Prepared by MERRILL CORPORATION

0000912057-01-537924.txt : 20011128 0000912057-01-537924.hdr.sgml : 20011128 ACCESSION NUMBER: 0000912057-01-537924 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20011107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAYPAL INC CENTRAL INDEX KEY: 0001103415 STANDARD INDUSTRIAL CLASSIFICATION: TELEGRAPH & OTHER MESSAGE COMMUNICATIONS [4822] IRS NUMBER: 770510487 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-70438 FILM NUMBER: 1776520 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/A 1 a2060419zs-1a.htm S-1/A Prepared by MERRILL CORPORATION
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As filed with the Securities and Exchange Commission on November 7, 2001

Registration No. 333-70438

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

AMENDMENT NO. 1
TO

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. / /

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 NOVEMBER 7, 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 7.

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

Bear, Stearns & Co. Inc.

Robertson Stephens

William Blair & Company

, 2001

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		7
Special Note Regarding Forward-Looking Statements		20
Use of Proceeds		21
Dividend Policy		21
Capitalization		22
Dilution		23
Selected Consolidated Financial Data		24
Management's Discussion and Analysis of Financial Condition and Results of Operations		25
Business		45
Management		63
Certain Relationships and Related Party Transactions		73
Principal Stockholders		79
Description of Capital Stock		81
Shares Eligible for Future Sale		84
Underwriting		86
Legal Matters		88
Experts		88
Where You Can Find More Information		89
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 37 countries including the United States. For the three months ended September 30, 2001, and for the nine months ended September 30, 2001, our payment volume to business accounts, which we refer to as Gross Merchant Sales or GMS, totaled $815.0 million and $2,024.9 million, respectively. GMS equaled 88.1% of our total payment volume of $924.6 million for the three months ended September 30, 2001, and 87.5% of our payment volume of $2,314.2 million for the nine months ended September 30, 2001. 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 30, 2001, we had 10.6 million accounts, including 2.1 million business accounts and 8.5 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 system.

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. In addition, with our Web Accept feature, merchants can accept PayPal payments directly from their websites. When a consumer who has not yet registered with PayPal visits the website of a merchant that has integrated Web Accept, 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 and nine months ended September 30, 2001, our account base grew by 1.8 million and 5.1 million respectively, an average of 19,500 and 18,500 per day respectively, with no material sales force or advertising expenses.

During the three months ended September 30, 2001, we processed an average of 195,000 payments per day totaling $10.1 million in daily volume. Our target transaction size ranges from $10 to $1,000. For the same period, 84.3% of the amount of our transactions fell within this range, 38.9% of the

amount of our transactions fell within the $10 to $100 range, and 45.4% of the amount of our transactions fell within the $100 to $1,000 range. The average payment amount sent equaled $51.

We earn revenues primarily from transaction fees on GMS, from international funding and withdrawal fees and from fees on our ATM/debit card. For the nine months ended September 30, 2001, we generated revenues of $64.4 million, of which GMS fees comprised 82.4%, or $53.0 million. For the same period, our transaction fees equaled 2.6% of total payment volume, compared to our transaction processing expenses of 1.4% of total payment volume. For the nine months ended September 30, 2001, we derived 86.5% of our total revenues from U.S. customers.

For the three months and nine months ended September 30, 2001, our net loss attributable to common stockholders amounted to $33.7 million and $90.6 million, respectively. For these periods, non-cash expenses related to amortization of goodwill and other intangibles, amortization of non-cash deferred stock-based compensation, and a deemed dividend on Class A stock amounted to $32.5 million and $71.5 million, respectively. Excluding these non-cash expenses, our net loss for the three months and nine months ended September 30, 2001 amounted to $1.2 million and $19.1 million, respectively.

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 by continuing to develop and enhance the product features useful to small business customers;
•: Strengthen our position as the payment method of choice on online auctions by adding product features valued by auction participants;
•: Increase volume of international payments through development of a multi-currency platform and the addition of features that increase international access to our product;
•: Maintain low variable costs, particularly transaction losses, by employing proprietary risk management techniques; and
•: Grow PayPal ATM/debit card usage by broadening card distribution to qualified customers.

Summary Risks

You should consider carefully the following important risks:

•: We have a limited operating history. The PayPal product launched in October 1999.
•: To date, we have never achieved a profitable quarter. We have accumulated net losses attributable to common stockholders, including non-cash deferred stock-based compensation expenses and amortization of intangibles, of $264.7 million from our inception, March 8, 1999, through September 30, 2001. Excluding non-cash expenses related to amortization of goodwill and other intangibles, amortization of non-cash deferred stock-based compensation, and a deemed dividend on Class A stock, we have accumulated net losses attributable to stockholders of $138.0 million from our inception, March 8, 1999, through September 30, 2001.
•: We operate in a highly competitive industry. Many of our competitors have longer operating histories, significantly greater financial, technical, marketing and customer service resources, greater name recognition or a larger base of customers in affiliated business than we do.

Please see the section entitled "Risk Factors" for information on these and other risks related to our business and this offering.

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 November 2001, we will 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 49,741,099 shares outstanding as of September 30, 2001, and excluding:

•: 4,072,491 shares of restricted common stock outstanding but subject to repurchase by us;
•: 2,061,313 shares of common stock issuable upon exercise of options outstanding at a weighted average exercise price of $0.98 per share;
•: 142,603 shares of common stock issuable upon exercise of warrants outstanding at a weighted average exercise price of $0.92 per share; and
•: 9,607,669 shares of common stock reserved for future grant under our stock option plans; subsequent to September 30, 2001, we reserved an additional 625,000 shares for issuance under our employee stock purchase plan.

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

•: a one-for-four reverse stock split of our common stock, which we expect to complete prior to the offering;
•: 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 43,392,644 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			Sept. 30, 2001
		(in thousands, except per share data) (unaudited)
Consolidated Statements of Operations:
Transaction fees		$	—		$	35		$	1,016		$	7,403		$	12,964		$	18,644		$	28,901
Interest on funds held for others			—			240			727			1,079			1,143			920			955
Investment management fees			—			—			—			22			192			348			328
Service agreement revenues			1,186			1,886			529			337			—			—			—

	Total revenues		1,186			2,161			2,272			8,841			14,299			19,912			30,184

Transaction processing expenses			—			6,230			9,764			9,098			8,754			10,659			12,441
Provision for transaction losses			13			2,577			5,131			3,307			3,103			2,437			4,163
Promotional and marketing			758			9,917			7,155			3,193			2,035			1,635			3,199
Product development			560			987			1,805			1,982			2,401			2,517			7,631
General and administrative			2,816			3,867			7,129			4,810			5,025			7,273			10,873
Customer service and operations			547			3,774			5,905			5,741			7,221			7,678			8,549
Amortization of goodwill and other intangibles			67			16,415			16,415			16,415			16,415			16,415			16,416
Service agreement costs and termination expenses			19,344			7,640			6,949			7,212			—			—			—

	Total operating expenses		24,105			51,407			60,253			51,758			44,954			48,614			63,272

Loss from operations			(22,919	)		(49,246	)		(57,981	)		(42,917	)		(30,655	)		(28,702	)		(33,088	)
Interest income			152			—			1,015			957			943			798			583
Other income (expense), net			(46	)		1,432			(9	)		56			454			254			152

Net loss		$	(22,813	)	$	(47,814	)	$	(56,975	)	$	(41,904	)	$	(29,258	)	$	(27,650	)	$	(32,353	)

Deemed dividend on Class A stock			—			—			—			—			—			—			(1,350	)

Net loss attributable to common stockholders			(22,813	)		(47,814	)		(56,975	)		(41,904	)		(29,258	)		(27,650	)		(33,703	)

Basic and diluted net loss per share		$	(14.51	)	$	(10.64	)	$	(11.94	)	$	(7.46	)	$	(4.48	)	$	(3.83	)	$	(4.52	)

Shares used in calculating basic and diluted net loss per share			1,572			4,492			4,771			5,615			6,533			7,219			7,457
Pro forma basic and diluted net loss per share		$	(0.58	)	$	(1.10	)	$	(1.33	)	$	(0.94	)	$	(0.60	)	$	(0.56	)	$	(0.66	)

Shares used in calculating pro forma basic and diluted net loss per share			39,107			43,553			42,922			44,790			48,865			49,487			50,850

Operating Data:
Gross Merchant Sales		$	—		$	1,873		$	55,621		$	335,691		$	546,848		$	663,014		$	815,014
Total payment volume		$	46,263		$	248,799		$	422,760		$	543,562		$	642,737		$	746,888		$	924,601
Total number of payments			1,026			5,456			9,438			12,325			13,524			15,058			17,969
Total number of accounts (at period end)			824			2,190			3,718			5,518			7,200			8,798			10,589
	Number of business accounts		—			14			289			800			1,327			1,731			2,138

		As of Sept. 30, 2001
		Actual			Pro Forma		Pro Forma As Adjusted
		(in thousands)
					(unaudited)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	22,375		$	22,375	$
Short term investments			4,998			4,998
Long term investments			20,826			20,826
Restricted cash			6,548			6,548

	Total	$	54,747		$	54,747	$

Cash and cash equivalents—held on behalf of customers		$	116,239		$	116,239	$
Long term investments—held on behalf of customers			16,365			16,365

	Total	$	132,604		$	132,604	$

Funds receivable			26,674			26,674
Total assets			265,901			265,901
Due to customers			139,993			139,993
Funds payable			16,584			16,584
Reserve for transaction losses			5,332			5,332
Mandatorily redeemable convertible preferred stock			279,674			—
Total stockholders' equity (deficit)			(187,098	)		92,576

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 which could cause our business to suffer and our stock price to decline.

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, we may fail to implement successfully these programs or to increase substantially adoption of our electronic payment method by customers who pay for the service.

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. If our ability to process payments for online auctions, particularly eBay, is impaired, our business may suffer and our stock price could decline.

For the three and nine months ended September 30, 2001, our customers identified to us approximately 66.7% and 68.3%, respectively, 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.

We face strong competitors and our market evolves rapidly. If we do not compete effectively, the demand for our product may decline, and our business would suffer.

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. They may devote greater resources to the development, promotion and sale of products and services than we can, and they may offer 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 online merchants. Either of these changes could make it more difficult for us to retain and attract customers.

We have a limited operating history, are not currently profitable and may not become profitable. If we never become profitable, our stock price would decline.

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. The revenue and income potential of our business and the market for online payments through non-traditional products such as ours 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 attributable to common stockholders of $264.7 million from our inception, March 8, 1999, through September 30, 2001, and net losses attributable to common stockholders of $90.6 million during the nine months ended September 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. If we are unable to deal effectively with losses from fraudulent transactions, our business would be harmed.

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 nine months ended September 30, 2001, $9.7 million, representing 0.42% of our total payment volume. Our provision for transaction losses may increase in future quarters following our increase from $250 to $1,000 in June 2001 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. If we are unable to detect and prevent unauthorized use of cards and bank accounts, our business would suffer.

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 30, 2001 with respect to unauthorized use of credit cards for transactions that occurred during the nine months ended September 30, 2001 totaled $3.2 million. For the nine months ended September 30, 2001, the amount of our losses with respect to unauthorized use of bank accounts totaled $0.9 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. If we are prohibited from accepting credit cards for payment, our business would suffer.

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 30, 2001 with respect to merchant-related disputes for transactions that occurred during the nine months ended September 30, 2001 totaled $5.8 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 and result in the loss of customers, either of which events could harm our business and cause our stock price to decline.

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; and
•: deter customers from using our product.

We cannot assure you that our use of applications designed for data security will effectively counter evolving security risks or address 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 and, as a result, our business would suffer.

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, which could expose us to additional liability and harm our business.

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 cease doing business with residents of certain states or to change our business practices. 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 nine months ended September 30, 2001, we processed approximately 171,000 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. These requirements could raise our costs significantly or reduce the attractiveness of our product. On October 26, 2001 President Bush signed into law the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. This Act, among other things, may require us to revise our anti-money laundering program and the procedures we take to verify the identity of our customers, and to monitor more closely international transactions. Because the Act is new, no implementing regulations have been passed and the interpretation and applicability of the Act to our business is uncertain. Future regulations under this Act may impose substantial burdens on our business. Failure to comply with this Act or other applicable state and federal money laundering laws could result in significant criminal and civil penalties and forfeiture of significant 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 is 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. The cost of obtaining any required licenses or regulatory approvals in these countries could affect our future profitability.

We offer our product to customers with Visa or MasterCard credit cards in 36 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. 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. We could be exposed to significant liabilities and expenses if we are required to comply with new or additional regulations, and as a result, our business could suffer.

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 prohibiting states and local governments from imposing new taxes on Internet access or electronic commerce transactions. This moratorium expired in October 2001. Unless it is renewed, 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. Our profitability could be harmed if the rate at which customers fund using credit cards goes up.

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 nine months ended September 30, 2001, senders funded 51.1% 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. If we are unable to accept credit cards, our business would suffer.

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, the credit card associations could 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. If we were unable to accept credit cards our competitive position would be seriously damaged.

Increases in credit card processing fees could increase our costs, affect our profitability, 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. Any such increased fees could increase our operating costs and reduce our profit margins. Furthermore, our credit card processors require us to keep funds on deposit as security with respect to our acceptance of Visa and MasterCard. Should we accept American Express or Discover, these organizations similarly may impose collateral requirements.

Customer complaints or negative publicity could affect use of our product adversely and, as a result, our business could suffer.

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 234 as of September 30, 2000 to 403 as of September 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.

We have limited experience in managing and accounting accurately for large amounts of customer funds. Our failure to manage these funds properly would harm our business.

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, which could affect adversely our ability to become profitable.

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;
•: computer denial of service attacks; and
•: power loss and California rolling blackouts.

We depend on third parties for co-location of our data servers and rely upon these third parties for the physical security of our servers. Our primary servers currently reside in facilities in Santa Clara, California. Currently we are not able 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.

Our infrastructure could prove unable to handle a larger volume of customer transactions. Any failure to accommodate transaction growth could impair customer satisfaction, lead to a loss of customers, impair our ability to add customers or increase 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. If our customers stop using our product, our business would suffer.

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 and harm our ability to become profitable.

We have experienced rapid growth in our revenues, from $5.6 million in the nine months ended September 30, 2000 and $14.5 million for the year ended December 31, 2000, to $64.4 million in the nine months ended September 30, 2001, and we intend to grow our business significantly. To support our growth plans, we may need to expand our existing management, operational, financial and human resources, customer service and management information systems and controls. We may be unable to expand these systems and to manage our growth successfully, and this inability would adversely affect our business.

Our quarterly operating results fluctuate and may not predict our future performance accurately. Variability in our future performance could cause our stock price to fluctuate and decline.

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.

Loss of principal of customer funds in the PayPal system or in the PayPal Money Market Reserve Fund may affect adversely customer perceptions and payment volumes. A reduction in payment volume could affect our ability to become profitable.

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 who opt to invest their money in the PayPal Money Market Reserve Fund may lose the original principal value of their initial investment. If these losses occur, customers' perceptions regarding the safety and handling of customer funds in the PayPal system may result in decreased participation in the Fund and decreased payment volume within our system.

We may not protect our proprietary technology effectively, which would allow competitors to duplicate our products. This would make it more difficult for us to compete with them.

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 including the source code for our proprietary software, and documentation and other proprietary information. 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. A third party might try to reverse engineer or otherwise obtain and use our technology without our permission, allowing competitors to duplicate our products. 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.

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 nine months ended September 30, 2001, we generated 13.5% 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.

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 30, 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, 2,203,916 shares under outstanding options and warrants and 10,232,669 shares available for grant under our existing stock plans as of October 31, 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. This could affect our stock price adversely.

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;
•: 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. This could affect our profitability and cause our stock price to decline.

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, and as a result, our stock price could decline.

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. These requirements arise when we use restricted cash to secure letters of credit with banks to provide collateral to other financial institutions for actual or contingent liabilities arising from potential charge-backs, adjustments, fees, or other charges we incur;
•: $10.0 to $15.0 million for capital expenditures. Significant capital expenditures include, but are not limited to, networking equipment, storage equipment, servers, and redundant data facilities; 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 September 30, 2001:

•: on an adjusted basis to retroactively effect the one-for-four reverse split of common stock approved in November 2001;
•: on a pro forma basis to reflect the conversion of all of the outstanding shares of our convertible preferred stock into 43,392,644 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 Sept. 30, 2001
				Actual			Pro Forma			Pro Forma As Adjusted
				(in thousands, except share data)
							(unaudited)
Cash and cash equivalents				$	22,375		$	22,375		$
Short term investments					4,998			4,998
Long term investments					20,826			20,826
Restricted cash					6,548			6,548

		Total		$	54,747		$	54,747		$

Cash and cash equivalents—held on behalf of customers				$	116,239		$	116,239		$
Long term investments—held on behalf of customers					16,365			16,365

		Total		$	132,604		$	132,604		$

Long term liabilities				$	1,883		$	1,883		$
Mandatorily redeemable convertible preferred stock, par value $0.001 per share: authorized: 197,868,795 shares actual, 20,000,000 shares pro forma and pro forma as adjusted; issued and outstanding: 173,570,806 shares actual, no shares pro forma and no shares pro forma as adjusted					279,674			—			—
Stockholders' equity (deficit):
	Common stock, par value $0.001 per share:
		authorized: 75,000,000 shares actual, 150,000,000 shares pro forma and pro forma as adjusted; issued and outstanding: 10,420,946 shares actual, 53,813,590 shares pro forma and shares pro forma as adjusted			10			54
	Additional paid in capital				100,726			380,356
	Deferred non-cash deferred stock-based compensation				(21,145	)		(21,145	)
	Stockholders' notes				(1,953	)		(1,953	)
	Accumulated deficit				(264,736	)		(264,736	)

			Total stockholders' equity (deficit)		(187,098	)		92,576

			Total capitalization	$	94,459		$	94,459		$

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

•: 2,061,313 shares of common stock issuable upon exercise of options outstanding at a weighted average exercise price of $0.98 per share;
•: 142,603 shares of common stock issuable upon exercise of warrants outstanding at a weighted average exercise price of $0.92 per share; and
•: 9,607,669 shares of common stock reserved for future grant under our stock option plans; subsequent to September 30, 2001, we reserved an additional 625,000 shares for issuance under our employee stock purchase plan.

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 as of September 30, 2001, assuming conversion of all outstanding preferred stock into common stock, equaled approximately $59.7 million or approximately $1.11 per share of common stock. Net tangible book value 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 September 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 per share as of September 30, 2001	$	1.11
	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 September 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		53,813,590		%		214,300,000		%	$	3.98
New investors

	Total		100	%	$		100	%

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

•: 2,061,313 shares of common stock issuable upon exercise of options outstanding at a weighted average exercise price of $0.98 per share;
•: 142,603 shares of common stock issuable upon exercise of warrants outstanding at a weighted average exercise price of $0.92 per share; and
•: 9,607,669 shares of common stock reserved for future grant under our stock option plans; subsequent to September 30, 2001, we reserved an additional 625,000 shares for issuance under our employee stock purchase plan.

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."

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.

We derived the consolidated statement of operations data for the period from inception, March 8, 1999, to December 31, 1999, for the year ended December 31, 2000, and for the period ended September 30, 2001 and consolidated balance sheet data as of December 31, 1999 and 2000 and September 30, 2001 set forth below from our audited consolidated financial statements included elsewhere in this prospectus. We derived the consolidated statement of operations for the nine months ended September 30, 2000 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.

								Nine Months Ended Sept. 30,
		Mar. 8, 1999 (inception) to Dec. 31, 1999
					Year Ended Dec. 31, 2000
					Year Ended Dec. 31, 2000			2000			2001
								(unaudited)
		(in thousands, except per share data)
Consolidated Statements of Operations:
Transaction fees		$	—		$	8,454		$	1,051		$	60,509
Interest on funds held for others			—			2,046			967			3,018
Investment management fees			—			22			—			868
Service agreement revenues			—			3,938			3,601			—

	Total revenues		—			14,460			5,619			64,395
Transaction processing expenses			—			25,093			15,994			31,854
Provision for transaction losses			—			11,028			7,721			9,703
Promotional and marketing			887			21,024			17,830			6,869
Product development			621			5,334			3,352			12,549
General and administrative			2,954			18,623			13,813			23,171
Customer service and operations			296			15,967			10,226			23,448
Amortization of goodwill and other intangibles			124			49,313			32,898			49,246
Service agreement costs and termination expenses			—			41,142			33,932			—

	Total operating expenses		4,882			187,524			135,766			156,840

Loss from operations			(4,882	)		(173,064	)		(130,147	)		(92,445	)
Interest income			264			2,124			1,167			2,325
Other income (expense), net			(1	)		1,434			1,377			859

Net loss		$	(4,619	)	$	(169,506	)	$	(127,603	)	$	(89,261	)
Deemed dividend on Class A stock			—			—			—			(1,350	)

Net loss attributable to common stockholders		$	(4,619	)	$	(169,506	)	$	(127,603	)	$	(90,611	)

Basic and diluted net loss per share		$	(6.56	)	$	(31.69	)	$	(28.49	)	$	(12.73	)

Shares used in calculating basic and diluted net loss per share			704			5,349			4,479			7,118

Pro forma basic and diluted net loss per share (unaudited)		$	0.39		$	(3.81	)	$	(2.99	)	$	(1.79	)

Shares used in calculating pro forma basic and diluted net loss per share (unaudited)			11,942			44,524			42,630			50,511

	Dec. 31,
	Dec. 31,						Sept. 30, 2001
	1999			2000			Sept. 30, 2001
Consolidated Balance Sheet Data:
Cash, cash equivalents and investment securities	$	8,442		$	52,096		$	54,747
Cash, cash equivalents and investment securities—held on behalf of customers		—			68,046			132,604
Restricted cash		150			3,976			6,548
Funds receivable		—			11,271			26,674
Total assets		12,842			231,796			265,901
Due to customers		—			82,786			139,993
Funds payable		—			6,721			16,584
Reserve for transaction losses		—			4,900			5,332
Mandatorily redeemable convertible preferred stock		15,791			241,641			279,674
Total stockholders' deficit		(4,039	)		(113,453	)		(187,098	)

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 system. We offer our account-based system to users in 37 countries including the U.S. The PayPal product launched in October 1999; as of September 30, 2001, our network had grown to include 8.5 million personal accounts and 2.1 million business accounts. During the nine months ended September 30, 2001, 1.8 million of our accounts received at least one payment and 5.3 million of our accounts sent at least one payment. For the same period, the number of unique accounts that sent or received at least one payment amounted to 5.7 million. For the nine months ending September 30, 2001, 5.3 million, or 91.8%, of these accounts engaged in a payment that resulted in a fee. For the nine months ended September 30, 2001:

•: our account base grew by an average of 18,500 per day, with no material sales force or advertising expenses;
•: we processed an average of 171,000 payments per day totaling $8.5 million in average daily volume;
•: our Gross Merchant Sales, or GMS, totaled $2,024.9 million; and
•: our transaction fees equaled 2.6% 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. Confinity, Inc. incorporated in California in December 1998. Through Confinity's product, users could send money to anyone with an email address. On March 30, 2000, X.com merged with Confinity, with X.com as the surviving entity. Under the terms of the agreement, the Company issued 6,372,369 shares of common stock and 5,051,637 shares of Series AA, 24,247,856 shares of Series BB, and 18,522,663 shares of Series CC, preferred stock, 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 46.5% of the total outstanding voting interest of the Company immediately following the merger. 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 purchase price of $129.7 million was determined through arms-length negotiations between the two parties, and 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 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 $49.2 million for the nine months ended September 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 $16.4 million of intangibles relating to the merger. See "Unaudited Pro Forma Combined Financial Statements."

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 tables present these revenue sources for the quarters indicated in both absolute dollars and as a percentage of total revenues:

		Mar. 31, 2000		June 30, 2000		Sept. 30, 2000		Dec. 30, 2000		Mar. 31, 2001		June 30, 2001			Sept. 30, 2001
		(in thousands)
		(unaudited)
Fees on Gross Merchant Sales		$	—	$	35	$	1,016	$	7,090	$	11,747	$	16,299		$	24,987
International funding and withdrawal fees			—		—		—		313		996		1,739			2,453
Debit card fees, gross			—		—		—		—		54		721			1,372
Debit card cash-back			—		—		—		—		—		(316	)		(342	)
Other transaction fees			—		—		—		—		167		201			431

Transaction fees			—		35		1,016		7,403		12,964		18,644			28,901
Interest on funds held for others			—		240		727		1,079		1,143		920			955
Investment management fees			—		—		—		22		192		348			328
Service agreement revenues			1,186		1,886		529		337		—		—			—

	Total revenues	$	1,186	$	2,161	$	2,272	$	8,841	$	14,299	$	19,912		$	30,184

		Mar. 31, 2000		June 30, 2000		Sept. 30, 2000		Dec. 30, 2000		Mar. 31, 2001		June 30, 2001		Sept. 30, 2001
Fees on Gross Merchant Sales		—	%	1.6	%	44.7	%	80.2	%	82.1	%	81.9	%	82.8	%
International funding and withdrawal fees		—		—		—		3.6		7.0		8.7		8.1
Debit card fees, gross		—		—		—		—		0.4		3.6		4.5
Debit card cash-back		—		—		—		—		—		(1.6	)%	(1.1	)%
Other transaction fees		—		—		—		—		1.2		1.0		1.4

Transaction fees		—		1.6		44.7		83.7		90.7		93.6		95.7
Interest on funds held for others		—		11.1		32.0		12.2		8.0		4.6		3.2
Investment management fees		—		—		—		0.2		1.3		1.8		1.1
Service agreement revenues		100		87.3		23.3		3.8		—		—		—

	Total revenues	100	%	100	%	100	%	100	%	100	%	100	%	100	%

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. "Higher risk" accounts consist of merchants in industries that historically have experienced significant charge-back rates. At September 30, 2001, we had 341 accounts designated as "higher risk." As of September 30, 2001, we had 2.1 million business accounts, 39,000 of which received an average of at least $1,000 per month during the nine months ended September 30, 2001. For the three and nine months ended September 30, 2001, we charged business accounts a weighted average of 3.1% and 2.6%, respectively. For the year ended December 31, 2000 we charged business accounts a weighted average of 2.1% of GMS. The increase in our weighted average GMS fee rate from 2.1% in 2000 to 3.1% for the three

months ended September 30, 2001 reflects price adjustments and increases effected over the last 18 months. We do not charge transaction fees to personal accounts on payments they receive. During the nine months ended September 30, 2001, we processed a total of 46.6 million payments at an average size of $50 per payment. During the year ended December 31, 2000, we processed a total of 28.2 million payments at an average size of $45 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 nine months ended September 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. We do not charge senders located in the U.S. For withdrawals, we charge our international recipients a fee, based on the recipient's country, averaging 2.1% of the amount plus $1.00 for each withdrawal from their PayPal accounts to local bank accounts. In addition, for the nine months ended September 30, 2001 we charged a weighted average currency risk spread of 1.6% of the withdrawal amount. During the nine months ended September 30, 2001, we processed a total of 1.9 million international funding and withdrawal transactions at an average size of $87 per transaction. During the year ended December 31, 2000, we processed a total of 136,000 international funding and withdrawal transactions at an average size of $81 per transaction. For the nine months ended September 30, 2001, 10.5% of our payment volume involved international senders or recipients. International funding and withdrawal fees plus GMS fees and other fees collected from senders or recipients that reside outside the U.S. accounted for 13.5% of our total revenues. We anticipate this percentage to continue to increase in the future as a result of our development of our multi-currency platform and the addition of features that increase international access to our product. We classify as international those users who register a non-U.S. address, credit card or bank account.

Debit Card Fees

The PayPal ATM/debit card enables selected PayPal customers 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. As of September 30, 2001, we had 144,000 users of activated PayPal ATM/debit cards. For the nine months ended September 30, 2001, we earned an average revenue rate of 1.8% 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, targeted primarily at online auction sellers, requires that users advertise PayPal as their exclusive online payment option for their auction listings. We continue to evaluate this promotion and may change the bonus amounts or requirements in the future. At September 30, 2001, 61.2% of users of activated PayPal ATM/debit cards 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 nine months ended September 30, 2001, our weighted average fee, net of cash back payments, for PayPal ATM/debit card purchases and withdrawals equaled 0.9%.

