series C Holders and the Series CC Holders (collectively, the "Prior Right Holders") have previously entered into an Amended and Restated Investors' Rights Agreement dated as of March 31, 2000 (the "Prior Rights Agreement"), pursuant to which the Company granted the Prior Rights Holders certain rights.

B. The Company and the Series D Holders have entered into a Series D Preferred Stock Purchase Agreement (the "Purchase Agreement") of even date herewith pursuant to which the Company desires to sell to the Series D Holders and the Series D Holders desire to purchase from the Company shares of the Company's Series D Preferred Stock. A condition to the Series D Holders' obligations under the Purchase Agreement is that the Company and the Investors enter into this Agreement in order to provide the Series D Holders with (i) certain rights to register shares of the Company's Common Stock issuable upon conversion of the Series D Preferred Stock held by the Series D Holders, (ii) certain rights to receive or inspect information pertaining to the Company, and (iii) a right of first offer with respect to certain issuances by the Company of its securities. The Company desires to induce the Series D Holders to purchase shares of Series D Preferred Stock pursuant to the Purchase Agreement by agreeing to the terms and conditions set forth herein.

C. The Company and the Prior Rights Holders each desire to amend and restate the Prior Rights Agreement to add the Series D Holders as parties to this Agreement and make certain other changes.

AGREEMENT

The parties hereby agree as follows:

A. Amendments of Prior Rights Agreement; Waiver of Right of First Offer. Effective and contingent upon execution of this Agreement by the Company and the holders of a majority of the Registrable Securities, as that term is defined in the Prior Rights Agreement, and upon closing of the transactions contemplated by the Purchase Agreement and the issuance of the Company's Series D Preferred Stock to the Series D Holders as provided for therein, the Prior Rights Agreement is hereby amended and restated in its entirety to read as set forth in this Agreement, and the Company and the Investors hereby agree to be bound by the provisions hereof as the sole agreement of the Company and the Investors with respect to registration rights of the Company's securities and certain other rights, as set forth herein, The Prior Rights Holders hereby waive the Right of First Offer, including the notice

requirements, set forth in the Prior Rights Agreement with respect to the issuance of the Company's Series D Preferred Stock.

1. Registration Rights. The Company and the Investors covenant and agree as follows:

1.1 Definitions. For purposes of this Section 1:

(a) The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration or ordering of effectiveness of such registration statement or document;

(b) The term "Registrable Securities" means (i) the shares of Common Stock issuable or issued upon conversion of the Company's Series A, AA, B, BB, C, CC, or D Preferred Stock and (ii) any other shares of Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares listed in (i); provided, however, that the foregoing definition shall exclude in all cases any Registrable Securities sold by a person in a transaction in which his or her rights under this Agreement are not assigned. Notwithstanding the foregoing, Common Stock or other securities shall only be treated as Registrable Securities if and so long as they have not been (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(l) thereof so that all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale;

(c) The number of shares of "Registrable Securities then outstanding" shall be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities;

(d) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.12 of this Agreement;

(e) The term "Form S-3" means such form under the Securities Act as in effect on the date hereof or any successor form under the Securities Act that permits significant incorporation by reference of the Company's subsequent public filings under the Securities Exchange Act of 1934;

(f) The term "SEC" means the Securities and Exchange Commission; and

(g) The term "Qualified IPO" means a firm commitment underwritten public offering by the Company of shares of its Common Stock pursuant to a registration statement under the Securities Act, which results in aggregate cash proceeds to the Corporation are not less than $25,000,000 (net of underwriting discounts and commissions).

1.2 Request for Registration

(a) If the Company shall receive at any time after the earlier of (i) the third anniversary of the date hereof, or (ii) six (6) months after the effective date of the first registration statement for a public offering of securities of the Company (other

than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan or an SEC Rule 145 transaction), a written request from the Holders of not less than twenty-five percent (25%) of the Registrable Securities then outstanding that the Company file a registration statement under the Securities Act covering the registration of Registrable Securities, then the Company shall, within ten (10) days of the receipt thereof, give written notice of such request to all Holders and shall, subject to the limitations of subsection 1.2(b), use its best efforts to effect as soon as practicable, and in any event within 60 days of the receipt of such request, the registration under the Securities Act of all Registrable Securities which the Holders request to be registered within twenty (20) days of the mailing of such notice by the Company in accordance with Section 3.3.

(b) If the Holders initiating the registration request hereunder ("Initiating Holders") intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 1.2 and the Company shall include such information in the written notice referred to in subsection 1.2(a). The underwriter will be selected by a majority in interest of the Initiating Holders and shall be reasonably acceptable to the Company. In such event, the right of any Holder to include his Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 1.5(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 1.2, if the underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then t he Initiating Holders shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder; provided, however, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting.

(c) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.2, a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a period of not more than 120 days after receipt of the request of the Initiating Holders; provided, however, that the Company may not utilize this right more than once in any twelve-month period.

(d) In addition, the Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to this Section 1.2:

(i) After the Company has effected one (1) registration pursuant to this Section 1.2 and such registration has been declared or ordered effective;

(ii) During the period starting with the date sixty (60) days prior to the Company's good faith estimate of the date of filing of, and ending on a date one hundred eighty (180) days after the effective date of, a registration subject to Section 1.3 hereof; provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or

(iii) If the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made pursuant to Section l.4 below.

1.3 Company Registration. If the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its securities under the Securities Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan or a transaction covered by Rule 145 under the Securities Act, a registration in which the only stock being registered is Common Stock issuable upon conversion of debt securities which are also being registered, or any registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 3.3, the Company shall, subject to the provisions of Section 1.8, cause to be registered under the Securities Act all of the Registrable Securities that each such Holder has requested to be registered.

1.4 Form S-3 Registration. In case the Company shall receive from any Holder or Holders of not less than ten percent (10%) of the Registrable Securities then outstanding a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will:

(a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and

(b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 1.4: (i) if Form S-3 is not available for such offering by the Holders; (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to th e public (net of any underwriters' discounts or commissions) of less than $10,000,000; (iii) if the Company shall furnish to the Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 Registration to

be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 120 days after receipt of the request of the Holder or Holders under this Section 1.4; provided, however, that the Company shall not utilize this right more than once in any twelve month period; (iv) if the Company has, within the twelve (12) month period preceding the date of such request, already effected one registration on Form S-3 for the Holders pursuant to this Section 1.4; (v) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance; or (vi) during the period ending one hundred eighty (180) days after the effective date of a registration statement subject to Section 1.3.

(c) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Registrations effected pursuant to this Section 1.4 shall not be counted as demands for registration or registrations effected pursuant to Sections 1.2 or 1.3, respectively.

1.5 Obligations of the Company. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

(a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to one hundred twenty (120) days. The Company shall not be required to file, cause to become effective or maintain the effectiveness of any registration statement on Form S-1 that contemplates a distribution of securities on a delayed or continuous basis pursuant to Rule 415 under the Securities Act; however, the Company will do so with respect to registrations made pursuant to Section 1.4 hereof.

(b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement for up to one hundred twenty (120) days and provide one copy of each such amended or supplemented prospectus to each Holder selling Registrable Securities under the applicable Registration Statement.

(c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them.

(d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions.

(e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement.

(f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, such obligation to continue for one hundred twenty (120) days.

(g) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed (or, if no similar securities of the Company are then listed on a national securities exchange or on the Nasdaq National Market System, then the Company shall list the Registrable Securities on such national securities exchange or the Nasdaq National Market System as reasonably requested by the Holders requesting such registration).

(h) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration.

(i) Use its best efforts to furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 1, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities.

1.6 Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. The Company shall have no obligation with respect to any registration requested pursuant to Section 1.2 or Section 1.4 of this Agreement if, as a result of the application of the preceding sentence, the number of shares or the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the number of shares or the anticipated aggregate

offering price required to originally trigger the Company's obligation to initiate such registration as specified in subsection 1.2(a) or subsection 1.4(b)(2), whichever is applicable.

1.7 Expenses of Registration.

(a) Demand Registration. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Section 1.2, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel for the selling Holders selected by them with the approval of the Company, which approval shall not be unreasonably withheld, shall be borne by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 1.2 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 1.2; provided further, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain all of their applicable rights pursuant to Section 1.2.

(b) Company Registration. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications of Registrable Securities pursuant to Section 1.3 for each Holder (which right may be assigned as provided in Section 1. 12), including (without limitation) all registration, filing, and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company and the reasonable fees and disbursements of one counsel for the selling Holder or Holders selected by them with the approval of the Company, which approval shall not be unreasonably withheld, shall be borne by the Company.

(c) Registration on Form S-3. All expenses other than underwriting discounts and commissions incurred in connection with a registration requested pursuant to Section 1.4, including (without limitation) all registration, filing, qualification, printers' and accounting fees and the reasonable fees and disbursements of one counsel for the selling Holder or Holders selected by them with the approval of the Company, which approval shall not be unreasonably withheld, and counsel for the Company, shall be borne by the Company.

1.8 Underwriting Requirements. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 1.3 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by stockholders to be included in such offering

exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling stockholders according to the total amount of securities entitled to be included therein owned by each selling stockholder or in such other proportions as shall mutually be agreed to by such selling stockholders) but in no event shall (i) the amount of securities of the selling Holders included in the offering be reduced below ten percent (10%) of the total amount of securities included in such offering, unless such offering is the initial public offering of the Company's securities, in which case, the selling stockholders may be excluded if the underwriters make the determination described above and no other stockholder's securities are included or (ii) any securities held by Elon Musk, Peter Thiel or Max Levchin be included if any securities held by any selling Holder are excluded. For purposes of the preceding parenthetical concerning apportionment, for any selling stockholder which is a holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and stockholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling stockholder," and any pro-rata reduction with respect to such "selling stockholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling stockholder," as defined in this sentence.

1.9 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1.

1.10 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 1:

(a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law; and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity

agreement contained in this subsection 1.10(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable to any Holder, underwater or controlling person for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person.

(b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.10(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.10(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that in no event shall any indemnity under this subsection 1.10(b) exceed the net proceeds from the offering received by such Holder, except in the case of willful fraud by such Holder.

(c) Promptly after receipt by an indemnified party under this Section 1. 10 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.10, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the reasonable fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.10, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.10.

(d) If the indemnification provided for in this Section 1.10 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations; provided, that in no event shall any contribution by a Holder under this Subsection 1.10(d) exceed the net proceeds from the offering received by such Holder, except in the case of willful fraud by such Holder. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission.

(e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

(f) The obligations of the Company and Holders under this Section 1.10 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise.

1.11 Reports Under Securities Exchange Act of 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Securities Act and any, other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to:

(a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety (90) days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public so long as the Company remains subject to the periodic reporting requirements under Sections 13 or 15(d) of the Exchange Act;

(b) take such action, including the voluntary registration of its Common Stock under Section 12 of the Exchange Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective;

(c) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and

(d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the

Company), the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form.

1.12 Assignment of Registration Right. The rights to cause the Company to register Registrable Securities pursuant to this Section I may be assigned (but only with all related obligations) by a Holder to (i) a transferee or assignee of at least 750,000 shares of such securities, (ii) a transferee or assignee of all of such Registrable Securities held by such transferring Holder, if less than 750,000 shares, or (iii) a partner, affiliate or member of the transferring Holder, provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferees and assignees of (i) a partnership who are partners or retired partners of such partnership or (ii) a limited liability company who are members or retired-members of such limited liability company (including spouses and ancestors, lineal descendants and siblings of such partners or members or spouses who acquire Registrable Securities by gift, will or intestate succession) shall be aggregated together and with the partnership or limited liability company, as the case may be; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under Section 1.

1.13 Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 1.2 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not reduce the amount of the Registrable Securities of the Holders which is included or (b) to make a demand registration which could result in such registration statement being declared effective prior to the earlier of either of the dates set forth in subsection 1.2(a) or within one hundred twenty (120) days of the effective date of any registration effected pursuant to Section 1.2.

1.14 "Market Stand-Off" Agreement.

(a) Market-Standoff Period; Agreement. In connection with the initial public offering of the Company's securities and upon request of the Company or the underwriters managing such offering of the Company's securities, each Holder agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any securities of the Company (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the

effective date of such registration as may be requested by the Company or such managing underwriters and to execute an agreement reflecting the foregoing as may be requested by the underwriters at the time of the Company's initial public offering, provided however, that the officers, directors and 5% or greater shareholders of the Company are likewise restricted and are also parties to such agreements or similar agreements. Such agreement will be in writing in a form satisfactory to the Company and the underwriters and shall provide that if any portion of any Company securities held by any Company executive officer, Company director, Elon Musk, Peter Thiel or Max Levchin is released early from such agreement that a corresponding percentage of the Registrable Securities of each Holder shall be similarly released.

(b) Stop-Transfer Instructions. In order to enforce the, foregoing covenants, the Company may impose stop-transfer instructions with respect to the securities of each Holder (and the securities of every other person subject to the restrictions in Section 1.14(a)).

(c) Transferees Bound. Each Holder agrees that it will not transfer securities of the Company unless each transferee agrees in writing to be bound by all of the provisions of this Section 1.14.

1.15 Termination of Registration Rights. No Holder shall be entitled to exercise any right provided for in this Section 1 after the earlier of (i) two (2) years following the consummation of a Qualified IPO, (ii) such time as Rule 144 or another similar exemption under the Securities Act is available for the sale of all of such Holder's shares during a three (3)-month period without registration, or (iii) upon termination of the entire Agreement upon a change in control of the Company, as provided in Section 3.1.

2. Covenants of the Company

2.1 Delivery of Financial Statements. The Company shall deliver to each Major Investor, as defined in Section 2.3 below (other than a Major Investor reasonably determined by the Company to be a competitor of the Company):

(a) as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of stockholder's equity as of the end of such year, and a statement of cash flows for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principles ("GAAP"), and audited and certified by an independent public accounting firm of nationally recognized standing selected by the Company;

(b) as soon as practicable, but in any event within thirty (30) days after the end of each of the first three (3) quarters of each fiscal year of the Company, an unaudited profit or loss statement, a statement of cash flows for such fiscal quarter and an unaudited balance sheet as of the end of such fiscal quarter;

(c) as soon as practicable, but in any event thirty (30) days prior to the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis and any amendments thereto when and as presented to the board of directors; and

(d) with respect to the financial statements called for in subsection (b) of this Section 2.1, an instrument executed by the Chief Financial Officer or President of the Company and certifying that such financials (i) were prepared in accordance with GAAP consistently applied with prior practice for earlier periods (with the exception

of footnotes that may be required by GAAP) and (ii) fairly present the financial condition of the Company and its results of operation for the period specified, subject to year-end audit adjustment, provided that the foregoing shall not restrict the right of the Company to change its accounting principles consistent with GAAP, if the Board of Directors determines that it is in the best interest of the Company to do so.

2.2 Inspection. The Company shall permit each Major Investor, as defined in Section 2.3 below (except for a Major Investor reasonably determined by the Company to be a competitor of the Company), at such Major Investor's expense, to visit and inspect the Company's properties, to examine its books of account and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by the Major Investor; provided, however, that the Company shall not be obligated pursuant to this Section 2.2 to provide access to any information which it reasonably considers to be a trade secret or similar confidential information.

2.3 Right of First Offer. Subject to the terms and conditions specified in this Section 2.3, the Company hereby grants to each Major Investor (as hereinafter defined) a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). For purposes of Section 2, a "Major Investor" shall mean any person who holds at least 1,000,000 shares of Preferred Stock (or the Common Stock issued upon conversion thereof) and includes any general partners, members and affiliates of, or entities under common investment management with, a Major Investor. A Major Investor who chooses to exercise the right of first offer may designate as purchasers under such right itself or its partners or affiliates or entities under common investment management in such proportions as it deems appropriate, provided however, that Messrs. Weinstein and DePaolis may not transfer their respective information rights or rights of first offer hereunder without the prior written consent of the Company.

Each time the Company proposes to offer any shares of, or securities convertible into or exercisable for any shares of, any class of its capital stock ("Share"), the Company shall first make an offering of such Shares to each Major Investor in accordance with the following provisions:

(a) The Company shall deliver a notice by certified mail ("Notice") to the Major Investors stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such Shares.

(b) Within 15 calendar days after delivery of the Notice, the Major Investor may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which equals the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion and exercise of all convertible or exercisable securities then held, by such Major Investor bears to the total number of shares of Common Stock then outstanding (assuming full conversion and exercise of all convertible or exercisable securities). Such purchase shall be completed at the same closing as that of any third party purchasers or at an additional closing thereunder. The Company shall promptly, in writing, inform each Major Investor that purchases all the shares available to it (each, a "Fully-Exercising Investor") of any other Major Investor's failure to do likewise. During the ten (10)-day period commencing after receipt of such information, each Fully-Exercising Investor shall be entitled to obtain that portion of the Shares for which Major Investors. were entitled to subscribe but which were not subscribed for by the Major Investors that is equal to the proportion that the number

of shares of Common Stock issued and held, or issuable upon conversion and exercise of all convertible or exercisable securities then held, by such Fully-Exercising Investor bears to the total number of shares of Common Stock then outstanding (assuming full conversion and exercise of all convertible or exercisable securities).

(c) The Company may, during the 45-day period following the expiration of the period provided in subsection 2.3(b) hereof, offer the remaining unsubscribed portion of the Shares to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within 60 days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Major Investors in accordance herewith.

(d) The right of first offer in this paragraph 2.3 shall not be applicable (i) to the issuance or sale of Common Stock (or options therefor) to employees, consultants and directors, pursuant to plans or agreements approved by the Board of Directors for the primary purpose of soliciting or retaining their services, (ii) to the issuance of capital stock of the Company to the public in or after consummation of a Qualified IPO, (iii) to the issuance of securities pursuant to the conversion of the Preferred Stock or the conversion or exercise of convertible or exercisable securities, (iv) to the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise, (v) to the issuance of securities to financial institutions or lessors in connection with commercial credit arrangements, equipment financings, or similar transactions, (vi) stock splits, stock dividends or like transactions, or (vii) to the issuance of securities that, with unanimous approval of the Board of Directors, of the Company, are not offered to any existing stockholder of the Company.

2.4 Participation Right. At least 15 days prior to any proposed transfer by a Holder hereunder of more than 1,000,000 shares of Registrable Securities (a "Transfer") (other than pursuant to a public sale or a Transfer of such shares to the Company or to another Holder), the Holder making such Transfer (the "Transferring Holder") shall deliver, a written notice (the "Sale Notice") to the Company and to each Major Investor (the "Other Holders"), specifying in reasonable detail the identity of the prospective transferee(s), the number of shares to be transferred and the terms and conditions of the Transfer. The Other Holders may elect to participate in the contemplated Transfer at the same price per share and on the same terms by delivering written notice to the Transferring Holder within 15 days after delivery of the Sale Notice. If any Other Holders have elected to participate in, such Transfer, the Transferring Holder and such Other Holders shall be entitled to sell in the contemplated Transfer, at the same price and on the same terms, a number of shares equal to the product of (i) the quotient determined by dividing the percentage of Registrable Securities owned by such person by the aggregate percentage of Registrable Securities owned by the Transferring Holder and the Other Holders participating in such sale and (ii) the number of Registrable Securities to be sold in the contemplated Transfer.

Each Transferring Holder shall use best efforts to obtain the agreement of the prospective transferee(s) to the participation of the Other Holders in any contemplated Transfer in the contemplated Transfer, and no Transferring Holder shall transfer any of its Registrable Securities to any prospective transferee if such prospective transferee(s) declines to allow the participation of the Other Holders. Each Holder transferring Registrable Securities pursuant

to this Section 2.4 shall pay its pro rata share (based on the number of Registrable Securities to be sold) of the expenses incurred by the Holders in connection with such transfer and shall be obligated to join on a pro rata basis (based on the number of Registrable Securities to be sold) in any indemnification or other obligations that the Transferring Holder agrees to provide in connection with such transfer (other than any such obligations that relate specifically to a particular Holder such as indemnification with respect to representations and warranties given by a Holder regarding such Holder's title to and ownership of Registrable Securities; provided that no Holder shall be obligated in connection with such Transfer to agree to indemnify or hold harmless the transferees with respect to an amount in excess of the net cash proceeds paid to such Holder in connection with such Transfer).

The provisions set forth in this Section 2.4 shall not apply with respect to any Transfer of Registrable Securities by any Holder (i) pursuant to applicable laws of descent and distribution or among such Holder's Family Group or (ii) among such Holder's Affiliates (collectively referred to herein as "Permitted Transferees"); provided that the restrictions contained in this Section 2.4 shall continue to be applicable to the Registrable Securities after any such Transfer and provided further that the transferees of such Registrable Securities shall have agreed in writing to be bound by the provisions of this Agreement affecting the Registrable Securities so transferred. For purposes of this Section 2.4, "Family Group" means a Holder's spouse, ancestors and descendants (whether natural or adopted) and any trust solely for the benefit of any of the foregoing, and "Affiliate" of a Holder means any other person, directly or indirectly controlling, controlled by or under common control with such Holder and any partner of a Holder which is a partnership or member of a Holder that is a limited liability company.

2.5 Termination of Covenants.

(a) The covenants set forth in Sections 2.1 through 2.4 shall terminate as to each Holder and be of no further force or effect (i) immediately prior to the consummation of a Qualified IPO, or (ii) upon termination of the entire Agreement upon a change in control of the Company, as provided in Section 3.1 (provided that, in such change in control the Other Holders had the right to participate pursuant to Section 2.4 above).

(b) The covenants set forth in Sections 2.1 and 2.2 shall terminate as to each Holder and be of no further force or effect when the Company first becomes subject to the periodic reporting requirements of Sections 13 or 15(d) of the Exchange Act, if this occurs earlier than the events described in Section 2.5(a) above.

3. Miscellaneous.

3.1 Termination of Entire Agreement Upon Change of Control. This Agreement shall terminate, and have no further force and effect, when the Company shall sell, convey, or otherwise dispose of all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any other transaction or Series of related transactions in which more than 50% of the voting power of the Company is disposed of, provided that this Agreement shall not be terminated following a merger effected solely for the purpose of changing the domicile of the Company.

3.2 Successors and Assigns. Except as otherwise provided in this Agreement, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of the parties (including transferees of any of the Preferred Stock or any Common Stock issued upon conversion thereof). Nothing in

this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

3.3 Amendments and Waivers. Any term of this Agreement may be amended or waived only with the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding; provided that no amendment or waiver may limit, reduce, restrict or adversely affect any Major Investor's rights hereunder in a manner that is different from that applicable to the other Major Investors without the written consent of such Major Investor. Notwithstanding the foregoing, this Agreement may be amended with only the written consent of the Company to include additional purchasers of Series D Preferred Stock as "Investors" or "Holders" who purchase shares in accordance with, and subject to the provisions of the Purchase Agreement, and without any amendment or modification thereof that is not agreed to by the requisite parties to the Purchase Agreement. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each party to the Agreement, whether or not such party has signed such amendment or waiver, each future holder of all such Registrable Securities, and the Company.

3.4 Notices. Unless otherwise provided, any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by overnight courier or sent by telegram or fax, or forty-eight (48) hours after being deposited in the U.S. Mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address or fax number as set forth on Exhibit A hereto or as subsequently modified by written notice.

3.5 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms.

3.6 Governing Law. This Agreement and all acts and transactions pursuant hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of laws.

3.7 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

3.8 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

3.9 Aggregation of Stock. All shares of the Preferred Stock held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement.

[Signature Page Follows]

The parties have executed this Amended and Restated Investors' Rights Agreement as of the date first above written.