Other Transaction Fees

We also earn revenues from other transaction-related charges, such as check withdrawal fees and domestic and international charge-back fees.

Interest on Funds Held for Others

Customers have an available PayPal balance if they have received a payment or funded their account but have not yet elected to direct these funds elsewhere. 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 4.42% during the nine months ended September 30, 2001. As of September 30, 2001, our total amount of funds held for others equaled $132.6 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 November 2001, we will deposit all customer funds not transferred to the PayPal Money Market Reserve Fund in FDIC-insured bank accounts. These accounts may bear interest at lower rates than short-term money market and money market equivalent securities, which could impact our revenues from interest on funds held for others. The objective of this strategy is to obtain pass- through FDIC insurance for individual PayPal users covering their available PayPal account balances.

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. The Fund imposes an additional charge of 0.1% on the average net assets held in the Fund which is passed on to Barclays Global Fund Advisors. 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 September 30, 2001, 295,000 of our customers chose to invest in the Fund; the aggregate amount of customer funds invested in the Fund at this date totaled $49.7 million, representing an average balance of $168 per account. These customers' balances accounted for 27.3% of all money held on behalf of others 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.

The following table sets forth payment funding data for the periods presented:

		Year Ended Dec. 31, 2000			Nine Months Ended Sept. 30, 2001
		(in millions, except percentages)
Existing PayPal Balances
	Payment amount funded	$	269.1		$	513.9
	% of total payment amount sent		21.3	%		22.2	%
	Number of transactions funded		6.9			11.3
	% of total transactions sent		24.4	%		24.3	%
Bank Account Transfers
	Payment amount funded	$	132.4		$	617.8
	% of total payment amount sent		10.5	%		26.7	%
	Number of transactions funded		2.6			12.6
	% of total transactions sent		9.4	%		27.0	%
Credit Cards
	Payment amount funded	$	859.8		$	1,182.5
	% of total payment amount sent		68.2	%		51.1	%
	Number of transactions funded		18.7			22.7
	% of total transactions sent		66.2	%		48.7	%

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 currently 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 nine months ended September 30, 2001, existing PayPal balances funded 22.2% of our payment volume, bank account transfers funded 26.7% and credit cards funded 51.1%. For the year ended December 31, 2000, existing PayPal balances funded 21.3% of our payment volume, bank account transfers funded 10.5% and credit cards funded 68.2%. The percentage of our total payment volume funded with credit cards has decreased as customers increasingly have chosen to fund their payments via bank account transfers.

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 nine months ended September 30, 2001 equaled approximately $0.45. 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 $0.62 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, using an actuarial technique, necessary to cover all outstanding transaction losses, including losses incurred as of the reporting date but of which we have not yet been notified. This technique enables us to estimate the total expected losses by loss category, for example unauthorized use or merchant-related losses, based upon the historical charge-back reporting pattern. The total of expected losses less the total amount of charge-backs reported equals the reserve for estimated losses incurred but not reported. 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 incur 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 1.08% for the nine months ended September 30, 2000, 0.87% for the year ended December 31, 2000 and 0.42% for the nine months ended September 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 51.1% for the nine months ended September 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 non-cash deferred 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. We have experienced a significant increase in our promotional and marketing expense during the third quarter of 2001 primarily due to the additional non-cash deferred stock-based compensation we recognized during that quarter.

Product Development

Product development expenses include salaries and non-cash deferred 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. We experienced a

significant increase in our product development expenses during the third quarter of 2001 primarily due to the additional non-cash deferred stock-based compensation we recognized during that quarter.

General and Administrative

General and administrative expenses consist primarily of salaries and non-cash deferred 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. Our general and administrative expenses may fluctuate from quarter to quarter, especially when taking into account non-cash deferred stock-based compensation expenses. See the subsection entitled "Non-Cash Deferred Stock-Based Compensation" in this section. We experienced a significant increase in our general and administrative expenses during the second and third quarters of 2001 primarily due to the additional non-cash deferred stock-based compensation we recognized during those quarters.

Customer Service and Operations

Customer service and operations expenses consist primarily of salaries and non-cash deferred 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. We have experienced a significant increase in customer service and operations expenses as a result of hiring personnel to support our payment volume growth.

Non-Cash Deferred Stock-Based Compensation

In connection with some employee stock option grants, we recorded non-cash 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 nine months ended September 30, 2001, we recorded non-cash deferred stock-based compensation expense of $5.8 million and $20.9 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 non-cash deferred 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 nine months ended September 30, 2001, we accelerated vesting for sixteen employees upon termination of service. We recorded $2.6 million in additional non-cash deferred stock-based compensation expense. The table below includes these amounts.

We include non-cash deferred 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		Sept. 30, 2001
		(in thousands)
Promotional and marketing		$	6	$	5	$	8	$	14	$	12	$	36	$	1,483
Product development			48		64		180		623		383		392		5,440
General and administrative			441		164		3,662		397		1,605		3,136		6,986
Customer service and operations			24		48		57		84		157		462		867

	Total	$	519	$	281	$	3,907	$	1,118	$	2,157	$	4,026	$	14,776

We expect to amortize the $21.1 million of non-cash deferred stock-based compensation remaining at September 30, 2001, along with $4.8 million non-cash deferred stock-based compensation related to grants subsequent to September 30, 2001, as follows (in thousands):

Three-month period ending December 31, 2001	$	5,044
Year ending December 31, 2002	$	9,745
Year ending December 31, 2003	$	6,401
Year ending December 31, 2004	$	3,977
Year ending December 31, 2005	$	776

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 25,000 options or shares of our restricted stock. We extended a loan to program participants for up to 20.0% of their number of shares of common stock multiplied by $6.00. 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 20.0% of his or her equity investment in our stock. The loan agreements include a call feature which gave us the right to repurchase 10.0% of the participant's total equity investment at the time of the loan, at $12.00 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.

As of September 30, 2001, we recognized non-cash deferred stock-based compensation of $10.3 million, which equals the increase in the intrinsic value recorded at the original grant date and the date we funded the loans to exercise the related options, which constituted a new measurement date. Non-cash deferred stock-based compensation accrued during the vesting period will be adjusted in subsequent periods, until the loans are repaid, for changes in the fair value of the shares but will not be adjusted below zero. We will amortize the non-cash deferred compensation in accordance with the vesting terms of the original equity awards using the methodology set out in FIN 28. As of September 30, 2001, we recognized amortization of $9.9 million.

In September 2001, we entered into amendments to all but one of the loan agreements, each of which was approved by the applicable participant, 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 on September 30, 2001 and repurchased 10.0% of the total equity investments in the loan program by participants who had not repaid their loans prior to that date. Three participants elected to repay their loans in full or partially in cash instead of allowing us to purchase 10.0% of their shares. This resulted in the repurchase of 428,047 shares of our common stock. As of September 30, 2001, one loan associated with this program was outstanding and the remaining loans were paid in full. We will adjust non-cash deferred stock-based compensation associated with the one remaining participant's pledged equity awards in periods subsequent to September 30, 2001 until this $90,000 loan is paid in full. We expect this loan to be paid in full on November 16, 2001. We will amortize the remaining non-cash deferred stock-based compensation associated with the 10.0% of the liquidity program participants' equity investment, not subject to repurchase, over the original vesting period of the equity awards.

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, leaving an unamortized

balance of $16.4 million. 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 in accordance with SFAS No. 142. We have not fully assessed the impact of adoption of this Statement as of September 30, 2001.

Net Operating Loss Carryforwards

As of September 30, 2001, we had federal and state net operating loss carryforwards of $133.0 million and $120.0 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 September 30, 2001 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.

Although we do not have conclusive data, we do not believe that recent changes in the U.S. and global economy would have a material favorable or adverse impact on our overall payment volume, revenues, or net income from operations. Moreover, the events of September 11, 2001 had only a temporary impact on our overall payment volume. During the period from July 1, 2001 to September 10, 2001, our daily payment volume averaged $10.0 million. From September 11, 2001 to September 17, 2001, the week following terrorist attacks against the U.S., our daily payment volume averaged $9.6 million. From September 18, 2001 to September 30, 2001, payment volume recovered to a daily average of $10.4 million, and during the month of October 2001, payment volume increased to a daily average of $12.0 million.

Nine Months Ended September 30, 2001 Compared to the Nine Months Ended September 30, 2000

Revenues

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

	Nine Months Ended
	Sept. 30, 2000		Sept. 30, 2001
	(in thousands)
Transaction fees	$	1,051	$	60,509
Gross Merchant Sales (GMS)	$	57,494	$	2,024,876
Total payment volume	$	717,822	$	2,314,226

Transaction fees increased to $60.5 million for the nine months ended September 30, 2001, from $1.1 million for the nine months ended September 30, 2000. We attribute the increase in transaction fees primarily to:

•: The increase in fees on Gross Merchant Sales. Gross Merchant Sales increased to $2,024.9 million for the nine months ended September 30, 2001 from $57.5 million for the nine months ended September 30, 2000. The average price we charged business accounts increased to 2.6% for the nine months ended September 30, 2001 from 1.8% for the nine months ended September 30, 2000. We began charging fees in September 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 $8.7 million for the nine months ended September 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 $1.5 million for the nine months ended September 30, 2001.

Interest on Funds Held for Others. Revenues from interest earned on funds held for others increased to $3.0 million for the nine months ended September 30, 2001 from $1.0 million for the nine months ended September 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 5.99% for the nine months ended September 30, 2000 and of 4.42% for the nine months ended September 30, 2001.

Investment Management Fees. We launched our Money Market Reserve Fund in November 2000. Revenues from investment management fees amounted to $0.9 million for the nine months ended September 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 $3.6 million for the nine months ended September 30, 2000 to $0 for the nine months ended September 30, 2001 following the termination of this agreement.

Operating Expenses

Transaction Processing Expenses. Transaction processing expenses increased by $15.9 million, or 99.2%, to $31.9 million for the nine months ended September 30, 2001 from $16.0 million for the nine months ended September 30, 2000. We attribute this increase primarily to the growth of our total payment volume by 222.4% to $2,314.2 million for the nine months ended September 30, 2001 from $717.8 million for the nine months ended September 30, 2000. As a percentage of total payment volume, total transaction processing expenses decreased to 1.4% from 2.2%. We attribute the decrease mainly to a reduction in the percentage of payment volume funded by credit cards to 51.1% for the nine months ended September 30, 2001 from 76.7% for the nine months ended September 30, 2000.

Provision for Transaction Losses. Provision for transaction losses increased by $2.0 million, or 25.7%, to $9.7 million for the nine months ended September 30, 2001 from $7.7 million for the nine months ended September 30, 2000. We attribute this increase primarily to the growth of our total payment volume by 222.4% to $2,314.2 million for the nine months ended September 30, 2001 from $717.8 million for the nine months ended September 30, 2000. As a percentage of total payment volume, provision for transactions losses decreased to 0.42% for the nine months ended September 30, 2001 from 1.08% for the nine months ended September 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 $10.9 million, or 61.2%, to $6.9 million for the nine months ended September 30, 2001 from $17.8 million for the nine months ended September 30, 2000. We attribute the decrease to the tightening of our requirements to receive sign-up and referral bonuses between the two periods, offset in part by a significant increase in our promotional and marketing expenses during the third quarter of 2001 primarily due to the additional non-cash deferred stock-based compensation we recognized during that quarter. For each new customer acquired, average promotional bonus expenses decreased to $0.13 for the nine months ended September 30, 2001 from $3.68 during the nine months ended September 30, 2000. For the nine months ended September 30, 2001 and the nine months ended September 30, 2000, we expensed as incurred promotion costs of $0.6 million and $13.6 million, respectively.

Product Development. Product development expenses increased by $9.1 million, or 267.6%, to $12.5 million for the nine months ended September 30, 2001 from $3.4 million for the nine months ended September 30, 2000. As a percentage of revenues, product development expenses totaled 19.5% and 59.7% for the nine months ended September 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. In addition, we experienced a significant increase in our product development expenses during the third quarter of 2001 primarily due to the additional non-cash stock-based compensation we recognized during that quarter. We attribute the decrease in product development expenses as a percentage of revenues for the nine months ended September 30, 2001 from the nine months ended September 30, 2000 mainly to the fact that revenues increased faster than product development expenses in these periods. Product development expenses also include amortization of non-cash deferred stock-based compensation of $6.2 million and $293,000 for the nine months ended September 30, 2001 and 2000, respectively, and depreciation and amortization of fixed assets of $1.1 million and $165,000 for the nine months ended September 30, 2001 and 2000, respectively.

General and Administrative. General and administrative expenses increased by $9.4 million, or 68.1%, to $23.2 million for the nine months ended September 30, 2001 from $13.8 million for the nine months ended September 30, 2000. As a percentage of revenues, general and administrative expenses equaled 36.0% and 245.8% for the nine months ended September 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. In addition, we experienced a significant increase in our general and administrative expenses during the second and third quarters of 2001 primarily due to the additional non-cash deferred stock-based compensation we recognized during those quarters. We attribute the decrease in general and administrative expenses as a percentage of revenues for the nine months ended September 30, 2001 from the nine months ended September 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 non-cash deferred stock-based compensation of $11.7 million and $4.3 million for the nine months ended September 30, 2001 and 2000, respectively.

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

		Nine Months Ended Sept. 30, 2000			Nine Months Ended Sept. 30, 2001			Percentage Increase (Decrease)
		(in thousands, except percentage, per payment and per account data)
Total number of payments			15,920			46,552		192.4	%
Average number of accounts in period			1,904			8,053		322.9	%
Customer service operations:
	Expense	$	10,226		$	23,448		129.3	%
	As a percentage of revenues		182.0	%		36.4	%	—
	Per payment		$0.64			$0.50		(21.9	)%
	Per account per month		$0.60			$0.32		(46.7	)%

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 nine months ended September 30, 2001 from the nine months ended September 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 non-cash deferred stock-based compensation of $1.5 million and $129,000 for the nine months ended September 30, 2001 and 2000, respectively, and depreciation and amortization of fixed assets of $3.2 million and $1.1 million for the nine months ended September 30, 2001 and 2000, respectively.

Amortization of Goodwill and Other Intangibles. Our amortization expense increased to $49.2 million for the nine months ended September 30, 2001 from $32.9 million for the nine months ended September 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 $33.9 million for the nine months ended September 30, 2000 to $0 for the nine months ended September 30, 2001 as the result of our termination of the CBI and First Western agreements in 2000.

Loss from Operations. For the nine months ended September 30, 2001, our loss from operations totaled $92.4 million. For the nine months ended September 30, 2000, our loss from operations totaled $130.1 million. We attribute the decrease in the loss primarily to the increase in our revenues to $64.4 million for the nine months ended September 30, 2001 from $5.6 million for the nine months ended September 30, 2000, partly offset by an increase in total operating expense to $156.8 million for the nine months ended September 30, 2001 from $135.8 million for the nine months ended September 30, 2000.

Interest, Other Income and Expenses, Net. Interest, other income and expenses, net increased by $0.7 million, or 28.0%, to $3.2 million for the nine months ended September 30, 2001 from $2.5 million for the nine months ended September 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 Attributable to Common Stockholders. Net loss attributable to common stockholders decreased by $37.0 million, or 29.0%, to $90.6 million for the nine months ended September 30, 2001 from $127.6 million for the nine months ended September 30, 2000. We attribute the decrease in net loss primarily to the increase in our total revenues to $64.4 million for the nine months ended September 30, 2001 from $5.6 million for the nine months ended September 30, 2000 and the decrease in our total operating expenses as a percentage of payment volume, offset by the deemed dividend on Class A stock of $1.4 million.

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 1.04% for the three months ended June 30, 2000, to 1.21% for the three months ended September 30, 2000, and decreased to 0.61% 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 non-cash deferred 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 non-cash deferred 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 non-cash deferred 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			Sept. 30, 2001
					(in thousands) (unaudited)
Consolidated Statements of Operations:
Transaction fees					$	—		$	35		$	1,016		$	7,403		$	12,964		$	18,644		$	28,901
Interest on funds held for others						—			240			727			1,079			1,143			920			955
Investment management fees						—			—			—			22			192			348			328
Service agreement revenues						1,186			1,886			529			337			—			—			—

	Total revenues					1,186			2,161			2,272			8,841			14,299			19,912			30,184

Transaction processing expenses						—			6,230			9,764			9,098			8,754			10,659			12,441
Provision for transaction losses						13			2,577			5,131			3,307			3,103			2,437			4,163
Promotional and marketing						758			9,917			7,155			3,193			2,035			1,635			3,199
Product development						560			987			1,805			1,982			2,401			2,517			7,631
General and administrative						2,816			3,867			7,129			4,810			5,025			7,273			10,873
Customer service and operations						547			3,774			5,905			5,741			7,221			7,678			8,549
Amortization of goodwill and other intangibles						67			16,415			16,415			16,415			16,415			16,415			16,416
Service agreement costs and termination expenses						19,344			7,640			6,949			7,212			—			—			—

	Total operating expenses					24,105			51,407			60,253			51,758			44,954			48,614			63,272

Loss from operations						(22,919	)		(49,246	)		(57,981	)		(42,917	)		(30,655	)		(28,702	)		(33,088	)
Interest income						152			—			1,015			957			943			798			583
Other income (expense), net						(46	)		1,432			(9	)		56			454			254			152

Net loss						(22,813	)		(47,814	)		(56,975	)		(41,904	)		(29,258	)		(27,650	)		(32,353	)

Deemed dividend on Class A stock						—			—			—			—			—			—			(1,350	)

Net loss attributable to common stockholders					$	(22,813	)	$	(47,814	)	$	(56,975	)	$	(41,904	)	$	(29,258	)	$	(27,650	)	$	(33,703	)

Operating Data:
Gross Merchant Sales					$	—		$	1,873		$	55,621		$	335,691		$	546,848		$	663,014		$	815,014
Total payment volume					$	46,263		$	248,799		$	422,760		$	543,562		$	642,737		$	746,888		$	924,601
Total number of payments						1,026			5,456			9,438			12,325			13,524			15,058			17,969
Total number of accounts (at period end)						824			2,190			3,718			5,518			7,200			8,798			10,589
	Number of business accounts					—			14			289			800			1,327			1,731			2,138
Consolidated Cash Flow Data:
Cash flows from operating activities
	Net loss				$	(22,813	)	$	(47,814	)	$	(56,975	)	$	(41,904	)	$	(29,258	)	$	(27,650	)	$	(32,353	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Provision for transaction losses				13			2,577			5,131			3,307			3,103			2,436			4,163
		Depreciation and amortization of fixed assets				357			330			744			921			1,253			1,258			1,379
		Amortization of goodwill and other intangibles				67			16,415			16,415			16,415			16,415			16,415			16,416
		Amortization of non-cash deferred stock-based compensation				519			281			3,907			1,118			2,157			4,026			14,776
		Changes in operating assets and liabilities				(754	)		4,794			(2,740	)		(10,601	)		(3,051	)		(3,548	)		(11,446	)

				Net cash used in operating activities		(22,611	)		(23,417	)		(33,518	)		(30,744	)		(9,381	)		(7,063	)		(7,065	)

Cash flows from investing activities
	Investments in common stock					(1,500	)		1,200			—			2,300			—			—			—
	Purchase of investment securities					(1,900	)		1,900			(60,991	)		49,129			(18,923	)		(7,369	)		(4,035	)
	Purchase of fixed assets					(2,311	)		(4,922	)		(2,962	)		(1,548	)		(1,870	)		(2,725	)		(4,142	)
			Cash used in investing activities			(5,711	)		(1,822	)		(63,953	)		49,881			(20,793	)		(10,094	)		(8,177	)

Cash flows from financing activities
	Due to customers				$	11,445		$	22,061		$	34,017		$	15,263		$	14,363		$	11,422		$	31,422
	Proceeds from capital leases					—			—			—			—			—			—			3,000
	Proceeds from issuance of equity instruments, net of repurchases					95,961			13,489			26,918			12,579			37,526			(649	)		1,049
	Payments made to employees associated with liquidity program					—			—			—			—			—			—			(5,226	)

			Cash provided by financing activities			107,406			35,550			60,935			27,842			51,889			10,773			30,245

			Net increase in cash and cash equivalents			79,084			10,311			(36,536	)		46,979			21,715			(6,384	)		15,003
Cash and cash equivalents at beginning of period						8,442			87,526			97,837			61,301			108,280			129,995			123,611

Cash and cash equivalents at end of period					$	87,526		$	97,837		$	61,301		$	108,280		$	129,995		$	123,611		$	138,614

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 September 30, 2001, we had raised $214.3 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 $23.5 million for the nine months ended September 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 $39.1 million for the nine months ended September 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 $92.9 million for the nine months ended September 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.

In connection with our plan to deposit all customer funds not transferred into the PayPal Money Market Reserve Fund into FDIC-insured bank accounts in November 2001, we anticipate a decrease in cash and cash equivalents held in respect of funds due to customers' available balances, which amounted to $95.4 million at September 30, 2001, and a decrease of the related liability.

For the three months ending December 31, 2001, we expect to spend approximately $3.0 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 September 30, 2001, our total restricted cash holdings of $6.5 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

•: Collateral for equipment loan: $0.5 million

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

Year Ended December 31,		Capital Leases		Operating Leases
		(in thousands)
2001 (Last three months only)		$	254	$	452
2002			1,435		1,859
2003			1,214		1,813
2004			400		1,793
2005 and thereafter			—		4,212

	Total minimum lease commitments	$	3,303	$	10,129

In October 2001 we entered into a lease agreement in connection with office space in Mountain View, California. Minimum lease commitments required under this lease are as follows (in thousands):

2002	$	1,582
2003		2,350
2004		2,446
2005		2,543
2006		2,645

	$	11,566

In addition, we have minimum payments due under service and marketing agreements in the aggregate amount of $0.1 million in 2001 (last three 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 cash currently available, 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 nine months ended September 30, 2001, we earned approximately 13.5% 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 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 issuer in local currency. 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.

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.

In August 2001, the FASB issued SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, or SFAS No. 144. It supercedes SFAS No. 121 Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of and APB Opinion No. 30 Reporting the Effects of Disposal of a Segment of a Business. It establishes a single account model based upon the framework of SFAS No. 121. It removes goodwill and intangible assets from its scope. It describes a probability-weighted cash flow estimation approach to deal with certain situations. It also establishes a "primary asset" approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used. The provisions of SFAS 144 are effective for fiscal years beginning after December 15, 2001. We have not fully assessed the impact of adoption of SFAS 144 upon our financial position or results of operations as of September 30, 2001.

BUSINESS

Overview

We seek to become the global standard for online payments. We offer our account-based system to users in 37 countries including the United States. For the three months ended September 30, 2001, our payment volume to business accounts, which we refer to as Gross Merchant Sales or GMS, totaled $815.0 million. GMS equaled 88.1% of our total payment volume of $924.6 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. For the three months and nine months ended September 30, 2001, the percentages of our payment volume related to online auctions were 66.7% and 68.3%, respectively. As of September 30, 2001, we had 10.6 million accounts, including 2.1 million business accounts and 8.5 million personal accounts.

During the three months ended September 30, 2001, we processed an average of 195,000 payments per day totaling $10.1 million in daily volume. Our target transaction size ranges from $10 to $1,000. For the same period, 38.9% of the amount of our transactions fell within the $10 to $100 range and 45.4% of the amount of our transactions fell within the $100 to $1,000 range. The average payment amount sent equaled $51.

Industry Overview

Growth of Online Commerce

Forrester projects consumer purchases on the Internet to grow from an estimated $51.5 billion in 2001 to $195.0 billion in 2006. 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 $6.6 billion for the nine months ended September 30, 2001, an increase of 73.5% over the comparable period in 2000. Forrester projects continued robust growth in total consumer auction sales—from an estimated $8.4 billion in 2001 to $48.5 billion in 2006.

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 September 30, 2001, we had 10.6 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 September 30, 2001, our 10.6 million total accounts included 2.1 million business accounts.

For the three months ended September 30, 2001, we processed an average of 195,000 payments per day, totaling $10.1 million in daily volume. Fee paying business accounts received 88.1% of this payment volume, for a total of $815.0 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 September 30, 2001, we added an average of 19,500 new accounts every day at an average cost of $0.09 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 system builds on the legacy financial infrastructure of bank accounts and credit cards to create an online payment network available to users in 37 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 September 30, 2001, customers funded 21.0% of payment volume through their existing PayPal balances, 25.7% via bank account transfers and 53.2% 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		Sept. 30, 2001
	(in millions, except percentages)
Number of verified bank accounts	—		0.04		0.78		1.38		1.97		2.51		3.02
Percentage of payment volume funded by credit cards during three months ended	76.2	%	81.0	%	74.1	%	56.9	%	48.8	%	50.5	%	53.2	%

The percentage of our payment volume funded by credit cards increased slightly from 48.8% for the three months ended March 31, 2001 to 53.2% for the three months ended September 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. ACH withdrawals may take three to five business days to arrive in the account holder's bank account, depending on the bank. Mailed checks may take one to two weeks to arrive and we charge $1.50 per check. 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, for a $1.00 fee per transaction, from any ATM connected to the Cirrus or Maestro networks and can make purchases at any merchant accepting MasterCard. For the three months ended September 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		Sept. 30, 2001
	(in millions, except percentages)
Gross Merchant Sales (GMS)	$	—	$	1.9	$	55.6	$	335.7	$	546.8	$	663.0	$	815.0
Total payment volume	$	46.3	$	248.8	$	422.8	$	543.6	$	642.7	$	746.9	$	924.6
GMS as a percentage of total payment volume		—		0.8%		13.2%		61.8%		85.1%		88.8%		88.1%

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 September 30, 2001, 183,000 customers upgraded from personal to business accounts.

International Accounts. We currently allow residents of 36 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 2.1% of the withdrawal amount plus $1.00 per withdrawal. In addition, for the nine months ended September 30, 2001 we charged a weighted average currency risk spread of 1.6% of the withdrawal amount. We charge international senders a fee of 2.6% plus $0.30 for making payments not funded from an existing PayPal balance. As of September 30, 2001, we had 723,000 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. See "Business—Technology."

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 a popular 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 our current 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 37 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 proprietary risk management techniques have reduced our provision for transaction losses from 1.21% for the three months ended September 30, 2000 to 0.45% for the three months ended September 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 September 30, 2001, 15.3% 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 receive payments online through PayPal.

PayPal has emerged as the method of choice for small to medium-sized businesses to receive payment for auctions on eBay, the largest online auction community. As of September 30, 2001, 69.4% of all eBay auctions explicitly accepted PayPal versus 29.5% accepting eBay Online Payments, formerly known as Billpoint.

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	Sept. 30, 2001
	(in thousands, except percentages and per account data)
Business accounts	—	14	289	800	1,327	1,731	2,138
Personal accounts	824	2,176	3,429	4,718	5,873	7,067	8,451
Total accounts	824	2,190	3,718	5,518	7,200	8,798	10,589
Business accounts as a percentage of total accounts	—	0.6%	7.8%	14.5%	18.4%	19.7%	20.2%
Total number of payments (during the period)	1,026	5,456	9,438	12,325	13,524	15,058	17,969
Average number of payments per quarter per account (at period end)	1.2	2.5	2.5	2.2	1.9	1.7	1.7

International Customers

As of September 30, 2001, we had 723,000 international accounts, equal to 6.8% 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 September 30, 2001, 13.1% of all PayPal payments involved at least one international account, up from 9.8% 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 37 countries have access to the PayPal network. As of September 30, 2001, our largest markets outside the U.S. included 244,000 accounts in Canada, 161,000 accounts in the United Kingdom, 57,000 accounts in Australia, 43,000 accounts in Germany and 20,000 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		Sept. 30, 2001
	(in thousands, except percentages)
International accounts	—	—	—	140		313		495		723
International accounts as a percentage of total accounts	—	—	—	2.5	%	4.3	%	5.6	%	6.8	%

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 September 30, 2000, we spent $5.0 million on these promotional bonuses and acquired 1.5 million accounts, for an average cost of

$3.29 per account. We have continued to refine the criteria qualifying users for promotional bonuses. During the three months ended September 30, 2001, we spent $0.2 million on promotional bonuses and acquired 1.8 million accounts, for an average cost of $0.09 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 transaction loss rate as a percentage of payment volume in the three months ended September 30, 2001 equaled 0.45% compared to 1.21% for the three months ended September 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 have established a second data center with Equinix in San Jose, California, and we are in the process of making it our primary data center.

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 September 30, 2001, this team consisted of 270 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 September 30, 2001, this team consisted of 133 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 an 8.8% call abandonment rate for the month ended September 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 16,000 PayPal accounts per customer service representative as of September 30, 2000 to 26,000 accounts per customer service representative as of September 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 nine months ended September 30, 2001, PayPal's operations team supported an average daily volume of 83,000 ACH transactions and an average daily volume of 100,000 Visa/MasterCard transactions.

Vendor Relationships

Chase Merchant Services

Since November 1999, we have processed substantially all of our credit card transactions through Chase Merchant Services. Under the terms of the contract governing this relationship, we agreed to use Chase Merchant Services as our exclusive provider of credit card processing services. The agreement also makes us responsible for all charge-backs unless we obtain a physical signature from the cardholder, and requires us to comply with Chase Merchant Services' Operating Guide and card association rules. Additionally, the agreement requires us to provide prior notice if we are going to change substantially or sell our business. In turn, Chase Merchant Services agreed to process properly-presented card transactions and to transfer the funds from such transactions to us, generally on the next business day after the transaction occurs. The contract limits Chase Merchant Services' liability to $50,000. We are required to maintain a reserve account, which is currently $3.0 million in the form of a certificate of deposit pledged to Chase Merchant Services, to protect Chase Merchant Services against the risk of loss from transactions that are subsequently reversed.

We pay Chase Merchant Services a fee for each credit card authorization, as well as a fee for each settled transaction. Chase Merchant Services also passes through standard industry fees it is charged by the card associations for issuer interchange on settled transactions, which consist of a percentage of the transaction amount. We expect to choose another vendor as our primary processor after the Chase Merchant Services contract terminates on November 30, 2001.

Wells Fargo

Since August 2000, we have processed all of our ACH and check transactions through Wells Fargo. Wells Fargo also provides other services for us, including wire transfers, check printing, mailing and reconciling as well as fraud protection. Under the terms of the contract governing this relationship, neither party has given the other exclusivity in terms of services, and either party can terminate upon ten days' notice. In general, we pay a transaction fee for each ACH and check transaction processed by Wells Fargo. Pricing is schedule-based, depending on a number of factors, including domestic or international location, the total volume of payments and other factors. 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.

Bank of America

As we expand the ability of customers in countries outside the U.S. to withdraw funds from the PayPal system to their local bank accounts, and to fund their PayPal transactions from their local bank accounts, we anticipate using Bank of America to process these bank account transfers. We expect to pay a transaction fee based on the country involved, the total volume of payments and other factors.

MasterCard and First Data

In October 2000, we launched the PayPal ATM/debit card to qualifying PayPal members through an arrangement with MasterCard International and with First Data Resources, Inc., which provides our debit card processing services. The PayPal ATM/debit card allows qualified PayPal account holders to access their account balances from any ATM connected to the Cirrus or Maestro networks and at any merchant that accepts MasterCard. We recently launched a "virtual" debit card which allows any customer with a PayPal account balance to use that balance at online merchants that accept MasterCard. Under the terms of the contract governing this relationship, First Data agreed to certain minimum uptime and other detailed service level requirements. We, in turn, agreed to use First Data exclusively for processing of debit card transactions. We also agreed to remain eligible for sponsorship by a "sponsor bank," which is, in our case, BankOne Indiana, N.A. We pay First Data fees on a per-transaction, rather than percentage, basis. In all years after the first year of the contract, we are required to pay First Data a minimum fee, even if the volume of transactions processed by First Data would yield a lower amount. Additionally, we agreed to obtain a letter of credit for the benefit of First Data to cover its settlement risk with the sponsoring bank. If our debit card transaction volume increases, First Data may require us to increase the letter of credit. If the volume decreases, or First Data's settlement risk otherwise decreases, we have the right to request, but not to require, a corresponding reduction in the letter of credit. This agreement, which has a five-year term, expires on November 1, 2005.

Providian

In February 2001, we entered into a strategic relationship with Providian Bancorp Services. Under the terms of the agreement, Providian agrees to offer PayPal-branded Visa credit cards to our account holders and to cooperate with PayPal in developing the marketing for this program. When a PayPal member funds his account using the PayPal Visa card, Providian reimburses us for some of the credit card processing fees we incur, making the funding less costly for us. Additionally, whenever a PayPal Visa card is used at a merchant other than PayPal, we receive a share of Providian's transaction fee revenue. We agreed to make the Providian-issued credit card the exclusive U.S. credit card promoted in the registration process on the PayPal website, and not to sponsor or participate in any competing co-branded credit card product. Under the terms of the contract governing this relationship, Providian is responsible for legal compliance and loan underwriting decisions, and bears all the costs of issuing cards and underwriting the portfolio. The contract has a five-year term, but may be terminated early by

either party if the percentage of credit card volume on the PayPal system from the PayPal-branded credit card is below certain thresholds, measured annually. Either party may also terminate the contract if the other party is acquired or is subject to a change of control. PayPal may terminate the contract, subject to payment of an early termination fee, if PayPal is acquired.

Competition

The market for our product is emerging, intensely competitive and characterized by rapid technological change. The major competitive factors affecting our business include:

•: Convenience. Senders and recipients both prefer an easy-to-use payment system. We emphasized convenience in designing the process by which our customers open PayPal accounts and have streamlined the process of sending and receiving payments.
•: Size of the Network. Our network continues to grow relative to most of our direct competitors, and our size encourages usage by new customers.
•: Price. Subject to the other factors listed, users generally will use the lowest cost payment system. Considering the advantages of the PayPal product, we believe that we offer attractive pricing.
•: Security and Privacy. We have addressed and continue to address security and privacy concerns in designing the PayPal system, which we believe builds user confidence and drives growth.
•: Brand Recognition. While we enjoy strong brand recognition in our market, many current and potential competitors have established long-standing relationships with their users.
•: Customer Service. We have strengthened our customer support network by establishing a large customer call center. We believe that our commitment to customer services helps us attract and retain customers.
•: Timing of Payments. When buyers and sellers are in different locations the PayPal product offers a faster method of payment than mailing cash or a check, which encourages customer use.

We anticipate continued challenges from current competitors, who may enjoy greater 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. Our direct competitors include:

•: eBay Online Payments, which is owned jointly by eBay and Wells Fargo, enjoys the strong eBay brand name and can gain market share rapidly by directly accessing their existing auction customer base. Their ability to integrate with eBay auctions could allow them to offer new and convenient features.
•: Citibank's c2it has received significant marketing support in the form of distribution agreements with AOL and Microsoft.

Yahoo!, the U.S. Postal Service and Western Union also offer payment services similar to ours, although to date they have not achieved wide acceptance. Potential direct competitors, should they decide to enter the market, may include CheckFree and American Express. We compete indirectly with credit card products offered under the Visa and Mastercard brands, which enjoy significant brand recognition and marketing resources. We also compete indirectly with traditional payment methods such as checks, wire transfers, money orders and ACH transactions, and 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. Under the recently enacted International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, or IML Act, we could be subject to federal civil and criminal penalties if we are deemed to be operating without an appropriate money transmitting license in a state where such operation is punishable as a misdemeanor or a felony under state law. We have not to date been fined or received notice of fines or other penalties under state or federal money transmitter laws.

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, Louisiana, 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 36 countries outside the U.S. 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 various foreign countries is unclear. We are working with foreign legal counsel to identify and comply with applicable laws and regulations. Some of the foreign countries where we offer our product regulate banks, financial institutions and other businesses and operate under legal systems that could apply those laws to our business even though we do not have a physical presence in those countries. For example, under the laws of France, we could be required to add special features to our product or contract with a French bank in order to serve customers located in France. Violations of these rules could result in civil and criminal penalties.

Under the IML Act, we may be required to obtain additional information, maintain records and file reports regarding any business we conduct with residents of jurisdictions that are identified by the Secretary of the Treasury as being of primary money laundering concern. We currently allow residents of Israel, which has been identified by the Financial Action Task Force as being non-cooperative on money laundering matters, to use PayPal, although we do not allow Israeli customers to withdraw funds to non-U.S. bank accounts. The Secretary of the Treasury, however, is not required to rely on the Financial Action Task Force list in identifying countries of primary money laundering concern, and could identify additional countries whose residents currently can do business with us as being of primary money laundering concern. We have implemented procedures, and are strengthening those procedures, to use Internet Protocol addresses to identify customers who try to access PayPal from countries that are not on our approved list.

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. The IML Act has also increased the civil and criminal penalties for money laundering violations to an amount not less than two times the amount of the transactions in question, up to a maximum of $1.0 million per occurrence.

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 September 30, 2001, 0.1% of our transactions and 6.5% 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. Under the IML Act, all financial institutions are required to implement anti money-laundering procedures by no later than April 24, 2002 that include, at a minimum:

•: the development of internal policies, procedures, and controls;
•: the designation of a compliance officer;
•: an ongoing employee training program; and
•: an independent audit function to test programs.

We believe that compliance with this requirement will not require material modifications to our existing compliance plans.

Under the IML Act, the Secretary of the Treasury is directed to enact regulations, by no later than October 26, 2002, setting forth minimum standards for financial institutions to determine the identity of their customers in connection with the opening of an account. The regulations shall, at a minimum, require financial institutions to implement reasonable procedures for

•: verifying the identity of any person seeking to open an account to the extent reasonable and practicable;

•: maintaining records of the information used to verify a person's identity, including name, address, and other identifying information; and
•: consulting lists of known or suspected terrorists or terrorist organizations provided by U.S. government agencies to determine whether a person seeking to open an account appears on any such list.

We have procedures in place to verify the identity of persons who open a PayPal account, to maintain records of the information used, and to consult lists of known or suspected terrorists or terrorist organizations prior to opening an account. The regulations to be adopted by the Secretary of the Treasury may require us to revise these procedures or adopt additional procedures. We will not be able to evaluate the potential impact of the new law until these regulations are proposed.

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 September 30, 2001, we had 576 full-time employees: 189 at our Palo Alto, California corporate headquarters, 387 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 recently signed a lease for 50,000 square feet of office space in Mountain View, California, and anticipate moving our corporate headquarters to that location in the first quarter of 2002. 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 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.

MANAGEMENT

Executive Officers, Directors and Key Employees

A list of our executive officers, directors and key employees, as of October 31, 2001, follows:

Name	Age	Position
Peter A. Thiel	34	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 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(2)	31	Director
John A. Malloy(2)	42	Director
Shailesh J. Mehta(1)	52	Director
Michael J. Moritz(1)(2)	47	Director
Elon R. Musk(1)	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 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 served as the chairman of the board of directors of Providian Financial Corporation from May 1988 to October 2001. Mr. Mehta has publicly announced his intention to step down from his position as the CEO of Providian at such time as the company hires a new CEO. 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 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. Mehta, Moritz and Musk.

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. Hurd, Malloy and Moritz.

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		—	353,614	—
Todd R. Pearson, Senior Vice President, Financial Services(2)	2000	$	116,614	$	41,000	75,000	—
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	353,614	(2)	10.1	%	$	0.30	1/31/2010	$	66,034	$	167,342
Todd R. Pearson	50,000		1.4			0.40	1/25/2010		12,578		31,875
	12,500		0.4			1.20	7/11/2010		9,433		23,906
	12,500		0.4			1.20	8/8/2010		9,433		23,906
Bill H. Harris	—		—			—	—		—		—
Elon R. Musk	—		—			—	—		—		—
H. David Johnson	—		—			—	—		—		—

(1): Includes 2,074,454 options issued by PayPal, Inc., formerly known as X.com Corporation, and 1,431,592 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	353,614	$	0	—	—	—		—
Todd R. Pearson	—		—	—	75,000	—	$	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 $1.20 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 40,000 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 4,677,733 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 1,207,583 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

In September 2001, we adopted a 2001 Equity Incentive Plan. 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 9,500,000 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.

We will initially reserve 625,000 shares of our common stock 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) 1,000,000 shares, (2) 1.0% 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 20.0% 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 85.0% of the fair market value per share on the participant's entry date into the offering period or, if lower, 85.0% 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 85.0% of the market value per share on the participant's entry date into the offering period in which an acquisition occurs or, if lower, 85.0% 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 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		858,778
Max R. Levchin		1,717,556
Reid G. Hoffman		50,516

The shares of common stock issued to Mr. Levchin remain subject to a repurchase right held by us and other restrictions. Of these shares, 343,513 were released from this repurchase right on the grant date, and the repurchase right on the remaining shares lapses at a rate of 28,626 shares per month. The repurchase right on all shares will be fully lapsed on December 31, 2003. The repurchase options on the shares issued to Mr. Thiel and Mr. Hoffman have already lapsed.

In October 2001, we granted an option under our 2001 Equity Incentive Plan to purchase 450,000 shares of our common stock at a price of $1.20 per share to Mr. Levchin, subject to stockholder approval of the 2001 Equity Incentive Plan. Upon such approval, we expect to extend a full recourse loan to Mr. Levchin in the amount of $780,000 at an interest rate of 8.0% per annum, conditioned on Mr. Levchin's use of $540,000 of the proceeds of the loan to exercise his option to purchase 450,000 shares. These shares will be pledged as collateral for the repayment of the loan. The loan will have a term of four years, with interest compounding annually, and will not be pre-payable.

In March 1999, we sold 1,350,000 shares of our common stock at a price of $0.0132 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 150,000 shares of our common stock at a price of $0.132 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 at a per share price of approximately $0.20 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 at a per share price of $0.375 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 at a per share price of $1.20 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, which was approximately 45% as of September 30, 2001.
(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 9.7% of our outstanding capital stock prior to this offering.
(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 6.9% of our outstanding capital stock prior to this offering.

In May and June 1999, we issued and sold an aggregate of 38,850,000 shares of Series A Preferred Stock to investors at a per share price of approximately $0.33 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 at a per share price of approximately $0.48 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 at a per share price of $2.75 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 at a per share price of $3.00 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 6.9% of our outstanding capital stock prior to this offering.
(7): Mr. Mehta, a director of PayPal, is the 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 $5.0 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 at a per share price of $0.30 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, 1,031,250 shares have been released from the repurchase option as of November 1, 2001. We have a right to repurchase up to all 656,250 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, expiring completely in June 2002. In the event of a change of control, any of such 656,250 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. 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 250,000 shares of our common stock owned by Mr. Musk. We then repurchased from Mr. Musk 450,000 shares of common stock at a per share price of $0.0132 and 50,000 shares of common stock at a per share price of $0.132, which is the price he paid for those shares, for a total purchase price of $12,666. We also repurchased 90,909 shares of our Series C Preferred Stock from Mr. Musk at a per share price of $2.75 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 from Mr. Musk at a per share price of $3.00 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 1,343,750 shares of common stock owned by Mr. Harris from him at a per share price of $1.32 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 at a per share price of $0.48 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 42,187 shares of the common stock owned by Mr. Johnson. We then repurchased 147,656 shares of common stock from Mr. Johnson at a per share price of $1.32 for a total purchase price of $19,687, which is the price he paid for those shares.

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 428,047 common shares for an aggregate consideration of $5,242,530. 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 30, 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% or 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 53,813,590 shares of common stock outstanding as of September 30, 2001 and shares of common stock outstanding after the completion of this offering which, in each case, includes 4,072,491 shares of common stock outstanding that are subject to repurchase by us. Shares of common stock subject to options that are currently exercisable or exercisable within 60 days of September 30, 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
	Number of Shares Beneficially Owned	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)	2,776,949	5.2	%
Max R. Levchin(2)	1,738,167	3.2	%
Reid G. Hoffman(3)	307,403	*
Todd R. Pearson(4)	90,000	*
Bill H. Harris	703,125	1.3	%
H. David Johnson	169,844	*
Entities Affiliated with Sequoia Capital(5) 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025	5,340,908	9.9	%
Nokia Ventures, L.P. 545 Middlefield Road, Suite 210 Menlo Park, CA 94025	4,807,491	8.9	%
Entities Affiliated with Clearstone Venture Partners(6) 2500 Sand Hill Road, Suite 205 Menlo Park, CA 94025	3,417,606	6.4	%

Entities Affiliated with Madison Dearborn Partners(7) Three First National Plaza, Suite 3800 Chicago, IL 60602	2,727,271	5.1	%
Elon R. Musk	7,101,656	13.2	%
Michael J. Moritz(8)	5,340,908	9.9	%
John A. Malloy(9)	4,807,491	8.9	%
Timothy M. Hurd(10)	2,727,271	5.1	%
Shailesh J. Mehta(11)	833,333	1.5	%
All directors, officers and key employees as a group (18 persons)	27,763,646	50.8	%

*: Less than 1%.
(1): Includes 1,267,950 shares of restricted stock subject to repurchase as of November 29, 2001. Also includes 363,783 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 400,763 shares of restricted stock subject to repurchase as of November 29, 2001, in addition to a stock option grant for 450,000 shares vesting over 4 years which has been approved by the board and is expected to be granted by November 29.
(3): Includes 29,468 shares of restricted stock subject to repurchase as of November 29, 2001.
(4): Includes 68,751 shares of restricted stock subject to repurchase as of November 29, 2001.
(5): Represents 3,990,193 shares of common stock held of record by Sequoia Capital IX, 736,511 shares of common stock held of record by Sequoia Capital IX Principals Fund and 614,204 shares of common stock held of record by Sequoia Capital Entrepreneurs Fund.
(6): Represents 3,002,368 shares of common stock held by Clearstone Venture Partners II-A, L.P., formerly idealab! Capital Partners II-A, LP, 102,527 shares of common stock held by Clearstone Venture Partners II-B, L.P., formerly idealab! Capital Partners II-B, L.P., and 312,711 shares of common stock held by Clearstone Venture Partners II-C, L.P., formerly idealab! Capital Principals Fund, L.P.
(7): Represents 2,654,690 shares of common stock held by Madison Dearborn Capital Partners III, L.P., 58,945 shares of common stock held by Madison Dearborn Special Equity III, L.P. and 13,636 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 4,807,491 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 833,333 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 150,000,000 shares of common stock, $0.001 par value per share, and 20,000,000 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 30, 2001, and assuming the conversion of all outstanding preferred stock into common stock upon the closing of this offering, there were 53,813,590 shares of common stock outstanding held by 445 stockholders and options outstanding to purchase 2,061,313 shares of common stock under our stock option plans and other options or warrants outstanding to purchase 142,603 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 0.25 shares of common stock.

Following the offering, we will be authorized, subject to the limits imposed by the Delaware General Corporation Law, to issue 20,000,000 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 41,681,021 shares of common stock and holders of warrants to purchase 7,500 shares of common stock have the right to require us to register their shares with the Securities and Exchange Commission 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 30, 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 41,681,021 shares of common stock and the holders of warrants to purchase 7,500 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 30, 2001, there were a total of 142,603 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 30, 2001, there were a total of 2,061,313 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., Bear, Stearns & Co. 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.
Bear, Stearns & Co. 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 15% 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, including our most active users, determined at September 25, 2001, with addresses within the United States, but also includes friends and family of our employees, our consultants and our strategic business partners, through a directed share program. Some of these shares may be subject to a lock-up agreement with the underwriters. 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. Salomon Smith Barney will administer the directed share program.

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. We estimate that the aggregate underwriting discounts and commissions we will pay to the underwriters will equal 7% of the public offering price set forth on the cover of this prospectus. 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 $2,000,000.

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. We pay $42,000 per month in premiums to Travelers Insurance to underwrite this policy. In addition, on March 31, 2000, affiliates of Robertson Stephens, Inc. purchased a total of 109,091 shares of our Series C Preferred shares for an aggregate purchase price of $300,000 and an affiliate of Bear, Stearns & Co. Inc. purchased a total of 1,090,909 shares of our Series C Preferred shares for an aggregate purchase price of $3,000,000.

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 September 30, 2001, December 31, 2000 and 1999 and for the nine months ended September 30, 2001, 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 September 30, 2001 and pro forma at September 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 nine months ended September 30, 2000 (unaudited) and 2001	F-4
	Consolidated statements of mandatorily redeemable convertible preferred stock and stockholders' deficit for March 8, 1999 (inception) to December 31, 1999, the year ended December 31, 2000, and the nine months ended September 30, 2001	F-5
	Consolidated statements of cash flows for March 8, 1999 (inception) to December 31, 1999, the year ended December 31, 2000, and the nine months ended September 30, 2000 (unaudited) and 2001	F-7
	Notes to consolidated financial statements	F-9
	Unaudited pro forma combined financial statements for the year ended December 31, 2000	F-36
Confinity, Inc. (a development stage company)
	Report of PricewaterhouseCoopers LLP, independent accountants	F-38
	Balance sheets at December 31, 1998 and 1999, and at March 30, 2000 (unaudited)	F-39
	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-40
	Statements of mandatorily redeemable 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-41
	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-42
	Notes to financial statements	F-43

F–1

REPORT OF INDEPENDENT ACCOUNTANTS

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

The accompanying consolidated financial statements have been adjusted to give effect to the one-for-four reverse split of the common stock as described in the third paragraph of Note 1 to the consolidated financial statements. The following report is in the form that will be signed upon the effectiveness of such event.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of mandatorily redeemable 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 September 30, 2001, December 31, 2000 and 1999, and the results of their operations and their cash flows for the nine months ended September 30, 2001, 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.

San Francisco, California
November 5, 2001

F–2

PAYPAL, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

			December 31,
			December 31,						September 30, 2001			Pro Forma September 30, 2001
			1999			2000			September 30, 2001			Pro Forma September 30, 2001
												(unaudited) (Note 1)
ASSETS
Cash and cash equivalents			$	8,442		$	108,280		$	138,614
Short-term investment securities				—			11,862			4,998
Restricted cash				150			3,976			6,548
Funds receivable				—			11,271			26,674
Other receivables				209			2,483			950
Prepaid expenses and other current assets				627			910			2,208

		Total current assets		9,428			138,782			179,992

Non-current investment securities				—			—			37,191
Investment in common stock				2,000			—			—
Fixed assets, net				743			10,398			15,244
Goodwill and other intangibles, net				493			82,087			32,831
Other assets				178			530			643

		Total assets	$	12,842		$	231,797		$	265,901

LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
Due to customers			$	—		$	82,786		$	139,993
Funds payable				—			6,721			16,584
Reserve for transaction losses				—			4,900			5,332
Accounts payable and accrued liabilities				1,090			8,799			8,136
Other liabilities				—			173			1,397

		Total current liabilities		1,090			103,379			171,442
Long-term capital leases				—			230			1,883

		Total liabilities	$	1,090		$	103,609		$	173,325

Mandatorily redeemable convertible preferred stock, par value $0.001: 68,850, 193,284, 197,869 shares authorized at December 31, 1999 and 2000 and September 30, 2001, respectively; 44,955, 156,700, 173,571 shares issued and outstanding at December 31, 1999 and 2000 and September 30, 2001, respectively.				15,791			241,641			279,674		$	—
Commitments and contingencies (Note 17)
Stockholders' equity (deficit):
Common stock, par value $0.001: 75,000 shares authorized; 4,396, 9,328 and 10,421 issued and outstanding at December 31, 1999 and 2000 and September 30, 2001; and 53,814 (unaudited) pro forma issued and outstanding at September 30, 2001				4			9			10			43
Additional paid in capital				3,754			69,825			100,726			380,367
Non-cash deferred stock-based compensation				(3,039	)		(8,597	)		(21,145	)		(21,145	)
Stockholder notes				(139	)		(565	)		(1,953	)		(1,953	)
Accumulated deficit				(4,619	)		(174,125	)		(264,736	)		(264,736	)

	Total stockholders' (deficit) equity			(4,039	)		(113,453	)		(187,098	)		92,576

		Total liabilities, mandatorily redeemable convertible preferred stock and stockholders' (deficit) equity	$	12,842		$	231,797		$	265,901

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

F–3

PAYPAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

									Nine Months Ended September 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		$	1,051		$	60,509
Interest on funds held for others				—			2,046			967			3,018
Investment management fees				—			22			—			868
Service agreement revenues				—			3,938			3,601			—

	Total revenues			—			14,460			5,619			64,395

Transaction processing expenses				—			25,093			15,994			31,854
Provision for transaction losses				—			11,028			7,721			9,703
Promotional and marketing				887			21,024			17,830			6,869
Product development				621			5,334			3,352			12,549
General and administrative				2,954			18,623			13,813			23,171
Customer service and operations				296			15,967			10,226			23,448
Amortization of goodwill and other intangibles				124			49,313			32,898			49,246
Service agreement costs and termination expenses				—			41,142			33,932			—

		Total operating expenses		4,882			187,524			135,766			156,840

Loss from operations				(4,882	)		(173,064	)		(130,147	)		(92,445	)
Interest income				264			2,124			1,167			2,325
Other income (expense), net				(1	)		1,434			1,377			859

Net loss				(4,619	)		(169,506	)		(127,603	)		(89,261	)

Deemed dividend on Class A stock				—			—			—			(1,350	)

Net loss attributable to common stockholders			$	(4,619	)	$	(169,506	)	$	(127,603	)	$	(90,611	)

Basic and diluted net loss per share			$	(6.56	)	$	(31.69	)	$	(28.49	)	$	(12.73	)

Shares used in calculating basic and diluted net loss per share				704			5,349			4,479			7,118

Pro forma basic and diluted net loss per share (unaudited)			$	(0.39	)	$	(3.81	)	$	(2.99	)	$	(1.79	)

Shares used in calculating pro forma basic and diluted net loss per share (unaudited)				11,942			44,524			42,630			50,511

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

F–4

PAYPAL, INC.
CONSOLIDATED STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(IN THOUSANDS)

		Mandatorily Redeemable Convertible Preferred Stock					Stockholders' Deficit
							Common Stock								Non-Cash Deferred Stock-based Compensation
							Common Stock					Additional Paid-In Capital						Stockholder Notes			Accumulated Deficit			Total Stockholder's (Deficit)
		Shares		Amount			Shares		Amount			Additional Paid-In Capital						Stockholder Notes			Accumulated Deficit			Total Stockholder's (Deficit)
Date of Inception
Issuance of Series A mandatorily redeemable convertible preferred stock for cash and intangible assets, net of issuance costs of $51		38,850		$	12,899		—		$	—		$	—		$	—		$	—		$	—		$	—
Issuance of Series B mandatorily redeemable convertible preferred stock, net of issuance costs of $15		6,105			2,892		—			—			—			—			—			—			—
Issuance of restricted common stock to employees at below fair value		—			—		4,656			4			3,034			(2,745	)		—			—			293
Amortization of non-cash deferred stock-based compensation from sales of restricted common stock to employees		—			—		—			—			—			147			—			—			147
Issuance of restricted common stock to non-employees in exchange for services		—			—		131			—			66			(63	)		—			—			3
Amortization of non-cash deferred stock-based compensation associated with non-cash deferred stock-based compensation from sales of restricted common stock to non-employees		—			—		—			—			—			63			—			—			63
Repurchase of restricted common stock from an officer		—			—		(2,750	)		(2	)		(68	)		—			—			—			(70	)
Issuance of stock options to employees at below fair value		—			—		—			—			499			(499	)		—			—			—
Amortization of non-cash deferred stock-based compensation associated with stock options to employees at below fair value		—			—		—			—			—			59			—			—			59
Issuance of stock options to non-employees in exchange for services		—			—		—			—			1			(1	)		—			—			—
Amortization of non-cash deferred stock-based compensation associated with stock options to non-employees in exchange for services		—			—		—			—			—			—			—			—			—
Issuance of warrants in exchange for services		—			—		—			—			85			(85	)		—			—			—
Amortization of warrants issued in exchange for services		—			—		—			—			—			85						—			85
Stockholder notes issued for restricted common stock		—			—		2,359			2			137			—			(139	)		—			—
Net loss		—			—		—			—			—			—			—			(4,619	)		(4,619	)