	COMPANY:
	X.COM CORPORATION
	By: /s/
	Name:	Elon Musk (print)
	Title:	CEO
	Address:	394 University Avenue, Suite 202 Palo Alto, CA 94301
	Tel:	650-833-5460
	Fax:	650-833-5470
	INVESTORS:
	Signed By:
	Elon Musk Sequoia Capital William Harris Madison Dearborn Capital Partners III, L.P. T.HeVENTURE PTE LTD X Partners LLC Nokia Ventures German American Capital Corporation HikariTsushin, Inc. Williams Family Trust Apex Venture Capital Corporation Hua Eng Venture Capital Corp. Taishin Venture Capital Investment Co., Ltd. Taishin Leasing & Financing Co., Ltd. Super Net Holding Ltd. Digital Century Capital, L.P. Digital Century Capital II, L.P. Digital Century Offshore Fund, Ltd. Chaudhri Investment Partners, LLC Masahiko Matsui TSC Venture 1 Inc. TSC Capital Group Inc.- TSC Ventures 2 Portfolio
SIGNATURE PAGE TO X.COM AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT

		Signed By: (cont.)
		Technology Partners Venture Capital Co. Redpine Finance Holdings, Inc. Kai Tswang Technology, Inc. Nichimen America Inc. Nichimen Corporation Lakshmi N. Mittal, LNM Internet Ventures Ltd. Gold Touch Properties Ltd. Purple Valley Venture, Inc. Compass Partners/x.com LLC Presto International Co., Ltd. H&Q/GAI Incubation Fund Global Alliance, Inc. Seaward Investment Ltd., Co. Azam Corporation Montparnasse Investissement II, F.C.P.R. UI-Union d'Etudes et d'Investissements, S.A. Idia, S.A. Dynamust, S.A. Kummell Investments Limited Kam Tech Investors Sunplus Venture Capital Corp. David Molner Senancourt S.A. KN1 Tech Investors Lansely Trade & Finance S.A. David Norman Kent Timothy George Eyles Gordon Ackroyd Jackson David Findlay Rich Capital Group, Inc. Wagner Family Trust Pliant Ventures LLC B.V.Algemene Beleggingsmaatshappij Kievietsdaal Prince Ventures USA Inc. Paradigm I Venture Capital Company Ainsley Industrial Ventures Limited Montvert Limited Halifax PLC Abdullah M. Mazrui Providian Bancorp Services Japan Electronic Settlement Planning Inc. Saudi Venture Development Company The Investment Office, LLC Somers Nominees (Far East) Limited Kni Tech Investors Intergestora Nuevas Technologias SCR, SA

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AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
EX-10.2 5 a2059025zex-10_2.htm EXHIBIT 10.2 Prepared by MERRILL CORPORATION
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EXHIBIT 10.2

PAYPAL, INC.

2001 EQUITY INCENTIVE PLAN

TABLE OF CONTENTS

		Page
1.	PURPOSES OF THE PLAN	1
2.	DEFINITIONS	1
3.	STOCK SUBJECT TO THE PLAN	3
4.	ADMINISTRATION OF THE PLAN	3
5.	ELIGIBILITY	5
6.	LIMITATIONS	5
7.	TERM OF PLAN	6
8.	TERM OF OPTION	6
9.	OPTION EXERCISE PRICE AND CONSIDERATION	6
10	EXERCISE OF OPTION	7
11	NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS	10
12	STOCK PURCHASE RIGHTS	10
13	ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR ASSET SALE	10
14	TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS	14
15	AMENDMENT AND TERMINATION OF THE PLAN	12
16	STOCKHOLDER APPROVAL	12
17	INABILITY TO OBTAIN AUTHORITY	13
18	RESERVATION OF SHARES	13
19	INFORMATION TO HOLDERS AND PURCHASERS	13
20	REPURCHASE PROVISIONS	13
21	INVESTMENT INTENT	14
22	GOVERNING LAW	14

PAYPAL, INC.

2001 EQUITY INCENTIVE PLAN

1. Purposes of the Plan. The purposes of the PayPal, Inc. 2001 Equity Incentive Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Non-Qualified Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan.

2. Definitions. As used herein, the following definitions shall apply:

(a) "Acquisition" means (i) any consolidation or merger of the Company with or into any other corporation or other entity or person in which the stockholders of the Company prior to such consolidation or merger own less than fifty percent (50%) of the Company's voting power immediately after such consolidation or merger, excluding any consolidation or merger effected exclusively to change the domicile of the Company; or (ii) a sale of all or substantially all of the assets of the Company.

(b) "Administrator" means the Board or the Committee responsible for conducting the general administration of the Plan, as applicable, in accordance with Section 4 hereof.

(c) "Applicable Laws" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan.

(d) "Board" means the Board of Directors of the Company.

(e) "Code" means the Internal Revenue Code of 1986, as amended, or any successor statute or statutes thereto. Reference to any particular Code section shall include any successor section.

(f) "Committee" means a committee appointed by the Board in accordance with Section 4 hereof.

(g) "Common Stock" means the common stock of the Company.

(h) "Company" means PayPal, Inc., a Delaware corporation.

(i) "Consultant" means any consultant or adviser if: (i) the consultant or adviser renders bona fide services to the Company or any Parent or Subsidiary of the Company; (ii) the services rendered by the consultant or adviser are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for the Company's securities; and (iii) the consultant or adviser is a natural person who has contracted directly with the Company or any Parent or Subsidiary of the Company to render such services.

(j) "Director" means a member of the Board.

(k) "Employee" means any person, including an Officer or Director, who is an employee (as defined in accordance with Section 3401(c) of the Code) of the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient, by itself, to constitute "employment" by the Company.

(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute or statutes thereto. Reference to any particular Exchange Act section shall include any successor section.

(m) "Fair Market Value" means, as of any date, the value of a share of Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or a national market system, including, without limitation, the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for a share of such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for a share of the Common Stock on the last market trading day prior to the day of determination; or

(iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator.

(n) "Holder" means a person who has been granted or awarded an Option or Stock Purchase Right or who holds Shares acquired pursuant to the exercise of an Option or Stock Purchase Right.

(o) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and which is designated as an Incentive Stock Option by the Administrator.

(p) "Independent Director" means a Director who is not an Employee of the Company.

(q) "Non-Qualified Stock Option" means an Option (or portion thereof) that is not designated as an Incentive Stock Option by the Administrator, or which is designated as an Incentive Stock Option by the Administrator but fails to qualify as an incentive stock option within the meaning of Section 422 of the Code.

(r) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(s) "Option" means a stock option granted pursuant to the Plan.

(t) "Option Agreement" means a written agreement between the Company and a Holder evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan.

(u) "Parent" means any corporation, whether now or hereafter existing (other than the Company), in an unbroken chain of corporations ending with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing more than fifty percent of the total combined voting power of all classes of stock in one of the other corporations in such chain.

(v) "Plan" means the PayPal, Inc. 2001 Equity Incentive Plan.

(w) "Public Trading Date" means the first date upon which Common Stock of the Company is listed (or approved for listing) upon notice of issuance on any securities exchange or designated

(or approved for designation) upon notice of issuance as a national market security on an interdealer quotation system.

(x) "Restricted Stock" means Shares acquired pursuant to the exercise of an unvested Option in accordance with Section 10(h) below or pursuant to a Stock Purchase Right granted under Section 12 below.

(y) "Rule 16b-3" means that certain Rule 16b-3 under the Exchange Act, as such Rule may be amended from time to time.

(z) "Section 16(b)" means Section 16(b) of the Exchange Act, as such Section may be amended from time to time.

(aa) "Securities Act" means the Securities Act of 1933, as amended, or any successor statute or statutes thereto. Reference to any particular Securities Act section shall include any successor section.

(bb) "Service Provider" means an Employee, Director or Consultant.

(cc) "Share" means a share of Common Stock, as adjusted in accordance with Section 13 below.

(dd) "Stock Purchase Right" means a right to purchase Common Stock pursuant to Section 12 below.

(ee) "Subsidiary" means any corporation, whether now or hereafter existing (other than the Company), in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing more than fifty percent of the total combined voting power of all classes of stock in one of the other corporations in such chain.

3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the shares of stock subject to Options or Stock Purchase Rights shall be Common Stock, initially shares of the Company's Common Stock. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares which may be issued upon exercise of such Options or Stock Purchase Rights is 38,000,000 Shares. Shares issued upon exercise of Options or Stock Purchase Rights may be authorized but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). Shares which are delivered by the Holder or withheld by the Company upon the exercise of an Option or Stock Purchase Right under the Plan, in payment of the exercise price thereof or tax withholding thereon, may again be optioned, granted or awarded hereunder, subject to the limitations of this Section 3. If Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. Notwithstanding the provisions of this Section 3, no Shares may again be optioned, granted or awarded if such action would cause an Incentive Stock Option to fail to qualify as an Incentive Stock Option under Code Section 422.

4. Administration of the Plan.

(a) Administrator. Unless and until the Board delegates administration to a Committee as set forth below, the Plan shall be administered by the Board. The Board may delegate administration of the Plan to a Committee or Committees of one or more members of the Board, and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to

delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. Notwithstanding the foregoing, however, from and after the Public Trading Date, a Committee of the Board shall administer the Plan and the Committee shall consist solely of two or more Independent Directors each of whom is both an "outside director," within the meaning of Section 162(m) of the Code, and a "non-employee director" within the meaning of Rule 16b-3. Within the scope of such authority, the Board or the Committee may (i) delegate to a committee of one or more members of the Board who are not Independent Directors the authority to grant awards under the Plan to eligible persons who are either (1) not then "covered employees," within the meaning of Section 162(m) of the Code and are not expected to be "covered employees" at the time of recognition of income resulting from such award or (2) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code and/or (ii) delegate to a committee of one or more members of the Board who are not "non-employee directors," within the meaning of Rule 16b-3, the authority to grant awards under the Plan to eligible persons who are not then subject to Section 16 of the Exchange Act. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee may only be filled by the Board.

(b) Powers of the Administrator. Subject to the provisions of the Plan and the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its sole discretion:

(i) to determine the Fair Market Value;

(ii) to select the Service Providers to whom Options and Stock Purchase Rights may from time to time be granted hereunder;

(iii) to determine the number of Shares to be covered by each such award granted hereunder;

(iv) to approve forms of agreement for use under the Plan;

(v) to determine the terms and conditions of any Option or Stock Purchase Right granted hereunder (such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may vest or be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine);

(vi) to determine whether to offer to buyout a previously granted Option as provided in subsection 10(i) and to determine the terms and conditions of such offer and buyout (including whether payment is to be made in cash or Shares);

(vii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws;

(viii) to allow Holders to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld based on the statutory withholding rates for federal and state

tax purposes that apply to supplemental taxable income. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Holders to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable;

(ix) to amend the Plan or any Option or Stock Purchase Right granted under the Plan as provided in Section 15; and

(x) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan and to exercise such powers and perform such acts as the Administrator deems necessary or desirable to promote the best interests of the Company which are not in conflict with the provisions of the Plan.

(c) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Holders.

5. Eligibility. Non-Qualified Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. If otherwise eligible, an Employee or Consultant who has been granted an Option or Stock Purchase Right may be granted additional Options or Stock Purchase Rights.

6. Limitations.

(a) Each Option shall be designated by the Administrator in the Option Agreement as either an Incentive Stock Option or a Non-Qualified Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of Shares subject to a Holder's Incentive Stock Options and other incentive stock options granted by the Company, any Parent or Subsidiary, which become exercisable for the first time during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options or other options shall be treated as Non-Qualified Stock Options.

For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time of grant.

(b) Neither the Plan, any Option nor any Stock Purchase Right shall confer upon a Holder any right with respect to continuing the Holder's employment or consulting relationship with the Company, nor shall they interfere in any way with the Holder's right or the Company's right to terminate such employment or consulting relationship at any time, with or without cause.

(c) No Service Provider shall be granted, in any calendar year, Options or Stock Purchase Rights to purchase more than 10,000,000 Shares; provided, however, that the foregoing limitation shall not apply prior to the Public Trading Date and, following the Public Trading Date, the foregoing limitation shall not apply until the earliest of: (i) the first material modification of the Plan (including any increase in the number of shares reserved for issuance under the Plan in accordance with Section 3); (ii) the issuance of all of the shares of Common Stock reserved for issuance under the Plan; (iii) the expiration of the Plan; (iv) the first meeting of stockholders at which Directors of the Company are to be elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of an equity security of the Company under Section 12 of the Exchange Act; or (v) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder. The foregoing limitation shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 13. For purposes of this Section 6(c), if an Option is canceled in the same calendar year it was granted (other than in connection with a transaction described in

Section 15), the canceled Option will be counted against the limit set forth in this Section 6(c). For this purpose, if the exercise price of an Option is reduced, the transaction shall be treated as a cancellation of the Option and the grant of a new Option.

7. Term of Plan. The Plan shall become effective upon its initial adoption by the Board and shall continue in effect until it is terminated under Section 17 of the Plan. No Options or Stock Purchase Rights may be issued under the Plan after the tenth (10th) anniversary of the earlier of (i) the date upon which the Plan is adopted by the Board or (ii) the date the Plan is approved by the stockholders.

8. Term of Option. The term of each Option shall be stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to a Holder who, at the time the Option is granted, owns (or is treated as owning under Code Section 424) stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement.

9. Option Exercise Price and Consideration.

(a) Except as provided in Section 13, the per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following:

(i) In the case of an Incentive Stock Option

(A) granted to an Employee who, at the time of grant of such Option, owns (or is treated as owning under Code Section 424) stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant.

(B) granted to any other Employee, the per Share exercise price shall be no less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(ii) In the case of a Non-Qualified Stock Option

(A) granted to a Service Provider who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of the grant.

(B) granted to any other Service Provider, the per Share exercise price shall be no less than eighty-five percent (85%) of the Fair Market Value per Share on the date of grant.

(iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction.

(6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) with the consent of the Administrator, surrendered Shares then issuable upon exercise of the Option having a Fair Market Value on the date of exercise equal to the aggregate exercise price of the Option or exercised portion thereof, (6) property of any kind which constitutes good and valuable consideration, (7) with the consent of the Administrator, delivery of a notice that the Holder has placed a market sell order with a broker with respect to Shares then issuable upon exercise of the Options and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price, provided, that payment of such proceeds is then made to the Company upon settlement of such sale, or (8) with the consent of the Administrator, any combination of the foregoing methods of payment.

10. Exercise of Option.

(a) Vesting; Fractional Exercises. Except as provided in Section 13, Options granted hereunder shall be vested and exercisable according to the terms hereof at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement; provided, however, that, prior to the Public Trading Date, except with regard to Options granted to Officers, Directors or Consultants, in no event shall an Option granted hereunder become vested and exercisable at a rate of less than twenty percent (20%) per year over five (5) years from the date the Option is granted, subject to reasonable conditions, such as continuing to be a Service Provider. An Option may not be exercised for a fraction of a Share.

(b) Deliveries upon Exercise. All or a portion of an exercisable Option shall be deemed exercised upon delivery of all of the following to the Secretary of the Company or his or her office:

(i) A written or electronic notice complying with the applicable rules established by the Administrator stating that the Option, or a portion thereof, is exercised. The notice shall be signed by the Holder or other person then entitled to exercise the Option or such portion of the Option;

(ii) Such representations and documents as the Administrator, in its sole discretion, deems necessary or advisable to effect compliance with Applicable Laws. The Administrator may, in its sole discretion, also take whatever additional actions it deems appropriate to effect such compliance, including, without limitation, placing legends on share certificates and issuing stop transfer notices to agents and registrars;

(iii) Upon the exercise of all or a portion of an unvested Option pursuant to Section 10(h), a Restricted Stock purchase agreement in a form determined by the Administrator and signed by the Holder or other person then entitled to exercise the Option or such portion of the Option; and

(iv) In the event that the Option shall be exercised pursuant to Section 10(f) by any person or persons other than the Holder, appropriate proof of the right of such person or persons to exercise the Option.

(c) Conditions to Delivery of Share Certificates. The Company shall not be required to issue or deliver any certificate or certificates for Shares purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions:

(i) The admission of such Shares to listing on all stock exchanges on which such class of stock is then listed;

(ii) The completion of any registration or other qualification of such Shares under any state or federal law, or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body which the Administrator shall, in its sole discretion, deem necessary or advisable;

(iii) The obtaining of any approval or other clearance from any state or federal governmental agency which the Administrator shall, in its sole discretion, determine to be necessary or advisable;

(iv) The lapse of such reasonable period of time following the exercise of the Option as the Administrator may establish from time to time for reasons of administrative convenience; and

(v) The receipt by the Company of full payment for such Shares, including payment of any applicable withholding tax, which in the sole discretion of the Administrator may be in the form of consideration used by the Holder to pay for such Shares under Section 9(b).

(d) Termination of Relationship as a Service Provider. If a Holder ceases to be a Service Provider other than by reason of the Holder's disability or death, such Holder may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination; provided, however, that prior to the Public Trading Date, such period of time shall not be less than thirty (30) days (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Holder's termination. If, on the date of termination, the Holder is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option immediately cease to be issuable under the Option and shall again become available for issuance under the Plan. If, after termination, the Holder does not exercise his or her Option within the time period

specified herein, the Option shall terminate, and the Shares covered by such Option shall again become available for issuance under the Plan.

(e) Disability of Holder. If a Holder ceases to be a Service Provider as a result of the Holder's disability, the Holder may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination; provided, however, that prior to the Public Trading Date, such period of time shall not be less than six (6) months (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Holder's termination. If such disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive Stock Option shall automatically cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Non-Qualified Stock Option from and after the day which is three (3) months and one (1) day following such termination. If, on the date of termination, the Holder is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately cease to be issuable under the Option and shall again become available for issuance under the Plan. If, after termination, the Holder does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall again become available for issuance under the Plan.

(f) Death of Holder. If a Holder dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement provided, however, that prior to the Public Trading Date, such period of time shall not be less than six (6) months (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Holder's estate or by a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Holder's termination. If, at the time of death, the Holder is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately cease to be issuable under the Option and shall again become available for issuance under the Plan. The Option may be exercised by the executor or administrator of the Holder's estate or, if none, by the person(s) entitled to exercise the Option under the Holder's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall again become available for issuance under the Plan.

(g) Regulatory Extension. A Holder's Option Agreement may provide that if the exercise of the Option following the termination of the Holder's status as a Service Provider (other than upon the Holder's death or Disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in Section 8 or (ii) the expiration of a period of three (3) months after the termination of the Holder's status as a Service Provider during which the exercise of the Option would not be in violation of such registration requirements.

(h) Early Exercisability. The Administrator may provide in the terms of a Holder's Option Agreement that the Holder may, at any time before the Holder's status as a Service Provider terminates, exercise the Option in whole or in part prior to the full vesting of the Option; provided, however, that subject to Section 22, Shares acquired upon exercise of an Option which has not fully vested may be subject to any forfeiture, transfer or other restrictions as the Administrator may determine in its sole discretion.

(i) Buyout Provisions. The Administrator may at any time offer to buyout for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Holder at the time that such offer is made.

11. Non-Transferability of Options and Stock Purchase Rights. Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Holder, only by the Holder.

12. Stock Purchase Rights.

(a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with Options granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer; provided, however, that to the extent required to comply with applicable securities laws, the purchase price of such Shares shall not be less than the purchase price requirements set forth in Section 260.140.42 of Title 10 of the California Code of Regulations. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator.

(b) Repurchase Right. Unless the Administrator determines otherwise, the Restricted Stock purchase agreement shall grant the Company the right to repurchase Shares acquired upon exercise of a Stock Purchase Right upon the termination of the purchaser's status as a Service Provider for any reason. Subject to Section 22, the purchase price for Shares repurchased by the Company pursuant to such repurchase right and the rate at which such repurchase right shall lapse shall be determined by the Administrator in its sole discretion, and shall be set forth in the Restricted Stock purchase agreement.

(c) Other Provisions. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion.

(d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have rights equivalent to those of a shareholder and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 15 of the Plan.

13. Adjustments upon Changes in Capitalization, Merger or Asset Sale.

(a) In the event that the Administrator determines that any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, liquidation, dissolution, or sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company, or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate transaction or event, in the Administrator's sole discretion, affects the Common Stock such that an adjustment is determined by the Administrator to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended by the Company to be made available under the Plan or with respect to any Option, Stock Purchase Right or Restricted Stock, then the Administrator shall, in such manner as it may deem equitable, adjust any or all of:

(i) the number and kind of shares of Common Stock (or other securities or property) with respect to which Options or Stock Purchase Rights may be granted or awarded (including, but not limited to, adjustments of the limitations in Section 3 on the maximum number and kind of shares which may be issued and adjustments of the maximum number of Shares that may be purchased by any Holder in any calendar year pursuant to Section 6(c));

(ii) the number and kind of shares of Common Stock (or other securities or property) subject to outstanding Options, Stock Purchase Rights or Restricted Stock; and

(iii) the grant or exercise price with respect to any Option or Stock Purchase Right.

(b) In the event of any transaction or event described in Section 15(a), the Administrator, in its sole discretion, and on such terms and conditions as it deems appropriate, either by the terms of the Option, Stock Purchase Right or Restricted Stock or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Holder's request, is hereby authorized to take any one or more of the following actions whenever the Administrator determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended by the Company to be made available under the Plan or with respect to any Option, Stock Purchase Right or Restricted Stock granted or issued under the Plan or to facilitate such transaction or event:

(i) To provide for either the purchase of any such Option, Stock Purchase Right or Restricted Stock for an amount of cash equal to the amount that could have been obtained upon the exercise of such Option or Stock Purchase Right or realization of the Holder's rights had such Option, Stock Purchase Right or Restricted Stock been currently exercisable or payable or fully vested or the replacement of such Option, Stock Purchase Right or Restricted Stock with other rights or property selected by the Administrator in its sole discretion;

(ii) To provide that such Option or Stock Purchase Right shall be exercisable as to all shares covered thereby, notwithstanding anything to the contrary in the Plan or the provisions of such Option or Stock Purchase Right;

(iii) To provide that such Option, Stock Purchase Right or Restricted Stock be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices;

(iv) To make adjustments in the number and type of shares of Common Stock (or other securities or property) subject to outstanding Options and Stock Purchase Rights, and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding Options, Stock Purchase Rights or Restricted Stock or Options, Stock Purchase Rights or Restricted Stock which may be granted in the future; and

(v) To provide that immediately upon the consummation of such event, such Option or Stock Purchase Right shall not be exercisable and shall terminate; provided, that for a specified period of time prior to such event, such Option or Stock Purchase Right shall be exercisable as to all Shares covered thereby, and the restrictions imposed under an Option Agreement or Restricted Stock purchase agreement upon some or all Shares may be terminated and, in the case of Restricted Stock, some or all shares of such Restricted Stock may cease to be subject to repurchase, notwithstanding anything to the contrary in the Plan or the provisions of such Option, Stock Purchase Right or Restricted Stock purchase agreement.

(c) Subject to Section 3, the Administrator may, in its sole discretion, include such further provisions and limitations in any Option, Stock Purchase Right, Restricted Stock agreement or certificate, as it may deem equitable and in the best interests of the Company.

(d) If the Company undergoes an Acquisition, then any surviving corporation or entity or acquiring corporation or entity, or affiliate of such corporation or entity, may assume any Options, Stock Purchase Rights or Restricted Stock outstanding under the Plan or may substitute similar stock awards (including an award to acquire the same consideration paid to the stockholders in the transaction described in this subsection 15(d)) for those outstanding under the Plan. In the event any surviving corporation or entity or acquiring corporation or entity in an Acquisition, or affiliate of such corporation or entity, does not assume such Options, Stock Purchase Rights or Restricted Stock or does not substitute similar stock awards for those outstanding under the Plan, then with respect to (i) Options, Stock Purchase Rights or Restricted Stock held by participants in the Plan whose status as a Service Provider has not terminated prior to such event, the vesting of such Options, Stock Purchase Rights or Restricted Stock (and, if applicable, the time during which such awards may be exercised) shall be accelerated and made fully exercisable and all restrictions thereon shall lapse at least ten (10) days prior to the closing of the Acquisition (and the Options or Stock Purchase Rights terminated if not exercised prior to the closing of such Acquisition), and (ii) any other Options or Stock Purchase Rights outstanding under the Plan, such Options or Stock Purchase rights shall be terminated if not exercised prior to the closing of the Acquisition.

(e) The existence of the Plan, any Option Agreement or Restricted Stock purchase agreement and the Options or Stock Purchase Rights granted hereunder shall not affect or restrict in any way the right or power of the Company or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise.

14. Time of Granting Options and Stock Purchase Rights. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant.

15. Amendment and Termination of the Plan.

(a) Amendment and Termination. The Board may at any time wholly or partially amend, alter, suspend or terminate the Plan. However, without approval of the Company's stockholders given within twelve (12) months before or after the action by the Board, no action of the Board may, except as provided in Section 15, increase the limits imposed in Section 3 on the maximum number of Shares which may be issued under the Plan or extend the term of the Plan under Section 7.

(b) Stockholder Approval. The Board shall obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.

(c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Holder, unless mutually agreed otherwise between the Holder and the Administrator, which agreement must be in writing and signed by the Holder and the Company. Termination of the Plan shall not affect the Administrator's ability to

exercise the powers granted to it hereunder with respect to Options, Stock Purchase Rights or Restricted Stock granted or awarded under the Plan prior to the date of such termination.

16. Stockholder Approval. The Plan will be submitted for the approval of the Company's stockholders within twelve (12) months after the date of the Board's initial adoption of the Plan. Options, Stock Purchase Rights or Restricted Stock may be granted or awarded prior to such stockholder approval, provided that such Options, Stock Purchase Rights and Restricted Stock shall not be exercisable, shall not vest and the restrictions thereon shall not lapse prior to the time when the Plan is approved by the stockholders, and provided further that if such approval has not been obtained at the end of said twelve-month period, all Options, Stock Purchase Rights and Restricted Stock previously granted or awarded under the Plan shall thereupon be canceled and become null and void.

17. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

18. Reservation of Shares. The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

19. Information to Holders and Purchasers. Prior to the Public Trading Date and to the extent required by Section 260.140.46 of Title 10 of the California Code of Regulations, the Company shall provide to each Holder and to each individual who acquires Shares pursuant to the Plan, not less frequently than annually during the period such Holder or purchaser has one or more Options or Stock Purchase Rights outstanding, and, in the case of an individual who acquires Shares pursuant to the Plan, during the period such individual owns such Shares, copies of annual financial statements. Notwithstanding the preceding sentence, the Company shall not be required to provide such statements to key employees whose duties in connection with the Company assure their access to equivalent information.

20. Repurchase Provisions. The Administrator in its sole discretion may provide that the Company may repurchase Shares acquired upon exercise of an Option or Stock Purchase Right upon the occurrence of certain specified events, including, without limitation, a Holder's termination as a Service Provider, divorce, bankruptcy or insolvency; provided, however, that any such repurchase right shall be set forth in the applicable Option Agreement or Restricted Stock purchase agreement or in another agreement referred to in such agreement and, provided further, that to the extent required by Section 260.140.41 and Section 260.140.42 of Title 10 of the California Code of Regulations, any such repurchase right set forth in an Option or Stock Purchase Right granted prior to the Public Trading Date to a person who is not an Officer, Director or Consultant shall be upon the following terms: (i) if the repurchase option gives the Company the right to repurchase the shares upon termination as a Service Provider at not less than the Fair Market Value of the shares to be purchased on the date of termination of status as a Service Provider, then (A) the right to repurchase shall be exercised for cash or cancellation of purchase money indebtedness for the shares within ninety (90) days of termination of status as a Service Provider (or in the case of shares issued upon exercise of Options or Stock Purchase Rights after such date of termination, within ninety (90) days after the date of the exercise) or such longer period as may be agreed to by the Administrator and the Plan participant and (B) the right terminates when the shares become publicly traded; and (ii) if the repurchase option gives the Company the right to repurchase the Shares upon termination as a Service Provider at the original purchase price for such Shares, then (A) the right to repurchase at the original purchase price shall lapse at the rate of at least twenty percent (20%) of the shares per year over five (5) years from the date the Option or Stock Purchase Right is granted (without respect to the date the Option or Stock Purchase Right was exercised or became exercisable) and (B) the right to repurchase shall be exercised

for cash or cancellation of purchase money indebtedness for the shares within ninety (90) days of termination of status as a Service Provider (or, in the case of shares issued upon exercise of Options or Stock Purchase Rights, after such date of termination, within ninety (90) days after the date of the exercise) or such longer period as may be agreed to by the Company and the Plan participant.

21. Investment Intent. The Company may require a Plan participant, as a condition of exercising or acquiring stock under any Option or Stock Purchase Right, (i) to give written assurances satisfactory to the Company as to the participant's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Option or Stock Purchase Right; and (ii) to give written assurances satisfactory to the Company stating that the participant is acquiring the stock subject to the Option or Stock Purchase Right for the participant's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (A) the issuance of the shares upon the exercise or acquisition of stock under the applicable Option or Stock Purchase Right has been registered under a then currently effective registration statement under the Securities Act or (B) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock.

22. Governing Law. The validity and enforceability of this Plan shall be governed by and construed in accordance with the laws of the State of Delaware without regard to otherwise governing principles of conflicts of law.

* * * * * * *

I hereby certify that the Plan was duly adopted by the Board of Directors of PayPal, Inc. on , 2001.

Executed at Palo Alto, California on this day of , 2001.

By:

Name:

Title:

* * * * * * *

I hereby certify that the foregoing Plan was approved by the stockholders of PayPal, Inc. on , 200 .

Executed at Palo Alto, California on this day of , 200 .

Secretary

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PAYPAL, INC. 2001 EQUITY INCENTIVE PLAN
EX-10.4 6 a2059025zex-10_4.htm EXHIBTI 10.4 Prepared by MERRILL CORPORATION
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EXHIBIT 10.4

X.COM CORPORATION

1999 STOCK PLAN

1. Purposes of the Plan. The purposes of this 1999 Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options (as defined under Section 422 of the Code) or Nonstatutory Stock Options, as determined by the Administrator at the time of grant of an Option and subject to the applicable provisions of Section 422 of the Code, as amended, and the regulations promulgated thereunder. Stock Purchase Rights may also be granted under the Plan.

2. Definitions. As used herein, the following definitions shall apply:

(a) "Administrator" means the Board or its Committee appointed pursuant to Section 4 of the Plan.

(b) "Affiliate" means an entity other than a Subsidiary in which the Company owns an equity interest or which, together with the Company, is under common control of a third person or entity.

(c) "Applicable Laws" means the legal requirements relating to the administration of stock option plans under applicable U.S. state corporate laws, U.S. federal and applicable state securities laws, the Code, any Stock Exchange rules or regulations and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan, as such laws, rules, regulations and requirements shall be in place from time to time.

(d) "Board" means the Board of Directors of the Company.

(e) "Change of Control" means a sale of all or substantially all of the Company's assets, or any merger or consolidation of the Company with or into another corporation; other than a merger or consolidation in which the holders of more than 50% of the shares of capital stock of the Company outstanding immediately prior to such transaction continue to hold (either by the voting securities remaining outstanding or by their being converted into voting securities of the surviving entity) more than 50% of the total voting power represented by the voting securities of the Company, or such surviving entity, outstanding immediately after such transaction.

(f) "Code" means the Internal Revenue Code of 1986, as amended.

(g) "Committee" means one or more committees or subcommittees of the Board appointed by the Board to administer the Plan in accordance with Section 4 below.

(h) "Common Stock" means the Common Stock of the Company.

(i) "Company" means X.com Corporation, a Delaware corporation.

(j) "Consultant" means any person, including an advisor, who renders services to the Company, or any Parent, Subsidiary or Affiliate, and is compensated for such services, and any director of the Company whether compensated for such services or not.

(k) "Continuous Service Status" means the absence of any interruption or termination of service as an Employee or Consultant to the Company or a Parent, Subsidiary or Affiliate. Continuous Service Status shall not be considered interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Administrator, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the

Company or between the Company, its Parents, Subsidiaries or Affiliates or their respective successors. Unless otherwise determined by the Administrator, a change in status from an Employee to a Consultant or from a Consultant to an Employee will not constitute an interruption of Continuous Service Status.

(l) "Corporate Transaction" means a sale of all or substantially all of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation.

(m) "Director" means a member of the Board.

(n) "Employee" means any person, including officers and Directors, employed by the Company or any Parent, Subsidiary or Affiliate of the Company. The payment by the Company of a director's fee to a Director shall not be sufficient to constitute "employment" of such Director by the Company.

(o) "Exchange Act" means the Securities Exchange Act of 1934, as amended.

(p) "Fair Market Value" means, as of any date, the fair market value of Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or a national market system including without limitation the National Market of the National Association of Securities Dealers, Inc. Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported), as quoted on such system or exchange on the date of determination, or if no trading occurred on the date of determination, on the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii) If the Common Stock is quoted on the Nasdaq System (but not on the National Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or

(iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator.

(q) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code, as designated in the applicable Option Agreement.

(r) "Listed Security" means any security of the Company that is listed or approved for listing on a national securities exchange or designated or approved for designation as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc.

(s) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option, as designated in the applicable Option Agreement.

(t) "Option" means a stock option granted pursuant to the Plan.

(u) "Option Agreement" means a written document, the form(s) of which shall be approved from time to time by the Administrator, reflecting the terms of an Option granted under the Plan

and includes any documents attached to or incorporated into such Option Agreement, including, but not limited to, a notice of stock option grant and a form of exercise notice.

(v) "Option Exchange Program" means a program approved by the Administrator whereby outstanding Options are exchanged for Options with a lower exercise price.

(w) "Optioned Stock" means the Common Stock subject to an Option or a Stock Purchase Right.

(x) "Optionee" means an Employee or Consultant who receives an Option.

(y) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code, or any successor provision.

(z) "Participant" means any holder of one or more Options or Stock Purchase Rights, or of the Shares issuable or issued upon exercise of such awards, under the Plan.

(aa) "Plan" means this 1999 Stock Plan.

(bb) "Reporting Person" means an officer, Director, or greater than 10% stockholder of the Company within the meaning of Rule 16a-2 under the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the Exchange Act.

(cc) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 10 below.

(dd) "Restricted Stock Purchase Agreement" means a written document, the form(s) of which shall be approved from time to time by the Administrator, reflecting the terms of a Stock Purchase Right granted under the Plan and includes any documents attached to such agreement.

(ee) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act, as the same may be amended from time to time, or any successor provision.

(ff) "Share" means a share of the Common Stock, as adjusted in accordance with Section 12 of the Plan.

(gg) "Stock Exchange" means any stock exchange or consolidated stock price reporting system on which prices for the Common Stock are quoted at any given time.

(hh) "Stock Purchase Right" means the right to purchase Common Stock pursuant to Section 10 below.

(ii) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code, or any successor provision.

(jj) "Ten Percent Holder" means a person who owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Parent or Subsidiary.

3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares that may be sold under the Plan is 2,000,000 Shares of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option expires or becomes unexercisable for any reason without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares that were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. In addition, any Shares of Common Stock that are retained by the Company upon exercise of an Option or Stock Purchase Right in order to satisfy the exercise or purchase price for such Option or Stock Purchase Right or any withholding taxes due with respect to such exercise shall be treated as not issued and shall continue to be available under the Plan. Shares issued under the Plan and later repurchased by the

Company pursuant to any repurchase right that the Company may have shall not be available for future grant under the Plan.

4. Administration of the Plan.

(a) General. The Plan shall be administered by the Board or a Committee, or a combination thereof, as determined by the Board. The Plan may be administered by different administrative bodies with respect to different classes of Optionees and, if permitted by the Applicable Laws, the Board may authorize one or more officers to grant Options or Stock Purchase Rights under the Plan.

(b) Administration with Respect to Reporting Persons. With respect to Options granted to Reporting Persons and Named Executives, the Plan may (but need not) be administered so as to permit such Options to qualify for the exemption set forth in Rule 16b-3 and to qualify as performance-based compensation under Section 162(m) of the Code.

(c) Committee Composition. If a Committee has been appointed pursuant to this Section 4, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of any Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies (however caused) and remove all members of a Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws and, in the case of a Committee administering the Plan pursuant to Section 4(b) above, to the extent permitted or required by Rule 16b-3 and Section 162(m) of the Code.

(d) Powers of the Administrator. Subject to the provisions of the Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, including the approval, if required, of any Stock Exchange, the Administrator shall have the authority, in its discretion:

(i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2 (p) of the Plan;

(ii) to select the Consultants and Employees to whom Options and Stock Purchase Rights or any combination thereof may from time to time be granted;

(iii) to determine whether and to what extent Options and Stock Purchase Rights or any combination thereof are granted;

(iv) to determine the number of Shares of Common Stock to be covered by each such award granted hereunder;

(v) to approve forms of agreement for use under the Plan;

(vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder, which terms and conditions include but are not limited to the exercise or purchase price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option, Optioned Stock, Stock Purchase Right or Restricted Stock, based in each case on such factors as the Administrator, in its sole discretion, shall determine;

(vii) to determine whether and under what circumstances an Option may be settled in cash under Section 9(f) instead of Common Stock;

(viii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since

the date the Option was granted and to make any other amendments or adjustments to any Option that the Administrator determines, in its discretion and under the authority granted to it under the Plan, to be necessary or advisable, provided however that no amendment or adjustment to an Option that would materially and adversely affect the rights of any Optionee shall be made without the prior written consent of the Optionee;

(ix) to determine the terms and restrictions applicable to Stock Purchase Rights and the Restricted Stock purchased by exercising such Stock Purchase Rights;

(x) to initiate an Option Exchange Program;

(xi) to construe and interpret the terms of the Plan and awards granted under the Plan; and

(xii) in order to fulfill the purposes of the Plan and without amending the Plan, to modify grants of Options or Stock Purchase Rights to Participants who are foreign nationals or employed outside of the United States in order to recognize differences in local law, tax policies or customs.

(e) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Participants.

5. Eligibility.

(a) Recipients of Grants. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees; provided however that Employees of Affiliates shall not be eligible to receive Incentive Stock Options. An Employee or Consultant who has been granted an Option or Stock Purchase Right may, if he or she is otherwise eligible, be granted additional Options or Stock Purchase Rights.

(b) Type of Option. Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of Shares with respect to which Options designated as Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares subject to an Incentive Stock Option shall be determined as of the date of grant of such Option.

(c) At-Will Relationship. The Plan shall not confer upon any Participant any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with such holder's right or the Company's right to terminate his or her employment or consulting relationship at any time, with or without cause.

6. Term of Plan. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten years unless sooner terminated under Section 15 of the Plan.

7. Term of Option. The term of each Option shall be the term stated in the Option Agreement; provided, however, that the term shall be no more than ten years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. However, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, is a Ten Percent Holder, the term of such Option shall be five years from the date of grant thereof or such shorter term as may be provided in the Option Agreement.

8. Option Exercise Price and Consideration.

(a) The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Administrator and set forth in the Option Agreement, but shall be subject to the following:

(i) In the case of an Incentive Stock Option that is:

(A) granted to an Employee who at the time of grant is a Ten Percent Holder, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant.

(B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant.

(ii) In the case of a Nonstatutory Stock Option that is:

(A) granted prior to the date, if any, on which the Common Stock becomes a Listed Security to a person who at the time of grant is a Ten Percent Holder, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of the grant if required by the Applicable Laws and, if not so required, shall be such price as is determined by the Administrator.

(B) granted prior to the date, if any, on which the Common Stock becomes a Listed Security to any other eligible person, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant if required by the Applicable Laws and, if not so required, shall be such price as is determined by the Administrator.

(iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction.

(b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash; (2) check; (3) delivery of Optionee's promissory note with such recourse, interest, security and redemption provisions as the Administrator determines to be appropriate (subject to the provisions of Section 153 of the Delaware General Corporation Law); (4) cancellation of indebtedness; (5) other Shares that (x) in the case of Shares acquired upon exercise of an Option, either have been owned by the Optionee for more than six months on the date of surrender or such other period as may be required to avoid a charge to the Company's earnings or were not acquired, directly or indirectly, from the Company, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised; (6) authorization for the Company to retain from the total number of Shares as to which the Option is exercised that number of Shares having a Fair Market Value on the date of exercise equal to the exercise price for the total number of Shares as to which the Option is exercised; (7) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect exercise of the Option and prompt delivery to the Company of the sale or loan proceeds required to pay the exercise price and any applicable withholding taxes; (8) any combination of the foregoing methods of payment; or (9) such other consideration and method of payment for the issuance of Shares to the extent permitted under the Applicable Laws. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company, and the Administrator may refuse to accept a particular form of consideration at the time of any Option exercise if, in its sole discretion, acceptance of such form of consideration is not in the best interests of the Company at such time.

9. Exercise of Option.

(a) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator, consistent with the term of the Plan and reflected in the Option Agreement, including vesting requirements and/or performance criteria with respect to the Company and/or the Optionee; provided however, that, if required by the Applicable Laws, any Option granted prior to the date, if any, upon which the Common Stock becomes a Listed Security shall become exercisable at the rate of at least 20% per year over five years from the date the Option is granted. In the event that any of the Shares issued upon exercise of an Option (which exercise occurs prior to the date, if any, upon which the Common Stock becomes a Listed Security) should be subject to a right of repurchase in the Company's favor, such repurchase right shall, if required by the Applicable Laws, lapse at the rate of at least 20% per year over five years from the date the Option is granted. Notwithstanding the above, in the case of an Option granted to an officer, Director or Consultant of the Company or any Parent, Subsidiary or Affiliate of the Company, the Option may become fully exercisable, or a repurchase right, if any, in favor of the Company shall lapse, at any time or during any period established by the Administrator. The Administrator shall have the discretion to determine whether and to what extent the vesting of Options shall cease or continue during any unpaid leave of absence; provided however that in the absence of such determination, vesting of Options shall cease during any such leave.

An Option may not be exercised for a fraction of a Share.

An Option shall be deemed exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and the Company has received full payment for the Shares with respect to which the Option is exercised. Full payment may, as authorized by the Administrator, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, not withstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan.

Exercise of an Option in any manner shall result in a decrease in the number of Shares that thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

(b) Termination of Employment or Consulting Relationship. In the event of termination of an Optionee's Continuous Service Status with the Company, such Optionee may, but only within three months (or such other period of time, not less than 30 days, as is determined by the Administrator, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise his or her Option to the extent that the Optionee was entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of such termination, or if the Optionee does not exercise the Option to the extent so entitled within the time specified above, the Option shall terminate and the Optioned Stock underlying the unexercised portion of the Option shall revert to the Plan. Unless otherwise determined by the Administrator, no termination shall be deemed to occur and this Section 9(b) shall not apply if (i) the Optionee is a Consultant who becomes an Employee, or (ii) the Optionee is an Employee who becomes a Consultant.

(i) Notwithstanding Section 9(b) above, in the event of termination of an Optionee's Continuous Service Status as a result of his or her total and permanent disability (within the meaning of Section 22(e)(3) of the Code), such Optionee may, but only within twelve months (or such other period of time as is determined by the Administrator, with such determination in the case of an Incentive Stock Option made at the time of grant of the Option) from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. To the extent that the Optionee was not entitled to exercise the Option at the date of termination, or if the Optionee does not exercise such Option to the extent so entitled within the time specified above, the Option shall terminate and the Optioned Stock underlying the unexercised portion of the Option shall revert to the Plan.

(ii) In the event of termination of an Optionee's Continuous Service Status as a result of a disability which does not fall within the meaning of total and permanent disability (as set forth in Section 22(e)(3) of the Code), such Optionee may, but only within twelve months (or such other period of time as is determined by the Administrator, with such determination in the case of an Incentive Stock Option made at the time of grant of the Option) from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. However, to the extent that such Optionee fails to exercise an Option that is an Incentive Stock Option (within the meaning of Section 422 of the Code) within three months of the date of such termination, the Option will not qualify for Incentive Stock Option treatment under the Code. To the extent that the Optionee was not entitled to exercise the Option at the date of termination, or if the Optionee does not exercise such Option to the extent so entitled within the time period specified above, the Option shall terminate and the Optioned Stock underlying the unexercised portion of the Option shall revert to the Plan.

(d) Death of Optionee. In the event of the death of an Optionee during the period of Continuous Service Status since the date of grant of the Option, or within 30 days following termination of the Optionee's Continuous Service Status, the Option may be exercised, at any time within twelve months following the date of death (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), by such Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of death or, if earlier, the date of termination of the Optionee's Continuous Service Status. To the extent that the Optionee was not entitled to exercise the Option at the date of death or termination, as the case may be, or if the Optionee does not exercise such Option to the extent so entitled within the time specified above, the Option shall terminate and the Optioned Stock underlying the unexercised portion of the Option shall revert to the Plan.

(e) Extension of Exercise Period. The Administrator shall have full power and authority to extend the period of time for which an Option is to remain exercisable following termination of an Optionee's Continuous Status as an Employee or Consultant from the periods set forth in Sections 9(b), 9(c) and 9(d) above or in the Option Agreement to such greater time as the Board shall deem appropriate, provided, that in no event shall such Option be exercisable later than the date of expiration of the term of such Option as set forth in the Option Agreement.

(f) Buy-Out Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted under the Plan based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time such offer is made.

10. Stock Purchase Rights.

(a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer, which shall in no event exceed 30 days from the date upon which the Administrator made the determination to grant the Stock Purchase Right. If required by the Applicable Laws, the purchase price of Shares subject to Stock Purchase Rights shall not be less than 85% of the Fair Market Value of the Shares as of the date of the offer, or, in the case of a person owning stock representing more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the price shall not be less than 100% of the Fair Market Value of the Shares as of the date of the offer. If the Applicable Laws do not impose restrictions on the purchase price, the purchase price of Shares subject to Stock Purchase Rights shall be as determined by the Administrator. The offer to purchase Shares subject to Stock Purchase Rights shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator.

(b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original purchase price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine; provided, however, that with respect to a purchaser who is not an officer, Director or Consultant of the Company or of any Parent or Subsidiary of the Company, it shall lapse at a minimum rate of 20% per year if required by the Applicable Laws.

(c) Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock Purchase Agreements need not be the same with respect to each purchaser.

(d) Rights as a Stockholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a stockholder, and shall be a stockholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 12 of the Plan.

11. Taxes.

(a) As a condition of the exercise of an Option or Stock Purchase Right granted under the Plan, the Participant (or in the case of the Participant's death, the person exercising the Option) shall make such arrangements as the Administrator may require for the satisfaction of any applicable federal, state, local or foreign withholding tax obligations that may arise in connection with the exercise of an Option or Stock Purchase Right and the issuance of Shares. The Company shall not be required to issue any Shares under the Plan until such obligations are satisfied.

(b) In the case of an Employee and in the absence of any other arrangement, the Employee shall be deemed to have directed the Company to withhold or collect from his or her compensation an amount sufficient to satisfy such tax obligations from the next payroll payment otherwise payable after the date of an exercise of the Option.

(c) This Section 11(c) shall apply only after the date, if any, upon which the Common Stock becomes a Listed Security. In the case of a Participant other than an Employee (or in the case of an Employee where the next payroll payment is not sufficient to satisfy such tax obligations, with respect to any remaining tax obligations), in the absence of any other arrangement and to the extent permitted under the Applicable Laws, the Participant shall be deemed to have elected to have the Company withhold from the Shares to be issued upon exercise of the Option or Stock Purchase Right that number of Shares having a Fair Market Value determined as of the applicable Tax Date (as defined below) equal to the amount required to be withheld. For purposes of this Section 11, the Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined under the Applicable Laws (the "Tax Date").

(d) If permitted by the Administrator, in its discretion, a Participant may satisfy his or her tax withholding obligations upon exercise of an Option or Stock Purchase Right by surrendering to the Company Shares that (i) in the case of Shares previously acquired from the Company, have been owned by the Participant for more than six months on the date of surrender, and (ii) have a Fair Market Value determined as of the applicable Tax Date equal to the amount required to be withheld.