Balance at December 31, 1999		44,955			15,791		4,396			4			3,754			(3,039	)		(139	)		(4,619	)		(4,039	)

Issuance of Series B mandatorily redeemable convertible preferred stock		21,000			10,003		—			—			—			—			—			—			—
Issuance of Series C mandatorily redeemable convertible preferred stock, net of issuance costs of $96		36,364			99,904		—			—			—			—			—			—			—
Issuance of Series D mandatorily redeemable convertible preferred stock, net of issuance costs of $782		16,119			47,577		—			—			—			—			—			—			—
Issuance of equity pursuant to merger:
	Series AA mandatorily redeemable convertible preferred stock	5,052			7,730		—			—			—			—			—			—			—
	Series BB mandatorily redeemable convertible preferred stock	24,248			37,452		—			—			—			—			—			—			—
	Series CC mandatorily redeemable convertible preferred stock	18,523			30,249		—			—			—			—			—			—			—
	Common stock	—			—		6,372			6			38,607			—			—			—			38,613
	Warrants assumed	—			—		—			—			8,480			—			—			—			8,480
	Options assumed	—			—		—			—			7,182			—			—			—			7,182
Issuance of restricted common stock to employees at below fair value		—			—		—			—			218			(218	)		—			—			—
Amortization of non-cash deferred stock-based compensation from sales of restricted common stock to employees		—			—		—			—			—			344			—			—			344
Issuance of stock options to employees at below fair value		—			—		—			—			11,079			(9,508	)		—			—			1,571
Amortization of non-cash deferred stock-based compensation associated with stock options to employees at below fair value		—			—		—			—			—			1,904			—			—			1,904
Issuance of stock options to non-employees in exchange for services		—			—		—			—			207			(207	)		—			—			—
Amortization of non-cash deferred stock-based compensation associated with stock options to non-employees in exchange for services		—			—		—			—			—			207			—			—			207
Repurchase of restricted Series B mandatorily redeemable convertible preferred stock from an officer		(18,813	)		(8,961	)	—			—			—			—			—			—
Reassignment of rights to Series B mandatorily redeemable convertible preferred stock to an officer		3,149			1,890		—			—			3,369			(3,369	)		(389	)		—			(389	)
Amortization of non-cash deferred stock-based compensation associated with rights to purchase Series B mandatorily redeemable convertible preferred stock		—			—		—			—			—			3,369			—			—			3,369
Repurchase of restricted common stock from an officer		—			—		(1,609	)		(1	)		(3,088	)		1,920			—			—			(1,169	)
Exercise of stock options		—			—		147			—			23			—			—			—			23
Exercise of warrants		6,103			6		—			—			(6	)		—			—			—			(6	)
Stockholders' notes assumed in merger		—			—		—			—			—			—			(37	)		—			(37	)
Net loss		—			—		—			—			—			—			—			(169,506	)		(169,506	)

Balance at December 31, 2000		156,700			241,641		9,328			9			69,825			(8,597	)		(565	)		(174,125	)		(113,453	)

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

F–5

PAYPAL, INC.
CONSOLIDATED STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(IN THOUSANDS) (Continued)

	Mandatorily Redeemable Convertible Preferred Stock					Stockholders' Deficit
						Common Stock								Non-Cash Deferred Stock-based Compensation
						Common Stock					Additional Paid-In Capital						Stockholder Notes			Accumulated Deficit			Total Stockholder's (Deficit)
	Shares		Amount			Shares		Amount			Additional Paid-In Capital						Stockholder Notes			Accumulated Deficit			Total Stockholder's (Deficit)
Issuance of Series D mandatorily redeemable convertible preferred stock, net of issuance costs of $451	12,628			37,433		—			—			—			—			—			—			—
Repurchase of restricted Series C mandatorily redeemable convertible preferred stock from an officer	(91	)		(250	)	—			—			—			—			—			—			—
Repurchase of restricted Series D mandatorily redeemable convertible preferred stock from an officer	(166	)		(500	)	—			—			—			—			—			—			—
Repurchase of restricted common stock from an officer	—			—		(500	)		(1	)		(12	)		15			13			—			15
Repurchase of common stock	—			—		(172	)		—			(46	)		—			44			—			(2	)
Issuance of stock options to employees at below fair market value	—			—		—			—			10,444			(10,809	)		—			—			(365	)
Amortization of non-cash deferred stock-based compensation associated with stock options to employees at below fair value	—			—		—			—			—			6,936			—			—			6,936
Amortization of non-cash deferred stock-based compensation from sales of restricted common stock to employees	—			—		—			—			—			72			—			—			72
Issuance of stock options to non-employees in exchange for services	—			—		—			—			214			(214	)		—			—			—
Amortization of non-cash deferred stock-based compensation associated with stock options to non-employees in exchange for services	—			—		—			—			—			210			—			—			210
Issuance of shareholders notes in connection with the Liquidity Program	—			—		—			—			10,328			(10,328	)		(5,362	)					(5,362	)
Exercise of call in connection with the Liquidity Program	—			—		(428	)		—			(5,136	)		—			5,272						136
Amortization of non-cash deferred stock-based compensation associated with Liquidity Program	—			—		—			—			—			9,942			—			—			9,942
Issuance of Class A stock in exchange for notes receivable from an officer	4,500			1,350		—			—			12,150			(12,150	)		(1,350	)		—			(1,350	)
Deemed dividend on Class A stock	—			—		—			—			1,350			—			—			(1,350	)		—
Amortization of non-cash deferred stock-based compensation associated with Class A stock	—			—		—			—			—			3,778			—			—			3,778
Exercise of stock options	—			—		2,193			2			1,597			—			(5	)		—			1,594
Issuance of warrants in exchange for services	—			—		—			—			12			(12	)		—			—			—
Amortization of warrants issued in exchange for services	—			—		—			—			—			12			—			—			12
Net loss	—			—		—			—			—			—			—			(89,261	)		(89,261	)

Balance at September 30, 2001	173,571		$	279,674		10,421		$	10		$	100,726		$	(21,145	)	$	(1,953	)	$	(264,736	)	$	(187,098	)

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

F–6

PAYPAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

										Nine Months Ended September 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	)	$	(169,506	)	$	(127,603	)	$	(89,261	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Provision for transaction losses			—			11,028			7,721			9,702
		Depreciation and amortization of fixed assets			78			2,352			1,431			3,890
		Amortization of goodwill and other intangibles			124			49,313			32,898			49,246
		Amortization of non-cash deferred stock-based compensation			354			5,825			4,707			20,959
		Changes in operating assets and liabilities:
			Restricted cash		(150	)		(3,826	)		(962	)		(2,572	)
			Funds receivable and other current receivables		(209	)		(13,546	)		(11,415	)		(13,869	)
			Prepaid expenses and other assets		(805	)		(635	)		(647	)		(1,411	)
			Charge-offs and recoveries to provision for transaction losses		—			(6,128	)		(749	)		(9,270	)
			Accounts payable and accrued liabilities		1,090			7,709			6,137			(662	)
			Funds payable and other liabilities		—			7,124			8,936			9,739

			Net cash used in operating activities		(4,137	)		(110,290	)		(79,546	)		(23,509	)

Cash flows from investing activities
	Investments in Community BancShares, Inc. common stock				(2,000	)		2,000			(300	)		—
	Purchase of investment securities				—			(11,862	)		(60,991	)		(30,327	)
	Purchase of fixed assets and domain names				(938	)		(11,743	)		(10,195	)		(8,737	)

			Cash used in investing activities		(2,938	)		(21,605	)		(71,486	)		(39,064	)

Cash flows from financing activities
	Due to customers				—			82,786			67,523			57,207
	Proceeds from capital lease				—			—			—			3,000
	Proceeds from issuance of preferred stock, net				15,291			157,484			145,207			37,433
	Proceeds from issuance of restricted stock to employees				293			1,571			1,270			—
	Proceeds from issuance of restricted stock to non-employees				3			—			—			—
	Proceeds from exercise of stock options				—			23			16			1,593
	Proceeds from exercise of warrants				—			—			6			—
	Payments to repurchase common stock				—			—			—			(365	)
	Payments to repurchase restricted common stock				(70	)		(1,170	)		(1,170	)		15
	Payments to repurchase preferred stock				—			(8,961	)		(8,961	)		(750	)
	Payments made to employees associated with Liquidity Program				—			—			—			(5,226	)

			Cash provided by financing activities		15,517			231,733			203,891			92,907

			Net increase in cash and cash equivalents		8,442			99,838			52,859			30,334
Cash and cash equivalents at beginning of period					—			8,442			8,442			108,280

	Cash and cash equivalents at end of period			$	8,442		$	108,280		$	61,301		$	138,614

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

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

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

	Non-cash deferred stock-based compensation associated with issuance of stock options to employees	$	499	$	9,508	$	5,122	$	10,809

	Non-cash deferred stock-based compensation associated with issuance of stock options to non-employees	$	1	$	207	$	155	$	214

	Non-cash deferred stock-based compensation associated with issuance of restricted common stock to employees	$	2,745	$	218	$	218	$	—

	Non-cash deferred stock-based compensation associated with issuance of restricted common stock to non-employees in exchange for services	$	63	$	—	$	—	$	—

	Stockholder notes issued for Class A stock	$	—	$	—	$	—	$	1,350

	Non-cash deferred stock-based compensation associated with issuance of Class A stock	$	—	$	—	$	—	$	12,150

	Non-cash deferred stock-based compensation associated with Liquidity Program	$	—	$	—	$	—	$	10,328

	Stockholder notes issued in connection with Liquidity Program	$	—	$	—	$	—	$	5,362

	Exercise of call and the retirement of common stock associated with the Liquidity Program	$	—	$	—	$	—	$	5,136

	Repayment of stockholder notes in connection with Liquidity Program	$	—	$	—	$	—	$	5,272

	Stockholder notes issued for restricted common stock	$	139	$	—	$	—	$	—

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

	Reduction of notes receivable in conjunction with repurchase of common stock	$	—	$	—	$	—	$	57

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

	Issuance of notes receivable in exchange for Series B mandatorily redeemable convertible preferred stock	$	—	$	389	$	389	$	—

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

	Assets acquired under capital lease	$	—	$	588	$	—	$	—

Supplemental disclosure of cash flow information:
	Cash paid for interest	$	6	$	65	$	37	$	83

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

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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 and November 2001, the Board of Directors approved a three-for-one stock split and a one-for-four reverse stock split. Accordingly, all common share and per common share amounts have been restated retroactively to reflect these splits. Prior to giving retroactive effect to the one-for-four reverse stock split, net loss per share—basic and diluted was $1.64, $7.92, $7.12 and $3.18 for the years ended December 31, 1999 and 2000, and the nine months ended September 30, 2000 and 2001 respectively.

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 statements of operations and cashflows for the nine-month period ended September 30, 2000, together with the financial data and other information for this 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 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.

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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 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, 1999 and 2000 and for the nine months ended September 30, 2001, the Company incurred a loss from operations of $4.6 million, $169.5 million and $89.3 million and negative cash flows from operations of $4.1 million, $110.3 million and $23.5 million, respectively. As of December 31, 1999 and 2000 and September 30, 2001, the Company had an accumulated deficit of $4.6 million, $174.1 million and $264.7 million, respectively. The Company raised private equity financing of $173.3 million, net of issuance costs during 1999 and 2000. The Company raised an additional $37.4 million, net of issuance costs in the first nine 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 2002.

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.

Reserves 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, such as 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. These reserves represent an accumulation of the estimated amounts, using an actuarial technique, necessary to provide for transaction losses incurred as of the reporting date, including those to which the Company has not yet been notified. This technique enables the Company to estimate the total of expected losses by loss category, for example unauthorized use vs. merchant related losses, based on the historical charge-back

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reporting pattern. The total of expected losses, less the total amount of charge-backs incurred to date equals the reserve for estimated losses incurred but not reported as of the reporting date.

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, in the form of provisions, are reflected in current operating results, while charge-offs to the reserve are made when a loss is determined to have occurred. 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 estimates as new facts become known and events occur that may impact the settlement or recovery of losses. The reserves are maintained at a level deemed appropriate by management to adequately provide for losses incurred at the balance sheet date.

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 nine-month period ended September 30, 2001, revenues from customers located outside the U.S. totaled $8.7 million, or approximately 13% 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, and September 30, 2001.

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 September 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,

F–11

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 at the date of acquisition 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.

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 18, 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 million. 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 million.

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, three 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 three years on a straight-line basis. As of December 31, 1999 and 2000 and September 30, 2001, the Company had capitalized approximately $0.2 million, $1.3 million and $2.3 million respectively, in internally developed

F–12

software costs and recognized approximately $19,700, $567,100 and $735,000, 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 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 September 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 18), the Company wrote-off the unamortized balance of approximately $0.5 million.

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.

Non-cash deferred stock-based compensation

The Company accounts for non-cash deferred stock-based employee compensation in accordance with 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

F–13

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 non-cash deferred stock-based compensation to employees. For fixed grants, 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. For variable grants, compensation expense is based on changes in the fair value of the Company's stock and is recorded using the methodology set out in FIN 28 Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, an interpretation of APB 15 and APB 25.

The Company accounts for non-cash deferred 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.

Net loss per share and share amounts

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 these shares are dilutive.

All outstanding and weighted average share amounts presented in this report have been restated to reflect the three-for-one stock split approved in January 2000 and the one-for-four reverse stock split approved in November 2001.

Unaudited pro forma net loss per share

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

F–14

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 September 30, 2001, customer funds invested in the Fund under management totaled approximately $17.2 million and $49.7 million, respectively. As of December 31, 2000 and September 30, 2001 the Company's cash and cash equivalents included approximately $58.2 million and $45.9 million invested in these funds, respectively, of which $35.4 million and $45.9 million, respectively, were funds being held on behalf of others.

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 18), 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 nine months ended September 30, 2001, advertising expenses totaled $43,165.

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 nine months ended September 30, 2001, acquisition costs of $0.5 million, $15.4 million, and $0.6 million, respectively, have been expensed as incurred and are included in promotional and marketing expense.

Income taxes

F–15

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 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.

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represents the unit of accounting for a long-lived asset to be held and used. The provisions of SFAS 144 are effective for fiscal years beginning after December 15, 2001. The Company has not fully assessed the impact of the adoption of SFAS 144 upon its financial position or results of operations.

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 6,372,369 shares of common stock and 5,051,627 shares of Series AA, 24,247,842 shares of Series BB, and 18,522,653 shares of Series CC, preferred stock, 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 46.5% 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 of $129.7 million 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 $131.3 million. 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 $49.3 million during the year ended December 31, 2000 and $49.2 million for the nine months ended September 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.

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
	(In thousands, except per share amounts)
Revenue	$	350		$	14,545
Net loss	$	(72,944	)	$	(201,555	)
Basic and diluted net loss per share	$	(7.20	)	$	(9.42	)

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3. CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of the following (in thousands):

			December 31,
			December 31,				September 30, 2001
			1999		2000		September 30, 2001
Cash—Corporate			$	27	$	—	$	3,407
Cash—Customers' accounts				—		3,330		3,084

	Total cash			27		3,330		6,491

Cash equivalents—Corporate				8,415		47,065		18,968
Cash equivalents—Customers' accounts				—		57,885		113,155

	Total cash equivalents			8,415		104,950		132,123

		Total cash and cash equivalents	$	8,442	$	108,280	$	138,614

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.

The Company had pledged certificates of deposit totaling $0, $3 million and $5 million as of December 31, 1999 and 2000 and September 30, 2001, respectively, pursuant to these agreements.

Pursuant to a marketing agreement with a software company entered into in September 2000, the Company obtained an irrevocable standby letter of credit with a financial institution for this company, for the minimum payments due in accordance with the agreement (see Note 17). As of December 31, 2000 and September 30, 2001, the Company had pledged cash, in the form of a certificate of deposit, totaling $0.5 million to secure the letter of credit. There was no such agreement outstanding as of December 31, 1999.

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 $150,000, $1 million, and $1 million as of December 31, 1999 and 2000 and September 30, 2001, respectively, 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 September 30, 2001, the amortized cost and estimated fair value of investment securities consist of the following (in thousands):

		December 31, 2000
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Held to Maturity securities:
Short-term investments:
	Asset backed securities	$	6,831	$	22	$	(1	)	$	6,852
	U.S. Government agencies		5,031		20		—			5,051

	Total securities	$	11,862	$	42	$	(1	)	$	11,903

		September 30, 2001
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Held to Maturity securities:
Short-term investments:
	U.S. Government agencies	$	4,998	$	54	$	—		$	5,052

			4,998		54		—			5,052

Long-term investments:
	U.S. Government agencies		21,639		290		—			21,929
	Asset backed securities		3,708		—		(4	)		3,704
	Collateralized Mortgage Obligation		11,844		104		(2	)		11,946

			37,191		394		(6	)		37,579

	Total securities(2)	$	42,189	$	448	$	(6	)	$	42,631

The following table shows estimated fair value of the Company's investment securities by year of maturity as of September 30, 2001.

			2001		2002 through 2005		2006 through 2010		2011 and thereafter		Total
Held to Maturity securities:
	U.S. Government agencies		$	19,830	$	7,152	$	—	$	—	$	26,982
	Asset backed securities(1)			332		3,372		—		—		3,704
	Collateralized Mortgage Obligation(1)			—		—		5,085		6,860		11,945

		Total securities	$	20,162	$	10,524	$	5,085	$	6,860	$	42,631

(1): Collateralized mortgage and asset backed securities are shown at contractual maturity; however, the average life of these securities may differ due to principal prepayments.
(2): Includes $16.4 million in funds held on behalf of customers.

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6. FIXED ASSETS, NET

Fixed assets consist of the following (in thousands):

		December 31,
		December 31,						September 30, 2001
		1999			2000			September 30, 2001
Internally developed software		$	198		$	1,330		$	2,312
Computer equipment			462			6,117			11,362
Purchased computer software			146			2,006			3,832
Furniture and fixtures			15			3,374			4,039

			821			12,827			21,545
Less: accumulated depreciation and amortization			(78	)		(2,429	)		(6,301	)

	Fixed assets, net	$	743		$	10,398		$	15,244

Depreciation and amortization expenses for the years ended December 31, 1999 and 2000 totaled approximately $0.1 million and $2.4 million, respectively. For the nine months period ended September 30, 2001, depreciation and amortization expenses totaled $3.9 million.

7. GOODWILL AND OTHER INTANGIBLES, NET

The components of goodwill and other intangibles are as follows (in thousands):

		December 31,
		December 31,						September 30, 2001
		1999			2000			September 30, 2001
Goodwill		$	—		$	123,623		$	123,623
Existing technology			—			620			620
Customer base			—			6,290			6,290
Assembled workforce			—			790			790
Purchased domain names			607			—			—
Licenses			10			10			10
Less: accumulated amortization			(124	)		(49,246	)		(98,502	)

	Goodwill and other intangibles, net	$	493		$	82,087		$	32,831

Amortization expense for the years ended December 31, 1999 and 2000 totaled $124,000 and $49.3 million, respectively. For the nine-month period ended September 30, 2001, amortization expense totaled $49.2 million.

In May 1999, the Company acquired the X.com domain name in exchange for 1,500,000 shares of the Company's Series A mandatorily redeemable convertible preferred stock at an aggregate value of $0.5 million.

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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 nine-months ended September 30, 2001.

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

Balance at December 31, 2000		4,900
Provision for transaction losses		9,703
Charge-offs		(15,615	)
Recoveries		6,344

Balance at September 30, 2001	$	5,332

9. FEDERAL AND STATE TAXES

For the years ended December 31, 1999 and 2000, and for the nine-months ended September 30, 2001, no provision for federal or state income taxes has been recorded as the Company incurred net operating losses. Temporary differences, which give rise to significant components of the deferred tax assets, are as follows (in thousands):

			December 31,
			December 31,						September 30, 2001
			1999			2000			September 30, 2001
Deferred tax assets
	Net operating loss and credit carryforwards		$	1,786		$	51,574		$	58,305
	Reserves for transaction losses			—			1,960			2,133
	Capitalized start-up			—			1,032			671
	Accrued vacation			—			386			345

		Total deferred tax assets	$	1,786		$	54,952		$	61,454

Deferred tax liabilities
	Fixed assets and capitalized software costs			(42	)		(204	)		(365	)
	Acquired identifiable intangibles, net			—			(1,925	)		(770	)

		Total deferred tax liabilities		(42	)		(2,129	)		(1,135	)

Valuation allowance				(1,744	)		(52,823	)		(60,319	)

Net deferred tax assets			$	—		$	—		$	—

Increase in deferred tax asset valuation allowance			$	1,744		$	51,079		$	7,496

In accordance with the provisions of SFAS No. 109, and due to the uncertainty surrounding the realization of favorable tax attributes in future tax returns, the Company has recorded a full valuation allowance against its net deferred tax assets at September 30, 2001, December 31, 2000 and 1999. At such time as it is determined that it is more likely than not that the deferred tax assets will be realizable, the valuation allowance will be reduced.

As of September 30, 2001, the Company had federal and state net operating loss carryforwards of approximately $133.0 million and $120.0 million, respectively. These federal and state net operating loss carryforwards will begin to expire in varying amounts beginning in 2019 and 2007, respectively. In

F–21

addition to these net operating loss carryforwards, Confinity, Inc. has pre-acquisition federal and state net operating loss carryforwards of approximately $15.0 million which begin to expire in 2020 and 2008, respectively. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards 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 has not yet been determined by the Company.

Prior to the acquisition, Confinity, Inc. provided a full valuation allowance for its net deferred tax assets related primarily to capitalized start-up costs. The Company has recorded a full valuation allowance against these deferred tax assets. When it is determined that it is more likely than not that these deferred tax assets will be realizable, the valuation allowance will be reduced, accordingly.

The following table reconciles the statutory federal tax rate:

		Year Ended December 31,
		Year Ended December 31,				Nine Months Ended September 30, 2001
		1999		2000		Nine Months Ended September 30, 2001
Statutory federal tax rate		34.00	%	34.00	%	34.00	%
California franchise tax expense, net of federeral income tax benefit		5.35		5.35		5.83
Amortization of non-cash deferred stock-based compensation		(5.71	)	(1.10	)	(9.95	)
Non-deductible intangible amortization		(0.00	)	(9.88	)	(21.97	)
Valuation allowance		(34.03	)	(27.05	)	(8.40	)
Other, net		0.39		(1.32	)	0.49

	Effective income tax rate	0.00	%	0.00	%	0.00	%

10. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

At December 31, 1999, mandatorily redeemable convertible preferred stock consisted of the following (in thousands):

	Shares				Value of Stock Issued, Net of Issuance Costs
	Shares		Liquidation Amount
	Authorized	Outstanding	Liquidation Amount
Series A	38,850	38,850	$	12,949	$	12,899
Series B	30,000	6,105		2,908		2,892

	68,850	44,955	$	15,857	$	15,791

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At December 31, 2000, mandatorily redeemable convertible preferred stock consisted of the following (in thousands):

	Shares				Value of Stock Issued, Net of Issuance Costs
	Shares		Liquidation Amount
	Authorized	Outstanding	Liquidation Amount
Series A	38,850	38,850	$	12,949	$	12,899
Series B	27,105	11,441		5,449		5,824
Series C	36,364	36,364		100,001		99,904
Series D	33,000	16,119		48,357		47,577
Series AA (Issued pursuant to merger)	5,052	5,052		500		7,730
Series BB (Issued pursuant to merger)	24,248	24,248		4,500		37,452
Series CC (Issued pursuant to merger)	28,666	24,626		14,625		30,255

	193,285	156,700	$	186,381	$	241,641

At September 30, 2001, mandatorily redeemable convertible preferred stock consisted of the following (in thousands):

	Shares				Value of Stock Issued, Net of Issuance Costs
	Shares		Liquidation Amount
	Authorized	Outstanding	Liquidation Amount
Series A	38,850	38,850	$	12,949	$	12,899
Series B	11,441	11,441		5,449		5,824
Series C	36,364	36,273		99,751		99,654
Series D	28,748	28,581		85,740		84,510
Series E	20,000	—		—		—
Series AA (Issued pursuant to merger)	5,052	5,052		500		7,730
Series BB (Issued pursuant to merger)	24,248	24,248		4,500		37,452
Series CC (Issued pursuant to merger)	28,666	24,626		14,625		30,255
Class A	4,500	4,500		13,500		1,350

	197,869	173,571	$	237,014	$	279,674

Liquidation preference

In the event of any liquidation or dissolution of the Company, either voluntary or involuntary, the holders of mandatorily redeemable 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, $3.00 per share of Series D and $3.00 per share of Class A stock.

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

F–23

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 mandatorily redeemable convertible preferred stock outside of the equity section as these factors are outside the control of the Company. The mandatorily redeemable convertible preferred stock is not redeemable in any other circumstances.

Voting rights

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

Conversion

Each share of mandatorily redeemable convertible preferred stock is convertible at any time into 0.25 shares of common stock (subject to certain adjustments). Each share of mandatorily redeemable 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 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 mandatorily redeemable convertible preferred stock.

Dividends

The holders of mandatorily redeemable convertible preferred stock (except Class A 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 September 30, 2001, no dividends had been declared on any series of the Company's preferred or common stock.

Private Placement of Class A Stock

In August and September 2001, the Company issued 4,500,000 non-voting shares of a new class of mandatorily redeemable convertible preferred stock ("Class A") to or for the benefit of an officer of the Company. 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 4:1. 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, 1,031,250 have been released from the repurchase option as of November 1, 2001. The Company has a right to repurchase all 656,250 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

F–24

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, 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 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. The issuance price of $0.30 was below the fair value of the common stock and resulted in non-cash deferred stock-based compensation of $12,150,000, which is equal to the difference between the fair value of the common stock at the measurement date and the consideration received for these shares. At issuance, the convertible instrument was deemed to have an embedded beneficial conversion feature which is limited to the amount of the proceeds of $1,350,000. This amount is recorded as a deemed dividend in the Statement of Operations.

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 loan, including accrued interest, matures on September 10, 2005 and becomes payable immediately upon termination of the executive's employment for any reason.

11. RESTRICTED STOCK

During the year ended December 31, 1999, the Company issued 7,015,000 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 $0.012 to $0.20 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 fair value of the common stock and resulted in non-cash 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 non-cash 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 nine months ended September 30, 2001 the amortization of non-cash 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 2,750,000 and 1,609,000 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 nine months ended September 30, 2001, in connection with termination of employment, the Company repurchased 647,656 shares of restricted common stock from two former officers 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 130,924 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 $0.012 to $0.132 per share. One award of 3,424 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

F–25

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 127,500 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.

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 non-cash deferred 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.

The number of shares outstanding subject to repurchase as of December 31, 1999 and 2000 and at September 30, 2001 was 3.7 million, 5.7 million, and 4.1 million, respectively. (See Note 19 for impact on net loss per share).

12. STOCKHOLDER NOTES RECEIVABLE

During the year ended December 31, 1999, the Company issued 2,359,000 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 mandatorily redeemable 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. LIQUIDITY PROGRAM

In July 2001, the Company adopted a new liquidity program which allowed for loans to or for the benefit of certain employees equal to the sum of up to 20% of their total equity investment in the Company times $6.00 per share. Each loan was non-recourse, secured in part by a pledge of shares of common stock owned by each participant and accrues interest at a fixed rate of 5.02% with principal and interest repayable in full at the end of the four-year term. In connection with each loan, each participant granted to the Company the right to purchase ("call") 10% of the shares of common stock owned by such participant at a price of $12 per share beginning one year from the date of the loan.