(e) Any election or deemed election by a Participant to have Shares withheld to satisfy tax withholding obligations under Section 11(c) or (d) above shall be irrevocable as to the particular Shares as to which the election is made and shall be subject to the consent or disapproval of the Administrator. Any election by a Participant under Section 11(d) above must be made on or prior to the applicable Tax Date.

(f) In the event an election to have Shares withheld is made by a Participant and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Participant shall receive the full number of Shares with respect to which the Option or Stock Purchase Right is exercised but such Participant shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date.

12. Non-Transferability of Options and Stock Purchase Rights. Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution; provided however that, after the date, if any, upon which the Common Stock becomes a Listed Security, the Administrator may in its discretion grant transferable Nonstatutory Stock Options pursuant to Option Agreements specifying (i) the manner in which such Nonstatutory Stock Options are transferable and (ii) that any such transfer shall be subject to the Applicable Laws. The designation of a beneficiary by an Optionee will not constitute a transfer. An Option or Stock Purchase Right may be exercised, during the lifetime of the holder of the Option or Stock Purchase Right, only by such holder or a transferee permitted by this Section 12.

13. Adjustments Upon Changes in Capitalization, Corporate Transactions and Certain Other Transactions.

(a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, and the number of shares of Common Stock that have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or that have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per Share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued Shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination, recapitalization or reclassification of the Common Stock (including any change in the number of Shares of Common Stock effected in connection with a change of domicile of the Company), or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided,

however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right.

(b) Dissolution or Liquidation. In the event of the dissolution or liquidation of the Company, each outstanding Option or Stock Purchase Right shall terminate immediately prior to the consummation of such action, unless otherwise provided by the Administrator.

(c) Corporate Transactions; Change of Control. In the event of a Corporate Transaction, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right shall be substituted by the successor corporation or a Parent or Subsidiary of such successor corporation, unless such successor corporation does not agree to assume the outstanding Options or Stock Purchase Rights or to substitute equivalent options or rights, in which case such Options or Stock Purchase Rights shall terminate upon the consummation of the transaction; provided however that in the event of a Change of Control, the Administrator shall, as to outstanding Options, either (i) provide that such Options shall be assumed by the successor corporation or a Parent or Subsidiary of the successor corporation (such entity, the "Successor Corporation") or that the Successor Corporation shall substitute with respect to such Options equivalent options; (ii) provide upon notice to Optionees that all Options, to the extent then exercisable or to be exercisable as a result of the Change of Control, must be exercised on or before a specified date (which date shall be at least five (5) days from the date of the notice), after which the Options shall terminate; or (iii) terminate each Option in its entirety in exchange for a payment of cash, securities and/or other property equal to the excess of the Fair Market Value of the portion of the Optioned Stock that is vested and exercisable immediately prior to the consummation of the transaction over the aggregate exercise price thereof.

For purposes of this Section 13(c), an Option or a Stock Purchase Right shall be considered assumed, without limitation, if, at the time of issuance of the stock or other consideration upon a Corporate Transaction or a Change of Control, as the case may be, each holder of an Option or Stock Purchase Right would be entitled to receive upon exercise of the Option or Stock Purchase Right the same number and kind of shares of stock or the same amount of property, cash or securities as such holder would have been entitled to receive upon the occurrence of the transaction if the holder had been, immediately prior to such transaction, the holder of the number of Shares of Common Stock covered by the Option or the Stock Purchase Right at such time (after giving effect to any adjustments in the number of Shares covered by the Option or Stock Purchase Right as provided for in this Section 13); provided however that if such consideration received in the transaction is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon exercise of the Option or Stock Purchase Right to be solely common stock of the successor corporation or its Parent equal to the Fair Market Value of the per Share consideration received by holders of Common Stock in the transaction.

(d) Certain Distributions. In the event of any distribution to the Company's stockholders of securities of any other entity or other assets (other than dividends payable in cash or stock of the Company) without receipt of consideration by the Company, the Administrator may, in its discretion, appropriately adjust the price per Share of Common Stock covered by each outstanding Option or Stock Purchase Right to reflect the effect of such distribution.

14. Time of Granting Options and Stock Purchase Rights. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the

determination granting such Option or Stock Purchase Right, or such other date as is determined by the Administrator; provided, however, that in the case of any Incentive Stock Option, the grant date shall be the later of the date on which the Administrator makes the determination granting such Incentive Stock Option or the date of commencement of the Optionee's employment relationship with the Company. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant.

15. Amendment and Termination of the Plan.

(a) Authority to Amend or Terminate. The Board may at any time amend, alter, suspend, discontinue or terminate the Plan, but no amendment, alteration, suspension, discontinuation or termination (other than an adjustment made pursuant to Section 13 above) shall be made that would materially and adversely affect the rights of any Optionee or holder of Stock Purchase Rights under any outstanding grant, without his or her consent. In addition, to the extent necessary and desirable to comply with the Applicable Laws, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required.

(b) Effect of Amendment or Termination. No amendment or termination of the Plan shall materially and adversely affect Options already granted, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company.

16. Conditions Upon Issuance of Shares. Notwithstanding any other provision of the Plan or any agreement entered into by the Company pursuant to the Plan, the Company shall not be obligated, and shall have no liability for, failure to issue or deliver any Shares under the Plan unless such issuance or delivery would comply with the Applicable Laws, with such compliance determined by the Company in consultation with its legal counsel.

As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by law.

17. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

18. Agreements. Options and Stock Purchase Rights shall be evidenced by Option Agreements and Restricted Stock Purchase Agreements, respectively, in such form(s) as the Administrator shall from time to time approve.

19. Stockholder Approval. If required by the Applicable Laws, continuance of the Plan shall be subject to approval by the stockholders of the Company within twelve months before or after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under the Applicable Laws.

20. Information and Documents to Optionees and Purchasers. Prior to the date, if any, upon which the Common Stock becomes a Listed Security and if required by the Applicable Laws, the Company shall provide financial statements at least annually to each Optionee and to each individual who acquired Shares pursuant to the Plan, during the period such Optionee or purchaser has one or more Options or Stock Purchase Rights outstanding, and in the case of an individual who acquired Shares pursuant to the Plan, during the period such individual owns such Shares. The Company shall not be required to provide such information if the issuance of Options or Stock Purchase Rights under the Plan is limited to key employees whose duties in connection with the Company assure their access to equivalent information. In addition, at the time of issuance of any securities under the Plan, the Company shall provide to the Optionee or the purchaser a copy of the Plan and any agreement(s) pursuant to which securities granted under the Plan are issued.

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X.COM CORPORATION 1999 STOCK PLAN
EX-10.5 7 a2059025zex-10_5.htm EXHIBIT 10.5 Prepared by MERRILL CORPORATION
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EXHIBIT 10.5

CONFINITY, INC.

1999 STOCK PLAN
(as amended February 29, 2000)

1. Purposes of the Plan. The purposes of this Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan.

2. Definitions. As used herein, the following definitions shall apply:

(a) "Administrator" means the Board or any of its Committees as shall be administering the Plan in accordance with Section 4 hereof.

(b) "Applicable Laws" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan.

(d) "Code" means the Internal Revenue Code of 1986, as amended.

(e) "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 hereof.

(f) "Common Stock" means the Common Stock of the Company.

(g) "Company" means Confinity, Inc., a California corporation.

(h) "Consultant" means any person who is engaged by the Company or any Parent or Subsidiary to render consulting or advisory services to such entity.

(i) "Director" means a member of the Board of Directors of the Company.

(j) "Disability" means total and permanent disability as defined in Section 22(e)(3) of the Code.

(k) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company.

(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended.

(m) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination; or

(iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator.

(n) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

(o) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option.

(p) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(q) "Option" means a stock option granted pursuant to the Plan.

(r) "Option Agreement" means a written or electronic agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan.

(s) "Option Exchange Program" means a program whereby outstanding Options are exchanged for Options with a lower exercise price.

(t) "Optioned Stock" means the Common Stock subject to an Option or a Stock Purchase Right.

(u) "Optionee" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan.

(v) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code,

(w) "Plan" means this 1999 Stock Plan.

(x) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 11 below.

(y) "Section 16(b)" means Section 16(b) of the Securities Exchange Act of 1934, as amended.

(z) "Service Provider" means an Employee, Director or Consultant.

(aa) "Share" means a share of the Common Stock, as adjusted in accordance with Section 12 below.

(bb) "Stock Purchase Right" means a right to purchase Common Stock pursuant to Section 11 below.

(cc) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code.

3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be subject to option and sold under the Plan is 7,500,000 Shares. The Shares may be authorized but unissued, or reacquired Common Stock.

If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). However, Shares that have actually been issued under the Plan, upon exercise of either an Option or Stock Purchase Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan.

4. Administration of the Plan.

(a) Administrator. The Plan shall be administered by the Board or a Committee appointed by the Board, which Committee shall be constituted to comply with Applicable Laws.

(b) Powers of the Administrator. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its discretion:

(i) to determine the Fair Market Value;

(ii) to select the Service Providers to whom Options and Stock Purchase Rights may from time to time be granted hereunder;

(iii) to determine the number of Shares to be covered by each such award granted hereunder;

(iv) to approve forms of agreement for use under the Plan;

(v) to determine the terms and conditions, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine;

(vi) to determine whether and under what circumstances an Option may be settled in cash under subsection 9(e) instead of Common Stock;

(vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option has declined since the date the Option was granted;

(viii) to initiate an Option Exchange Program;

(ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws;

(x) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock

Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Optionees to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; and

(xi) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan.

(c) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees.

5. Eligibility.

(a) Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. For purposes of this Section 5(a), "Service Providers" shall include prospective Service Providers to whom Options or Stock Purchase Rights are granted in connection with written offers of a service relationship with the Company or any Parent or Subsidiary. Any person who is not an Employee on the effective date of the grant of an Option may be granted only a Nonstatutory, Stock Option. An Incentive Stock Option granted to a prospective Employee on the condition that such individual become an Employee shall be deemed granted effective on the date such person begins service with the Company or any Parent or Subsidiary. The exercise price of such Incentive Stock Option shall be determined as of such date in accordance with Section 8.

(b) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time of the Option with respect to such Shares is granted.

(c) Neither the Plan nor any Option or Stock Purchase Right shall confer upon any Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate such relationship at any time, with or without cause.

6. Term of Plan. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan.

7. Term of Option. The term of each Option shall be stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement.

8. Option Exercise Price and Consideration.

(a) The per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following:

(i) In the case of an Incentive Stock Option

(A) granted to an Employee who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant.

(B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant.

(ii) In the case of a Nonstatutory Stock Option

(A) granted to a Service Provider who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant.

(B) granted to any other Service Provider, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant.

(iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction.

9. Exercise of Option.

(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable according to the terms hereof at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Except in the case of Options granted to Officers, Directors and Consultants, Options shall become exercisable at a rate of no less than 20% per year over five (5) years from the date the Options are granted. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share.

An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option

is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 12 of the Plan.

Exercise of an Option in any manner shall result in a decrease in the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

(b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, such Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least thirty (30) days) to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

(c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least six (6) months) to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

(d) Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (of at least six (6) months) to the extent that the Option is vested on the date of death (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement) by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to the entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

(e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the administrator shall establish and communicate to the Optionee at the time that such offer is made.

10. Non-Transferability of Options and Stock Purchase Rights. The Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee.

11. Stock Purchase Rights.

(a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall

advise the offeree in writing or electronically of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer. The terms of the offer shall comply in all respects with Section 260.140.42 of Title 10 of the California Code of Regulations. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator.

(b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine. Except with respect to Shares purchased by Officers, Directors and Consultants, the repurchase option shall in no case lapse at a rate of less than 20% per year over five (5) years from the date of purchase.

(c) Other Provisions. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion.

(d) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have rights equivalent to those of a shareholder and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 12 of the Plan.

12. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.

(a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company. The conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right.

(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option or Stock Purchase Right until fifteen (15) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option or Stock Purchase Right would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any

Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action.

(i) Employee and Consultant Options.

(A) General. In the event of (1) a merger or consolidation of the Company with or into any other corporation or corporations (but excluding any transaction or series of transactions effected solely for the purpose of reincorporating the Company into another jurisdiction and any transaction(s) in which the shareholders of the Company immediately prior to such transaction(s) control, immediately after consummation of the transaction(s), more than 50% of the voting power of the surviving entity) or (2) a sale of all or substantially all of the assets of the Company (a "Change of Control"), each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the Successor Corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets.

(B) Executive Officer Options. Following an assumption or substitution in connection with a Change of Control, if an Executive Officer's (a person appointed by the Board of Directors as Executive Officer) status as an employee of the Successor Corporation, as applicable, is terminated by the Successor Corporation as a result of an involuntary termination (other than for cause) within twelve months following a Change of Control, the Optionee shall fully vest in and have the right to exercise Optionee's Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which Optionee would not otherwise be vested or exercisable. Thereafter, the Option or Stock Purchase Right shall remain exercisable in accordance with Section 9. For purposes only of this provision, "Involuntary Termination" shall mean (1) without Optionee's

express written consent, a significant reduction of the Optionee's duties, position or responsibilities, as an employee of the Company or the removal of the Optionee from such position and responsibilities, unless Optionee is provided with a comparable position (i.e., a position of equal or greater organizational level, duties, authority, compensation and status) (the fact that Optionee may be employed at a divisional or departmental level with the surviving corporation will not by itself determine that there has been a significant reduction in Optionee's duties, position or responsibilities or that Optionee's position with the surviving corporation is not a comparable position); (2) a significant reduction by the Company in the base salary of the Optionee as in effect immediately prior to such reduction; (3) a material reduction by the Company in the kind or level of employee benefits to which the Optionee is entitled immediately prior to such reduction with the result that the Purchaser's overall benefits package is significantly reduced; or (4) without the Optionee's express written consent, the relocation of the Purchaser to a facility or a location more than twenty-five (25) miles from the Company's offices immediately prior to the date of the Change of Control. Notwithstanding the above, none of the following shall be factors in determining whether an Involuntary Termination has occurred: the event of a Change of Control itself, the identity of the surviving corporation, or the surviving corporation's status as a private or public company.

(ii) Outside Director Options. In the event of a Change of Control, each outstanding Option and Stock Purchase Right held by an Outside Director (and granted to such person in such capacity) shall fully vest as to all of the Optioned Stock, including Shares as to which the Outside Director would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable as provided in this paragraph, the Administrator shall notify the optionee in writing or electronically that the Option or Stock Purchase Right shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Rights shall terminate upon the expiration of such period.

13. Time of Granting Options and Stock Purchase Rights. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Service Provider to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant.

14. Amendment and Termination of the Plan.

(a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan.

(b) Shareholder Approval. The Board shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.

(c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination.

15. Conditions Upon Issuance of Share.

(a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance.

(b) Investment Representations. As a condition to the exercise of an Option, the Administrator may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.

16. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

17. Reservation of Shares. The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

18. Shareholder Approval. The Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under Applicable Laws.

19. Information to Optionees and Purchasers. The Company shall provide to each Optionee and to each individual who acquires Shares pursuant to the Plan, not less frequently than annually during the period such Optionee or purchaser has one or more Options or Stock Purchase Rights outstanding, and, in the case of an individual who acquires Shares pursuant to the Plan, during the period such individual owns such Shares, copies of annual financial statements. The Company shall not be required to provide such statements to key employees whose duties in connection with the Company assure their access to equivalent information.

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CONFINITY, INC. 1999 STOCK PLAN (as amended February 29, 2000)
EX-10.6 8 a2059025zex-10_6.htm EXHIBIT 10.6 Prepared by MERRILL CORPORATION
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EXHIBIT 10.6

FORM OF LOAN, PLEDGE AND OPTION AGREEMENT

This LOAN, PLEDGE AND OPTION AGREEMENT (the "Agreement") is made as of July , 2001 between ("Borrower") and PayPal, Inc. ("Lender").

A. Borrower desires to borrow and Lender desires to loan the aggregate amount of Dollars ($ ) on the terms and subject to the conditions of this Agreement.

B. To induce Lender to make such a loan, Borrower desires to grant a call option to Lender on the terms and subject to the conditions of this Agreement.

THE PARTIES AGREE AS FOLLOWS:

1. The Loan.

1.1 Advance of Funds. Subject to the terms and conditions of this Agreement, Lender will advance to Borrower the sum of Dollars ($ ) (the "Loan"). As security for the Loan, Borrower herein assigns as security and pledges to Lender ( ) shares (the "Shares") of Common Stock of PayPal, Inc. (the "Issuer"), as further described in Section 6 below.

1.2 Promise to Pay. On or before July , 2005 or such earlier date as provided below (the "Maturity Date"), Borrower promises to pay to Lender the sum of Dollars ($ ) together with accrued but unpaid interest as provided herein. Interest shall be due and payable on the date that the principal is due on the outstanding principal balance of the Loan at the rate of 5.02% per annum, compounded annually (the "Interest"). The principal and Interest payable by Borrower under this Agreement are secured as provided in Section 6 and, other than such security, constitute a non-recourse obligation of Borrower.

2. Lender's Call Option.

2.1 Grant of the Call. Borrower hereby grants to Lender a call option (the "Call") to purchase from Borrower ( ) shares (the "Call Shares") of Common Stock of the Issuer. Pursuant to the Call, the per share exercise price for the Call Shares (the "Lender Exercise Price"), payable by Lender, shall equal Three Dollars ($3.00).

2.2 Exercise Period. The Call may be exercised on one occasion, in whole, but not in part, at any time after July , 2002 and before July , 2005.

2.3 Manner of Exercise. Subject to the terms and conditions herein, Lender may exercise the Call by delivery of written notice (the "Call Exercise Notice") to Borrower and Pledgeholder (as such term is defined in Section 6 hereof), specifying the effective date of the exercise (the "Call Exercise Date"), which shall be fifteen (15) days after the date on which Borrower is deemed to receive the Call Exercise Notice.

2.4 Call Payment. Lender may elect to pay the Lender Exercise Price by (i) cash, (ii) cancellation of the principal and Interest payable by Borrower under this Agreement, or (iii) any combination of the foregoing. The election of the form of payment shall be made by Lender in its sole discretion.

2.5 Termination of Call. The Call shall expire upon the earlier of (i) July , 2005, or (ii) the sale or transfer of the Collateral pursuant to Section 6.2.

3. Distributions and Adjustments to the Shares.

3.1 Changes in Capital Structure. If the Shares are changed by reason of a stock split, reverse stock split, stock dividend or recapitalization, or converted or exchanged for other securities as a result of a merger or reorganization of Issuer, the number of Shares and Call Shares, the class of securities and the Lender Exercise Price shall be appropriately adjusted to

preserve the benefits to the parties under this Agreement, provided that the aggregate Lender Exercise Price shall remain unchanged.

3.2 Distributions and Additional Securities. If any Distribution (as hereinafter defined) of securities, cash or other property issued in connection with a change described in Section 3.1 shall be received by Borrower, Borrower shall, within five days of receipt, deliver the cash, certificates or other instruments evidencing title to such Distribution or other securities, together with appropriate instruments of transfer, to Pledgeholder to be held as part of the Pledge. Any Distribution shall become a part of the Share or Call Share to which it relates and shall therefore, among other things, be subject to the Call and shall constitute additional Collateral (as such term is defined in Section 6.1 hereof). A "Distribution" means any property receivable by Borrower or other holder of a Share as owner of any Share, and shall include, without limitation, dividends (whether in cash or other property, such as securities or contract rights), cash, and securities or other property arising from a reorganization, recapitalization, stock split or merger of the Issuer or the issuer of any security that is a Distribution.

3.3. Determination of Fair Market Value. For valuation purposes under this Agreement, the "Value" of each Share on any relevant date shall be equal to the fair market value of such Share as determined in accordance with the following provisions:

(a) If Issuer's Common Stock at the time is neither listed nor admitted to trading on any stock exchange nor traded in the over-the-counter market, then the fair market value of each Share shall be equal to the fair market value last determined by the Board of Directors of the Issuer, taking into account any limitations on transferability, whether due to the size of the block of shares or the restrictions of applicable securities laws.

(b) If Issuer's Common Stock is at the time listed or admitted to trading on any stock exchange, then the fair market value of each Share shall be the closing selling price of one share of Common Stock on the date in question on the stock exchange serving as the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no reported sale of Common Stock on such exchange on the date in question, then the fair market value of each Share shall be the closing selling price on the exchange on the last preceding date for which such quotation exists.

(c) If Issuer's Common Stock is not at the time listed or admitted to trading on any stock exchange but is traded in the over-the-counter market, the fair market value of each Share shall be the mean between the highest bid and lowest asked prices (or, if such information is available, the closing selling price) of one share of the Common Stock on the date in question in the over-the-counter market, as such prices are reported by the National Association of Securities Dealers through its Nasdaq system or any successor system. If there are no reported bid and asked prices (or closing selling price) for the Common Stock on the date in question, then the mean between the highest bid price and lowest asked price (or the closing selling price) on the last preceding date for which such quotations exist shall be determinative of fair market value of each Share.

4. Certain Rights Respecting Shares.

4.1 Rights Notice. Borrower shall give notice (the "Rights Notice") to Lender of any right to purchase additional shares or other securities ("Right") granted to Borrower and arising out of Borrower's ownership of any Shares or Distributions, such Rights Notice to be given within five (5) days after Borrower becomes aware of the existence of any Right. Each Rights Notice shall state the terms of the Right, including the expiration date for the exercise of the Right, shall state

whether the Issuer will allow assignment of the Right to Lender, and shall be accompanied by the notice received by Borrower advising of the existence of the Right.

4.2 Rights Exercise Notice. Lender shall have ten (10) business days after receipt of a Rights Notice within which to give notice (the "Rights Exercise Notice") to Borrower that Lender wishes Borrower to (i) assign all or a portion of such Right to Pledgeholder, and/or (ii) exercise all or any portion of the Right. If Lender requests an assignment, Borrower shall, promptly and without further consideration, assign to Pledgeholder the portion of the Right specified in the Rights Exercise Notice. If Lender requests Borrower to exercise all or any portion of the Right, and provide to Borrower the consideration required to be paid in connection with the exercise of the Right prior to the expiration date of the Right, then Borrower shall exercise the Right and immediately transfer, assign and deliver to Pledgeholder the securities received upon exercise in exchange for such consideration. Any amount advanced by Lender pursuant to this section shall be added to the amount of the loan hereunder, and the call price for such Rights shall equal the amount advanced plus an amount equal to interest at 5.02% per annum compounded annually from the date of such advance. The call for such Rights may not be exercised other than in connection with a call of a corresponding number of Shares.

4.3 Borrower's Right to Exercise. If the Lender fails to give a Rights Exercise Notice in accordance with Section 4.2 with respect to any Right, or portion of a Right, Borrower shall be free to exercise or assign such Right or portion of a Right for its own account.

5. Loan Payment Terms.

5.1 Acceleration. Lender may, at its option and in its sole discretion declare the then-outstanding principal balance of the Loan, together with all accrued and unpaid interest thereon, to be immediately due and payable ninety (90) days following the occurrence of any of the following (each of which is referred to herein as an "Event of Default"):

(a) the failure of Borrower to pay any amount under this Agreement when due;

(b) the commencement of any proceeding against Borrower in bankruptcy, or otherwise seeking any reorganization, arrangement or similar relief, or the appointment of a receiver, trustee, or liquidator to take possession of the assets of Borrower, or the commencement of any other proceeding under any law for the relief of creditors;

(d) any liquidation of Borrower.

5.2 Payment. Borrower may prepay amounts due under this Agreement without the consent of Lender; provided, however, that no such prepayment shall affect the validity or exercisability of the Call. If payment is due on a Saturday, Sunday, or a public holiday under the laws of the State of California, such payment shall be made on the next succeeding business day and such extension of time shall be included in computing interest in connection with such payment. The date specified for payment under this Section 5.2 may be accelerated as provided in Section 5.1.