F–26

In September 2001, the Company entered into amendments to all but one of 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. The Company then exercised the calls on September 30, 2001 and purchased, 428,047 common shares from the participants of the Liquidity Program for an aggregate consideration of $5,272,000. Three participants elected to repay the notes in full or partially in cash instead of allowing the Company to purchase 10% of their shares. The remaining participants used the proceeds to repay their promissory notes issued in July 2001. As of September 30, 2001, one loan associated with this program was outstanding and the remaining loans were paid in full. We will adjust non-cash deferred stock-based compensation associated with the one remaining participant's pledged equity awards in periods subsequent to September 30, 2001 until this $90,000 loan is paid in full. The Company expects this loan to be paid in full in November 2001.

In accordance with EITF 95-16, the Company has remeasured ("the new measurement date") the 20% holdings of the participants' restricted stock pledged in accordance with the terms of the Liquidity Program upon granting of the non-recourse notes. As of September 30, 2001, non-cash deferred stock-based compensation of $10.3 million has been recognized, which is equal to the increase in the intrinsic value recorded at the original grant date and the new measurement date. Non-cash deferred stock-based compensation accrued during the vesting period shall be adjusted in subsequent periods, until the notes are settled for changes in the fair value of the shares but shall not be adjusted below zero. Amortization will be recognized in accordance with the vesting terms of the original equity awards using the methodology set out in FIN 28. As of September 30, 2001, amortization of $9.9 million has been recognized. The remaining non-cash deferred stock-based compensation associated with the 10% of the Liquidity Program participants' equity investment, not subject to repurchase, will be amortized over the original vesting period or period over which the Company's repurchase right expires on a straight-line basis.

14. STOCK OPTION PLAN

As of September 30, 2001, the Company had reserved up to 4,677,733 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

F–27

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 December 2000 and March 2001, the Company amended the Plan to permit option holders who hold more than 25,000 and 2,500 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 nine months ended September 30, 2001 resulted in non-cash deferred stock-based compensation of $0.5 million, $9.5 million and $13.6 million 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 non-cash 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 non-cash deferred stock-based compensation was $58,956 and $1.9 million, respectively. For the nine months ended September 30, 2001, the amortization of non-cash deferred stock-based compensation was $6.9 million.

The Company granted options to purchase 34,860, 32,766 and 34,203 shares of common stock to non-employees for consulting services during the years ended December 31, 1999 and 2000, and the nine months ended September 30, 2001, resulting in deferred compensation of $533, $206,782 and $214,404, respectively. The fair value of the options granted 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 nine months ended September 30, 2001 the amortization of deferred compensation related to these options was $209,945.

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 $0.5 million in additional compensation. During the nine months ended September 30, 2001, the Company accelerated vesting for sixteen employees upon termination of employment and recorded $2.6 million in additional non-cash deferred stock-based compensation expense.

F–28

A summary of the status of the Company's stock option plan and changes during those periods is presented below (share numbers in thousands):

	Years Ended December 31,
	Years Ended December 31,								Nine Months Ended September 30, 2001
	1999				2000				Nine Months Ended September 30, 2001
	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	—		$	—	430		$	0.14	3,203		$	0.69
Granted	561		$	0.14	2,074		$	1.01	2,106		$	1.20
Assumed in merger	—			—	1,208		$	0.17	—			—
Exercised	—			—	(147	)	$	0.16	(2,192	)	$	0.75
Terminated/forfeited	(131	)	$	0.14	(362	)	$	0.37	(1,056	)	$	1.11

Outstanding at end of year	430		$	0.14	3,203		$	0.69	2,061		$	0.98

Options exercisable at end of year	—			—	2,754		$	0.69	1,870		$	0.96

The following table summarizes information about stock options outstanding at September 30, 2001 (share numbers in thousands):

	Options Outstanding				Options Exercisable
Exercise Price Range	Number Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Number Exercisable	Weighted Average Exercise Price
$0.04 - $0.12	241	$	0.07	8.00	241	$	0.07
$0.12 - $0.20	28		0.15	8.09	26		0.14
$0.20 - $0.40	169		0.34	8.42	168		0.34
$1.20	1,623		1.20	9.31	1,435		1.20

$0.04 - $1.20	2,061	$	0.98	9.07	1,870	$	0.96

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

F–29

value of each stock option granted to employees was estimated on the date of grant using the following weighted average assumptions:

	Years Ended December 31,				Nine Months Ended September 30,
	1999		2000		2000		2001
Expected stock price volatility	125	%	125	%	125	%	125	%
Risk-free interest rate	5.5	%	6.2	%	6.2	%	3.76	%
Expected life of options (years)	3		3		3		3
Dividend yield	0.0	%	0.0	%	0.0	%	0.0	%

As a result of the above assumptions, the weighted average fair value of options granted during the years ended December 31, 1999 and 2000, and for the nine months ended September 30, 2001 was $1.32, $5.88 and $11.86, 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 and the nine months ended September 30, 2001 consistent with the provisions of SFAS 123, the Company's net loss would have increased to the pro forma amounts reported below (in thousands, except per share amounts):

		Years Ended December 31,						Nine Months Ended September 30,
		1999			2000			2001
Net loss attributable to common stockholders—as reported		$	(4,619	)	$	(169,506	)	$	(90,611	)

Net loss attributable to common stockholders—pro forma		$	(4,643	)	$	(169,738	)	$	(90,932	)

Net loss per share basic and diluted
	As reported	$	(6.56	)	$	(31.69	)	$	(12.73	)

	Pro forma	$	(6.59	)	$	(31.73	)	$	(12.77	)

15. WARRANTS

During November 1999, the Company issued warrants to purchase 125,000 shares of common stock at an exercise price of $0.01332 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 10,103 shares of common stock at an exercise price of $2.40 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 September 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

F–30

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 September 30, 2001, the warrant remains outstanding and fully exercisable.

16. 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 nine months ended September 30, 2001.

17. 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 September 30, 2001, minimum lease commitments required under all leases are as follows (in thousands):

		Capital Leases			Operating Leases
2001		$	254		$	452
2002			1,435			1,859
2003			1,214			1,813
2004			400			1,793
2005 and thereafter			—			4,212

	Total minimum lease commitments	$	3,303		$	10,129

Less: Amount representing interest			(28	)

Present value of minimum lease payments			3,275
Less: Current portion of capital lease obligation			(1,392	)

Long-term portion of capital lease obligation		$	1,883

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 nine months ended September 30, 2001 was $1,539,079. The terms of the facility lease provide for rental

F–31

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 September 30, 2001, the outstanding balance was $3 million. These funds were used to purchase furniture and fixtures, computer equipment and software. Starting in November 2001, the principal amount of the capital lease will be amortized over 30 equal principal payments plus interest. The interest rate is based on current prime rate. In addition, the Company also granted warrants to purchase 30,000 shares of Series D preferred stock in conjunction with this agreement (see Note 15). The Company has the option to pay off the principal amount at any time without penalty.

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.

Commitments under service and marketing agreements

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

As of September 30,
2001		$	125
2002			1,500
2003			1,875
2004			3,000
2005			2,500

	Total Commitments under service and marketing agreements	$	9,000

18. 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.

F–32

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.

19. NET LOSS PER SHARE

								Nine Months Ended September 30,
		March 8, 1999 (inception) to December 31, 1999
					Year Ended December 31, 2000
					Year Ended December 31, 2000			2000			2001
								(unaudited)
Numerator
	Net loss	$	(4,619	)	$	(169,506	)	$	(127,603	)	$	(89,261	)
	Deemed dividend on Class A stock		—			—			—			(1,350	)

	Net loss attributable to common shareholders	$	(4,619	)	$	(169,506	)	$	(127,603	)	$	(90,611	)

Denominator
	Weighted average common shares		1,947			8,493			8,432			9,783
	Weighted average unvested common shares subject to repurchase		(1,243	)		(3,144	)		(3,953	)		(2,665	)

Denominator for basic and diluted calculation			704			5,349			4,479			7,118

Basic and diluted net loss per share		$	(6.56	)	$	(31.69	)	$	(28.49	)	$	(12.73	)

F–33

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:

					Nine Months Ended September 30,
			March 8, 1999 (inception) to December 31, 1999
				Year Ended December 31, 2000
				Year Ended December 31, 2000	2000	2001
					(unaudited)
Effect of common equivalent shares:
	Mandatorily redeemable convertible preferred stock upon conversion to common stock		44,955	156,700	152,606	173,571
	Stock options to purchase common stock		430	3,203	2,521	2,061
	Warrrants to purchase mandatorily redeemable convertible preferred stock and common stock		15	673	853	143
	Unvested common shares subject to repurchase agreements		3,650	4,013	4,714	4,071

		Total	49,050	164,589	160,694	179,846

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

21. SUBSEQUENT EVENTS

In October 2001, the Company entered into a lease agreement for an office building. The term of this lease, which qualifies as an operating lease, commences on January 1, 2002 for 126 months. Under the terms of the lease, the tenant is generally responsible for the payment of property taxes, insurance and maintenance costs related to the leased property. Additionally, in accordance with the lease agreement, the Company has also established 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 approximately $1.28 million to secure the letter of credit.

F–34

Minimum lease commitments required under this lease are as follows (in thousands):

2002	$	1,582
2003		2,350
2004		2,446
2005		2,543
2006		2,645

	$	11,566

In October 2001, the Company amended the lease agreement it has with a financial institution, increasing the advances available from $3.0 million to $5.0 million. (See note 17)

In November 2001, the Company granted options to purchase 450,000 shares of common stock to an executive officer at an exercise price of $1.20 per share. The Company expects to record non-cash deferred stock-based compensation during the fourth quarter for an amount equal to the difference between the exercise price and the fair value of the Company's common stock subject to the options granted. The non-cash deferred stock-based compensation will be amortized over the vesting period of four years.

In connection with the exercise of the options granted, the Company made a full-recourse loan in the amount of $0.8 million, at an interest rate of 8% per annum. The principal and accrued interest are due four years from the date of issuance.

In September 2001, the Company adopted a 2001 Equity Incentive Plan and reserved up to 9,500,000 shares of common stock issuable upon exercise of options issued to certain employees, directors, advisors and consultants.

F–35

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 6,372,369 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 597,637 options and 5,020,001 warrants outstanding into options and warrants to purchase 1,207,583 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 of $129.6 million 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–36

UNAUDITED PROFORMA COMBINED STATEMENTS OF OPERATIONS

				Year ended December 31, 2000
				The Company			Confinity, Inc.			Pro Forma Adjustments(A)			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.

F–37

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 mandatorily redeemable 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–38

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, MANDATORILY REDEEMABLE 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

Mandatorily redeemable 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
	Non-cash 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 mandatorily redeemable 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–39

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–40

CONFINITY, INC. (a development stage company)
STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY/(DEFICIT)

	Mandatorily Redeemable Convertible Preferred Stock
					Common Stock						Non-cash Deferred Stock-based Compensation
					Common Stock				Additional Paid-In Capital					Stockholder's Notes			Accumulated Deficit			Total Stockholders' (Deficit)
	Shares		Amount		Shares		Amount		Additional Paid-In Capital					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 mandatorily redeemable 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 mandatorily redeemable 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 mandatorily redeemable 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	)

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

F–41

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 non-cash deferred 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-offs, 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

Non-cash 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 mandatorily redeemable convertible preferred stock			$	—	$	500,000		$	—		$	500,000

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

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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.

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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

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 charged to expense as incurred.

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.

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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

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.

Non-cash deferred stock-based compensation

The Company accounts for non-cash deferred 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 non-cash deferred 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.

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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 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 non-cash deferred stock-based compensation		(2.12	)
Valuation allowance		(37.22	)
Other		(0.24	)

	Effective tax rate	0.00	%

7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

December 31, 1999, mandatorily redeemable 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, mandatorily redeemable 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 substantially all of the property or business of the company shall be deemed a liquidation, dissolution,

F–47

or winding up of the Company. These liquidation characteristics require classification of the mandatorily redeemable convertible preferred stock outside of the equity section. There are no other redemption features.

Liquidation preference

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 mandatorily redeemable convertible preferred stock are entitled to vote together with holders of common stock. The number of votes granted to mandatorily redeemable convertible preferred shareholders equals the number of full shares of common stock into which each share of mandatorily redeemable 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 mandatorily redeemable 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 mandatorily redeemable 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 mandatorily redeemable 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.

F–48

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 non-cash 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 non-cash 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 non-cash 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 non-cash deferred stock-based compensation of $372,113 and $3,283,978, respectively. Amortization of the non-cash 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

F–49

of non-cash deferred stock-based compensation related to these stock options was $47,218 and $283,363, respectively.

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
$0.02 - $0.04	1,744,800	$	0.034	9.52	164,106	$	0.028

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 non-cash 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 non-cash deferred stock-based compensation related to these options was

F–50

$86,431. For the three months ended March 30, 2000 the amortization of non-cash deferred stock-based compensation related to these options was $10,197.

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.

F–52

Shares

PayPal, Inc.

Common Stock

P R O S P E C T U S

, 2001

Salomon Smith Barney

Bear, Stearns & Co. Inc.

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

II–1

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 February 1999, Confinity, Inc. issued and sold an aggregate of 2,500,000 shares of its Series A Preferred Stock to investors at a per share price of $0.20 for an aggregate consideration of $0.5 million. This transaction was effected in reliance on Rule 506 of Regulation D under the Securities Act.

(2) In May and June 1999, we issued and sold an aggregate of 38,850,000 shares of Series A Preferred Stock to investors at a per share price of approximately $0.33 for an aggregate consideration of $12.5 million and the domain name "X.com" valued at $500,000. These transactions were effected in reliance on Section 4(2) under the Securities Act.

(3) In June and August 1999, Confinity, Inc. issued and sold 12,000,000 shares its Series B Preferred Stock to investors at a per share price of $0.375 for an aggregate consideration of $4.5 million. These transactions were effected in reliance on Rule 506 of Regulation D under the Securities Act.

(4) 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 per share to Silicon Valley Bank. This transaction was effected in reliance on Section 4(2) under the Securities Act. 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 per share.

(5) In November 1999, we issued a warrant to purchase 125,000 shares of our common stock at an exercise price of $0.133332 per share to Heidrick & Struggles, Inc. This transaction was effected in reliance on Section 4(2) under the Securities Act.

(6) In December 1999 and January 2000, we issued and sold 27,104,970 shares of Series B Preferred Stock to investors at a per share price of approximately $0.48 for an aggregate consideration of $12.9 million. These transactions were effected in reliance on Rule 506 of Regulation D under the Securities Act.

(7) 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 at a per share price of $1.20 and granted to

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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 $11.0 million. These transactions were effected in reliance on Rule 506 of Regulation D under the Securities Act.

(8) In March and April 2000, we issued and sold an aggregate of 36,363,637 shares of Series C Preferred Stock to investors at a per share price of $2.75 for an aggregate consideration of $100.0 million. These transactions were effected in reliance on Rule 506 of Regulation D under the Securities Act.

(9) On March 30, 2000, we merged with Confinity, Inc. Under the terms of the merger, we issued 6,372,369 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 597,637 options and 5,020,001 warrants outstanding into options and warrants to purchase 1,207,583 and 10,143,689 shares of our common and Series CC Preferred Stock, respectively. This transaction was effected in reliance on Section 4(2) of the Securities Act.

(10) 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. This transaction was effected in reliance on Section 4(2) under the Securities Act.

(11) 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 at a per share price of $3.00 for an aggregate consideration of $86.2 million. These transactions were effected in reliance on Rule 506 of Regulation D under the Securities Act.

(12) In August and September 2001, we issued and sold 4,500,000 shares of Class A Stock to or for the benefit of Peter A. Thiel at a per share price of $0.30 for consideration of $0.5 million in cash and a promissory note for $0.8 million. These transactions were effected in reliance on Section 4(2) under the Securities Act.

(13) Since our inception and as of September 30, 2001, we have granted options to purchase shares of common stock (including options to purchase 1,207,583 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 $0.013332 to $1.20 per share. Of the options granted, 2,061,313 remain outstanding, 2,677,380 shares of common stock have been purchased pursuant to exercises of stock options and 446,457 shares have been cancelled and returned to the 1999 Stock Plan option pool as of September 30, 2001. These transactions were effected under Rule 701 and, in the case of certain consultants, Section 4(2) of the Securities Act.

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.

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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
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 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

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10.22		Lease Agreement, dated as of August 15, 2001, between the registrant and Bryant Street Associates, LLC, for office space in Mountain View, California
21.1	**	List of Subsidiaries of the Registrant
23.1		Consent of PricewaterhouseCoopers LLP, independent accountants, relating to financial statements of Confinity, Inc.
23.2		Consent of PricewaterhouseCoopers LLP, independent accountants, relating to registrant's financial statements
23.3	*	Consent of Latham & Watkins (included in Exhibit 5.1)
24.1	**	Power of Attorney

*: To be filed by amendment.
**: Previously filed.
†: Confidential treatment 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.

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 amendment to this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Palo Alto, State of California, on November 7, 2001.

		PAYPAL, INC.
		By:		* Peter A. Thiel Chief Executive Officer and President

Pursuant to the requirements of the Securities Act, this amendment to this registration statement has been signed by the following persons in the capacities and on the dates indicated:

Signature	Title	Date

* Peter A. Thiel	Chief Executive Officer, President and Chairman of the Board (Principal Executive Officer)	November 7, 2001
/s/ ROELOF F. BOTHA Roelof F. Botha	Chief Financial Officer (Principal Financial and Accounting Officer)	November 7, 2001
* Max R. Levchin	Director	November 7, 2001
* Timothy M. Hurd	Director	November 7, 2001
* John A. Malloy	Director	November 7, 2001
* Shailesh J. Mehta	Director	November 7, 2001
* Michael J. Moritz	Director	November 7, 2001
* Elon R. Musk	Director	November 7, 2001


*By:		/s/ ROELOF F. BOTHA Roelof F. Botha Attorney-In-Fact

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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 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
10.22		Lease Agreement, dated as of August 15, 2001, between the registrant and Bryant Street Associates, LLC, for office space in Mountain View, California
21.1	**	List of Subsidiaries of the Registrant
23.1		Consent of PricewaterhouseCoopers LLP, independent accountants, relating to financial statements of Confinity, Inc.

23.2		Consent of PricewaterhouseCoopers LLP, independent accountants, relating to registrant's financial statements
23.3	*	Consent of Latham & Watkins (included in Exhibit 5.1)
24.1	**	Power of Attorney

*: To be filed by amendment.
**: Previously filed.
†: Confidential treatment requested.

QuickLinks

TABLE OF CONTENTS
PROSPECTUS SUMMARY
PayPal, Inc.
Summary Risks
Company Information
The Offering
Summary Consolidated Financial Information
RISK FACTORS
Risks Related To Our Business
Risks Related to This Offering
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
USE OF PROCEEDS
DIVIDEND POLICY
CAPITALIZATION
DILUTION
SELECTED CONSOLIDATED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
MANAGEMENT
Summary Compensation Table
Option Grants in Last Fiscal Year
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
PRINCIPAL STOCKHOLDERS
DESCRIPTION OF CAPITAL STOCK
SHARES ELIGIBLE FOR FUTURE SALE
UNDERWRITING
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
PAYPAL, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
PAYPAL, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PAYPAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
PAYPAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PAYPAL, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
UNAUDITED PROFORMA COMBINED STATEMENTS OF OPERATIONS
Report of Independent Accountants
CONFINITY, INC. (a development stage company) BALANCE SHEETS
CONFINITY, INC. (a development stage company) STATEMENTS OF OPERATIONS
STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY/DEFICIT
CONFINITY, INC. (a development stage company) STATEMENTS OF CASH FLOWS
CONFINITY, INC. (a development stage company) NOTES TO THE FINANCIAL STATEMENTS
PART II INFORMATION NOT REQUIRED IN PROSPECTUS.
SIGNATURES
PAYPAL EXHIBIT INDEX
EX-4.3 3 a2060419zex-4_3.htm EXHIBIT 4.3 Prepared by MERRILL CORPORATION

EXHIBIT 4.3

THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.

WARRANT TO PURCHASE STOCK

Corporation:		PAYPAL, INC., a Delaware corporation
Number of Shares		30,000
Class of Stock:		Common/Series D Preferred
[strike descriptions that do not apply.]
Initial Exercise Price:		$3.00 per share
Issue Date:		April 10, 2001
Expiration Date:		April 10, 2006 or as specified in Section 4.1

THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, COMERICA BANK-CALIFORNIA ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the "Shares") of the corporation (the "Company") at the initial exercise price per Share (the "Warrant Price") all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth of this Warrant.

ARTICLE 1
EXERCISE

1.1 Method of Exercise. Holder may exercise this Warrant in whole or in part at any time prior to expiration by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1, together with this Warrant, to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Section 1.2, Holder shall also deliver to the Company a check for the aggregate Warrant Price for the Shares being purchased.

1.2 Conversion Right. In lieu of exercising this Warrant as specified in Section 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Section 1.3.

1.3 Fair Market Value. If the Shares are traded in a public market, the fair market value of the Shares shall be the closing price of the Shares (or the closing price of the Company's stock into which the Shares are convertible) reported for the business day immediately before Holder delivers its Notice of Exercise to the Company. If the Shares are not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment.

1.4 Delivery of Certificate and New Warrant. Promptly after Holder exercises or converts this Warrant, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant

has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired.

1.5 Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation of, or surrender and cancellation of this Warrant, the Company at its expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor.

1.6 Repurchase on Sale, Merger, or Consolidation of the Company.

1.6.1 "Acquisition". For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction.

1.6.2 Assumption of Warrant. Holder shall be deemed to have converted this Warrant pursuant to Section 1.2 immediately prior to an Acquisition in which the consideration is cash or marketable securities unless Holder has previously exercised its rights under Section 1.1 or Section 1.2, and the Warrant shall thereafter terminate. In all other cases, the successor entity as a condition to closing the Acquisition shall assume the obligations of this Warrant, and this Warrant shall be exercisable for the same securities and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing.

1.7 Market Standoff. The Holder of this Warrant agrees that, during the period of duration specified by the Company or an underwriter of Common Stock or other securities of the Company, following the effective date of a registration statement of the Company filed under the Securities Act of 1933, as amended, the Holder (or any transferee) shall not, to the extent requested by the Company or such underwriter, directly or indirectly, sell, offer to sell, contract to sell (including without limitation, any short sale), loan, grant any option to purchase or otherwise transfer or dispose of any securities of the Company held by it at any time during the period requested by the Company or the underwriter, except Common Stock included in such registration, if any, provided, however, that (a) all officers and directors of the Company and persons or entities holding at least 5 percent of the Company's capital stock enter into similar agreements, and (b) such market stand-off period shall not exceed 180 calendar days. Holder agrees to execute an agreement reflecting the foregoing as may be requested by the underwriters at the time of the Company's initial public offering, in a form satisfactory to the Company and the underwriters. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the securities of the Company held by such Holder until the end of the period. Holder agrees that it will not transfer securities of the Company, including these Warrants, unless each transferee agrees in writing to be bound by all of the provisions of this Section 1.7.

ARTICLE 2
ADJUSTMENTS TO THE SHARES

2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on its common stock (or the Shares if the Shares are securities other than common stock) payable in common stock, or other securities, subdivides the outstanding common stock into a greater amount of common stock, or, if the Shares are securities other than common stock, subdivides the Shares in a transaction that increases the amount of common stock into which the Shares are convertible, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number

and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend or subdivision occurred.

2.2 Reclassification, Exchange or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Articles of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder a new Warrant for such new securities or other property. The new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events.

2.3 Adjustments for Combinations, Etc. If the outstanding Shares are combined or consolidated, by reclassification or otherwise, into a lesser or greater number of shares, the Warrant Price shall be proportionately increased, or decreased, respectively.

2.4 Adjustments for Diluting Issuances. The Warrant Price and the number of Shares issuable upon exercise of this Warrant or, if the Shares are Preferred Stock, the number of shares of common stock issuable upon conversion of the Shares, shall be subject to adjustment, from time to time in the manner set forth on Exhibit A in the event of Diluting Issuances (as defined on Exhibit A).

2.5 No Impairment. The Company shall not, by amendment of its Articles of Incorporation or through a reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. If the Company takes any action affecting the Shares or its common stock other than as described above that adversely affects Holder's rights under this Warrant, the Warrant Price shall be adjusted downward and the number of Shares issuable upon exercise of this Warrant shall be adjusted upward to the same extent, if any, as the conversion price and the number of common shares issuable upon conversion of a share of Series D Preferred Stock are adjusted.

2.6 Fractional Shares. No fractional Shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder amount computed by multiplying the fractional interest by the fair market value of a full Share.

2.7 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, the Company at its expense shall promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price.

ARTICLE 3
REPRESENTATIONS AND COVENANTS OF THE COMPANY

3.1 Representations and Warranties. The Company hereby represents and warrants to the Holder as follows:

(a) The initial Warrant Price referenced on the first page of this Warrant is not greater than (i) the price per share at which the Shares were last issued in an arms-length transaction in which at least $500,000 of the Shares were sold and (ii) the fair market value of the Shares as of the date of this Warrant.

(b) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws.

3.2 Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon its common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights, (c) to effect any reclassification or recapitalization of common stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder (1) at least 20 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 20 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights.

3.3 Information Rights. So long as the Holder holds this Warrant and/or any of the Shares, the Company shall deliver to the Holder (a) promptly after mailing, copies of all notices or other written communications to the shareholders of the Company, (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements.

3.4 Registration Under Securities Act of 1933, as amended. The Company agrees that the Shares or, if the Shares are convertible into common stock of the Company, such common stock, shall be subject to the registration rights set forth on Exhibit B, if attached.

ARTICLE 4
MISCELLANEOUS

4.1 Term; Notice of Expiration. This Warrant (and the right to purchase Shares upon exercise hereof) shall terminate upon the earliest to occur of the following: (a) the Expiration Date set forth on page 1; or (b) the effective time of an Acquisition, if the surviving entity does not agree to assume the Warrant (provided that this Section 4.1 shall not apply to a merger effected exclusively for the purpose

of changing the domicile of the Company). The Company shall give Holder written notice of Holder's right to exercise this Warrant in the form attached as Appendix 2 not more than 90 days and not less than 30 days before the Expiration Date. If the notice is not so given, the Expiration Date shall automatically be extended until 30 days after the date the Company delivers the notice to Holder.

4.2 Legends. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form:

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.

4.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise of this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder or if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder's notice of proposed sale. For any proposed transfer of this Warrant or the Shares exercisable hereunder prior to the Company's initial public offering of capital stock under the Securities Act of 1933, the proposed transferee will be required to complete an Investor Suitability Questionnaire in which such transferee demonstrates its status as an "Accredited Investor," as that term is defined in Rule 501(a) of Regulation D under the Securities Act, or any successor provision.

4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) by giving the Company notice of the portion of the Warrant being transferred setting forth the name, address and taxpayer identification number of the transferee and surrendering this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). Unless the Company is filing financial information with the SEC pursuant to the Securities Exchange Act of 1934, the Company shall have the right to refuse to transfer any portion of this Warrant to any person who competes with the Company or is an Accredited Investor.

4.5 Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such holder from time to time.

4.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.

4.7 Attorneys Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys' fees.

4.8 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law.

		"COMPANY"

		By:
		Name:		(Print)
		Title:		Chairman of the Board, President or Vice President
		By:		/s/ Ralph Ho
		Name:		Ralph Ho
				(Print)
		Title:		Chief Financial Officer, Secretary Assistant Treasurer, or Assistant Secretary

APPENDIX 1

NOTICE OF EXERCISE

1. The undersigned hereby elects to purchase shares of the Common/Series Preferred [strike one] Stock of pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full.

1. The undersigned hereby elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised with respect to of the Shares covered by the Warrant.

[Strike paragraph that does not apply.]

2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below:

(Name)

(Address)

3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws.

(Signature)

(Date)

APPENDIX 2

NOTICE THAT WARRANT IS ABOUT TO EXPIRE

(Name of Holder)

(Address of Holder)

Attn: Chief Financial Officer

Dear :

This is to advise you that the Warrant issued to you described below will expire on , 19 .

Issuer:

Issue Date:

Class of Security Issuable:

Exercise Price per Share:

Number of Shares Issuable:

Procedure for Exercise:

Please contact [name of contact person at (phone number)] with any questions you may have concerning exercise of the Warrant. This is your only notice of pending expiration.

(Name of Issuer)

its

EXHIBIT A

Anti-Dilution Provisions
(For Common Stock Warrants Where Exercise Price Equals
Price of Preferred Stock Which Has Anti-Dilution Protection)

In the event of the issuance (a "Diluting Issuance") by the Company, after the Issue Date of the Warrant, of securities at a price per share less than the then conversion price of the Company's Series Preferred Stock, then the number of Shares issuable upon exercise of the Warrant shall be adjusted as a result of Diluting Issuances in the same proportion as the number of shares of common stock issuable upon conversion of the Company's Series Preferred Stock (the "Preferred Stock") are adjusted pursuant to those provisions (the "Provisions") of the Company's Articles (Certificate) of Incorporation which adjust the conversion price of the Preferred Stock in the event of Diluting Issuances with respect to the Series D Preferred Stock, as amended and as may be further amended from time to time.

Under no circumstances shall the aggregate Warrant Price payable by the Holder upon exercise of the Warrant increase as a result of any adjustment arising from a Diluting Issuance.

EXHIBIT A

Anti-Dilution Provisions
(For Preferred Stock Warrants With Existing Anti-Dilution Protection)

In the event of the issuance (a "Diluting Issuance") by the Company, after the Issue Date of the Warrant, of securities at a price per share less than the Warrant Price, then the number of shares of common stock issuable upon conversion of the Shares shall be adjusted in accordance with those provisions (the "Provisions") of the Company's Articles (Certificate) of Incorporation which apply to Diluting Issuances, with respect to the Series D Preferred Stock as amended and as may be further amended from time to time.

Under no circumstances shall the aggregate Warrant Price payable by the Holder upon exercise of the Warrant increase as a result of any adjustment arising from a Diluting Issuance.

EXHIBIT A

Anti-Dilution Provisions
(For Preferred Stock or Common Stock Warrants Where
Anti-Dilution Protection is Inadequate or Non-Existent)

In the event of the issuance (a "Diluting Issuance") by the Company, after the Issue Date of the Warrant, of securities at a price per share less than the Warrant Price, or, if the Shares are common stock, less than the then conversion price of the Company's Series Preferred Stock, then the number of shares of common stock issuable upon conversion of the Shares, or if the Shares are common stock, the number of Shares issuable upon exercise of the Warrant, shall be adjusted as a result of Diluting Issuances in accordance with the Holder's standard form of Anti-Dilution Agreement in effect on the Issue Date.

Under no circumstances shall the aggregate Warrant Price payable by the Holder upon exercise of the Warrant increase as a result of any adjustment arising from a Diluting Issuance.

EXHIBIT B

Registration Rights

The Shares (if common stock), or the common stock issuable upon conversion of the Shares, shall be deemed "registrable securities" or otherwise entitled to "piggyback" registration rights in accordance with the terms of the following agreement (the "Agreement") between the Company and its investor(s):

Amended and Restated Investors' Rights Agreement dated August 7, 2000
[Identify Agreement by date, title and parties. If no Agreement exists, indicate by "none".]

The Company agrees that no amendments will be made to the Agreement which would have an adverse impact on Holder's registration rights thereunder without the consent of Holder or a majority of the Series D Preferred Stock. By acceptance of the Warrant to which this Exhibit B is attached, Holder shall be deemed to be a party to the Agreement.

EX-10.12 4 a2060419zex-10_12.htm EXHIBIT 10.12 Prepared by MERRILL CORPORATION
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EXHIBIT 10.12

LEASE AGREEMENT

BY AND BETWEEN

HARBOR INVESTMENT PARTNERS,
a California general partnership

AS LANDLORD

and

X.COM,
a Delaware corporation

AS TENANT

Dated March 10, 2000

TABLE OF CONTENTS

		PAGE
1.	Demise	1
2.	Premises	1
3.	Term	2
4.	Rent	2
5.	Utility Expenses	7
6.	Late Charge	7
7.	Security Deposit	8
8.	Letter of Credit	8
9.	Possession	10
10.	Use Of Premises	10
11.	Acceptance of Premises	11
12.	Surrender	12
13.	Alterations and Additions	13
14.	Maintenance and Repairs of Premises	15
15.	Landlord's Insurance	16
16.	Tenant's Insurance	16
17.	Indemnification	17
18.	Subrogation	18
19.	Signs	18
20.	Free From Liens	19
21.	Entry By Landlord	19
22.	Destruction and Damage	19
23.	Condemnation	21
24.	Assignment And Subletting	22
25.	Tenant's Default	24
26.	Landlord's Remedies	26
27.	Landlord's Right To Perform Tenant's Obligations	28
28.	Attorneys' Fees	28
29.	Taxes	29
30.	Effect Of Conveyance	29
31.	Tenant's Estoppel Certificate	29
32.	Subordination	30

33.	Environmental Covenants	30
34.	Notices	34
35.	Waiver	34
36.	Holding Over	34
37.	Successors And Assigns	35
38.	Time	35
39.	Brokers	35
40.	Limitation Of Liability	35
41.	Financial Statements	35
42.	Rules And Regulations	35
43.	Mortgagee Protection	36
44.	Entire Agreement	36
45.	Interest	36
46.	Construction	36
47.	Representations And Warranties Of Tenant	37
48.	Security	37
49.	Jury Trial Waiver	37

Exhibit

A-1		Diagram of the Premises
A-2		Diagram of the Intuit Server Area
B-1		Initial Premises Commencement Date Memorandum
B-2		Subsequent Premises Commencement and Expiration Date Memorandum
C		Rules and Regulations
D		Hazardous Materials Disclosure Certificate

LEASE AGREEMENT

BASIC LEASE INFORMATION

Lease Date:		March 10, 2000
Landlord:		HARBOR INVESTMENT PARTNERS, a California general partnership
Landlord's Address:		c/o UBS Brinson Realty Investors LLC 455 Market Street, Suite 1540 San Francisco, California 94105 Attention: Asset Manager The Harbor Business Park

All notices sent to Landlord under this Lease shall be sent to the above address, with copies to:

		Insignia/ESG of California, Inc. 160 West Santa Clara Street, Suite 1350 San Jose, California 95113 Attention: Property Manager, The Harbor Business Park
Tenant:		X.Com, a Delaware corporation
Tenant's Contact Person:		Steve Armstrong
Tenant's Address:		1840 Embarcadero Road Palo Alto, California
Initial Premises Square Footage:		Approximately Eleven Thousand Two Hundred Twenty (11,220) rentable square feet
Subsequent Premises Square Footage:		Approximately Ten Thousand Six Hundred Fifty-Four (10,654) rentable square feet
Total Premises Square Footage:		Approximately twenty-one thousand eight hundred seventy-four (21,874) rentable square feet
Premises Address:		1840 Embarcadero Road Palo Alto, California
Project:		The Harbor Business Park, 1800-1858 Embarcadero Road and 2445-2465 Faber Place, Palo Alto, California, together with the land on which the Project is situated and all Common Areas
Building (if not the same as the Project):		1840 Embarcadero Road Palo Alto, California

Tenant's Proportionate Share of Project:	Initial Premises:	4.33	%
	Subsequent Premises:	4.11	%
	Total Premises:	100	%

iii

Tenant's Proportionate Share of Building:	Initial Premises:	51.29	%
	Subsequent Premises:	48.71	%
	Total Premises:	100	%

Term:		Commencing on Initial Premises Commencement Date and expiring on day immediately preceding the seventh (7th) anniversary of the Subsequent Premises Commencement Date
Estimated Initial Premises Commencement Date:		March 15,2000
Estimated Subsequent Premises Commencement Date:		May 15,2000
Estimated Expiration Date:		May 14,2007
Monthly Base Rent:		See Paragraph 4(a)
Prepaid Rent:		One Hundred Two Thousand Eight Hundred Seven and 80/100 Dollars ($102,807.80)
Prepaid Additional Rent:		Ten Thousand Three Hundred Two and 00/100 Dollars ($10,302.00)
Month to which Prepaid Base Rent and Additional Rent will be Applied:		First (1^st) month of the Term following the Subsequent Premises Commencement Date
Security Deposit:		One Hundred Twenty Thousand Two Hundred Seventy and 00/100 Dollars ($120,270.00)
Letter of Credit:		Nine Hundred Sixty-Two Thousand One Hundred Sixty and 00/100 Dollars ($962,160.00)
Permitted Use:		General office, sales/marketing and administration of online banking/financial services
Unreserved Parking Spaces:		Sixty-nine (69) nonexclusive and undesignated parking spaces
Brokers:		Steve Bouret of BT Commercial (Landlord's Broker) Randy Arrillaga of BT Commercial (Tenant's Broker)
Alterations Allowance:		Sixty Five Thousand Six Hundred Twenty-Two Dollars ($65,622.00) (viz. $3.00 per rentable square foot)

LEASE AGREEMENT

THIS LEASE AGREEMENT is made and entered into by and between Landlord and Tenant on the Lease Date. The defined terms used in this Lease which are defined in the Basic Lease Information attached to this Lease Agreement ("Basic Lease Information") shall have the meaning and definition given them in the Basic Lease Information. The Basic Lease Information, the exhibits, the addendum or addenda described in the Basic Lease Information, and this Lease Agreement are and shall be construed as a single instrument and are referred to herein as the "Lease".

1. DEMISE

In consideration for the rents and all other charges and payments payable by Tenant, and for the agreements, terms and conditions to be performed by Tenant in this Lease, LANDLORD DOES HEREBY LEASE TO TENANT, AND TENANT DOES HEREBY HIRE AND TAKE FROM LANDLORD, the Premises described below, upon the agreements, terms and conditions of this Lease for the Term hereinafter stated.

2. PREMISES

(a) The premises demised by this Lease consists of the Initial Premises and the Subsequent Premises (collectively, the "Premises") located in that certain building (the "Building") specified in the Basic Lease Information, which Building is located in that certain real estate development (the "Project") specified in the Basic Lease Information. The Premises has the address and contains the square footage specified in the Basic Lease Information. The location and dimensions of the Initial Premises and the Subsequent Premises are depicted on Exhibit A, which is attached hereto and incorporated herein by this reference; provided, however, that any statement of square footage set forth in this Lease, or that may have been used in calculating any of the economic terms hereof, is an approximation which Landlord and Tenant agree is reasonable and, except as expressly set forth in Paragraph 4(c)(iii) below, no economic terms based thereon shall be subject to revision whether or not the actual square footage is more or less. Tenant shall have the non-exclusive right (in common with the other tenants, Landlord and any other person granted use by Landlord) to use the-Common Areas (as hereinafter defined), except that, with respect to parking, Tenant shall have only a license to use-the number of nonexclusive and undesignated parking spaces set forth in the Basic Lease Information in the Project's parking areas (the "Parking Areas"); provided, however, that Landlord shall not be required to enforce Tenant's right to use such parking spaces; and provided, further, that the number of parking spaces allocated to Tenant hereunder shall be reduced on a proportionate basis in the event any of the parking spaces in the Parking Areas are taken or otherwise eliminated as a result of any Condemnation (as hereinafter defined) or casualty event affecting such Parking Areas. No easement for light or air is incorporated in the Premises. For purposes of this Lease, the term "Common Areas" shall mean all areas and facilities outside the Premises and within the exterior boundary line, of the Project that are provided and designated by Landlord for the non-exclusive use of Landlord, Tenant and other tenants of the Project and their respective employees, guests and invitees.

(b) Landlord has the right, in its sole discretion, from time to time, to: (i) make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, ingress, egress, direction of driveways, entrances, corridors and walkways; (ii) close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (iii) add additional buildings and improvements to the Common Areas or remove existing buildings or improvements therefrom; (iv) use the Common Areas while engaged in making and do additional improvements, repairs or alterations to the Project or any portion thereof; and (v) and perform any other acts or make any other changes in, to or with respect to the Common Areas and the Project as Landlord may, in its sole discretion, deem

to be appropriate; provided, however, that Landlord shall use reasonable efforts to minimize any disruption to Tenant's business during the making of any such modifications.

(c) Tenant acknowledges and agrees that Intuit, Inc. ("Intuit"), the former tenant of the Premises, is permitted to maintain equipment in the area of the Premises shown on Exhibit A-2 hereto (the "Intuit Server Area") server room until May 1, 2000. Tenant agrees to allow Intuit access to the Premises during normal business hours for the purpose of maintaining and removing such equipment. Tenant acknowledges and agrees that Landlord shall have no liability for any damages or losses suffered or incurred by Tenant resulting from or related to Intuit's maintenance or removal of such equipment.

3. Term

(a) The term of this Lease (the "Term") shall commence with respect to the Initial Premises on the date Landlord delivers possession of the Initial Premises to Tenant (the "Initial Premises Commencement Date") and with respect to the Subsequent Premises on the date Landlord delivers possession of the Subsequent Premises to Tenant (the "Subsequent Premises Commencement Date"), and shall expire with respect to the entire Premises on the Expiration Date. In the event the actual Initial Premises Commencement Date is a date other than the Estimated Initial Premises Commencement Date specified in the Basic Lease Information, or the actual Subsequent Premises Commencement Date is a date other than the Estimated Subsequent Premises Commencement Date specified in the Basic Lease Information, then Landlord and Tenant shall promptly execute a Commencement and Expiration Date Memorandum in the form attached hereto as Exhibit B-1 or Exhibit B-2, as applicable, wherein the parties shall specify the Initial Premises Commencement Date or the Subsequent Premises Commencement Date, as applicable, and, in the case of a Commencement and Expiration Date Memorandum, executed to memorialize the actual Subsequent Premises Commencement Date, the Expiration Date.

(b) Tenant acknowledges and agrees that Landlord shall be performing seismic upgrade work (the "Seismic Work") in the Subsequent Premises prior to the Subsequent Premises Commencement Date and that Tenant shall have no right to occupy all or any portion of the Subsequent Premises prior to the Subsequent Premises Commencement Date. In addition to the foregoing, Tenant acknowledges and agrees that Landlord shall be performing Seismic Work in the Initial Premises prior to and following the Subsequent Premises Commencement Date. Tenant agrees to cooperate with Landlord and take all actions required by Landlord to facilitate the completion of the Seismic Work in the Initial Premises during the Term. Without limiting the generality of the foregoing, Tenant understands and agrees that it might be required to remove cubicles and computers from portions of the Initial Premises or to vacate portions of the Initial Premises altogether during the performance of such Seismic Work. Tenant further understands that Landlord may be required to turn off the electricity and other utilities and to disengage the wiring in part or all of the Initial Premises during the performance of the Seismic Work. Landlord shall use reasonable efforts to provide Tenant with advance notice of Landlord's work in the Initial Premises, but Landlord shall have no liability for the failure to so provide such notice. Landlord's performance of the Seismic Work and any disruption of Tenant's use or occupancy of or business activities in the Premises shall not be deemed an eviction of Tenant or relieve Tenant from any of its obligations hereunder, including, without limitation, the obligation to pay Rent. Landlord and Landlord's contractors shall have keys to the Premises and shall have the right to enter upon the Premises 24-hours a day, 7-days a week to complete the Seismic Work.

4. Rent

(a) Base Rent. Tenant shall pay to Landlord, in advance on the first day of each month, without further notice or demand and without offset, rebate, credit or deduction for any reason whatsoever, the monthly installments of rent specified in the table below (the "Base Rent").

Period	Sq. Ft.	Monthly Base Rate	Monthly Base Rent
Period commencing on Initial Premises Commencement Date and expiring on day immediately preceding Subsequent Premises Commencement Date		$4.70
Period commencing on Subsequent Premises Commencement Date and expiring on day immediately preceding first (1st) anniversary of Subsequent Premises Commencement Date	21,874	$4.70	=$102,807.80
Period commencing on first (1st) anniversary of Subsequent Premises Commencement Date and expiring on day immediately preceding second (2nd) anniversary of Subsequent Premises Commencement Date	21,874	$4.89	=$106,963.86
Period commencing on second (2nd) anniversary of Subsequent Premises Commencement Date and expiring on day immediately preceding third (3rd) anniversary of Subsequent Premises Commencement Date	21,874	$5.08	=$111,119.92
Period commencing on third (3rd) anniversary of Subsequent Premises Commencement Date and expiring on day immediately preceding fourth (4th) anniversary of Subsequent Premises Commencement Date	21,874	$5.29	=$115,713.46
Period commencing on fourth (4th) anniversary of Subsequent Premises Commencement Date and expiring on day immediately preceding fifth (5th) anniversary of Subsequent Premises Commencement Date	21,874	$5.50	=$120,307.00
Period commencing on fifth (5th) anniversary of Subsequent Premises Commencement Date and expiring on day immediately preceding sixth (6th) anniversary of Subsequent Premises Commencement Date	21,874	$5.72	=$125,119.28
Period commencing on sixth (6th) anniversary of Subsequent Premises Commencement Date and expiring on Expiration Date	21,874	$5.95	=$130,150.30

Upon execution of this Lease, Tenant shall pay to Landlord the Prepaid Rent and first monthly installment of estimated Additional Rent (as hereinafter defined) specified in the Basic Lease Information to be applied toward Base Rent and Additional Rent for the month of the Term specified in the Basic Lease Information.

(b) Additional Rent. This Lease is intended to be a triple-net Lease with respect to Landlord; and subject to Paragraph 14(b) below, the Base Rent owing hereunder is (i) to be paid by Tenant absolutely net of all costs and expenses relating to Landlord's ownership and operation of the Project and the Building, and (ii) not to be reduced, offset or diminished, directly or indirectly, by any cost, charge or expense payable hereunder by Tenant or by others in connection with the Premises, the Building and/or the Projector any part thereof. The provisions of this Paragraph 4(b) for the payment of Tenant's Proportionate Share(s) of Expenses (as hereinafter defined) are intended to pass on to Tenant its share of all such costs and expenses. In addition to the Base Rent, Tenant shall pay to Landlord, in accordance with this Paragraph 4, Tenant's Proportionate Share(s) of all costs and expenses paid or incurred by Landlord in connection with the ownership, operation, maintenance, management and repair of the Premises, the Building and/or the Project or any part thereof (collectively, the "Expenses"), including, without limitation, all the following items (the "Additional Rent"):

(i) Taxes and Assessments. All real estate taxes and assessments, which shall include any form of tax, assessment, fee, license fee, business license fee, levy, penalty (if a result of Tenant's delinquency), or tax (other than net income, estate, succession, inheritance, transfer or franchise

taxes), imposed by any authority having the direct or indirect power to tax, or by any city, county, state or federal government or any improvement or other district or division thereof, whether such tax is: (A) determined by the area of the Premises, the Building and/or the Project or any part thereof, or the Rent and other sums payable hereunder by Tenant or by other tenants, including, but not limited to, any gross income or excise tax levied by any of the foregoing authorities with respect to receipt of Rent and/or other sums due under this Lease; (B) upon any legal or equitable interest of Landlord in the Premises, the Building and/or the Project or any part thereof, (C) upon this transaction or any document to which Tenant is a party creating or transferring any interest in the Premises, the Building and/or the Project; (D) levied or assessed in lieu of, in substitution for, or in addition to, existing or additional taxes against the Premises, the Building and/or the Project, whether or not now customary or within the contemplation of the parties; or (E) surcharged against the parking area. Tenant and Landlord acknowledge that Proposition 13 was adopted by the voters of the State of California in the June, 1978 election and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such purposes as fire protection, street, sidewalk, road, utility construction and maintenance, refuse removal and for other governmental services which may formerly have been provided without charge to property owners or occupants. It is the intention of the parties that all new and increased assessments, taxes, fees, levies and charges due to any cause whatsoever are to be included within the definition of real property taxes for purposes of this Lease. "Taxes and assessments" shall also include legal and consultants' fees, costs and disbursements incurred in connection with proceedings to contest, determine or reduce taxes, Landlord specifically reserving the right, but not the obligation, to contest by appropriate legal proceedings the amount or validity of any taxes.

(ii) Insurance. All insurance premiums for the Building and/or the Project or any part thereof, including premiums for "all risk" fire and extended coverage insurance, commercial general liability insurance, rent loss or abatement insurance, earthquake insurance, flood or surface water coverage, and other insurance as Landlord deems necessary in its sole discretion, and any deductibles paid under policies of any such insurance.

(iii) Utilities. The cost of all Utilities (as hereinafter defined) serving the Premises, the Building and the Project that are not separately metered to Tenant, any assessments or charges for Utilities or similar purposes included within any tax bill for the Building or the Project, including, without limitation, entitlement fees, allocation unit fees, and/or any similar fees or charges and any penalties (if a result of Tenant's delinquency) related thereto, and any amounts, taxes, charges, surcharges, assessments or impositions levied, assessed or imposed upon the Premises, the Building or the Project or any part thereof, or upon Tenant's use and occupancy thereof, as a result of any rationing of Utility services or restriction on Utility use affecting the Premises, the Building and/or the Project, as contemplated in Paragraph 5 below (collectively, "Utility Expenses").

(iv) Common Area Expenses. All costs to operate, maintain, repair, replace, supervise, insure and administer the Common Areas, including supplies, materials, labor and equipment used in or related to the operation and maintenance of the Common Areas, including parking areas (including, without limitation, all costs of resurfacing and restriping parking areas), signs and directories on the Building and/or the Project, landscaping (including maintenance contracts and fees payable to landscaping consultants), amenities, sprinkler systems, sidewalks, walkways, driveways, curbs, lighting systems and security services, if any, provided by Landlord for the Common Areas, and any charges, assessments, costs or fees levied by any association or entity of which the Project or any part thereof is a member or to which the Project or any part thereof is subject.

(v) Parking Charges. Any parking charges or other costs levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulations, or interpretations thereof, promulgated

by any governmental authority or insurer in connection with the use or occupancy of the Building or the Project.

(vi) Maintenance and Repair Costs. Except for costs which are the responsibility of Landlord pursuant to Paragraph 14(b) below, all costs to maintain, repair, and replace the Premises, the Building and/or the Project or any part thereof, including, without limitation, (A) all costs paid under maintenance, management and service agreements such as contracts for janitorial, security and refuse removal, (B) all costs to maintain, repair and replace the roof coverings of the Building or the Project or any part thereof, (C) all costs to maintain, repair and replace the heating, ventilating, air conditioning, plumbing, sewer, drainage, electrical, fire protection, life safety and security systems and other mechanical and electrical systems and equipment serving the Premises, the Building and/or the Project or any part thereof (collectively, the "Systems"), and (D) all costs and expenses incurred in causing the Project to be Year 2000 Compliant (as defined below). "Year 2000 Compliant" shall mean that all Systems containing or using computers or other information technology will function without material error or interruption resulting from the date change from year 1999 to year 2000, to the extent that information technology of third parties properly communicates date/time data with the Systems.

(vii) Life Safety Costs. All costs to install, maintain, repair and replace all life safety systems, including, without limitation, all fire alarm systems, serving the Premises, the Building and/or the Project or any part thereof (including all maintenance contracts and fees payable to life safety consultants) whether such systems are or shall be required by Landlord's insurance carriers, Laws (as hereinafter defined) or otherwise.

(viii) Management and Administration. All costs for management and administration of the Premises, the Building and/or the Project or any part thereof, including, without limitation, a property management fee, accounting, auditing, billing, postage, salaries and benefits for clerical and supervisory employees, whether located on the Project or off-site, payroll taxes and legal and accounting costs and fees for licenses and permits related to the ownership and operation of the Project.

Notwithstanding anything in this Paragraph 4(b) to the contrary, with respect to all sums payable by Tenant as Additional Rent under this Paragraph 4(b) for the replacement of any item or the construction of any new item in connection with the physical operation of the Premises, the Building or the Project (i.e., HVAC, roof membrane or coverings and parking area) which is a capital item the replacement of which would be capitalized under Landlord's commercial real estate accounting practices, Tenant shall be required to pay only the prorata share of the cost of the item falling due within the Term (including any Renewal Term) based upon the amortization of the same over the useful life of such item, as reasonably determined by Landlord.

(i) Upon commencement of this Lease, Landlord shall submit to Tenant an estimate of monthly Additional Rent for the period between the Commencement Date and the following December 31 and Tenant shall pay such estimated Additional Rent on a monthly basis, in advance, on the first day of each month. Tenant shall continue to make said monthly payments until notified by Landlord of a change therein. If at any time or times Landlord determines that the amounts payable under Paragraph 4(b) for the current year will vary from Landlord's estimate given to Tenant, Landlord, by notice to Tenant, may revise the estimate for such year, and subsequent payments by Tenant for such year shall be based upon such revised estimate. By April 1 of each calendar year, Landlord shall endeavor to provide to Tenant a statement ("Expense Statement") showing the actual Additional Rent due to Landlord for the prior calendar year, to be prorated during the first year from the Commencement Date. If the total of the monthly payments of Additional Rent that Tenant has made for the prior calendar year is less than the actual Additional

Rent chargeable to Tenant for such prior calendar year, then Tenant shall pay the difference in a lump sum within thirty (30) days after receipt of such Expense Statement from Landlord. Any overpayment by Tenant of Additional Rent for the prior calendar year shall be credited towards the Additional Rent next due.

(ii) Landlord's then-current annual operating and capital budgets for the Building and the Project or the pertinent part thereof shall be used for purposes of calculating Tenant's monthly payment of estimated Additional Rent for the current year, subject to adjustment as provided above. Landlord shall make the final determination of Additional Rent for the year in which this Lease terminates as soon as possible after termination of such year. Even though the Term has expired and Tenant has vacated the Premises, Tenant shall remain liable for payment of any amount due to Landlord in excess of the estimated Additional Rent previously paid by Tenant, and, conversely, Landlord shall promptly return to Tenant any overpayment. Failure of Landlord to submit statements as called for herein shall not be deemed a waiver of Tenant's obligation to pay Additional Rent as herein provided.

(iii) With respect to Expenses which Landlord allocates to the Building, Tenant's "Proportionate Share" shall be the percentage set forth in the Basic Lease Information as Tenant's Proportionate Share of the Building, as adjusted by Landlord from time to time for a remeasurement of or changes in the physical size of the Premises or the Building, whether such changes in size are due to an addition to or a sale or conveyance of a portion of the Building or otherwise. With respect to Expenses which Landlord allocates to the Project as a whole or to only a portion of the Project, Tenant's "Proportionate Share" shall be, with respect to Expenses which Landlord allocates to the Project as a whole, the percentage set forth in the Basic Lease Information as Tenant's Proportionate Share of the Project and, with respect to Expenses which Landlord allocates to only a portion of the Project, a percentage calculated by Landlord from time to time in its sole discretion and furnished to Tenant in writing, in either case as adjusted by Landlord from time to time for a remeasurement of or changes in the physical size of the Premises or the Project, whether such changes in size are due to an addition to or a sale or conveyance of a portion of the Project or otherwise. Notwithstanding the foregoing, Landlord may equitably adjust Tenant's Proportionate Share(s) for all or part of any item of expense or cost reimbursable by Tenant that relates to a repair, replacement, or service that benefits only the Premises or only a portion of the Building and/or the Project or that varies with the occupancy of the Building and/or the Project. Without limiting the generality of the foregoing, Tenant understands and agrees that Landlord shall have the right to adjust Tenant's Proportionate Share(s) of any Utility Expenses based upon Tenant's use of the Utilities or similar services as reasonably estimated and determined by Landlord based upon factors such as size of the Premises and intensity of use of such Utilities by Tenant such that Tenant shall pay the portion of such charges reasonably consistent with Tenant's use of such Utilities and similar services. If Tenant disputes any such estimate or determination of Utility Expenses, then Tenant shall either pay the estimated amount or cause the Premises to be separately metered at Tenant's sole expense.