6. Pledge as Security.

6.1 Pledge. As security for all of Borrower's obligations and liabilities to Lender whether now existing or hereafter arising under this Agreement, including without limitation the Call (the "Obligations"), Borrower herein assigns as security and pledges to Lender the Shares and grants Lender a security interest in Borrower's right, title and interest in and to the Shares and any Distributions thereon, the proceeds (from disposition or otherwise) thereof and all proceeds (from disposition or otherwise) of proceeds (collectively the "Collateral"). Borrower agrees to take such

additional actions as may be necessary or advisable at the reasonable request of Lender to perfect and continue Lender's security interest in the Collateral.

6.2 Default; Non-Recourse Obligation. If an Event of Default has occurred, Lender is authorized to purchase the Collateral or to sell, assign and deliver at Lender's discretion, from time to time, all or any part of the Collateral at any private or public sale, on not less than ten (10) days' written notice to Borrower and Pledgeholder (as such term is defined in Section 6.3 hereof), at such price or prices and upon such terms as Lender may deem advisable, and Lender shall have all the rights and remedies of a secured creditor under the provisions of the California Uniform Commercial Code. At any such public sale, Lender may bid for, and become the purchaser of, the whole or any part of the Collateral offered for sale. The parties agree that, prior to the establishment of a public market for the Common Stock of the Issuer, the securities laws affecting sale of the Shares make a public sale of the Shares commercially unreasonable. The parties further agree that the repurchasing of such Shares by the Issuer, or by any person to whom the Issuer may have assigned its rights under this Agreement, is commercially reasonable if made at a price at least equal to the Value of the Shares. In case of any sale, after deducting the costs, counsel fees and other expenses of sale and delivery, the remaining proceeds of such sale shall be applied to the satisfaction of the Obligations; provided, however, that after satisfaction in full of the Obligations, the balance of the proceeds of sale then remaining shall be paid to Borrower. The Obligations are non-recourse obligations and Borrower shall not be personally liable for any deficiency if the proceeds of the sale of the Collateral are insufficient to discharge the amount of principal and interest due under this Agreement.

6.3 Appointment of Pledgeholder. Lender hereby appoints the Secretary of the Issuer, or his designee, as "Pledgeholder" to accept and hold the Collateral on its behalf. To assure Borrower's ability to perform Borrower's Obligations under this Agreement, Borrower will, concurrently with the delivery of this Agreement, deliver the stock certificate representing the Shares, together with a duly executed blank assignment separate from certificate for such certificate, to Pledgeholder, such documents to be held in pledge (the "Pledge").

6.4 Duties After an Event of Default. Pledgeholder shall have no duty to determine the existence of an Event of Default, but may, without any liability whatsoever, rely upon the written notice of Lender that an Event of Default has occurred. If, following an Event of Default, Lender shall elect to exercise its right to realize on the Shares, Pledgeholder shall, upon the receipt of written notice from Lender of the number of Shares sold and sale price, (i) date the stock assignments necessary for each transfer in question, (ii) fill in the number of Shares being transferred and (iii) deliver the same, together with the certificate(s) evidencing the Shares to be transferred to the purchaser against the simultaneous delivery to Pledgeholder of the purchase price for the number of the Shares then being purchased. In connection with each such sale, Pledgeholder shall deliver from the Pledge the specific Shares which are designated by Lender; provided, however, that Pledgeholder's duties hereunder are subject to the cooperation of Borrower, Issuer and Issuer's transfer agent or counsel with respect to furnishing to Pledgeholder all necessary stock certificates and other related instruments as appropriate. Following an Event of Default, Pledgeholder shall dispose of the Collateral other than the Shares in accordance with written instructions of Lender. After deducting the costs, counsel fees and other expenses of such sale and delivery, Pledgeholder shall pay the remaining proceeds of such sale to Lender to the extent of the Obligations of Borrower under this Agreement as specified by Lender. Any remaining proceeds of such sale shall be paid to Borrower.

6.5 Duties of Pledgeholder Upon Exercise of Call. If Pledgeholder is given a valid Call Exercise Notice, Pledgeholder shall, on the Call Exercise Date (i) date the stock assignment necessary for the transfer in question, (ii) fill in the number of Shares being transferred and

(iii) deliver to Lender the assignment, together with the certificate for the Shares being transferred.

6.6 Return of Collateral. Upon Borrower's satisfaction of the Obligations, Lender shall instruct Pledgeholder to return to Borrower all Collateral, if any, then in Pledgeholder's possession.

6.7 Return of Property. If, at the time of termination of the Pledge, Pledgeholder has in its possession any documents, securities, or other property belonging to Borrower, then it shall deliver all of same to Borrower and shall be discharged of all further obligations hereunder.

6.8 Attorney-In-Fact; Additional Stock Assignments. The parties hereby irrevocably constitute and appoint Pledgeholder as their attorney-in-fact and agent for the term of this Pledge to execute, with respect to the securities and other property that are deposited with Pledgeholder hereunder, all documents necessary or appropriate to make any such securities negotiable and complete any transaction contemplated herein. Borrower shall deliver to Pledgeholder from time to time any instruments of transfer duly executed by Borrower as may be requested by Lender or Pledgeholder.

6.9 Duties. Pledgeholder shall carry out its duties hereunder to the best of its ability and shall be liable only for gross negligence or willful misconduct. Pledgeholder's duties hereunder may be altered, amended, modified or revoked only by a written instrument signed by Lender, Borrower and Pledgeholder.

6.10 Obligations. Pledgeholder shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by it to be genuine and to have been signed or presented by the proper party or parties. Pledgeholder shall not be personally liable for any act it may do or omit to do hereunder as Pledgeholder or as attorney-in-fact for Borrower or Lender while acting in good faith and in the exercise of its own judgment, and any act done or omitted by Pledgeholder pursuant to the advice of its own attorneys shall be conclusive evidence of such good faith.

6.11 Authorization to Act. Pledgeholder is hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case Pledgeholder obeys or complies with any such order, judgment or decree of any court, it shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction.

6.12 Authority to Invest. Any cash received by Pledgeholder pursuant to this Agreement and designated by Lender as a Distribution shall be invested in an interest-bearing savings account and the interest thereon shall constitute a part of such Distribution.

6.13 Bankruptcy. Bankruptcy, insolvency, dissolution or absence of any party hereto shall not affect Pledgeholder's performance hereunder.

6.14 Statute of Limitations. Pledgeholder shall not be liable for the lapse of any rights because of any Statute of Limitation applicable with respect to this Agreement or any documents deposited with Pledgeholder.

6.15 Legal Counsel. Pledgeholder shall be entitled to employ such legal counsel and other experts as it may deem necessary to advise it properly in connection with its obligations hereunder,

may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor, for which Pledgeholder shall be reimbursed 50% by Lender and 50% by Borrower.

6.16 Termination of Duties; Successor. Pledgeholder's responsibilities as Pledgeholder hereunder shall terminate if (i) Pledgeholder shall resign by thirty (30) days written notice to Borrower and Lender, (ii) Borrower and Lender jointly agree as to Pledgeholder's termination and appoint Pledgeholder's successor, or (iii) Pledgeholder dies or is disabled. In the event of such termination by resignation, death or disability, Lender shall appoint a successor. Upon receipt of notice of appointment of a successor, all documents, shares and other property then in Pledgeholder's possession pursuant to this Agreement shall be delivered to such successor.

6.17 Further Instruments. If Pledgeholder reasonably requires other or further instruments in connection with this Agreement or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments.

6.18 Disputes. If any dispute arises with respect to the delivery and/or ownership or right of possession of the securities or other property held by Pledgeholder hereunder, Pledgeholder may, at Pledgeholder's option, be relieved from all liability to Borrower and Lender by depositing all documents held hereunder with the Clerk of the California Superior Court for the County of San Mateo for the purpose of permitting the Borrower and Lender to litigate their respective rights in such court. The receipt of the Clerk of such court of such documents shall discharge Pledgeholder from all liability to Borrower and Lender, and the same may be pleaded as a bar to any action by Borrower or Lender against Pledgeholder.

7. Representations, Warranties and Covenants of Borrower.

7.1 Ownership of Shares; No Conflicts. Borrower represents and warrants as of this date, and covenants, for the period beginning on this date and ending on the Expiration Date (as such term is defined in Section 8.5 hereof), that (i) Borrower has and will have the right to transfer to Lender all or any part of the Shares and Distributions, free and clear of any lien, claim, encumbrance or restriction of any type or nature whatsoever (other than such as are presently held by the Lender or may arise under this Agreement, and restrictions on resale that may arise under applicable federal and state securities laws); (ii) the Shares are not, and the Shares and Distributions will not be, subject to any right of first refusal, right of repurchase or any similar right granted to, or retained by any person other than the Lender; and (iii) there is no provision of any existing agreement, and Borrower will not enter into an agreement by which the Borrower is or would be bound (or to which the Borrower is or would become subject), that conflicts or would conflict with this Agreement or the performance of Borrower's obligations under this Agreement.

7.2 Further Assurances. Upon the reasonable request of Pledgeholder or Lender, Borrower will prepare, execute and deliver any further instruments and do any further acts that may be necessary to carry out more effectively the purposes of this Agreement, including, if necessary, the preparation and execution of applications to the California Department of Corporations.

7.3 Acknowledgement. Borrower hereby acknowledges that he has had access to all of the information that Borrower needs in order to make an informed decision to enter into this Agreement and that he has not relied on any information provided to him by Lender in reaching such decision.

8. Miscellaneous.

8.1 Assignment.

Distributions or Collateral. Any attempt to sell, assign, transfer, hypothecate, pledge or otherwise encumber this Agreement, any interest therein or any such Shares or Distributions or Collateral and any levy of execution, attachment, or similar process on the Shares or such Distributions or Collateral shall be null and void. Subject to the foregoing, the Call shall be binding on and inure to the benefit of the heirs, executors, and personal representatives of Borrower.

(b) By Lender. Lender may assign its right, title and interest in this Agreement, in whole or in part, effective upon notice to Borrower and Pledgeholder. Following such assignment, this Agreement shall be binding upon and inure to the benefit of any such assignee. Such assignment shall be conditioned on compliance with any applicable state and federal securities laws and, upon request by Borrower, Lender shall furnish an opinion of counsel to such effect, reasonably satisfactory to the Issuer and Borrower.

8.2 Amendment. Except as provided in Section 6.9 with respect to Pledgeholder's duties, this Agreement may only be amended by a writing signed by Borrower and Lender.

8.3 Governing Law; Consent to Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts entered into and wholly to be performed in the State of California. Each party hereto hereby agrees that any action that, in whole or in part, in any way arises under this Agreement shall be brought in the Superior Court of the State of California for the County of Santa Clara or the United States District Courts for the Northern District of California. Each party hereby submits itself to the exclusive jurisdiction and venue of such Courts for purposes of any such action and agrees that any notice, document or complaint in any such action may be served on it by delivery in the manner provided for the delivery of notices under this Agreement.

8.4 Notices. All notices and other communications under this Agreement shall be in writing, and shall be deemed to have been duly given on the date of delivery if delivered personally or by confirmed facsimile, or on the next day after dispatch via overnight messenger or courier, or on the second day after mailing if mailed to the party to whom notice is to be given by first class mail, registered or certified, postage prepaid, and addressed as follows (until any such address is changed by notice duly given):


	If to Borrower:	«Purchaser» «Address1» «Address2»
	If to Lender:	PayPal, Inc. 1840 Embarcadero Road Palo Alto, CA 94303 Attn: Chief Financial Officer Facsimile: (650) 251-1222
	If to Pledgeholder:	PayPal, Inc. 1840 Embarcadero Road Palo Alto, CA 94303 Attn: Secretary Facsimile: (650) 251-1222

8.5 Term. This Agreement shall terminate at 5 p.m. Pacific Time, on July , 2005 (the "Expiration Date"); provided, however, that such termination shall not affect Borrower's obligation to repay principal plus accrued but unpaid Interest (whether accruing before or after the Expiration Date) on the Loan.

8.6 Voluntary Execution of Agreement. Borrower and Lender each acknowledge that: (a) Borrower and Lender have read this Agreement; (b) Borrower and Lender have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice or have voluntarily declined to seek such counsel; and (c) Borrower and Lender are fully aware of the legal and binding effect of this Agreement.

Signature Page Follows

IN WITNESS WHEREOF, the parties hereto have duly executed this Loan, Pledge and Option Agreement as of the date first written above.


		BORROWER:		«PURCHASER»

				(Signature)
		SPOUSE:

				(Signature)
		LENDER:		PAYPAL, INC.
				By:

				Name:

				Title:

SIGNATURE PAGE TO LOAN AND OPTION AGREEMENT

Consent by P1edgeholder. The undersigned, as Secretary of PayPal, Inc., agrees to act as Pledgeholder under this Loan, Pledge and Option Agreement pursuant to Section 6 and agrees to be bound only by such Section 6 and Section 8.


		JOHN D. MULLER

FORM OF AMENDMENT TO LOAN, PLEDGE AND OPTION AGREEMENT

WHEREAS, PayPal, Inc. ("Lender") and [Employee Name] ("Borrower") entered into a Loan, Pledge and Option Agreement dated [June 30,] 2001 (the "Agreement").

WHEREAS, Section 8.2 of the Agreement provides that it may be amended by a writing signed by Lender and Borrower.

WHEREAS, Lender and Borrower desire to amend the Agreement as set forth below.

NOW THEREFORE, in consideration of the promises contained herein and for other good and valuable consideration, Lender and Borrower, intending to be legally bound, hereby agree as follows

1. Continued Effectiveness of Agreement. All capitalized terms, unless otherwise defined in this Amendment, shall have the meaning ascribed to them in the Agreement. As amended herein, the Agreement remains in full force and effect.

2. Exercise Date of Call. Sections 2.2 and 2.3 of the Agreement are amended to read as follows:

2.2 Exercise Period. The Call may be exercised on one occasion, in whole, but not in part, at any time after September 1, 2001 and before July 1, 2005..

2.3 Manner of Exercise. Subject to the terms and conditions herein, Lender may exercise the Call by delivery of written notice (the "Call Exercise Notice") to Borrower and Pledgeholder (as such term is defined in Section 6 hereof), specifying the effective date of the exercise (the "Call Exercise Date"), which shall be two (2) days after the date on which Borrower is deemed to receive the Call Exercise Notice.

3. Termination of Call. Section 2.5 of the Agreement is amended to read as follows:

2.5 Termination of Call. The Call shall expire upon the earlier of (i) July ___, 2005, (ii) the sale or transfer of the Collateral pursuant to Section 6.2, or (iii) repayment in full of the Loan, including accrued interest.

4. Additional Event of Acceleration. Lender may, at its option and in its sole discretion, declare the remaining balance of the Loan, including all accrued and unpaid interest thereon, to be immediately due and payable upon exercise of the Call.

IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of September __, 2001.

BORROWER:

		(Signature)
SPOUSE:
		(Signature)
LENDER:		PAYPAL, INC.
	By:

	Name:

	Title:

Schedule to Exhibit 10.6

The following borrowers signed the form of Loan, Pledge and Option Agreement on the date and with the terms specified below. Each also executed the form of Amendment to the Loan, Pledge and Option Agreement.

Borrower	Date	Number of Shares Held as Collateral	Loan Amount
Reid Hoffman	7/2/01	333,333	$	500,000
David Sacks	6/29/01	300,000	$	450,000
Henry David Johnson	7/2/01	160,000	$	240,000
Jack Selby	6/30/01	160,000	$	240,000
James Templeton	7/5/01	160,000	$	240,000
Sandeep Lal	7/5/01	80,000	$	120,000
Todd Pearson	6/29/01	80,000	$	120,000
Roelof Botha	6/30/01	75,000	$	112,500
Sarah Imbach	7/5/01	72,248	$	108,372

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FORM OF LOAN, PLEDGE AND OPTION AGREEMENT
FORM OF AMENDMENT TO LOAN, PLEDGE AND OPTION AGREEMENT
EX-10.7 9 a2059025zex-10_7.htm EXHIBIT 10.7 Prepared by MERRILL CORPORATION
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EXHIBIT 10.7

FORM OF PROMISSORY NOTE

$[AMOUNT]

Palo Alto, California
[DATE]

For value received, the undersigned promises to pay to PayPal, Inc., a Delaware corporation (the "Company"), at its principal office the principal sum of $[AMOUNT] with interest from the date hereof at a rate of 5.02% per annum, compounded annually, on the unpaid balance of such principal sum. Such principal and interest shall be due and payable on [DATE].

If the undersigned's employment or consulting relationship with the Company is terminated prior to payment in full of this Note, this Note shall be immediately due and payable.

Principal and interest are payable in lawful money of the United States of America. AMOUNTS DUE UNDER THIS NOTE MAY BE PREPAID AT ANY TIME WITHOUT PREMIUM OR PENALTY.

Should suit be commenced to collect any sums due under this Note, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The undersigned and any endorsers have severally waived presentment for payment, protest, notice of protest and notice of nonpayment of this Note.

This note, which is non-recourse, is secured by a pledge of certain shares of Common Stock and is subject to the terms of a Loan, Pledge and Option Agreement between the undersigned and the Company of even date herewith.

[NAME]

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FORM OF PROMISSORY NOTE
EX-10.8 10 a2059025zex-10_8.htm EXHIBIT 10.8 Prepared by MERRILL CORPORATION

[X.com LETTERHEAD]

Exhibit 10.8

January 13, 2000

Mr. Todd Pearson

Dear Todd:

I am pleased to offer you the position of Director of Credit Card Products with X.com Corporation. This position will report, in the interim, to the Chief Executive Officer.

This letter outlines the proposed terms of your employment with X.com. Your gross salary will be $120,000, to be paid semi-monthly. You will also be paid a one-time sign on bonus of $35,000 which will be repayable to X.com should you elect to terminate your employment within one year from your start date. You will also receive up to $6,000 per year of medical expenses for your son not covered under the company's standard health care plan. Your start date is January 17, 2000 and is subject to your signing below and on the bottom of the Company's confidentiality agreement.

Subject to approval of the Board of Directors of X.com, you are eligible to receive a stock option grant for 160,000 shares (post-split) pursuant to an X.com equity incentive plan, pursuant to the terms (e.g. number of shares, exercise price, vesting and exercisability) determined by X.com. The X.com Stock Plan vesting schedule is as follows: 25% after 1 year, and 1/48 each month thereafter. X.com will also accelerate one year of additional vesting upon change of control of the company.

The company will also provide to you, the health, holiday, vacation and other benefits that it affords all its employees.

Please understand that your employment is not governed by any written or oral contract and is considered an "at-will" arrangement. This means that you are free, as is the Company, to terminate the employment relationship at any time for any reason, so long as there is no violation of applicable state or federal law.

We have enormous respect for your talent and dedication and are looking forward to your helping us to grow this company in a mutually rewarding relationship.

Sincerely,

/s/ ELON MUSK

Elon Musk
Chairman

I accept your offer of employment pursuant to terms and conditions set forth in this letter.

Signed

/s/ TODD PEARSON

Todd Pearson

Date

January 24, 2000

EX-10.9 11 a2059025zex-10_9.htm EXHIBIT 10.9 Prepared by MERRILL CORPORATION
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EXHIBIT 10.9

PAYPAL, INC.

RESTRICTED STOCK PURCHASE AGREEMENT

THIS RESTRICTED STOCK PURCHASE AGREEMENT is made as of September 10, 2001 by and between PayPal, Inc., a Delaware corporation (the "Company"), and Peter Thiel (the "Purchaser").

The parties agree as follows:

1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and the Purchaser hereby agrees to purchase an aggregate of 2,812,500 shares of the Company's Class A Common Stock, at $0.30 per share (the "Shares"), for an aggregate cash purchase price of $843,750.00.

2. Payment of Purchase Price. The payment of the purchase price shall be paid by cash, check, delivery of a promissory note in the form attached as Exhibit A or any combination of the foregoing. If Purchaser delivers a promissory note as partial or full payment of the purchase price, Purchaser will also deliver a Pledge and Security Agreement in form and substance acceptable to the Company.

3. Repurchase Option. Subject to the provisions of Section 5 below, in the event of any voluntary or involuntary termination of the Purchaser's services to the Company for any or no reason before all of the Shares are released from the Company's Repurchase Option (as defined below), the Company shall, upon the date of such termination (as reasonably fixed and determined by the Company), have an irrevocable, exclusive option, but not the obligation, for a period of 90 days from such date to repurchase all or any portion of the Unreleased Shares (as defined below in Section 4) at such time (the "Repurchase Option") at the original cash purchase price per share (the "Repurchase Price"). The Repurchase Option shall be exercisable by the Company by written notice to the Purchaser or the Purchaser's executor (with a copy to the Escrow Holder, as defined below in Section 8) and shall be exercisable, at the Company's option, (i) by delivery to the Purchaser or the Purchaser's executor with such notice of a check in the amount of the purchase price for the Shares being repurchased, or (ii) by cancellation by the Company of an amount of the Purchaser's indebtedness, if any, to the Company equal to the purchase price for the Shares being repurchased, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals the Repurchase Price times the number of shares to be repurchased (the "Aggregate Repurchase Price"). Upon delivery of such notice and the payment of the Aggregate Repurchase Price in any of the ways described above, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Shares being repurchased by the Company. The Repurchase Option set forth in this Section may be assigned by the Company in whole or in part in its sole and unfettered discretion.

4. Release of Shares From Repurchase Option.

(a) The Shares shall be released from the Company's Repurchase Option pursuant to the following schedule:

93,750 Shares shall be released from the Company's Repurchase Option on July 1, 2002. 93,750 Shares shall be released from the Company's Repurchase Option on the first day of each calendar month thereafter such that 100% of the Shares shall be released from the Company's Repurchase Option on January 1, 2005.

(b) Any of the Shares which, from time to time, have not yet been released from the Repurchase Option are referred to herein as "Unreleased Shares."

5. Accelerated Release of Shares from Repurchase Option.

(a) Actual or Constructive Termination. In the event of an Involuntary Termination (as defined below) of Purchaser's employment or a termination of Purchaser's employment by the Company (or any successor in interest to the Company) for any reason other than Cause (as defined below) within one (1) calendar year following a Change of Control (as defined below),

then the Repurchase Option shall immediately lapse in its entirety. For purposes of this paragraph, "Involuntary Termination" shall mean:

(i) a significant adverse alteration of Purchaser's duties, position, responsibilities or conditions of employment compared to his duties, position, responsibilities and conditions of employment with the Company immediately prior to a Change of Control, including but not limited to a reduction in Purchaser's authority to approve transactions or a significant adverse change in the lines of business reporting to Purchaser;

(ii) the reduction of Purchaser's annual base salary or bonus opportunity, each as in effect immediately prior to the Change of Control;

(iii) the relocation of the offices at which Purchaser is principally employed immediately prior to the date of the Change of Control (the "Principal Location") to a location more than fifty (50) miles from such location, or the Company's requiring Purchaser to be based at a location more than fifty (50) miles from the Principal Location, except for required travel on the Company's business to an extent substantially consistent with Purchaser's business travel obligations prior to the Change of Control;

(iv) the failure to continue in effect compensation and benefit plans which provide Purchaser with benefits which are substantially similar, on an aggregate basis, to the benefits provided Purchaser under the Company's regular compensation and benefit plans and practices immediately prior to the Change in Control, unless an equitable arrangement (embodied in ongoing substitute or alternative plans) has been made with respect to such plans; or

(v) the failure to pay to Purchaser any portion of his then-current compensation or any portion of an installment of deferred compensation under any deferred compensation program of the Company, in each case within seven (7) days of the date such compensation is due.