(d) General Payment Terms. The Base Rent, Additional Rent and all other sums payable by Tenant to Landlord hereunder, if any, any late charges assessed pursuant to Paragraph 6 below and any interest assessed pursuant to Paragraph 45 below, are referred to as the "Rent". All Rent shall be paid, without deduction, offset or abatement in lawful money of the United States of America. Checks are to be made payable to Harbor Investment Partners and shall be mailed to: Dept. No. 66218, El Monte, California 91735-6128 or to such other person or place as Landlord may, from time to time, designate to Tenant in writing. The Rent for any fractional part of a calendar month at the commencement or termination of the Lease term shall be a prorated amount of the Rent for a full calendar month based upon a thirty (30) day month.

(e) Tenant's Audit Rights. Provided Tenant is not then in Default under the terms of this Lease (nor is any event occurring which with the giving of notice or the passage of time, or both, would constitute a Default hereunder), Tenant, at its sole expense, shall have the right within ninety (90) days after the delivery of each Expense Statement to review and audit Landlord's books and records regarding such Expense Statement for the sole purpose of determining the accuracy thereof. Such review or audit shall be performed by a nationally recognized accounting firm that calculates its fees with respect to hours actually worked and that does not discount its time or rate (as opposed to a calculation based upon percentage of recoveries or other incentive arrangement), shall take place during normal business hours in the office of Landlord or Landlord's property manager and shall be completed within three (3) business days after the commencement thereof. If Tenant does not so review or audit Landlord's books and records, Landlord's Expense Statement shall be final and binding upon Tenant. In the event that Tenant determines on the basis of its review of Landlord's books and records that the amount of Expenses paid by Tenant pursuant to this Paragraph 4(e) for the period covered by such Expense Statement is less than or greater than the actual amount properly payable by Tenant under the terms of this Lease, Tenant shall promptly pay any deficiency to Landlord or, if Landlord concurs with the results of such audit, Landlord shall promptly refund any excess payment to Tenant, as the case may be. Tenant shall be solely responsible for the cost of such audit; provided, however, that if the audit reveals that Landlord has overstated Expenses for the relevant annual period by more than seven percent (7%) of the actual Expenses for such period, then Landlord shall pay the reasonable costs of the audit.

5. UTILITY EXPENSES

(a) Tenant shall pay the cost of all water, sewer use, sewer discharge fees and permit costs and sewer connection fees, gas, heat, electricity, refuse pick-up, janitorial service, telephone and all materials and services or other utilities (collectively, "Utilities") billed or metered separately to the Premises and/or Tenant, together with all taxes, assessments, charges and penalties added to or included within such cost. Tenant acknowledges that the Premises, the Building and/or the Project may become subject to the rationing of Utility services or restrictions on Utility use as required by a public utility company, governmental agency or other similar entity having jurisdiction thereof. Tenant acknowledges and agrees that its tenancy and occupancy hereunder shall be subject to such rationing or restrictions as maybe imposed upon Landlord, Tenant, the Premises, the Building and/or the Project, and Tenant shall in no event be excused or relieved from any covenant or obligation to be kept or performed by Tenant by reason of any such rationing or restrictions. Tenant agrees to comply with energy conservation programs implemented by Landlord by reason of rationing, restrictions or Laws.

(b) Landlord shall not be liable for any loss, injury or damage to property caused by or resulting from any variation, interruption, or failure of Utilities due to any cause whatsoever, or from failure to make any repairs or perform any maintenance. No temporary interruption or failure of such services incident to the making of repairs, alterations, improvements, or due to accident, strike, or conditions or other events shall be deemed an eviction of Tenant or relieve Tenant from any of its obligations hereunder. In no event shall Landlord be liable to Tenant for any damage to the Premises or for any loss, damage or injury to any property therein or thereon occasioned by bursting, rupture, leakage or overflow of any plumbing or other pipes (including, without limitation, water, steam, and/or refrigerant lines), sprinklers, tanks, drains, drinking fountains or washstands, or other similar cause in, above, upon or about the Premises, the Building, or the Project.

6. LATE CHARGE

Notwithstanding any other provision of this Lease, Tenant hereby acknowledges that late payment to Landlord of Rent, or other amounts due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. If any

Rent or other sums due from Tenant are not received by Landlord or by Landlord's designated agent within five (5) days after their due date, then Tenant shall pay to Landlord a late charge equal to six percent (6%) of such overdue amount, plus any costs and attorneys' fees incurred by Landlord by reason of Tenant's failure to pay Rent and/or other charges when due hereunder. Landlord and Tenant hereby agree that such late charges represent a fair and reasonable estimate of the cost that Landlord will incur by reason of Tenant's late payment and shall not be construed as a penalty. Landlord's acceptance of such late charges shall not constitute a waiver of Tenant's default with respect to such overdue amount or estop Landlord from exercising any of the other rights and remedies granted under this Lease.

Initials:

/s/

Landlord

/s/

Tenant

7. SECURITY DEPOSIT

Concurrently with Tenant's execution of the Lease, Tenant shall deposit with Landlord the Security Deposit specified in the Basic Lease Information as security for the full and faithful performance of each and every term, covenant and condition of this Lease. Landlord may use, apply or retain the whole or any part of the Security Deposit as may be reasonably necessary (a) to remedy Tenant's Default in the payment of any Rent, (b) to repair damage to the Premises caused by Tenant and not repaired by Tenant in accordance with the terms of this Lease, (c) to clean the Premises upon termination of this Lease if Tenant does not surrender the Premises to Landlord in accordance with the requirements of this Lease, (d) to reimburse Landlord for the payment of any amount which Landlord may reasonably spend or be required to spend by reason of Tenant's Default, or (e) to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's Default. Should Tenant faithfully and fully comply with all of the terms, covenants and conditions of this Lease, within thirty (30) days following the expiration of the Term, the Security Deposit or any balance thereof shall be returned to Tenant or, at the option of Landlord, to the last assignee of Tenant's interest in this Lease. Landlord shall not be required to keep the Security Deposit separate from its general funds and Tenant shall not be entitled to any interest on such deposit. If Landlord so uses or applies all or any portion of said deposit, within five (5) days after written demand therefor Tenant shall deposit cash with Landlord in an amount sufficient to restore the Security Deposit to the full extent of the above amount, and Tenant's failure to do so shall be a default under this Lease. In the event Landlord transfers its interest in this Lease, Landlord shall transfer the then remaining amount of the Security Deposit to Landlord's successor in interest, and thereafter Landlord shall have no further liability to Tenant with respect to such Security Deposit.

8. LETTER OF CREDIT

Upon execution of this Lease, Tenant shall deliver to Landlord, at Tenant's sole cost and expense, the Letter of Credit described below in the amount of Nine Hundred Sixty-Two Thousand One Hundred Sixty and 00/100 Dollars ($962,160.00) (the "LC Face Amount") as security for Tenant's performance of all of Tenant's covenants and obligations under this Lease; provided, however, that neither the Letter of Credit nor any Letter of Credit Proceeds (as defined below) shall be deemed an advance rent deposit or an advance payment of any other kind, or a measure of Landlord's damages upon Tenant's Default. The Letter of Credit shall be maintained in effect from the date hereof through the date that is sixty (60) days after the Expiration Date (the "LC Termination Date"). On the LC Termination Date, Landlord shall return to Tenant the Letter of Credit and any Letter of Credit Proceeds then held by Landlord (other than those Letter of Credit Proceeds Landlord is entitled to retain under the terms of this Paragraph 8(a)); provided, however, that in no event shall any such return be construed as an admission by Landlord that Tenant has performed all of its obligations hereunder. Landlord shall not be required to segregate the Letter of Credit Proceeds from its other

funds and no interest shall accrue or be payable to Tenant with respect thereto. Landlord may (but shall not be required to) draw upon the Letter of Credit and use the proceeds therefrom (the "Letter of Credit Proceeds") or any portion thereof as may be reasonably necessary (i) to cure any Default under this Lease and to compensate Landlord for any loss or damage Landlord incurs as a result of such Default, (ii) to repair damage to the Premises caused by Tenant and not repaired by Tenant in accordance with the terms of this Lease, (iii) to clean the Premises upon termination of this Lease if Tenant does not surrender the Premises to Landlord in accordance with the requirements of this Lease, (iv) to reimburse Landlord for the payment of any amount which Landlord may for any other purpose spend or be required to spend by reason of Tenant's Default, and (v) for any other purpose for which Landlord is entitled to use the Security Deposit, it being understood that any use of the Letter of Credit Proceeds shall not constitute a bar or defense to any of Landlord's remedies set forth in Paragraph 26 below. In such event and upon written notice from Landlord to Tenant specifying the amount of the Letter of Credit Proceeds so utilized by Landlord and the particular purpose for which such amount was applied, Tenant shall immediately deliver to Landlord an amendment to the Letter of Credit or a replacement Letter of Credit in an amount equal to the full LC Face Amount. Tenant's failure to deliver such replacement Letter of Credit to Landlord within ten (10) days of Landlord's notice shall constitute a Default hereunder. In the event Landlord transfers its interest in this Lease, Landlord shall transfer the Letter of Credit and any Letter of Credit Proceeds then held by Landlord to Landlord's successor in interest, at Landlord's sole cost and expense, and thereafter Landlord shall have no further liability to Tenant with respect to such Letter of Credit or Letter of Credit Proceeds.

(a) As used herein, Letter of Credit shall mean an unconditional, stand-by irrevocable letter of credit (herein referred to as the "Letter of Credit") issued by the San Francisco office of a major national bank insured by the Federal Deposit Insurance Corporation and otherwise satisfactory to Landlord (the "Bank"), naming Landlord as beneficiary, in the amount of the LC Face Amount, and otherwise in form and substance satisfactory to Landlord. The Letter of Credit shall be for a one-year term and shall provide: (i) that Landlord may make partial and multiple draws thereunder, up to the face amount thereof, (ii) that Landlord may draw upon the Letter of Credit up to the full amount thereof and the Bank will pay to Landlord the amount of such draw upon receipt by the Bank of a sight draft signed by Landlord and accompanied by a written certification from Landlord to the Bank stating either that: (A) a Default has occurred and is continuing under this Lease and any applicable grace period has expired, or (B) Landlord has not received notice from the Bank at least thirty (30) days prior to the then current expiry date of the Letter of Credit that the Letter of Credit will be renewed by the Bank for at least one (1) year beyond the relevant annual expiration date or, in the case of the last year of the Term, sixty (60) days after the Expiration Date, together with a replacement Letter of Credit or a modification to the existing Letter of Credit effectuating such renewal, and Tenant has not otherwise furnished Landlord with a replacement Letter of Credit as hereinafter provided; and (iii) that, in the event of Landlord's assignment or other transfer of its interest in this Lease, the Letter of Credit shall be freely transferable by Landlord, without recourse and without the payment of any fee or consideration, to the assignee or transferee of such interest and the Bank shall confirm the same to Landlord and such assignee or transferee. In the event that the Bank shall fail to (y) notify Landlord that the Letter of Credit will be renewed for at least one (1) year beyond the then applicable expiration date, and (z) deliver to Landlord a replacement Letter of Credit or a modification to the existing Letter of Credit effectuating such renewal, and Tenant shall not have otherwise delivered to Landlord, at least thirty (30) days prior to the relevant annual expiration date, a replacement Letter Of Credit in the amount required hereunder and otherwise meeting the requirements set forth above, then Landlord shall be entitled to draw on the Letter of Credit as provided above, and shall hold the proceeds of such draw as Letter of Credit Proceeds pursuant to Paragraph 8(a) above.

9. POSSESSION

(a) Tenant's Right of Possession. Subject to Paragraph 9(b), Tenant shall be entitled to possession of the Premises upon commencement of the Term.

(b) Early Occupancy. Notwithstanding anything to the contrary contained herein, Tenant shall have the right to enter upon the Initial Premises at times acceptable to Landlord following the execution of this Lease and the vacation of the Premises by Intuit for the sole purpose of installing telephones and computer equipment, provided that Tenant shall not conduct its business in the Initial Premises during such period, and provided further, that such entry shall be subject to all of the terms and conditions of this Lease, excluding only the obligation to pay Rent.

(c) Delay in Delivering Possession. If for any reason whatsoever, Landlord cannot deliver possession of the Premises to Tenant on or before the Estimated Commencement Date, this Lease shall not be void or voidable, nor shall Landlord, or Landlord's agents, advisors, employees, partners, shareholders, directors, invitees or independent contractors (collectively, "Landlord's Agents"), be liable to Tenant for any loss or damage resulting therefrom. Tenant shall not be liable for Rent until Landlord delivers possession of the Premises to Tenant. The Expiration Date shall be extended by the same number of days that Tenant's possession of the Premises was delayed beyond the Estimated Commencement Date.

(d) Tenant's Right to Terminate Lease. Notwithstanding anything to the contrary contained in Paragraph 9(c) above, if Landlord fails to deliver possession of the Subsequent Premises to Tenant on or before September 30, 2000 for reasons other than Force Majeure Events and Tenant Delays (as such terms are hereinafter defined), then Tenant shall have the right, as its sole and absolute remedy for such failure, to terminate this Lease by written notice to Landlord given not later than October 5, 2000. If Tenant fails to deliver such notice to Landlord on or before such date, then this Lease shall remain in fall force and effect and Tenant's rights under this Paragraph 9(d) shall terminate. As used herein, "Force Majeure Events" means strikes, embargoes, governmental regulations, acts of God, war, civil commotion or other strife, and other events beyond the reasonable control of Landlord; and "Tenant Delays" means any delays caused by Tenant or Tenant's Agents (as hereinafter defined).

10. USE OF PREMISES

(a) Permitted Use. The use of the Premises by Tenant and Tenant's agents, advisors, employees, partners, shareholders, directors, invitees and independent contractors (collectively, "Tenant's Agents") shall be solely for the Permitted Use specified in the Basic Lease Information and for no other use. Tenant shall not permit any objectionable or unpleasant odor, smoke, dust, gas, noise or vibration to emanate from or near the Premises. The Premises shall not be used to create any nuisance or trespass, for any illegal purpose, for any purpose not permitted by Laws, for any purpose that would invalidate the insurance or increase the premiums for insurance on the Premises, the Building or the Project or for any purpose or in any manner that would interfere with other tenants' use or occupancy of the Project. If any of Tenant's office machines or equipment disturb any other tenant in the Building, then Tenant shall provide adequate insulation or take such other action as may be necessary to eliminate the noise or disturbance. Tenant agrees to pay to Landlord, as Additional Rent, any increases in premiums on policies resulting from Tenant's Permitted Use or any other use or action by Tenant or Tenant's Agents which increases Landlord's premiums or requires additional coverage by Landlord to insure the Premises. Tenant agrees not to overload the floor(s) of the Building.

(b) Compliance with Governmental Regulations and Private Restrictions. Tenant and Tenant's Agents shall, at Tenant's expense, faithfully observe and comply with (i) all municipal, state and federal laws, statutes, codes, rules, regulations, ordinances, requirements, and orders (collectively, "Laws"), now in force or which may hereafter be in force pertaining to the Premises or Tenant's use of the Premises, the Building or the Project, whether substantial in cost or otherwise; provided, however, that except as provided in Paragraph 10(c) below, Tenant shall not be required to make or, except as provided in

Paragraph 4 above, pay for, structural changes to the Premises or the Building not related to Tenant's specific use of the Premises unless the requirement for such changes is imposed as a result of any improvements or additions made or proposed to be made at Tenant's request; (ii) all recorded covenants, conditions and restrictions affecting the Project ("Private Restrictions") now in force or which may hereafter be in force; and (iii) any and all rules and regulations set forth in Exhibit C and any other rules and regulations now Or hereafter promulgated by Landlord related to parking or the operation of the Premises, the Building and/or the Project (collectively, the "Rules and Regulations"). The judgment of any court of competent jurisdiction, or the admission of Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such Laws or Private Restrictions, shall-be conclusive of that fact as between Landlord and Tenant.

(c) Compliance with Americans with Disabilities Act. Landlord and Tenant hereby agree and acknowledge that the Premises, the Building and/or the Project may be subject to, among other Laws, the requirements of the Americans with Disabilities Act, a federal law codified at 42 U.S.C. § 12101 et seq., including, but not limited to, Title III thereof, and all regulations and guidelines related thereto, together with any and all laws, rules, regulations, ordinances, codes and statutes now or hereafter enacted by local or state agencies having jurisdiction thereof, including all requirements of Title 24 of the State of California, as the same may be in effect on the date of this Lease and may be hereafter modified, amended or supplemented (collectively, the "ADA"). Any Alterations to be constructed hereunder shall be in compliance with the requirements of the ADA, and all costs incurred for purposes of compliance therewith shall be a part of and included in the costs of the Alterations. Tenant shall be solely responsible for conducting its own independent investigation of this matter and for ensuring that the design of all Alterations strictly complies with all requirements of the ADA. Subject to, reimbursement pursuant to Paragraph 4 above, if any barrier removal work or other work is required to the Building, the Common Areas or the Project under the ADA, then such work shall be the responsibility of Landlord; provided, however, that if such work is required under the ADA as a result of Tenant's specific use of the Premises or any work or Alteration (as hereinafter defined) made to the Premises by or on behalf of Tenant, then such work shall be performed by Landlord at the sole cost and expense of Tenant. Except as otherwise expressly provided in this provision, Tenant shall be responsible at its sole cost and expense for fully and faithfully complying with all applicable requirements of the ADA, including, without limitation, not discriminating against any disabled persons in the operation of Tenant's business in or about the Premises, and offering or otherwise providing auxiliary aids and services as, and when, required by the ADA. Within ten (10) days after receipt, Tenant shall advise Landlord in writing, and provide Landlord with copies of (as applicable), any notices alleging violation of the ADA relating to any portion of the Premises, the Building or the Project; any claims made or threatened orally or in writing regarding noncompliance with the ADA and relating to any portion of the Premises, the Building, or the Project; or any governmental or regulatory actions or investigations instituted or threatened regarding noncompliance with the ADA and relating to any portion of the Premises, the Building or the Project. Tenant shall and hereby agrees to protect, defend (with counsel acceptable to Landlord) and hold Landlord and Landlord's Agents harmless and indemnify Landlord and Landlord's Agents from and against all liabilities, damages, claims, losses, penalties, judgments, charges and expenses (including attorneys' fees, costs of court and expenses necessary in the prosecution or defense of any litigation including the enforcement of this provision) arising from or in any way related to, directly or indirectly, Tenant's or Tenant's Agents' violation or alleged violation of the ADA. Tenant agrees that the obligations of Tenant herein shall survive the expiration or earlier termination of this Lease.

11. ACCEPTANCE OF PREMISES

(a) By entry hereunder, Tenant accepts the Premises as suitable for Tenant's intended use and as being in good and sanitary operating order, condition and repair, AS IS, and without representation or

warranty by Landlord as to the condition, use or occupancy which may be made thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant.

(b) Notwithstanding the terms of Paragraph 11(a) above, Landlord shall cause the roof on the Building to be in good condition and the HVAC, electrical and plumbing systems serving the Premises to be in good working order on the Commencement Date. Any claims by Tenant under the preceding, sentence shall be made in writing not later than the fifteenth (15th) day after the Commencement Date. In the event Tenant fails to deliver a written claim to Landlord on or before such fifteenth (15th) day, then Landlord shall be conclusively deemed to have satisfied its obligations under this Paragraph 11(b).

12. SURRENDER

Tenant agrees that on the last day of the Term, or on the sooner termination of this Lease, Tenant shall surrender the Premises to Landlord (a) in good condition and repair (damage by acts of God, fire, and normal wear and tear excepted), but with all interior walls painted or cleaned so they appear painted, any carpets cleaned, all floors cleaned and waxed, all non-working light bulbs and ballasts replaced and all roll-up doors and plumbing fixtures in good condition and working order, and (b) otherwise in accordance with Paragraph 33(h). Normal wear and tear shall not include any damage or deterioration to the floors of the Premises arising from the use of forklifts in, on or about the Premises (including, without limitation, any marks or stains on any portion of the floors, other than marks arising in the ordinary course), and any damage or deterioration that would have been prevented by proper maintenance by Tenant, or Tenant otherwise performing all of its obligations under this Lease. On or before the expiration or sooner termination of this Lease, (i) Tenant shall remove all of Tenant's Property (as hereinafter defined) and Tenant's signage from the Premises, the Building and the Project and repair any damage caused by such removal, and (ii) Landlord may, by notice to Tenant given not later than ninety (90) days prior to the Expiration Date (except in the event of a termination of this Lease prior to the scheduled Expiration Date, in which event no advance notice shall be required), require Tenant at Tenant's expense to remove any or all Alterations and to repair any damage caused by such removal. Nothing contained in the foregoing sentence shall be deemed to obligate Tenant to remove from the Premises any of the improvements located therein on the Initial Premises Commencement Date or the Subsequent Premises Commencement Date, as applicable. Any of Tenant's Property not removed by Tenant as required herein shall be deemed abandoned and may be stored, removed, and disposed of by Landlord at Tenant's expense, and Tenant waives all claims against Landlord for any damages resulting from Landlord's retention and disposition of such property; provided, however, that Tenant shall remain liable to Landlord for all costs incurred in storing and disposing of such abandoned property of Tenant. All Alterations except those which Landlord requires Tenant to remove shall remain in the Premises as the property of Landlord. If the Premises are not surrendered at the end of the Term or sooner termination of this Lease, and in accordance with the provisions of this Paragraph 12 and Paragraph 33(h) below. Tenant shall continue to be responsible for the payment of Rent (as the same may be increased pursuant to Paragraph 36 below) until the Premises are so surrendered in accordance with said Paragraphs, and Tenant shall indemnify, defend and hold Landlord harmless from and against any and all loss or liability resulting, from delay by Tenant in so surrendering the Premises including, without limitation, any loss or liability resulting from any claim against Landlord made by any succeeding tenant or prospective tenant founded on or resulting from such delay and losses to Landlord due to lost opportunities to lease any portion of the Premises to any such succeeding tenant or prospective tenant, together with, in each case, actual attorneys' fees and costs.

13. ALTERATIONS AND ADDITIONS

(a) Tenant shall not make, or permit to be made, any alteration, addition or improvement (hereinafter referred to individually as an "Alteration" and collectively as the "Alterations") to the Premises or any part thereof without the prior written consent of Landlord, which consent shall not be unreasonably withheld; provided, however, that Landlord shall have the right in its sole and absolute discretion to consent or to withhold its consent to any Alteration which affects the structural portions of the Premises, the Building or the Project or the Systems serving the Premises, the Building and/or the Project or any portion thereof.

(b) Any Alteration to the Premises shall be at Tenant's sole cost and expense, in compliance with all applicable Laws and all requirements requested by Landlord, including, without limitation, the requirements of any insurer providing coverage for the Premises or the Project or any part thereof, and in accordance with plans and specifications approved in writing by Landlord, and shall be constructed and installed by a contractor approved in writing by Landlord. As a further condition to giving, consent, Landlord may require Tenant to provide Landlord, at Tenant's sole cost and expense, with evidence satisfactory to Landlord of Tenant's financial ability to pay the costs and expenses of the proposed Tenant Improvements. Before Alterations may begin, valid building, permits or other permits or licenses required must be furnished to Landlord, and, once the Alterations begin, Tenant will diligently and continuously pursue their completion. Landlord may monitor construction of the Alterations and Tenant shall reimburse Landlord for its costs (including, without limitation, the costs of any construction manager retained by Landlord, provided that the costs of such construction manager shall not exceed five percent (5%) of the total "hard" and "soft" costs of the applicable Alterations) in reviewing plans and documents and in monitoring construction. Tenant shall maintain during the course of construction, at its sole cost and expense, builders' risk insurance for the amount of the completed value of the Alterations on an all-risk non-reporting form covering all improvements under construction, including building materials, and other insurance in amounts and against such risks as Landlord shall reasonably require in connection with the Alterations. In addition to and without limitation on the generality of the foregoing, Tenant shall ensure that its' contractor(s) procure and maintain in full force and effect during the course of construction a "broad form" commercial general liability and property damage policy of insurance naming Landlord, Landlord's investment advisor and agent, UBS Brinson Realty Investors LLC, Tenant and Landlord's lenders as additional insureds. The minimum limit of coverage of the aforesaid policy shall be in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of one person in any one accident or occurrence and in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of more than one person in any one accident or occurrence, and shall contain a severability of interest clause or a cross liability endorsement. Such insurance shall further insure Landlord and Tenant against liability for property damage of at least One Million Dollars ($1,000,000.00).

(c) All Alterations, including, but not limited to, heating, lighting, electrical, air conditioning, fixed partitioning, drapery, wall covering and paneling, built-in cabinet work and carpeting installations made by Tenant, together with all property that has become an integral part of the Premises or the Building, shall, solely for federal and state income tax purposes, be deemed the property of Tenant upon installation; provided, however, that such Alterations and property shall automatically be and become the property of Landlord for all purposes upon the expiration or sooner termination of this Lease without the need for any further documentation from Tenant, and shall not be deemed trade fixtures or Tenant's Property. If requested by Landlord, Tenant will pay, prior to the commencement of construction (excluding Alterations consisting solely of paint and carpeting), an amount determined by Landlord necessary to cover the costs of demolishing such Alterations and/or the cost of returning the Premises and the Building to its condition prior to such Alterations. Landlord shall return such amount to Tenant promptly following Tenant's demolition of such Alterations and restoration of the Premises and the Building.

(d) No private telephone systems and/or other related computer or telecommunications equipment or lines may be installed without Landlord's prior written consent. If Landlord gives such consent, all equipment must be installed within the Premises and, at the request of Landlord made at any time prior to the expiration of the Term, removed upon the expiration or sooner termination of this Lease and the Premises restored to the same condition as before such installation.

(e) Notwithstanding anything herein to the contrary, before installing any equipment or lights which generate an undue amount of heat in the Premises, or if Tenant plans to use any high-power usage equipment in the Premises, Tenant shall obtain the written permission of Landlord. Landlord

may refuse to grant such permission unless Tenant agrees to pay the costs to Landlord for installation of supplementary air conditioning capacity or electrical systems necessitated by such equipment.

(f) Tenant agrees not to proceed to make any Alterations, notwithstanding consent from Landlord to do so, until Tenant has provided Landlord with at least fifteen (15) days prior written notice of the date Tenant desires to commence construction or installation of such Alterations, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work.

(g) Landlord shall provide an allowance to Tenant in the amount specified in the Basic Lease Information'("Alterations Allowance") for the making of Alterations to the Premises following the Commencement Date, provided that such Alterations are made in full compliance with the terms of this Paragraph 13. Landlord shall disburse the Alterations Allowance to Tenant following, the completion of the Alterations and the delivery to Landlord of invoices, lien waivers and other documents requested by Landlord to evidence the lien-free completion of the Alterations; provided, however, that Landlord shall have no obligation to disburse all or any portion of the Alterations Allowance to Tenant after the first anniversary of the Commencement Date, and any portion that is not disbursed after such anniversary shall no longer be available to Tenant hereunder. The Alterations Allowance shall be the maximum contribution by Landlord for the Alterations. Should the actual cost of planning and constructing such Alterations be less than the Alterations Allowance, the Alterations Allowance shall be reduced to an amount equal to said actual cost.

14. MAINTENANCE AND REPAIRS OF PREMISES

(a) Maintenance by Tenant. Throughout the Term, Tenant shall, at its sole expense, (i) keep and maintain in good order and condition the Premises, and repair and replace every part thereof, including glass, windows, window frames, window casements, skylights, interior and exterior doors, door frames and door closers; interior lighting (including, without limitation, light bulbs and ballasts), the plumbing and electrical systems exclusively serving the Premises, all communications systems serving the Premises, Tenant's signage, interior demising walls and partitions, equipment, interior painting and interior walls and floors, and the roll-up doors, ramps and dock equipment, including, without limitation, dock bumpers, dock plates, dock seals, dock levelers and dock lights located in or on the Premises (excepting only those portions of the Building or the Project to be maintained by Landlord, as provided in Paragraph 14(b) below), (ii) furnish all expendables, including light bulbs, paper goods and soaps, used in the Premises, and (iii) keep and maintain in good order and condition, repair and replace all of Tenant's security systems in or about or serving the Premises and, except to the extent that Landlord notifies Tenant in writing of its intention to arrange for such monitoring, cause the fire alarm systems serving the Premises to be monitored by a monitoring or protective services firm approved by Landlord in writing. Tenant shall not do nor shall Tenant allow Tenant's Agents to do anything to cause any damage, deterioration or unsightliness to the Premises, the Building or the Project.