(b) Definition of Cause. For purposes of subsection 5(a) above, the term "Cause" shall mean (i) Purchaser's willful and continued failure to perform his duties to the Company or its successor which continues after a written notice is delivered to him by the Company or its successor which notice identifies the manner in which the Company or its successor believe that Executive has not performed his duties; (ii) the commission of a felony, any crime involving moral turpitude, or any crime or act of fraud or dishonesty against the Company or any of the Company's affiliates; or (iii) a willful breach by Purchaser of this Agreement or any other agreement between Purchaser and the Company. For purposes of this subsection 5(b), (x) no act, or failure to act, on Purchaser's part, will be considered "willful" unless done or omitted to be done by him not in good faith or without a reasonable belief that his action or omission was in furtherance of and in the best interests of the Company's business, and (y) poor business performance by itself shall not constitute "Cause."

(c) Definition of Change of Control. For purposes of subsection 5(a) above, the term "Change of Control" shall mean a merger, acquisition or sale of all or substantially all of the assets of the Company in which the stockholders of the Company immediately prior to such event do not own a majority of the outstanding shares of the surviving corporation.

6. Company Call Right.

(a) The Company shall have the right to purchase from Purchaser, or Purchaser's personal representative or permitted transferees, as the case may be, any or all of the Shares owned by the Purchaser or such transferees at a price equal to $3.00 per Share (the "Call Right"). The Call Right may be exercised on one occasion, in whole but not in part, at any time before

September 10, 2005. The Call Right shall terminate upon completion of conversion of the Shares of Common Stock.

(b) The Company may exercise the Company Call Right by delivering personally or by registered mail to Purchaser (or his transferee or legal representative, as the case may be), a notice in writing indicating the Company's intention to exercise the Company Call Right and setting forth a date for closing not later than thirty (30) days from the mailing of such notice. The closing shall take place at the Company's office. At the closing, the holder of the certificates for the Shares being transferred shall deliver the stock certificate or certificates evidencing the Shares, and the Company shall deliver the purchase price therefor.

(c) At its option, the Company may elect to make payment for the Shares to a bank selected by the Company. The Company shall avail itself of this option by a notice in writing to Purchaser stating the name and address of the bank, date of closing, and waiving the closing at the Company's office.

7. Restriction on Transfer. Except for the escrow described below in Section 8 or transfers to Purchaser's Immediate Family (as defined below), none of the Shares or any beneficial interest therein shall be transferred, encumbered or otherwise disposed of in any manner until the initial public offering of the Company's common stock. As used herein, "Immediate Family" shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister or stepchild (whether or not adopted). In case of a permitted transfer, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Agreement (including the Company Call Right and, with respect to any Unreleased Shares, the Repurchase Option), and there shall be no further transfer of such Shares except in accordance with the terms of this Section. Any transferee shall acknowledge the same by signing a copy of this Agreement. Any transfer or sale of the Shares is subject to restrictions on transfer imposed by any applicable state and federal securities laws

8. Escrow of Shares.

(a) Purchaser hereby authorizes and directs the secretary of the Company, or such other person designated by the Company, to transfer the Unreleased Shares as to which the Repurchase Option has been exercised from Purchaser to the Company.

(b) To insure the availability for delivery of Purchaser's Unreleased Shares upon repurchase by the Company pursuant to the Repurchase Option under Section 3, Purchaser hereby appoints the secretary, or any other person designated by the Company as escrow agent, as its attorney-in-fact to sell, assign and transfer unto the Company, such Unreleased Shares, if any, repurchased by the Company pursuant to the Repurchase Option and shall, upon execution of this Agreement, deliver and deposit with the secretary of the Company, or such other person designated by the Company, the share certificates representing the Unreleased Shares, together with the stock assignment duly endorsed in blank, attached hereto as Exhibit A. The Unreleased Shares and stock assignment shall be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of the Company and Purchaser attached as Exhibit B hereto, until the Company exercises its Repurchase Option as provided in Section 3, until such Unreleased Shares are released from the Company's Repurchase Option, or until such time as this Agreement no longer is in effect. Upon release of the Unreleased Shares, the escrow agent shall promptly deliver to the Purchaser the certificate or certificates representing such Shares in the escrow agent's possession belonging to the Purchaser, and the escrow agent shall be discharged of all further obligations hereunder; provided, however, that the escrow agent shall nevertheless retain such certificate or certificates as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement.

(c) The Company, or its designee, shall not be liable for any act it may do or omit to do with respect to holding the Shares in escrow and while acting in good faith and in the exercise of its judgment.

9. Investment Representations. In connection with the purchase of the Shares, the Purchaser represents to the Company the following:

(a) The Purchaser is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Shares. The Purchaser is purchasing the Shares for investment for the Purchaser's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act").

(b) The Purchaser understands that the Shares have not been registered under the Securities Act by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein. In this connection, the Purchaser understands that, in view of the Securities and Exchange Commission ("Commission"), the statutory basis for such exemption may not be present if the Purchaser's representations meant that the Purchaser's present intention was to hold the Shares for a minimum capital gains period under applicable tax statutes, for a deferred sale, for a market rise, for a sale if the market does not rise, or for a year or any other fixed period in the future.

(c) The Purchaser further acknowledges and understands that the Shares must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. The Purchaser further acknowledges and understands that the Company is under no obligation to register the Shares. The Purchaser understands that the certificate evidencing the Shares will be imprinted with a legend which prohibits the transfer of the Shares unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company.

10. Stock Certificate Legends. The share certificate evidencing the Shares issued hereunder shall be endorsed with the following legends:

(a) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.

(b) THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A REPURCHASE OPTION IN FAVOR OF THE COMPANY AND MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.

11. Market Stand-Off Agreement. The Purchaser hereby agrees, if so requested by the managing underwriters or the Company in connection with the initial public offering of the Company's Common Stock, that, without the prior written consent of such managing underwriters, the Purchaser will not offer, sell, contract to sell, grant any option to purchase, make any short sale or otherwise dispose of, assign any legal or beneficial interest in or make a distribution of any capital stock of the Company held by or on behalf of the Purchaser or beneficially owned by the Purchaser in accordance with the

rules and regulations of the Securities and Exchange Commission for a period of up to 180 days after the date of the final prospectus relating to the Company's initial public offering.

12. Adjustment for Stock Split. All references to the number of Shares and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, reverse stock split or stock dividend or other similar change in the Shares which may be made by the Company after the date of this Agreement.

13. Tax Consequences. The Purchaser has reviewed with the Purchaser's own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. The Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The Purchaser understands that the Purchaser (and not the Company) shall be responsible for the Purchaser's own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. The Purchaser understands that Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income both (i) the difference between the fair market value of the Shares when the Company granted the Purchaser the right to purchase the Shares and the fair market value of the Shares on the date of this Agreement, and (ii) the difference between the amount paid for the Shares and the fair market value of the Shares as of the date any restrictions on the Shares lapse. In this context, "restriction" includes the right of the Company to buy back the Shares pursuant to its repurchase option. In the event the Company has registered under the Exchange Act, "restriction" with respect to officers, directors and 10% shareholders also means the period after the purchase of the Shares during which such officers, directors and 10% shareholders could be subject to suit under Section 16(b) of the Exchange Act. The Purchaser understands that the Purchaser may elect to be taxed at the time the Shares are purchased rather than when and as the Company's repurchase option or 16(b) period expires by filing an election under Section 83(b) of the Code with the I.R.S. within 30 days from the date of purchase.

THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO TIMELY FILE THE ELECTION UNDER SECTION 83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON THE PURCHASER'S BEHALF.

14. General Provisions.

(a) This Agreement shall be governed by the laws of the State of California. This Agreement represents the entire agreement between the parties with respect to the purchase of Common Stock by the Purchaser and may only be modified or amended in writing signed by both parties.

(b) Any notice, demand or request required or permitted to be given by either the Company or the Purchaser pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing.

(c) The rights and benefits of the Company under this Agreement shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company's successors and assigns. The rights and obligations of the Purchaser under this Agreement may only be assigned with the prior written consent of the Company and any purported transfer otherwise shall be null and void.

both parties herein are cumulative and shall not constitute a waiver of either party's right to assert all other legal remedies available to it under the circumstances.

(e) The Purchaser agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement.

(f) PURCHASER ACKNOWLEDGES AND AGREES THAT THE LAPSING OF THE REPURCHASE OPTION PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN "AT WILL" EMPLOYEE OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED OR PURCHASING SHARES HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE REPURCHASE OPTION SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE FOR SUCH PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH THE COMPANY'S RIGHT TO TERMINATE PURCHASER'S EMPLOYMENT AT ANY TIME, WITH OR WITHOUT CAUSE

(g) Purchaser has reviewed this Agreement in its entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of this Agreement.

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first set forth above.

PAYPAL, INC. a Delaware corporation		PURCHASER:
By:	/s/ ROELOF F. BOTHA Roelof F. Botha Chief Financial Officer	/s/ PETER THIEL Peter Thiel
Address: 1840 Embarcadero Road Palo Alto, CA 94303		Address: 1788 Oak Creek Drive Palo Alto, CA 94304

PAYPAL, INC.

RESTRICTED STOCK PURCHASE AGREEMENT

THIS RESTRICTED STOCK PURCHASE AGREEMENT is made as of August 30, 2001 by and between PayPal, Inc., a Delaware corporation (the "Company"), the PENSCO Trust Company Roth IRA Account fbo Peter Thiel #TH076 (the "Purchaser") and Peter Thiel, who is the individual for whose benefit the foregoing IRA has been established (the "IRA Beneficiary").

The parties agree as follows:

1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and the Purchaser hereby agrees to purchase an aggregate of 1,687,500 shares of the Company's Class A Common Stock, at $0.30 per share (the "Shares"), for an aggregate cash purchase price of $506,250.

2. Payment of Purchase Price. The payment of the purchase price shall be paid by wire transfer, by check, or any combination of the foregoing.

3. Repurchase Option. Subject to the provisions of Section 5 below, the Company shall have an irrevocable, exclusive option, but not the obligation, to repurchase all or any portion of the Unreleased Shares (as defined below in Section 4) (the "Repurchase Option") at the original cash purchase price per share (the "Repurchase Price"). The Repurchase Option shall be exercisable by the Company by written notice to the Purchaser or the Purchaser's executor (with a copy to the Escrow Holder, as defined below in Section 8) and shall be exercisable by delivery to the Purchaser or the Purchaser's representative with such notice of a check in the amount of the purchase price for the Shares being repurchased (the "Aggregate Repurchase Price"). Upon delivery of such notice and the payment of the Aggregate Repurchase Price, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Shares being repurchased by the Company. The Repurchase Option set forth in this Section may be assigned by the Company in whole or in part in its sole and unfettered discretion.

4. Release of Shares From Repurchase Option.

(a) The Shares shall be released from the Company's Repurchase Option pursuant to the following schedule:

750,000 Shares shall be released from the Company's Repurchase Option on August 30, 2001. 93,750 Shares shall be released from the Company's Repurchase Option on the first day of each calendar month thereafter such that 100% of the Shares shall be released from the Company's Repurchase Option on June 1, 2002.

(b) Any of the Shares which, from time to time, have not yet been released from the Repurchase Option are referred to herein as "Unreleased Shares."

5. Accelerated Release of Shares from Repurchase Option. In the event of a Change of Control (as defined below), the Repurchase Option shall immediately lapse in its entirety. The term "Change of Control" shall mean a merger, acquisition or sale of all or substantially all of the assets of the Company in which the stockholders of the Company immediately prior to such event do not own a majority of the outstanding shares of the surviving corporation.

6. Company Call Right.

(a) The Company shall have the right to purchase from Purchaser, or Purchaser's representative or permitted transferees, as the case may be, any or all of the Shares owned by the Purchaser or such transferees at a price equal to $3.00 per Share (the "Call Right"). The Call Right may be exercised on one occasion, in whole but not in part, at any time before August 30, 2005. The Call Right shall terminate upon completion of conversion of the Shares to Common Stock.

(b) The Company may exercise the Company Call Right by delivering personally or by registered mail to Purchaser (or its transferee or legal representative, as the case may be) and the IRA Beneficiary, a notice in writing indicating the Company's intention to exercise the Company Call Right and setting forth a date for closing not later than thirty (30) days from the mailing of such notice. The closing shall take place at the Company's office. At the closing, the holder of the certificates for the Shares being transferred shall deliver the stock certificate or certificates evidencing the Shares, and the Company shall deliver the purchase price therefor.

(c) At its option, the Company may elect to make payment for the Shares to a bank selected by the Company. The Company shall avail itself of this option by a notice in writing to Purchaser and the IRA Beneficiary stating the name and address of the bank, date of closing, and waiving the closing at the Company's office.

7. Restriction on Transfer. Except for the escrow described below in Section 8 or transfers to Peter Thiel or to Peter Thiel's Immediate Family (as defined below), none of the Shares or any beneficial interest therein shall be transferred, encumbered or otherwise disposed of in any manner until the initial public offering of the Company's common stock. As used herein, "Immediate Family" shall mean Peter Thiel's spouse, lineal descendant or antecedent, father, mother, brother or sister or stepchild (whether or not adopted). In case of a permitted transfer, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Agreement (including the Company Call Right and, with respect to any Unreleased Shares, the Repurchase Option), and there shall be no further transfer of such Shares except in accordance with the terms of this Section. Any transferee shall acknowledge the same by signing a copy of this Agreement. Any transfer or sale of the Shares is subject to restrictions on transfer imposed by any applicable state and federal securities laws.

8. Escrow of Shares.

(b) To insure the availability for delivery of Purchaser's Unreleased Shares upon repurchase by the Company pursuant to the Repurchase Option under Section 3, Purchaser hereby appoints the secretary, or any other person designated by the Company as escrow agent, as its attorney-in-fact to sell, assign and transfer unto the Company, such Unreleased Shares, if any, repurchased by the Company pursuant to the Repurchase Option and shall, upon execution of this Agreement, deliver and deposit with the secretary of the Company, or such other person designated by the Company, the share certificates representing the Unreleased Shares, together with the stock assignment duly endorsed in blank, attached hereto as Exhibit A. The Unreleased Shares and stock assignment shall be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of the Company and Purchaser attached as Exhibit B hereto, until the Company exercises its Repurchase Option as provided in Section 3, until such Unreleased Shares are released from the Company's Repurchase Option, or until such time as this Agreement no longer is in effect. Upon release of the Unreleased Shares, the escrow agent shall promptly deliver to the Purchaser the certificate or certificates representing such Shares in the escrow agent's possession belonging to the Purchaser, and the escrow agent shall be discharged of all further obligations hereunder; provided, however, that the escrow agent shall nevertheless retain such certificate or certificates as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement.

9. Investment Representations. In connection with the purchase of the Shares, the Purchaser and the IRA Beneficiary represent to the Company the following:

(a) The IRA Beneficiary is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to direct Purchaser to acquire the Shares. At the direction of the IRA Beneficiary, the Purchaser is purchasing the Shares for investment for the Purchaser's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act").

(b) The Purchaser and the IRA Beneficiary understand that the Shares have not been registered under the Securities Act in reliance on a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein. In this connection, the Purchaser and the IRA Beneficiary understand that, in view of the Securities and Exchange Commission ("Commission"), the statutory basis for such exemption may not be present if the Purchaser's and the IRA Beneficiary's representations meant that the Purchaser's present intention was to hold the Shares for a minimum capital gains period under applicable tax statutes, for a deferred sale, for a market rise, for a sale if the market does not rise, or for a year or any other fixed period in the future.

(c) The Purchaser and the IRA Beneficiary further acknowledge and understand that the Shares must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. The Purchaser and the IRA Beneficiary further acknowledge and understand that the Company is under no obligation to register the Shares. The Purchaser and the IRA Beneficiary understand that the certificate evidencing the Shares will be imprinted with a legend which prohibits the transfer of the Shares unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company.

10. Stock Certificate Legends. The share certificate evidencing the Shares issued hereunder shall be endorsed with the following legends:

11. Market Stand-Off Agreement. The Purchaser hereby agrees, if so requested by the managing underwriters or the Company in connection with the initial public offering of the Company's Common Stock, that, without the prior written consent of such managing underwriters, the Purchaser will not offer, sell, contract to sell, grant any option to purchase, make any short sale or otherwise dispose of, assign any legal or beneficial interest in or make a distribution of any capital stock of the Company held by or on behalf of the Purchaser or beneficially owned by the Purchaser in accordance with the rules and regulations of the Securities and Exchange Commission for a period of up to 180 days after the date of the final prospectus relating to the Company's initial public offering.

12. Adjustment for Stock Split. All references to the number of Shares and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, reverse stock split or stock dividend or other similar change in the Shares which may be made by the Company after the date of this Agreement.

13. Tax Consequences. The IRA Beneficiary has reviewed with the IRA Beneficiary's own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. The IRA Beneficiary is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The IRA Beneficiary understands that the IRA Beneficiary (and not the Company) shall be responsible for the IRA Beneficiary's own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. The IRA Beneficiary understands that Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income both (i) the difference between the fair market value of the Shares when the Company granted the Purchaser the right to purchase the Shares and the fair market value of the Shares on the date of this Agreement, and (ii) the difference between the amount paid for the Shares and the fair market value of the Shares as of the date any restrictions on the Shares lapse. In this context, "restriction" includes the right of the Company to buy back the Shares pursuant to its repurchase option. In the event the Company has registered under the Exchange Act, "restriction" with respect to officers, directors and 10% shareholders also means the period after the purchase of the Shares during which such officers, directors and 10% shareholders could be subject to suit under Section 16(b) of the Exchange Act. The IRA Beneficiary understands that the IRA Beneficiary may elect to be taxed at the time the Shares are purchased rather than when and as the Company's repurchase option or 16(b) period expires by filing an election under Section 83(b) of the Code with the I.R.S. within 30 days from the date of purchase.

THE IRA BENEFICIARY ACKNOWLEDGES THAT IT IS THE IRA BENEFICIARY'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO CAUSE THE ELECTION UNDER SECTION 83(b) TO BE TIMELY FILED, EVEN IF THE IRA BENEFICIARY REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON THE IRA BENEFICIARY'S BEHALF.

14. General Provisions.

(d) Either party's failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, nor prevent that party thereafter from enforcing each and every other provision of this Agreement. The rights granted both parties herein are cumulative and shall not constitute a waiver of either party's right to assert all other legal remedies available to it under the circumstances.

(e) The Purchaser agrees upon request to execute any further documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement.

(f) The Purchaser and the IRA Beneficiary have reviewed this Agreement in its entirety, have had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understand all provisions of this Agreement.

IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first set forth above.

PAYPAL, INC. a Delaware corporation		PENSCO Trust Company ROTH IRA ACCOUNT fbo Peter Thiel #TH076
By:	/s/ ROELOF F. BOTHA Roelof F. Botha Chief Financial Officer	By:	/s/ DENISE M. BROUSSARD PENSCO Trust Company, Custodian
Address: 1840 Embarcadero Road Palo Alto, CA 94303		Address: 250 Montgomery Street San Francisco, CA 94104

		PETER THIEL, as IRA BENEFICIARY
		By:	/s/ PETER THIEL Peter Thiel
		Address: 1788 Oak Creek Drive Palo Alto, CA 94304

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PAYPAL, INC. RESTRICTED STOCK PURCHASE AGREEMENT
PAYPAL, INC. RESTRICTED STOCK PURCHASE AGREEMENT
EX-10.10 12 a2059025zex-10_10.htm EXHIBIT 10.10 Prepared by MERRILL CORPORATION
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EXHIBIT 10.10

LOAN AND PLEDGE AGREEMENT

This LOAN AND PLEDGE AGREEMENT (the "Agreement") is made as of September 10, 2001 between Peter Thiel ("Borrower") and PayPal, Inc. ("Lender").

A. Borrower has concurrently herewith executed that certain Full Recourse Secured Promissory Note (the "Note") in favor of Lender in the aggregate amount of One Million Three Hundred Fifty Thousand Dollars and No Cents ($1,350,000).

B. Lender is willing to extend a loan to Borrower in return for the Note from Borrower, but only upon the condition, among others, that Borrower shall have executed and delivered to Lender this Loan and Pledge Agreement and the Collateral (as defined below) to secure Borrower's obligations under the Note and this Agreement.

THE PARTIES AGREE AS FOLLOWS:

1. Pledge of Stock.

1.1 Advance of Funds. As security for the repayment by Borrower of the amounts payable under the Note and to ensure Lender's ability to exercise the Call, Borrower herein assigns as security and pledges to Lender Two Million Eight Hundred Twelve Thousand Five Hundred (2,812,500) shares (the "Shares") of Class A Stock of PayPal, Inc. (the "Issuer"), as further described in Section 5 below.

1.2 Promise to Pay. The principal and interest payable by Borrower under the Note are secured as provided in Section 5 and, as set forth in the Note, constitute full recourse obligations of Borrower.

2. Distributions and Adjustments to the Shares.

2.1 Changes in Capital Structure. If the Shares are changed by reason of a stock split, reverse stock split, stock dividend or recapitalization, or converted or exchanged for other securities as a result of a merger or reorganization of Issuer, the number of Shares and Call Shares, the class of securities and the Lender Exercise Price shall be appropriately adjusted to preserve the benefits to the parties under this Agreement, provided that the aggregate Lender Exercise Price shall remain unchanged.

2.2 Distributions and Additional Securities. If any Distribution (as hereinafter defined) of securities, cash or other property issued in connection with a change described in Section 2.1 shall be received by Borrower, Borrower shall, within five days of receipt, deliver the cash, certificates or other instruments evidencing title to such Distribution or other securities, together with appropriate instruments of transfer, to Pledgeholder to be held as part of the Pledge. Any Distribution shall become a part of the Share or Call Share to which it relates and shall therefore, among other things, be subject to the Call and shall constitute additional Collateral (as such term is defined in Section 5.1 hereof). A "Distribution" means any property receivable by Borrower or other holder of a Share as owner of any Share, and shall include, without limitation, dividends (whether in cash or other property, such as securities or contract rights), cash, and securities or other property arising from a reorganization, recapitalization, stock split or merger of the Issuer or the issuer of any security that is a Distribution.

2.3. Determination of Fair Market Value. For valuation purposes under this Agreement, the "Value" of each Share on any relevant date shall be equal to the fair market value of such Share as determined in accordance with the following provisions:

(a) If the Shares have not yet converted pursuant to their terms into shares of Issuer's Common Stock or if the Shares have been converted pursuant to their terms into shares of Issuer's Common Stock but Issuer's Common Stock at the time is neither listed nor admitted

to trading on any stock exchange nor traded in the over-the-counter market, then the fair market value of each Share shall be determined by the Board of Directors of the Issuer, taking into account any limitations on transferability, whether due to the size of the block of shares or the restrictions of applicable securities laws.

(b) If the Shares have converted pursuant to their terms into shares of Issuer's Common Stock, and if Issuer's Common Stock is at the time listed or admitted to trading on any stock exchange, then the fair market value of each Share shall be the closing selling price of one share of Common Stock on the date in question on the stock exchange serving as the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no reported sale of Common Stock on such exchange on the date in question, then the fair market value of each Share shall be the closing selling price on the exchange on the last preceding date for which such quotation exists.

(c) If the Shares have converted pursuant to their terms into shares of Issuer's Common Stock, and if Issuer's Common Stock is not at the time listed or admitted to trading on any stock exchange but is traded in the over-the-counter market, the fair market value of each Share shall be the mean between the highest bid and lowest asked prices (or, if such information is available, the closing selling price) of one share of the Common Stock on the date in question in the over-the-counter market, as such prices are reported by the National Association of Securities Dealers through its Nasdaq system or any successor system. If there are no reported bid and asked prices (or closing selling price) for the Common Stock on the date in question, then the mean between the highest bid price and lowest asked price (or the closing selling price) on the last preceding date for which such quotations exist shall be determinative of fair market value of each Share.

3. Certain Rights Respecting Shares.

3.1 Rights Notice. Borrower shall give notice (the "Rights Notice") to Lender of any right to purchase additional shares or other securities ("Right") granted to Borrower and arising out of Borrower's ownership of any Shares or Distributions, such Rights Notice to be given within five (5) days after Borrower becomes aware of the existence of any Right. Each Rights Notice shall state the terms of the Right, including the expiration date for the exercise of the Right, shall state whether the Issuer will allow assignment of the Right to Lender, and shall be accompanied by the notice received by Borrower advising of the existence of the Right.

3.2 Rights Exercise Notice. Lender shall have ten (10) business days after receipt of a Rights Notice within which to give notice (the "Rights Exercise Notice") to Borrower that Lender wishes Borrower to (i) assign all or a portion of such Right to Pledgeholder, and/or (ii) exercise all or any portion of the Right. If Lender requests an assignment, Borrower shall, promptly and without further consideration, assign to Pledgeholder the portion of the Right specified in the Rights Exercise Notice. If Lender requests Borrower to exercise all or any portion of the Right, and provide to Borrower the consideration required to be paid in connection with the exercise of the Right prior to the expiration date of the Right, then Borrower shall exercise the Right and immediately transfer, assign and deliver to Pledgeholder the securities received upon exercise in exchange for such consideration. Any amount advanced by Lender pursuant to this section shall be added to the amount of the loan hereunder.

3.3 Borrower's Right to Exercise. If the Lender fails to give a Rights Exercise Notice in accordance with Section 3.2 with respect to any Right, or portion of a Right, Borrower shall be free to exercise or assign such Right or portion of a Right for its own account.

4. Loan Payment Terms.

4.1 Acceleration. Lender may, at its option and in its sole discretion declare the then-outstanding principal balance of the Loan, together with all accrued and unpaid interest

thereon, to be immediately due and payable following the occurrence of any of the following (each of which is referred to herein as an "Event of Default"):

(a) the failure of Borrower to pay any amount under this Agreement when due;

(d) any liquidation of Borrower;

(e) Borrower defaults on an obligation contained in this Agreement;

(f) any Event of Default occurs under the Note or that certain Full Recourse Secured Promissory Note of even date herewith by the PENSCO Trust Company Roth IRA Account fbo Peter Thiel #TH076 in favor of the Company; or

(g) Borrower's employment by or association with Company is terminated for any reason or no reason, including, without limitation, death of Borrower.

4.2 Payment. Borrower may prepay amounts due under the Note and this Agreement without the consent of Lender; provided, however, that no such prepayment shall affect the validity or exercisability of the call rights held by Company under the Restricted Stock Purchase Agreement of even date herewith between Borrower and Lender (the "Call"). If payment is due on a Saturday, Sunday, or a public holiday under the laws of the State of California, such payment shall be made on the next succeeding business day and such extension of time shall be included in computing interest in connection with such payment. The date specified for payment under this Section 4.2 may be accelerated as provided in Section 4.1.

5. Pledge as Security.

5.1 Pledge. As security for all of Borrower's obligations and liabilities to Lender whether now existing or hereafter arising under this Agreement and the Note, including without limitation the Call (the "Obligations"), Borrower herein assigns as security and pledges to Lender the Shares and grants Lender a security interest in Borrower's right, title and interest in and to the Shares and any Distributions thereon, the proceeds (from disposition or otherwise) thereof and all proceeds (from disposition or otherwise) of proceeds (collectively the "Collateral"). Borrower agrees to take such additional actions as may be necessary or advisable at the reasonable request of Lender to perfect and continue Lender's security interest in the Collateral.

5.2 Default; Full Recourse Obligation. Lender is authorized to purchase the Collateral or to sell, assign and deliver at Lender's discretion, from time to time, all or any part of the Collateral at any private or public sale, on not less than ten (10) days' written notice to Borrower and Pledgeholder (as such term is defined in Section 5.4 hereof), at such price or prices and upon such terms as Lender may deem advisable, and Lender shall have all the rights and remedies of a secured creditor under the provisions of the California Uniform Commercial Code. At any such public sale, Lender may bid for, and become the purchaser of, the whole or any part of the Collateral offered for sale. The parties agree that, prior to the establishment of a public market for the Common Stock of the Issuer, the securities laws affecting sale of the Shares make a public sale of the Shares commercially unreasonable. The parties further agree that the repurchasing of such Shares by the Issuer, or by any person to whom the Issuer may have assigned its rights under this Agreement, is commercially reasonable if made at a price at least equal to the Value of the Shares. In case of any sale, after deducting the costs, counsel fees and other expenses of sale and delivery, the remaining proceeds of such sale shall be applied to the satisfaction of the Obligations; provided, however, that after satisfaction in full of the Obligations, the balance of the proceeds of sale then remaining shall be paid to Borrower. The Obligations are full recourse obligations.

5.3 Administration of Collateral. The following provisions shall govern the administration of the Collateral:

(a) So long as no Event of Default shall have occurred:

(i) The Borrower shall be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Note; provided, however, that the Borrower shall not exercise or refrain from exercising any such right if, in the Pledgeholder's judgment, such action or inaction would have a material adverse effect on the value of the Collateral or any part thereof; and provided, further, that the Borrower shall give the Pledgeholder at least five (5) days' written notice of the manner in which he intends to exercise, and the reasons therefor, or the reasons for refraining from exercising, any such right.

(ii) The Borrower shall be entitled to receive all cash dividends and other cash distributions paid or payable with respect to any of the Collateral. Any and all instruments and other property (other than cash or checks) received, receivable or otherwise distributed in respect of, or in exchange for, any Collateral, shall be, and shall be forthwith delivered to the Pledgeholder to hold as Collateral and shall, if received by the Borrower, be received in trust for the benefit of the Pledgeholder, be segregated from the other property or funds of Borrower, and be forthwith delivered to the Pledgeholder as Collateral in the same form as so received (with any necessary indorsement).

(b) If an Event of Default has occurred:

(i) All rights of Borrower to exercise the voting and other consensual rights which he would otherwise be entitled to exercise pursuant to Section 5.3(a)(i) and to receive the dividends which he would otherwise be authorized to receive and retain pursuant to Section 5.3(a)(ii) shall cease, and all such rights shall, upon notice by the Pledgeholder to Borrower, become vested in the Pledgeholder who shall thereupon have the sole right to exercise such voting and other consensual rights and the sole right to receive and hold as Collateral such dividends (and to the extent permissible, apply them to the Obligations of the Borrower); and

(ii) All dividends which are received by the Borrower contrary to the provisions of paragraph (i) of this Section 5.3(b) shall be received in trust for the benefit of the Pledgeholder, shall be segregated from other funds of the Borrower and shall be forthwith paid over to the Pledgeholder as Collateral in the same form as so received (with any necessary indorsement).

5.4 Appointment of Pledgeholder. Lender hereby appoints the Secretary of the Issuer, or his designee, as "Pledgeholder" to accept and hold the Collateral on its behalf. To assure Borrower's ability to perform Borrower's Obligations under this Agreement, Borrower will, concurrently with the delivery of this Agreement, deliver the stock certificate representing the Shares, together with a duly executed blank assignment separate from certificate for such certificate, to Pledgeholder, such documents to be held in pledge (the "Pledge").

5.5 Duties After an Event of Default. Pledgeholder shall have no duty to determine the existence of an Event of Default, but may, without any liability whatsoever, rely upon the written notice of Lender that an Event of Default has occurred. If, following an Event of Default, Lender shall elect to exercise its right to realize on the Shares, Pledgeholder shall, upon the receipt of written notice from Lender of the number of Shares sold and sale price, (i) date the stock assignments necessary for each transfer in question, (ii) fill in the number of Shares being transferred and (iii) deliver the same, together with the certificate(s) evidencing the Shares to be transferred to the purchaser against the simultaneous delivery to Pledgeholder of the purchase price for the number of the Shares then being purchased. In connection with each such sale, Pledgeholder shall deliver from the Pledge the specific Shares which are designated by Lender;

provided, however, that Pledgeholder's duties hereunder are subject to the cooperation of Borrower, Issuer and Issuer's transfer agent or counsel with respect to furnishing to Pledgeholder all necessary stock certificates and other related instruments as appropriate. Following an Event of Default, Pledgeholder shall dispose of the Collateral other than the Shares in accordance with written instructions of Lender. After deducting the costs, counsel fees and other expenses of such sale and delivery, Pledgeholder shall pay the remaining proceeds of such sale to Lender to the extent of the Obligations of Borrower under this Agreement and the Note as specified by Lender. Any remaining proceeds of such sale shall be paid to Borrower.

5.6 Duties of Pledgeholder Upon Exercise of Call. If Pledgeholder is given a valid Call Exercise Notice, Pledgeholder shall, on the Call Exercise Date (i) date the stock assignment necessary for the transfer in question, (ii) fill in the number of Shares being transferred and (iii) deliver to Lender the assignment, together with the certificate for the Shares being transferred.

5.7 Return of Collateral. Upon Borrower's satisfaction of the Obligations, Lender shall instruct Pledgeholder to return to Borrower all Collateral, if any, then in Pledgeholder's possession.

5.8 Return of Property. If, at the time of termination of the Pledge, Pledgeholder has in its possession any documents, securities, or other property belonging to Borrower, then it shall deliver all of same to Borrower and shall be discharged of all further obligations hereunder.

5.9 Attorney-In-Fact; Additional Stock Assignments. The parties hereby irrevocably constitute and appoint Pledgeholder as their attorney-in-fact and agent for the term of this Pledge to execute, with respect to the securities and other property that are deposited with Pledgeholder hereunder, all documents necessary or appropriate to make any such securities negotiable and complete any transaction contemplated herein. Borrower shall deliver to Pledgeholder from time to time any instruments of transfer duly executed by Borrower as may be requested by Lender or Pledgeholder.

5.10 Duties. Pledgeholder shall carry out its duties hereunder to the best of its ability and shall be liable only for gross negligence or willful misconduct. Pledgeholder's duties hereunder may be altered, amended, modified or revoked only by a written instrument signed by Lender, Borrower and Pledgeholder.

5.11 Obligations. Pledgeholder shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by it to be genuine and to have been signed or presented by the proper party or parties. Pledgeholder shall not be personally liable for any act it may do or omit to do hereunder as Pledgeholder or as attorney-in-fact for Borrower or Lender while acting in good faith and in the exercise of its own judgment, and any act done or omitted by Pledgeholder pursuant to the advice of its own attorneys shall be conclusive evidence of such good faith.

5.12 Authorization to Act. Pledgeholder is hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case Pledgeholder obeys or complies with any such order, judgment or decree of any court, it shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction.

5.13 Authority to Invest. Any cash received by Pledgeholder pursuant to this Agreement and designated by Lender as a Distribution shall be invested in an interest-bearing savings account and the interest thereon shall constitute a part of such Distribution.

5.14 Bankruptcy. Bankruptcy, insolvency, dissolution or absence of any party hereto shall not affect Pledgeholder's performance hereunder.

5.15 Statute of Limitations. Pledgeholder shall not be liable for the lapse of any rights because of any Statute of Limitation applicable with respect to this Agreement or any documents deposited with Pledgeholder.

5.16 Legal Counsel. Pledgeholder shall be entitled to employ such legal counsel and other experts as it may deem necessary to advise it properly in connection with its obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor, for which Pledgeholder shall be reimbursed 50% by Lender and 50% by Borrower.

5.17 Termination of Duties; Successor. Pledgeholder's responsibilities as Pledgeholder hereunder shall terminate if (i) Pledgeholder shall resign by thirty (30) days written notice to Borrower and Lender, (ii) Borrower and Lender jointly agree as to Pledgeholder's termination and appoint Pledgeholder's successor, or (iii) Pledgeholder dies or is disabled. In the event of such termination by resignation, death or disability, Lender shall appoint a successor. Upon receipt of notice of appointment of a successor, all documents, shares and other property then in Pledgeholder's possession pursuant to this Agreement shall be delivered to such successor.

5.18 Further Instruments. If Pledgeholder reasonably requires other or further instruments in connection with this Agreement or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments.

5.19 Disputes. If any dispute arises with respect to the delivery and/or ownership or right of possession of the securities or other property held by Pledgeholder hereunder, Pledgeholder may, at Pledgeholder's option, be relieved from all liability to Borrower and Lender by depositing all documents held hereunder with the Clerk of the California Superior Court for the County of Santa Clara for the purpose of permitting the Borrower and Lender to litigate their respective rights in such court. The receipt of the Clerk of such court of such documents shall discharge Pledgeholder from all liability to Borrower and Lender, and the same may be pleaded as a bar to any action by Borrower or Lender against Pledgeholder.

6. Representations, Warranties and Covenants of Borrower.

6.1 Ownership of Shares; No Conflicts. Borrower represents and warrants as of this date, and covenants, for the period beginning on this date and ending on the Expiration Date (as such term is defined in Section 7.5 hereof), that (i) Borrower has and will have the right to transfer to Lender all or any part of the Shares and Distributions, free and clear of any lien, claim, encumbrance or restriction of any type or nature whatsoever (other than such as are presently held by the Lender or may arise under this Agreement, and restrictions on resale that may arise under applicable federal and state securities laws); (ii) the Shares are not, and the Shares and Distributions will not be, subject to any right of first refusal, right of repurchase or any similar right granted to, or retained by any person other than the Lender; and (iii) there is no provision of any existing agreement, and Borrower will not enter into an agreement by which the Borrower is or would be bound (or to which the Borrower is or would become subject), that conflicts or would conflict with this Agreement or the performance of Borrower's obligations under this Agreement.

6.2 Further Assurances. Upon the reasonable request of Pledgeholder or Lender, Borrower will prepare, execute and deliver any further instruments and do any further acts that may be necessary to carry out more effectively the purposes of this Agreement, including, if necessary, the preparation and execution of applications to the California Department of Corporations.

6.3 Acknowledgement. Borrower hereby acknowledges that he has had access to all of the information that Borrower needs in order to make an informed decision to enter into this Agreement and that he has not relied on any information provided to him by Lender in reaching such decision.

7. Miscellaneous.

7.1 Assignment.

(a) By Borrower. Except as otherwise provided herein, Borrower may not sell, assign, transfer, hypothecate, pledge or otherwise encumber, in any manner, prior to the Expiration Date (as such term is defined in Section 7.5 hereof), this Agreement or any of the Shares or Distributions or Collateral. Any attempt to sell, assign, transfer, hypothecate, pledge or otherwise encumber this Agreement, any interest therein or any such Shares or Distributions or Collateral and any levy of execution, attachment, or similar process on the Shares or such Distributions or Collateral shall be null and void. Subject to the foregoing, this Agreement shall be binding on and inure to the benefit of the heirs, executors, and personal representatives of Borrower. Notwithstanding the foregoing, Borrower may transfer the Shares to Borrower's Immediate Family (as defined below). As used herein, "Immediate Family" shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister or stepchild (whether or not adopted). In case of a permitted transfer, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Agreement (including the Call), and there shall be no further transfer of such Shares except in accordance with the terms of this Section. Any transferee shall acknowledge the same by signing a copy of this Agreement. Any transfer or sale of the Shares is subject to restrictions on transfer imposed by any applicable state and federal securities laws.

7.2 Amendment. Except as provided in Section 5.10 with respect to Pledgeholder's duties, this Agreement may only be amended by a writing signed by Borrower and Lender.

7.3 Governing Law; Consent to Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts entered into and wholly to be performed in the State of California. Each party hereto hereby agrees that any action that, in whole or in part, in any way arises under this Agreement shall be brought in the Superior Court of the State of California for the County of Santa Clara or the United States District Courts for the Northern District of California. Each party hereby submits itself to the exclusive jurisdiction and venue of such Courts for purposes of any such action and agrees that any notice, document or complaint in any such action may be served on it by delivery in the manner provided for the delivery of notices under this Agreement.

7.4 Notices. All notices and other communications under this Agreement shall be in writing, and shall be deemed to have been duly given on the date of delivery if delivered personally or by confirmed facsimile, or on the next day after dispatch via overnight messenger or courier, or on the second day after mailing if mailed to the party to whom notice is to be given by first class mail,

registered or certified, postage prepaid, and addressed as follows (until any such address is changed by notice duly given):

If to Borrower:		Peter Thiel 1788 Oak Creek Drive Palo Alto, CA 94304
If to Lender:		PayPal, Inc. 1840 Embarcadero Road Alto, CA 94303 Attn: Chief Financial Officer Facsimile: (650) 251-1222
If to Pledgeholder:		PayPal, Inc. 1840 Embarcadero Road Palo Alto, CA 94303 Attn: Secretary Facsimile: (650) 251-1222

7.5 Term. This Agreement shall terminate upon full and complete payment in full of all Obligations under the Note and this Agreement. The Pledgeholder, at the time of such termination and at the expense of the Borrower, will execute and deliver to the Borrower a proper instrument or instruments acknowledging the termination of this Agreement, and will duly assign, transfer and deliver to the Borrower such of the Collateral as has not yet theretofore been sold or otherwise applied or released pursuant to this Agreement, together with any moneys at the time held by the Pledgeholder hereunder, [subject to any other agreement including, without limitation, the Restricted Stock Purchase Agreement]. Such assignment and delivery shall be without warranty by or recourse to the Pledgeholder.

7.6 Voluntary Execution of Agreement. Borrower and Lender each acknowledge that: (a) Borrower and Lender have read this Agreement; (b) Borrower and Lender have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice or have voluntarily declined to seek such counsel; and (c) Borrower and Lender are fully aware of the legal and binding effect of this Agreement.

[Signature Page Follows]

IN WITNESS WHEREOF, the parties hereto have duly executed this Loan, Pledge and Option Agreement as of the date first written above.

BORROWER:	PETER THIEL
	/s/ Peter Thiel (Signature)
LENDER:	PAYPAL, INC.
	By:	/s/ Roelof F. Botha
	Name:	Roelof F. Botha
	Title:	CFO

SIGNATURE PAGE TO LOAN AND OPTION AGREEMENT

Consent by P1edgeholder. The undersigned, as Secretary of PayPal, Inc., agrees to act as Pledgeholder under this Loan, Pledge and Option Agreement pursuant to Section 5 and agrees to be bound only by such Section 5 and Section 7.

		JOHN D. MULLER
		/s/ John D. Muller

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LOAN AND PLEDGE AGREEMENT
EX-10.11 13 a2059025zex-10_11.htm EXHIBIT 10.11 Prepared by MERRILL CORPORATION
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EXHIBIT 10.11

FULL RECOURSE PROMISSORY NOTE

$1,350,000.00
Palo Alto, California

September 10, 2001

For value received, the undersigned promises to pay PAYPAL, INC., a Delaware corporation (the "Company"), at its principal office the principal sum of One Million Three Hundred Fifty Thousand Dollars and No Cents ($1,350,000.00) with interest from the date hereof at a rate of 5.12% per annum, compounded annually, on the unpaid balance of such principal sum. Such principal and interest shall be due and payable on August 13, 2005.

If the undersigned's employment or consulting relationship with the Company is terminated prior to payment in full of this Note, this Note shall be immediately due and payable.

Principal and interest are payable in lawful money of the United States of America. Amounts due under this Note may be prepaid at any time without penalty.

THIS NOTE IS A FULL RECOURSE PROMISSORY NOTE. Should suit be commenced to collect this Note or any portion thereof, such amount of attorneys' fees and other collection fees paid by the Company as the court or arbitrator may deem reasonable shall be added to the principal amount herein. The makers and any endorsers severally waive presentment for payment, protest, notice of protest and notice of non-payment of this Note. This Note shall be construed in accordance with the laws of the State of California, without regard to the conflicts of law provisions of the State of California or of any other state.

/s/ Peter Thiel

Peter Thiel

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FULL RECOURSE PROMISSORY NOTE
EX-10.15 14 a2059025zex-10_15.htm EXHIBIT 10.15 Prepared by MERRILL CORPORATION
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EXHIBIT 10.15

PAYPAL, INC.

SEPARATION AGREEMENT AND MUTUAL RELEASE

This Separation Agreement and Mutual Release ("Agreement") is made by and between PayPal, Inc., a Delaware corporation (the "Company"), and Elon Musk ("Mr. Musk" or "Employee").

Mr. Musk has been an employee and officer, and is a founder and member of the Board of Directors (the "Board"), of the Company. The Company and Mr. Musk (the "Parties") have mutually agreed to terminate their employment relationship, to release each other from any claims arising from or related to this relationship and to enter into this Agreement.

In consideration of the mutual promises made herein and other valuable consideration, receipt of which is hereby acknowledged, the Parties agree as follows:

1. Resignation and Termination of Employment. The Parties agree and acknowledge that Mr. Musk resigned as Chief Executive Officer and President of the Company effective September 24, 2000 (the "Resignation Date"). In addition, the Parties agree and acknowledge that Mr. Musk continued as an employee of the Company for the period beginning on the Resignation Date and ending on March 9, 2001 (the "Termination Date").

2. Employee Benefits.

(a) The Parties agree and acknowledge that Mr. Musk continued to receive the Company's life, medical, dental and vision insurance benefits at Company expense until March 31, 2001, which date is the "qualifying event" date under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"). After such date, Mr. Musk has the right to continue coverage, at his own expense, under these programs pursuant to COBRA, provided he properly elects such coverage. Except as otherwise set forth in this Section 2(a), Mr. Musk shall not be entitled to participate in any of the Company's benefit plans or programs offered to employees or officers of the Company after the Termination Date.

(b) The Company shall reimburse Mr. Musk for all reasonable business expenses incurred by Mr. Musk up until the Termination Date in accordance with Company policy.

3. Stock Matters. All share numbers reflected in this Agreement are stated on a post-split basis.

(a) Common Stock. The Parties acknowledge and agree that Mr. Musk purchased 6,000,000 shares of Common Stock (the "Common Shares") pursuant to two Common Stock Purchase Agreements, one relating to a purchase for cash of 5,400,000 shares, with a purchase price of $0.00333 per share, dated March 20, 1999 (the "First Common Stock Agreement") and one relating to a purchase upon issuance of a promissory note to the Company in the amount of $19,998 (the "Common Stock Note") (plus cash in the amount of par value) of 600,000 shares, with a purchase price of $0.03333 per share, dated May 20, 1999 (the "Second Common Stock Agreement," and together with the First Common Stock Agreement, the "Common Stock Agreements"). Mr. Musk agrees and acknowledges that the Company's repurchase right, as provided for in Section 3(a) of each of the Common Stock Agreements, with respect to the Common Shares, shall have lapsed as of the Termination Date as to 3,000,000 shares and, effective on the Termination Date and for a period of 60 days thereafter, the Company has the right to repurchase, at Mr. Musk's original cost, 3,000,000 of the shares that are unvested as of that date (the "Unvested Shares"). In addition, the Company shall release and irrevocably waives its repurchase right as to an additional 1,000,000 shares of the Unvested Shares (900,000 shares under the First Common Stock Purchase Agreement and 100,000 shares under the Second Common Stock Purchase Agreement), so that Mr. Musk shall own outright, and the Company shall have no right to repurchase, an aggregate of 4,000,000 shares (the "Vested Shares") and the Company shall have a repurchase right as to an aggregate of 2,000,000 shares (the "Repurchase Shares"). The Company hereby (meaning, by delivery of this draft Agreement) gives Mr. Musk notice of its

intent to repurchase the Repurchase Shares, for an aggregate purchase price of $12,666.00 (1,800,000 shares at $0.00333 per share pursuant to the First Common Stock Agreement and 200,000 shares of $0.03333 per share pursuant to the Second Common Stock Agreement). The Company shall cancel the Common Stock Note as to $12,666 of its principal amount in satisfaction of its repurchase right with respect to the Repurchase Shares. Mr. Musk agrees and acknowledges that he owes the Company the remainder of the principal and all accrued interest payable under the Common Stock Note, or an aggregate of $9,201.45 ($7,134.00 of principal and $2,061.45 of accrued interest), which amount he shall pay by delivering to the Company a check for such amount at the time he delivers an executed copy of this Agreement to the Company. At that time, the Company shall deliver a stock certificate reflecting the Vested Shares. Mr. Musk agrees and acknowledges that the Vested Shares continue to be subject to the provisions of the Common Stock Agreements (except with respect to Section 3(a) thereof).

(b) Series A Preferred Stock. The Parties agree and acknowledge that Mr. Musk owns 21,000,000 shares of the Company's Series A Preferred Stock purchased pursuant to a Series A Preferred Stock Purchase Agreement dated May 20, 1999 among the Company, Mr. Musk and certain other parties (the "Series A Agreement"). The Parties agree and acknowledge that these shares are vested and that they continue to be subject to the terms and provisions of the Series A Agreement.

(c) Series B Preferred Stock. The Parties agree and acknowledge that, on July 11, 2000, the Company transferred its repurchase right applicable to 3,149,055 shares of its Series B Preferred Stock owned by William Harris to Mr. Musk. Mr. Musk purchased these shares by paying to Mr. Harris $0.476333 per share and by issuing to the Company a promissory note (the "Series B Note") in the principal amount of $389,433.14 (or, $0.123667 per share), plus interest compounded semiannually at a rate of 6.62%. The Parties agree and acknowledge that the shares of Series B Preferred Stock purchased by Mr. Musk from Mr. Harris are vested.

(d) Series C Preferred Stock. The Parties agree and acknowledge that Mr. Musk owns 181,818 shares of the Company's Series C Preferred Stock purchased pursuant to a Series C Preferred Stock Purchase Agreement dated March 31, 2000 among the Company, Mr. Musk and certain other parties (the "Series C Agreement"). The Parties agree and acknowledge that these shares are vested and that they continue to be subject to the terms and provisions of the Series C Agreement.

(e) Series D Preferred Stock. The Parties agree and acknowledge that Mr. Musk owns 333,333 shares of the Company's Series D Preferred Stock purchased pursuant to a Series D Preferred Stock Purchase Agreement dated August 7, 2000 among the Company, Mr. Musk and certain other parties (the "Series D Agreement"). The Parties agree and acknowledge that these shares are vested and that they continue to be subject to the terms and provisions of the Series D Agreement.

(f) Other Agreements. The Parties agree and acknowledge that they are parties to an Amended and Restated Investors' Rights Agreement, together with certain other parties, dated August 7, 2000 (the "Rights Agreement"), which Agreement imposes certain rights and restrictions on the shares of Company stock owned by Mr. Musk. The Parties agree and acknowledge that they continue to be bound by the Rights Agreement as it relates to shares of Company stock owned by Mr. Musk, all as set forth in the Rights Agreement.

(g) Sale of Preferred Stock.

(i) Series C Preferred Stock Closing. On or before the third business day after the Effective Date, Mr. Musk shall sell to the Company, and the Company shall purchase from Mr. Musk, 90,909 shares of Series C Preferred Stock owned by Mr. Musk at $2.75 per share for a total purchase price of $249,999.75. At the closing, Mr. Musk shall deliver the certificates

evidencing the shares of Series C Preferred Stock being sold to the Company and the Company shall deliver to Mr. Musk a check in the amount of $249,999.75.

(ii) Series D Preferred Stock Closing. On or before the third business day after the Effective Date, Mr. Musk shall sell to the Company, and the Company shall purchase from Mr. Musk, 166,667 shares of Series D Preferred Stock owned by Mr. Musk at $3.00 per share for a total purchase price of $500,001.00. At the closing, Mr. Musk shall deliver the certificates evidencing the shares of Series D Preferred Stock being sold to the Company and the Company shall deliver to Mr. Musk a check in the amount of $500,001.00.

(h) General. Except as set forth in this Section 3 and in the Common Stock Agreements, the Series A Agreement, the Series B Agreement, the Series C Agreement, the Series D Agreement and the Rights Agreement, Mr. Musk acknowledges that he has no right, title or interest in or to any shares of the Company's capital stock under any of the above listed agreements, or any other agreement or arrangement (oral or written) with the Company or any other party.

4. Amendment of Series B Note. In consideration of Mr. Musk's release of claims made herein, and other promises and undertakings made by him in this Agreement, the Company agrees that the term of the Series B Note is hereby amended to provide that such note shall not become due and payable on the Termination Date (as provided for under such note), but instead its term shall be extended to provide that the Series B Note shall become due and payable in full as to all principal and accrued interest on July 11, 2004 (the original maturity date of the note). Notwithstanding the foregoing, in the event of the earlier to occur of a Change of Control or an IPO (each, as defined below), the Company hereby agrees to forgive and cancel the Series B Note and that Mr. Musk shall be released and discharged from his obligations to pay the principal and all accrued interest under the Series B Note. "Change of Control" means a sale of all or substantially all of the Company's assets, or any merger or consolidation of the Company with or into another corporation other than a merger or consolidation in which the holders of more than 50% of the shares of capital stock of the Company outstanding immediately prior to such transaction continue to hold (either by the voting securities remaining outstanding or by their being converted into voting securities of the surviving entity) more than 50% of the total voting power represented by the voting securities of the Company, or such surviving entity, outstanding immediately after such transaction. "IPO" means a firm commitment underwritten public offering by the Company of shares of its Common Stock pursuant to a registration statement under the Securities Act, which results in aggregate cash proceeds to the Company not less than $25,000,000 (net of underwriting discounts and commissions). Mr. Musk agrees to indemnify and hold the Company harmless from any and all liabilities, costs or expenses relating to any tax (including without limitation any income, excise or employment tax) liability, withholding obligations, interest, penalties or additions to tax that may be assessed against the Company by the Internal Revenue Service or any state tax authority as a result of any benefits conferred under this Section 4.

5. Deletion of Reference to "Founders". The Company acknowledges and agrees that Mr. Musk is a founder of the Company and its predecessor X.com. The Company agrees that, within ten days after the effective date of this Agreement, all references to "founders" of the Company will be removed from the Company's website and from the "about" section of all future Company press releases. In addition, the Company shall refrain from stating who the founders of the Company are or making statements quoted in the press that undermine Mr. Musk's status as a "founder" of X.com or the Company when communicating with the media or other external third parties. In the event the Company breaches its obligations under this Section 5(a), Mr. Musk may sell to the Company, and the

Company shall purchase from Mr. Musk, shares of Series C and Series D Preferred Stock owned by Mr. Musk, at his original purchase price, as follows:


90,909 shares of Series C Preferred at $2.75/share; aggregate:			249,999.75
166,667 shares of Series D Preferred at $3.00/shares; aggregate:			500,001.00

	Total:	$	750,000.75

In the event that Mr. Musk wishes to sell shares of Preferred Stock to the Company under this Section 5(a), he shall provide written notice to the Company of his intent to this effect after the alleged breach and a summary of the facts giving rise to the breach. The closing of this sale shall occur within five business days after receipt of the notice and a satisfactory statement of facts giving rise to the breach. At such closing, Mr. Musk shall deliver the certificates evidencing the shares of Series C and Series D Preferred Stock being sold to the Company and the Company shall deliver to Mr. Musk, within 30 business days, a check in the amount of $750,000.75. In the event the Company disagrees with Mr. Musk's assertion that the Company has breached this Section 5(a), the Company or Mr. Musk may seek to have the matter settled by the procedures set forth in Section 14. Nothing in this Section 5 shall impair or affect Mr. Musk's right to seek additional injunctive relief as a remedy for a breach of this Section 5.

6. Employee and Mutual Covenants.

(a) Confidential Information. Mr. Musk represents and warrants that he has not breached his obligations to the Company under the terms of the Confidential Information and Invention Assignment Agreement he executed June 22, 2000 (the "Confidentiality Agreement"), a copy of which is attached hereto as Exhibit A. Mr. Musk understands and agrees that his obligations to the Company under the Confidentiality Agreement survive the termination of his relationship with the Company under this Agreement. Mr. Musk further agrees to execute the Termination Certification attached as Exhibit B to the Confidentiality Agreement.

(b) Confidentiality of Terms. The Parties agree, on their own behalf and on behalf of their representatives, to keep the terms and amount of this Agreement completely confidential and that they will not hereafter disclose any such information concerning this Agreement to anyone, unless required or permitted to do so by law. Mr. Musk may disclose the terms of this Agreement to his spouse and his accountants, tax advisors or preparers, each of whom shall be required to maintain the confidentiality of this Agreement. The Company may disclose the terms of this Agreement to certain of its employees who need to know, its board members, its accountants, lawyers, tax advisors or preparers, or other advisors who need to know, each of whom shall be required to maintain the confidentiality of this Agreement.

(c) Nondisparagement. The Parties also agree that they will not, either directly or indirectly, hereafter make any defamatory, negative or denigrating comments of any type or nature whatsoever about each other (or the other Party's employees, officers, agents, consultants, affiliates, investors or business partners) to anyone.

7. No Other Payments Due. The Parties agree that the Company has paid Mr. Musk all salary owed him through the Termination Date, and that the Company has paid him all bonuses, accrued vacation and other sums as are due to him. By executing this Agreement, Mr. Musk hereby acknowledges receipt of all such payments as received, and acknowledges that, in light of the payment

by the Company of all wages due to him, California Labor Code Section 206.5 is not applicable to the Parties hereto. That section provided in pertinent part as follows:

No employer shall require the execution of any release of any claim or right on account of wages due, or to become due, or made as an advance on wages to be earned, unless payment of such wages has been made.

8. Release of Claims. In consideration for the obligations of both parties set forth in this Agreement and for other valuable consideration, Mr. Musk and the Company, on behalf of themselves, and their respective heirs, executors, officers, directors, employees, investors, stockholders, administrators and assigns, hereby fully and forever release each other and their respective heirs, executors, officers, directors, employees, investors, stockholders, administrators, parent and subsidiary corporations, predecessor and successor corporations and assigns, of and from any claim, duty, obligation or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that any of them may possess arising from any omissions, acts or facts that have occurred up until and including the Effective Date of this Agreement including, without limitation:

(a) any and all claims relating to or arising from Mr. Musk's employment relationship with the Company and the termination of that relationship;

(b) any and all claims relating to, or arising from, Mr. Musk's right to purchase, or actual purchase of shares of stock of the Company;

(c) any and all claims for wrongful discharge of employment; breach of contract, both express and implied; breach of a covenant of good faith and fair dealing, both express and implied, negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; negligence; and defamation;

(d) any and all claims for violation of any federal, state or municipal statute, including, but not limited to the Civil Rights Act of 1866, as amended, the Civil Rights Act of 1964, as amended, the California Fair Employment and Housing Act, as amended, the federal and state family leave acts, the Age Discrimination in Employment Act of 1967, the Older Workers' Benefit Protection Act, the Americans with Disabilities Act of 1990, and the Civil Rights Act of 1991);

(e) any and all claims arising out of any other laws and regulations relating to employment or employment discrimination; and

(f) any and all claims for attorneys' fees and costs.

The Company and Mr. Musk agree that the release set forth in this Section 8 shall be and remain in effect in all respects as a complete general release as to the matters released. This release does not extend to any obligations incurred or specified under this Agreement.

9. Civil Code Section 1542. The Parties represent that they are not aware of any claim by either of them other than the claims that are released by this Agreement. Mr. Musk and the Company acknowledge that they are familiar with the provisions of California Civil Code Section 1542, which provides as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

Mr. Musk and the Company, being aware of said Code section, agree to expressly waive any rights they may have thereunder, as well as under any other statute or common law principles of similar effect.

10. Breach of Agreement. The Parties agree and acknowledge that upon breach by either Party of this Agreement, including the covenants contained in Sections 5 or 6 above, the other Party would sustain irreparable harm, and, therefore, they agree that in addition to any other remedies that they may have under this Agreement or otherwise, each Party shall be entitled to obtain equitable relief, including specific performance and injunctive relief, restraining the other Party from committing or continuing any such breach or directing such Party to perform its obligations pursuant to this Agreement.

11. Authority. The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Mr. Musk represents and warrants that he has the capacity to act on his own behalf and on behalf of all who might claim through him to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein.

12. No Representations. Neither Party has relied upon any representations or statements made by the other Party hereto which are not specifically set forth in this Agreement.

13. Severability. In the event that any provision hereof becomes or is declared by a court or other tribunal of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision.

14. Arbitration. The Parties shall attempt to settle all disputes arising in connection with this Agreement through good faith consultation. In the event no agreement can be reached on such dispute within thirty (30) days after notification in writing by either Party to the other concerning such dispute, the dispute shall be settled by binding arbitration to be conducted in Santa Clara County, California before an arbitrator to be mutually agreed upon. If the Parties cannot agree, they shall submit the matter to the presiding judge of Santa Clara County, who shall select an arbitrator based on input from the Parties. The arbitration decision shall be final, conclusive and binding on both Parties and any arbitration award or decision may be entered in any court having jurisdiction. The Parties agree that the prevailing party in any arbitration shall be entitled to injunctive relief in any court of competent jurisdiction to enforce the arbitration award. The Parties further agree that the prevailing Party in any such proceeding shall be awarded reasonable attorneys' fees and costs. This Section 14 shall not apply to the Confidentiality Agreement. The parties hereby waive any rights they may have to trial by jury in regard to arbitrable claims.

15. Entire Agreement. This Agreement, the exhibits hereto and the other agreements referenced in this Agreement (as such other agreements are amended by this Agreement), represent the entire agreement and understanding between the Company and Mr. Musk concerning Mr. Musk's separation from the Company, and supersede and replace any and all prior agreements and understandings concerning Mr. Musk's employment relationship with the Company, termination of that relationship, his compensation by the Company and his ownership and interests in any capital stock of the Company. Notwithstanding the above, the Non-Competition Agreement between Mr. Musk and the Company dated March 30, 2000 remains in full force and effect pursuant to its terms.

16. No Oral Modification. This Agreement may only be amended in writing signed by Mr. Musk and the Company.

17. Governing Law. This Agreement shall be governed by the laws of the State of California, without regard to its conflicts of law provisions.

18. Effective Date. This Agreement is effective upon execution by both Parties (the "Effective Date").

19. Counterparts. This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned.

20. Assignment. This Agreement may not be assigned by Mr. Musk or the Company without the prior written consent of the other party. Notwithstanding the foregoing, this Agreement may be assigned by the Company to a corporation controlling, controlled by or under common control with the Company, including a successor to the Company, without the consent of Mr. Musk.

21. Voluntary Execution of Agreement. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the Parties hereto, with the full intent of releasing all claims. The Parties acknowledge that:

(a) they have read this Agreement;

(b) they have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice or that they have voluntarily declined to seek such counsel; provided that both Parties acknowledge and agree that Venture Law Group solely represents the Company in connection with this Agreement, and generally, and does not represent Mr. Musk individually in any capacity;

(d) they are fully aware of the legal and binding effect of this Agreement.

The Parties have executed this Separation Agreement and Mutual Release on the respective dates set forth below.

		PayPal, Inc.
Dated as of May 4, 2001		By: /s/ John Muller Title: General Counsel and Secretary
		Elon R. Musk, an individual
Dated as of May 4, 2001		/s/ Elon R. Musk Elon R. Musk

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PAYPAL, INC. SEPARATION AGREEMENT AND MUTUAL RELEASE
EX-10.16 15 a2059025zex-10_16.htm EXHIBIT 10.16 Prepared by MERRILL CORPORATION
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EXHIBIT 10.16

August 27^th, 2001

Mr. H. David Johnson
3 Willow Spring Court
Moraga, CA 94556
(925) 376-6439

Re: Settlement Agreement and Release of Claims

Dear Mr. Johnson:

This letter constitutes a settlement agreement and release of claims ("Agreement") that compromises, settles and discharges any and all claims that you may have against PayPal, Inc. (the "Company") including those arising from your employment as Chief Financial Officer, the termination of your employment on August 8^th, 2001, and the events surrounding the termination of your employment. You and the Company may be referred to in this Agreement as "Parties," collectively, or as a "Party," individually.

1. Separation. Your last day of work with the Company and your employment termination date was August 8^th, 2001 (the "Separation Date").

2. Payment. Although the Company has no policy or procedure requiring payment of any severance benefits, the Company will pay you the gross lump sum amount of $75,000.00, subject to standard payroll deductions and withholdings. That amount will be paid in a lump sum by check within the day you sign this Agreement and return it to the Company by hand.

3. Restricted Stock. Although the Company has no policy or procedure requiring the grant of additional restricted stock, you will be eligible to vest an additional 168,750 Restricted Stock shares previously purchased by you pursuant to the Company's Restricted Stock plan the day you sign this agreement and return it to the company by hand. All remaining Restricted shares previously granted to you will expire unvested on August 8^th, 2001. As your start date was 11/8/99, through your separation date you will have vested 21 months of Restricted Stock or 590,625 shares. As you were granted a recourse loan to purchase your initial Restricted Stock, you will need to submit a check for $22,781.25 for the balance of your unvested Restricted Stock shares.

4. Medical Benefits. Although the Company has no policy or procedure requiring the payment of COBRA premiums, should you elect to participate in COBRA, the Company agrees to pay for your medical, dental and vision monthly premium costs ($678.38 per month) for a maximum total of six months, or a maximum value of $4,070.28. At the end of six months, you will be responsible for this monthly premium should you choose to continue to participate in COBRA. Should you elect COBRA, you will receive invoices on a monthly basis, please forward these invoices as soon as you receive them directly to me for payment.

5. Other Compensation or Benefits. You acknowledge that, except as expressly provided in this Agreement, you will not receive any additional compensation, severance or benefits after the Separation Date.

6. Return of Company Property. Within five (5) days after the Effective Date, you agree to return to the Company all Company documents (and all copies thereof) and other Company property that you have had in your possession at any time, including, but not limited to, Company files, notes, drawings, records, business plans and forecasts, financial information, specifications, computer-recorded information, tangible property (including, but not limited to, computers), credit cards, entry cards,

identification badges and keys; and, any materials of any kind that contain or embody any proprietary or confidential information of the Company (and all reproductions thereof).

7. Proprietary Information Obligations. You will refrain from any use or disclosure of the Company's proprietary or confidential information or materials, unless such use is authorized in writing by an appropriate Company representative.

8. Confidentiality. The provisions of this Agreement will be held in strictest confidence by you and the Company and will not be publicized or disclosed in any manner whatsoever; provided, however, that: (a) you disclose this Agreement to your immediate family; (b) the Parties may disclose this Agreement in confidence to their respective attorneys, accountants, auditors, tax preparers, and financial advisors; (c) the Company may disclose this Agreement as necessary to fulfill standard or legally required corporate reporting or disclosure requirements; and (d) the Parties may disclose this Agreement insofar as such disclosure may be necessary to enforce its terms or as otherwise required by law. In particular, and without limitation, you agree not to disclose the terms of this Agreement to any current or former Company employee. You and the Company will respond to inquiries in words to the effect of: "Dave Johnson left PayPal, Inc. for personal reasons."

9. Nondisparagement. The Company agree not to disparage you, and you agree not to disparage the Company or the Company's other officers, directors, employees, shareholders and agents, in any manner likely to be harmful to the Parties or their business, business reputation or personal reputation; provided that you and the Company may respond accurately and fully to any question, inquiry or request for information when required by legal process.

10. Releases.

8.1. In exchange for the payment and other consideration under this Agreement to which you would not otherwise be entitled, you agree to execute the Employee Agreement and Release attached hereto as Exhibit A.

8.2. The releases attached hereto as Exhibit A expressly do not apply to or limit: (1) your rights to indemnification (if any) by the Company; (2) either your potential claims with regard to the Company's future activities, or the Company's potential claims with regard to your future activities; or (3) any Party's rights to enforce the terms of this Agreement.

11. Miscellaneous. This Agreement, including Exhibit A, constitutes the complete, final and exclusive embodiment of the entire agreement among the Parties with regard to this subject matter. Each of the Parties represents, warrants and agrees that it has received independent legal advice from counsel with respect to the advisability of making the release and settlement provided for herein and with respect to the advisability of executing this Agreement.

Each signatory below represents that he has the indicated Party's full authority to execute this Agreement on the Party's behalf. Furthermore, each of the Parties acknowledges that the Party has read and understands this Agreement, and that the Party signs its release of all claims voluntarily, with the full appreciation that at no time in the future may the Party pursue any of the rights of the Party has waived in this Agreement, including Exhibit A. This Agreement is entered into without reliance on any promise or representation, written or oral, other than those expressly contained herein, and it supersedes any other such promises, warranties or representations. This Agreement may not be modified or amended except in a writing signed by you, and a duly authorized officer of the Company. This Agreement will bind the heirs, personal representatives, successors and assigns of you and the Company and inure to the benefit of you and the Company and your, or its heirs, successor and assigns. If any provision of this Agreement is determined to be invalid or unenforceable, in whole or in part, this determination will not affect any other provision of this Agreement and the provision in question will be modified by the court so as to be rendered enforceable. This Agreement will be

deemed to have been entered into and will be construed and enforced in accordance with the laws of the State of California.

If this Agreement is acceptable to you please sign below and on the attached Employee Agreement and Release, which is part of this Agreement, and return the originals of both to me by hand.

Sincerely,

PAYPAL, INC.
By:		/s/ SAL GIAMBANCO Sal Giambanco Vice President, HR and Administration
EXHIBIT A—EMPLOYEE AGREEMENT AND RELEASE
ACCEPTED AND AGREED BY H. DAVID JOHNSON:
/s/ H. DAVID JOHNSON H. David Johnson

EXHIBIT A
CONFIDENTIALITY AGREEMENT

Exhibit A

EMPLOYEE AGREEMENT AND RELEASE

I agree to the terms described in the foregoing letter Agreement.

Except as otherwise set forth in this Agreement, I hereby release, acquit and forever discharge the Company, its subsidiaries, and their officers, directors, agents, servants, employees, attorneys, shareholders, successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed, arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the date this Agreement is signed, including but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with my employment with the Company, the termination of that employment or the events surrounding the termination; claims or demands related to salary, bonuses, commissions, stock, stock options, or any other ownership interest in the Company, vacation pay, fringe benefits, expense reimbursements, severance pay, or any other form of compensation; and claims pursuant to any federal, state or local law, statute or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended, the federal Americans with Disabilities Act of 1990, the California Fair Employment and Housing Act, as amended, tort law, contract law, wrongful discharge, discrimination, harassment, fraud, defamation, emotional distress, and breach of the implied covenant of good faith and fair dealing.

I UNDERSTAND THAT THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. In giving this release, which includes claims that may be unknown to me at present, I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." I expressly waive and relinquish all rights and benefits under that section and any law of Nebraska or any other jurisdiction of similar effect with respect to my release of any unknown or unsuspected claims I may have against the Company.

		By:		/s/ H. David Johnson
		Date:		August 29, 2001

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Exhibit A EMPLOYEE AGREEMENT AND RELEASE
EX-21.1 16 a2059025zex-21_1.htm EXHIBIT 21.1 Prepared by MERRILL CORPORATION
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EXHIBIT 21.1

SUBSIDIARIES OF PAYPAL, INC.

The following entities are wholly owned subsidiaries of PayPal, Inc.: Confinity, Inc., a California corporation; PayPal Asset Management, Inc., a Delaware corporation and PayPal (Europe) Ltd., a United Kingdom company.

As of September 20, 2001, PayPal, Inc. owned 48.1% of the ownership interest in PayPal Funds, a Delaware business trust.

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SUBSIDIARIES OF PAYPAL, INC.
EX-23.1 17 a2059025zex-23_1.htm EXHIBIT 23.1 Prepared by MERRILL CORPORATION
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EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Registration Statement on Form S-1 of our report dated November 28, 2000 relating to the financial statements of Confinity, Inc., which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement.

/s/ PricewaterhouseCoopers LLP

San Francisco, California
September 21, 2001

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CONSENT OF INDEPENDENT ACCOUNTANTS
EX-23.2 18 a2059025zex-23_2.htm EXHIBIT 23.2 Prepared by MERRILL CORPORATION
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EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Registration Statement on Form S-1 of our report dated March 12, 2001 relating to the consolidated financial statements of PayPal, Inc., which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement.

/s/ PricewaterhouseCoopers LLP

San Francisco, California
September 21, 2001

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CONSENT OF INDEPENDENT ACCOUNTANTS
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