(b) Maintenance by Landlord. Subject to the provisions of Paragraphs 14(a), 22 and 23, and further subject to Tenant's obligation under Paragraph 4 to reimburse Landlord, in the form of Additional Rent, for Tenant's Proportionate Share(s) of the cost and expense of the following items, Landlord agrees to repair and maintain the following items: the roof coverings (provided that Tenant installs no additional air conditioning or other equipment on the roof that damages the roof coverings, in which event Tenant shall pay all costs resulting from the presence of such additional equipment); the Systems serving the Premises and the Building, excluding the plumbing and electrical systems exclusively serving the Premises; and the Parking Areas, pavement, landscaping, sprinkler systems, sidewalks, driveways, curbs, and lighting systems in the Common Areas. Subject to the provisions of Paragraphs 14(a), 22 and 23, Landlord, at its own cost and expense, agrees to repair and maintain the following items: the

structural portions of the roof (specifically excluding the roof coverings), the foundation, the footings, the floor slab, and the load bearing walls and exterior walls of the Building (excluding any glass and any routine maintenance, including, without limitation, any painting, sealing, patching and waterproofing of such walls). Notwithstanding anything in this Paragraph 14 to the contrary, Landlord shall have the right to either repair or to require Tenant to repair any damage to any portion of the Premises, the Building and/or the Project caused by or created due to any act, omission, negligence or willful misconduct of Tenant or Tenant's Agents and to restore the Premises, the Building and/or the Project, as applicable., to the condition existing prior to the occurrence of such damage; provided, however, that in the event Landlord elects to perform such repair and restoration work, Tenant shall reimburse Landlord upon demand for all costs and expenses incurred by Landlord in connection therewith. Landlord's obligation hereunder to repair and maintain is subject to the condition precedent that Landlord shall have received written notice of the need for such repairs and maintenance and a reasonable time to perform such repair and maintenance. Tenant shall promptly report in writing to Landlord any defective condition known to it which Landlord is required to repair, and failure to so report such defects shall make Tenant responsible to Landlord for any liability incurred by Landlord by reason of such condition.

(c) Tenant's Waiver of Rights. Tenant hereby expressly waives all rights to make repairs at the expense of Landlord or to terminate this Lease, as provided for in California Civil Code Sections 1941 and 1942, and 1932(l), respectively, and any similar or successor statute or law in effect or any amendment thereof during the Tenn.

15. LANDLORD'S INSURANCE

Landlord shall purchase and keep in force fire, extended coverage and "all risk" insurance covering the Building and the Project. Tenant shall, at its sole cost and expense, comply with any and all reasonable requirements pertaining to the Premises, the Building and the Project of any insurer necessary for the maintenance of reasonable fire and commercial general liability insurance, covering the Building and the Project. Landlord, at Tenant's cost, may maintain "Loss of Rents" insurance, insuring that the Rent will be paid in a timely manner to Landlord for a period of at least twelve (12) months if the Premises, the Building or the Project or any portion thereof are destroyed or rendered unusable or inaccessible by any cause insured against under this Lease.

16. TENANT'S INSURANCE

(a) Commercial General Liability Insurance. Tenant shall, at Tenant's expense, secure and keep in force a "broad form" commercial general liability insurance and property damage policy covering the Premises, insuring Tenant, and naming Landlord, Landlord's investment advisors and agents from time to time, including, without limitation, UBS Brinson Realty Investors LLC, and Landlord's lenders as additional insureds, against any liability arising out of the ownership, use, occupancy or maintenance of the Premises. The minimum limit of coverage of such policy shall be in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of one person in any one accident or occurrence and in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of more than one person in any one accident or occurrence, shall include an extended liability endorsement providing contractual liability coverage (which shall include coverage for Tenant's indemnification obligations in this Lease), and shall contain a severability of interest clause or a cross liability endorsement. Such insurance shall further insure Landlord and Tenant against liability for property damage of at least Three Million Dollars ($3,000,000.00). Landlord may from time to time require reasonable increases in any such limits if Landlord believes that additional coverage is necessary or desirable. The limit of any insurance shall not limit the liability of Tenant hereunder. No policy maintained by Tenant under this Paragraph 16(a) shall contain a deductible greater than Two Thousand Five Hundred Dollars ($2,500.00). No policy shall be cancelable or subject to reduction of

coverage without thirty (30) days prior written notice to Landlord, and loss payable clauses shall be subject to Landlord's approval. Such policies of insurance shall be issued as primary policies and not contributing with or in excess of coverage that Landlord may carry, by an insurance company authorized to do business in the State of California for the issuance of such type of insurance coverage and rated A:IX or better in Best's Key Rating Guide.

(b) Personal Property Insurance. Tenant shall maintain in full force and effect on all of its personal property, furniture, furnishings, trade or business fixtures and equipment (collectively, "Tenant's Property") on the Premises, a policy or policies of fire and extended coverage insurance with standard coverage endorsement to the extent of the full replacement cost thereof. No such policy shall contain a deductible greater than Two Thousand Five Hundred Dollars ($2,500.00). During the term of this Lease the proceeds from any such policy or policies of insurance shall be used for the repair or replacement of the fixtures and equipment so insured. Landlord shall have no interest in the insurance upon Tenant's equipment and fixtures and will sign all documents reasonably necessary in connection with the settlement of any claim or loss by Tenant. Landlord will not carry insurance on Tenant's possessions.

(c) Worker's Compensation Insurance; Employer's Liability Insurance. Tenant shall, at Tenant's expense, maintain in full force and effect worker's compensation insurance with not less than the minimum limits required by law, and employer's liability insurance with a minimum limit of coverage of One Million Dollars ($ 1,000,000.00).

(d) Evidence of Coverage. Tenant shall deliver to Landlord certificates of insurance and true and complete copies of any and all endorsements required herein for all insurance required to be maintained by Tenant hereunder at the time of execution of this Lease by Tenant. Tenant shall, at least thirty (30) days prior to expiration of each policy, furnish Landlord with certificates of renewal or "binders" thereof. Each certificate shall expressly provide that such policies shall not be cancellable or otherwise subject to modification except after thirty (30) days prior written notice to Landlord and the other parties named as additional insureds as required in this Lease (except for cancellation for nonpayment of premium, in which event cancellation shall not take effect until at least ten (10) days notice has been given to Landlord).

17. INDEMNIFICATION

(a) Of Landlord. Tenant shall indemnify and hold harmless Landlord and Landlord's Agents against and from any and all claims, liabilities, judgments, costs, demands, causes of action and expenses (including, without limitation, reasonable attorneys' fees) arising from (i) the use of the Premises, the Building or the Project by Tenant or Tenant's Agents, or from any activity done, permitted or suffered by Tenant or Tenant's Agents in or about the Premises, the Building or the Project, and (ii) any act, neglect, fault, willful misconduct or omission of Tenant or Tenant's Agents, or from any breach or default in the terms of this Lease by Tenant or Tenant's Agents, and (iii) any action or proceeding brought on account of any matter in items (i) or (ii). If any action or proceeding is brought against Landlord by reason of any such claim, upon notice from Landlord, Tenant shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. As a material part of the consideration to Landlord, Tenant hereby releases Landlord and Landlord's Agents from responsibility for, waives its entire claim of recovery for and assumes all risk of (A) damage to property or injury to persons in or about the Premises, the Building or the Project from any cause whatsoever (except that which is caused by the sole active gross negligence or willful misconduct of Landlord or Landlord's Agents or by the failure of Landlord to observe any of the terms and conditions of this Lease, if such failure has persisted for an unreasonable period of time after written notice of such failure), or (B) loss resulting from business interruption or loss of income at the Premises. Without limiting the generality of foregoing, in consideration of Landlord's willingness to permit Tenant to occupy the Initial Premises prior to the Subsequent Premises Commencement Date, Tenant expressly releases Landlord and

Landlord's Agents from responsibility for, waives its entire claim of recovery for and assumes all risk of damage to property or injury to persons in or about the Premises, the Building or the Project, however caused, and loss resulting from business interruption or loss of income at the Premises resulting from or related to, directly or indirectly, the Seismic Work. Tenant acknowledges and agrees that Landlord would not permit Tenant to occupy the Initial Premises during the performance of the Seismic Work but for the agreement by Tenant to the terms of the foregoing release, and that by entering upon the Premises prior to the Subsequent Premises Commencement Date, Tenant expressly assumes all risk of damage to property or injury to persons resulting from or related to, directly or indirectly, the Seismic Work. In furtherance of the foregoing terms contained in this Paragraph 17(a), Tenant expressly waives all rights under California Civil Code section 1542, which provides that:

"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."

Initials:

/s/

TENANT

The terms and provisions of this Paragraph 17 shall survive any termination of this Lease.

(b) No Impairment of Insurance. The foregoing indemnity shall not relieve any insurance carrier of its obligations under any policies required to be carried by either party pursuant to this Lease, to the extent that such policies cover the peril or occurrence that results in the claim that is subject to the foregoing indemnity.

18. SUBROGATION

Landlord and Tenant hereby mutually waive any claim against the other and its Agents for any loss or damage to any of their property located on or about the Premises, the Building or the Project that is caused by or results from perils covered by property insurance carried by the respective parties, to the extent of the proceeds of such insurance actually received with respect to such loss or damage whether or not due to the negligence of the other party or its Agents. Because the foregoing waivers will preclude the assignment of any claim by way of subrogation to an insurance company or any other person, each party now agrees to immediately give to its insurer written notice of the terms of these mutual waivers and shall have their insurance policies endorsed to prevent the invalidation of the insurance coverage because of these waivers. Nothing in this Paragraph 18 shall relieve a party of liability to the other for failure to carry insurance required by this Lease.

19. SIGNS

Tenant shall not place or permit to be placed in, upon, or about the Premises, the Building or the Project any exterior lights, decorations, balloons, flags, pennants, banners, advertisements or notices, or erect or install any signs, windows or door lettering, placards, decorations, or advertising media of any type which can be viewed from the exterior the Premises without obtaining Landlord's prior written consent or without complying with Landlord's signage criteria, as the same may be modified by Landlord from time to time, and with all applicable Laws, and will not conduct, or permit to be conducted, any sale by auction on the Premises or otherwise on the Project. Notwithstanding the foregoing, Tenant shall have the right to install identification signage on the exterior of the Building, subject to compliance with Landlord's signage criteria and Landlord's approval of the size, design, style and location of such signage. Tenant shall remove any sign, advertisement or notice placed on the Premises, the Building or the Project by Tenant upon the expiration of the Term or sooner termination of this Lease, and Tenant shall repair any damage or injury to the Premises, the Building or the Project

caused thereby, all at Tenant's expense. If any signs are not removed, or necessary repairs not made, Landlord shall have the right to remove the signs and repair any damage or injury to the Premises, the Building or the Project at Tenant's sole cost and expense.

20. FREE FROM LIENS

Tenant shall keep the Premises, the Building and the Project free from any liens arising out of any work performed, material furnished or obligations incurred by or for Tenant. In the event that Tenant shall not, within twenty (20) days (or, if Landlord is then in the process of selling or financing the Building or the Project, ten (10) days) following the imposition of any such lien, cause the lien to be released of record by payment or posting of a proper bond, Landlord shall have in addition to all other remedies provided herein and by law the right but not the obligation to cause same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection therewith (including, without limitation, attorneys' fees) shall be payable to Landlord by Tenant upon demand. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law or that Landlord shall deem proper for the protection of Landlord, the Premises, the Building and the Project, from mechanics' and materialmen's liens. Tenant shall give to Landlord at least five (5) business days' prior written notice of commencement of any repair or construction on the Premises.

21. ENTRY BY LANDLORD

Tenant shall permit Landlord and Landlord's Agents to enter into and upon the Premises at all reasonable times, upon not less than twenty four (24) hours prior written or telephonic notice (except in the case of an emergency, for which no notice shall be required), and subject to Tenant's reasonable security arrangements, for the purpose of inspecting the same or showing the Premises to prospective purchasers, lenders or tenants or to alter (in accordance with the terms and provisions of this Lease), improve, maintain and repair the Premises or the Building as required or permitted of Landlord under the terms hereof, or for any other business purpose, without any rebate of Rent and without any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises thereby occasioned (except for actual damages resulting from the sole active gross negligence or willful misconduct of Landlord); and Tenant shall permit Landlord to post notices of non-responsibility and ordinary "for sale" or, during the last nine (9) months of the Term, "for lease," signs. No such entry shall be construed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises. Landlord may temporarily close entrances, doors, corridors, elevators or other facilities without liability to Tenant by reason of such closure in the case of an emergency and when Landlord otherwise deems such closure necessary.

22. DESTRUCTION AND DAMAGE

(a) If the Premises are damaged by fire or other perils covered by extended coverage insurance, Landlord shall, at Landlord's option:

(i) In the event of total destruction (which shall mean destruction or damage in excess of twenty-five percent (25%) of the full insurable value thereof) of the Premises, elect either to commence promptly to repair and restore the Premises and prosecute the same diligently to completion, in which event this Lease shall remain in full force and effect; or not to repair or restore the Premises, in which event this Lease shall terminate. Landlord shall give Tenant written notice of its intention within sixty (60) days after the date (the "Casualty Discovery Date") Landlord obtains actual knowledge of such destruction. If Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date of such total destruction.

(ii) I n the event of a partial destruction (which shall mean destruction or damage to an extent not exceeding twenty-five percent (25%) of the full insurable value thereof) of the Premises for which Landlord will receive insurance proceeds sufficient to cover the cost to repair and restore such partial destruction and, if the damage thereto is such that the Premises may be substantially repaired or restored to its condition existing immediately prior to such damage or destruction within one hundred eighty (180) days from the Casualty Discovery Date, Landlord shall commence and proceed diligently with the work of repair and restoration, in which event the Lease shall continue in full force and effect. If such repair and restoration requires longer than one hundred eighty (180) days or if the insurance proceeds therefor (plus any amounts Tenant may elect or is obligated to contribute) are not sufficient to cover the cost of such repair and restoration, Landlord may elect either to so repair and restore, in which event the Lease shall continue in full force and effect, or not to repair or restore, in which event the Lease shall terminate. In either case, Landlord shall give written notice to Tenant of its intention within sixty (60) days after the Casualty Discovery Date. If Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date of such partial destruction.

(iii) Notwithstanding anything to the contrary contained in this Paragraph, in the event of damage to the Premises occurring during the last twelve (12) months of the Term, Landlord and Tenant shall each have the right to terminate this Lease by written notice of such election given to the other party within thirty (30) days after the Casualty Discovery Date, provided, however, that Tenant shall have the right to terminate this Lease pursuant to this Paragraph 22(a)(iii) only if Tenant's use and occupancy of the Premises are materially interfered with as a result of such damage.

(b) If the Premises are damaged by any peril not covered by extended coverage insurance, and the cost to repair such damage exceeds any amount Tenant may agree to contribute, Landlord may elect either to commence promptly to repair and restore the Premises and prosecute the same diligently to completion, in which event this Lease shall remain in full force and effect; or not to repair or restore the Premises, in which event this Lease shall terminate. Landlord shall give Tenant written notice of its intention within sixty (60) days after the Casualty Discovery Date. If Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date on which Tenant surrenders possession of the Premises to Landlord, except that if the damage to the Premises materially impairs Tenant's ability to continue its business operations in the Premises, then this Lease shall be deemed to have terminated as of the date such damage occurred.

(c) Notwithstanding anything to the contrary in this Paragraph 22, Landlord shall have the option to terminate this Lease, exercisable by notice to Tenant within sixty (60) days after the Casualty Discovery Date in each of the following instances:

(i) If more than twenty-five percent (25%) of the full insurable value of the Building or the Project is damaged or destroyed, regardless of whether or not the Premises are destroyed.

(ii) If the Building or the Projector any portion thereof is damaged or destroyed and the repair and restoration of such damage requires longer than one hundred eighty (180) days from the Casualty Discovery Date.

(iii) If the Building or the Project or any portion thereof is damaged or destroyed and the insurance proceeds therefor are not sufficient to cover the costs of repair and restoration.

(iv) If the Building or the Project or any portion thereof is damaged or destroyed during the last twelve (12) months of the Term.

(d) If the Premises is damaged or destroyed to the extent that the Premises cannot be substantially repaired or restored by Landlord within two hundred seventy (270) days after the Casualty Discovery Date, Tenant may terminate this Lease immediately upon notice thereof to Landlord, which

notice shall be given, if at all, not later than fifteen (15) days after Landlord notifies Tenant of Landlord's estimate of the period of time required to repair such damage or destruction.

(e) In the event of repair and restoration as herein provided, the monthly installments of Base Rent shall be abated proportionately in the ratio which Tenant's use of the Premises is impaired during the period of such repair or restoration; provided, however, that Tenant shall not be entitled to such abatement to the extent that such damage or destruction resulted from the acts or inaction of Tenant or Tenant's Agents. Except as expressly provided in the immediately preceding sentence with respect to abatement of Base Rent, Tenant shall have no claim against Landlord for, and hereby releases Landlord and Landlord's Agents from responsibility for and waives its entire claim of recovery for any cost, loss or expense suffered or incurred by Tenant as a result of any damage to or destruction of the Premises, the Building or the Project or the repair or restoration thereof, including, without limitation, any cost, loss or expense resulting from any loss of use of the whole or any part of the Premises, the Building or the Project and/or any inconvenience or annoyance occasioned by such damage, repair or restoration.

(f) Tenant shall promptly repair and restore, at Tenant's expense, Tenant's Alterations which were not constructed by Landlord.

(g) Tenant hereby waives the provisions of California Civil Code Section 1932(2) and Section 1933(4) which permit termination of a lease upon destruction of the leased premises, and the provisions of any similar law now or hereinafter in effect, and the provisions of this Paragraph 22 shall govern exclusively in case of such destruction.

23. CONDEMNATION

(a) If twenty-five percent (25%) or more of either the Premises, the Building or the Project or the parking areas for the Building or the Project is taken for any public or quasi-public purpose by any lawful governmental power or authority, by exercise of the right of appropriation, inverse condemnation, condemnation or eminent domain, or sold to prevent such taking (each such event being referred to as a "Condemnation"), Landlord may, at its option, terminate this Lease as of the date title vests in the condemning party. If twenty-five percent (25%) or more of the Premises is taken and if the Premises remaining after such Condemnation and any repairs by Landlord would be untenantable for the conduct of Tenant's business operations, Tenant shall have the right to terminate this Lease as of the date title vests in the condemning party. If either party elects to terminate this Lease as provided herein, such election shall be made by written notice to the other party given within thirty (30) days after the nature and extent of such Condemnation have been finally determined. If neither Landlord nor Tenant elects to terminate this Lease to the extent permitted above, Landlord shall promptly proceed to restore the Premises, to the extent of any Condemnation award received by Landlord, to substantially the same condition as existed prior to such Condemnation, allowing for the reasonable effects of such Condemnation, and a proportionate abatement shall be made to the Base Rent corresponding to the time during which, and to the portion of the floor area of the Premises (adjusted for any increase thereto resulting from any reconstruction) of which, Tenant is deprived on account of such Condemnation and restoration, as reasonably determined by Landlord. Except as expressly provided in the immediately preceding sentence with respect to abatement of Base Rent, Tenant shall have no claim against Landlord for, and hereby releases Landlord and Landlord's Agents from responsibility for and waives its entire claim of recovery for any cost, loss or expense suffered or incurred by Tenant as a result of any Condemnation or the repair or restoration of the Premises, the Building or the Project or the parking areas for the Building or the Project following such Condemnation, including, without limitation, any cost, loss or expense resulting from any loss of use of the whole or any part of the Premises, the Building, the Project or the parking areas and/or any inconvenience or annoyance occasioned by such Condemnation, repair or restoration. The provisions of California Code of Civil Procedure Section 1265.130, which allows either party to petition the Superior

Court to terminate the Lease in the event of a partial taking of the Premises, the Building or the Project or the parking areas for the Building or the Project, and any other applicable law now or hereafter enacted, are hereby waived by Tenant.

(b) Landlord shall be entitled to any and all compensation, damages, income, rent, awards, or any interest therein whatsoever which may be paid or made in connection with any Condemnation, and Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease or otherwise; provided, however, that Tenant shall be entitled to receive any award separately allocated by the condemning authority to Tenant for Tenant's relocation expenses or the value of Tenant's Property (specifically excluding fixtures, Alterations and other components of the Premises which under this Lease or by law are or at the expiration of the Term will become the property of Landlord), provided that such award does not reduce any award otherwise allocable or payable to Landlord.

24. ASSIGNMENT AND SUBLETTING

(a) Tenant shall not voluntarily or by operation of law, (i) mortgage, pledge, hypothecate or encumber this Lease or any interest herein, (ii) assign or transfer this Lease or any interest herein, sublease the Premises or any part thereof, or any right or privilege appurtenant thereto, or allow any other person (the employees and invitees of Tenant excepted) to occupy or use the Premises, or any portion thereof, without first obtaining the written consent of Landlord, which consent shall not be unreasonably withheld; provided, however, that (A) Tenant is not then in Default under this Lease nor is any event then occurring which with the giving of notice or the passage of time, or both, would constitute a Default hereunder, and (B) the proposed transfer is not an assignment or a sublease under a previous assignment or an existing sublease. When Tenant requests Landlord's consent to such assignment or subletting, it shall notify Landlord in writing of the name and address of the proposed assignee or subtenant and the nature and character of the business of the proposed assignee or subtenant and shall provide (1) a fully completed Hazardous Materials Disclosure Certificate for such assignee or subtenant in the form of Exhibit D hereto, and (2) current and prior financial statements for the proposed assignee or subtenant, which financial statements shall be audited to the extent available and shall in any event be prepared in accordance with generally accepted accounting principles. Tenant shall also provide Landlord with a copy of the proposed sublease or assignment agreement, including all material terms and conditions thereof. Landlord shall have the option, to be exercised within twenty (20) days of receipt of the foregoing, to (1) terminate this Lease as of the commencement date stated in the proposed sublease or assignment, (2) sublease or take an assignment, as the case may be, from Tenant of the interest, or any portion thereof, in this Lease and/or the Premises that Tenant proposes to assign or sublease, on the same terms and conditions as stated in the proposed sublet or assignment agreement, (3) consent to the proposed assignment or sublease, or (4) refuse its consent to the proposed assignment or sublease, provided that such consent shall not be unreasonably withheld so long as Tenant is not then in Default under this Lease nor is any event then occurring which with the giving of notice or tile passage of time, or both, would constitute a Default hereunder. In the event Landlord elects to terminate this Lease or recapture the Premises, Tenant may, if it so elects, by written notice to Landlord within ten (10) days after receipt of Landlord's termination or recapture notice, revoke its request for Landlord's consent and, in such event, this Lease shall continue in full force and effect as if Tenant had not requested Landlord's consent. In the event Landlord elects to terminate this Lease or sublease or take an assignment from Tenant of the interest, or portion thereof, in the Lease and/or the Premises that Tenant proposes to assign or sublease as provided in the foregoing clauses (1) and (2), respectively, then Landlord shall have the additional right to negotiate directly with Tenant's proposed assignee or subtenant and to enter into a direct lease or occupancy agreement with such party on such terms as shall be acceptable to Landlord in its sole and absolute discretion, and Tenant hereby waives any claims against Landlord related thereto, including, without limitation, any claims for any compensation or profit related to such lease or occupancy agreement.

(b) Without otherwise limiting the criteria upon which Landlord may withhold its consent, Landlord shall be entitled to consider all reasonable criteria including, but not limited to, the following: (i) whether or not the proposed subtenant or assignee is engaged in a business which, and the use of the Premises will be in an manner which, is in keeping with the then character and nature of all other tenancies in the Project; (ii) whether the use to be made of the Premises by the proposed subtenant or assignee will conflict with any so-called "exclusive" use then in favor of any other tenant of the Building or the Project, and whether such use would be prohibited by any other portion of this Lease, including, but not limited to, any rules and regulations then in effect, or under applicable Laws, and whether such use imposes a greater load upon the Premises and the Building and Project services then imposed by Tenant; (iii) the business reputation of the proposed individuals who will be managing and operating the business operations of the assignee or subtenant, and the long-term financial and competitive business prospects of the proposed assignee or subtenant; and (iv) the creditworthiness and financial stability of the proposed assignee or subtenant in light of the responsibilities involved. In any event, Landlord may withhold its consent to any assignment or sublease, if (A) the actual use proposed to be conducted in the Premises or portion thereof conflicts with the provisions of Paragraph 10(a) or (b) above or with any other lease which restricts the use to which any space in the Building or the Project may be put, or (B) the proposed assignment or sublease requires Alterations to the Premises or portions thereof other than Alterations approved by Landlord in accordance with Paragraph 13 above.

(c) If Landlord approves an assignment or subletting as herein provided, Tenant shall pay to Landlord, as Additional Rent, the difference, if any, between (i) the Base Rent plus Additional Rent allocable to that part of the Premises affected by such assignment or sublease pursuant to the provisions of this Lease, and (ii) the rent and any additional rent payable by the assignee or sublessee to Tenant, less reasonable and customary market-based leasing commissions and reasonable legal fees, if any, incurred by Tenant in connection with such assignment or sublease, which commissions and fees shall, for purposes of the aforesaid calculation, be amortized on a straight-line basis over the term of such assignment or sublease. The assignment or sublease agreement, as the case may be, after approval by Landlord, shall not be amended without Landlord's prior written consent, and shall contain a provision directing the assignee or subtenant to pay the rent and other sums due thereunder directly to Landlord upon receiving written notice from Landlord that Tenant is in default under this Lease with respect to the payment of Rent. In the event that, notwithstanding the giving of such notice, Tenant collects any rent or other sums from the assignee or subtenant, then Tenant shall hold such sums in trust for the benefit of Landlord and shall immediately forward the same to Landlord. Landlord's collection of such rent and other sums shall not constitute an acceptance by Landlord of attornment by such assignee or subtenant. A consent to one assignment, subletting, occupation or use shall not be deemed to be a consent to any other or subsequent assignment, subletting, occupation or use and consent to any assignment or subletting shall in no way relieve Tenant of any liability under this Lease. Any assignment or subletting, or without Landlord's consent shall be void, and shall, at the option of Landlord, constitute a Default under this Lease.

(d) Notwithstanding any assignment or subletting, Tenant and any guarantor or surety of Tenant's obligations under this Lease shall at all times remain fully responsible and liable for the payment of the Rent and for compliance with all of Tenant's other obligations under this Lease (regardless of whether Landlord's approval has been obtained for any such assignment or subletting).

(e) Tenant shall pay Landlord's reasonable fees (including, without limitation, the fees of Landlord's counsel), actually incurred in connection with Landlord's review and processing of documents regarding any proposed assignment or sublease.

(f) Notwithstanding anything in this Lease to the contrary, in the event Landlord consents to an assignment or subletting by Tenant in accordance with the terms of this Paragraph 24, Tenant's assignee or subtenant shall have no right to further assign this Lease or any interest therein or thereunder or to further sublease all or any portion of the Premises. In furtherance of the foregoing, Tenant acknowledges and agrees on behalf of itself and any assignee or subtenant claiming under it (and any such assignee or subtenant by accepting such assignment or sublease shall be deemed to acknowledge and agree) that no sub-subleases or further assignments of this lease shall be permitted at any time,

(g) Tenant acknowledges and agrees that the restrictions, conditions and limitations imposed by this Paragraph 24 on Tenant's ability to assign or transfer this Lease or any interest herein, to sublet the Premises or any part thereof, to transfer or assign any right or privilege appurtenant to the Premises, or to allow any other person to occupy or use the Premises or any portion thereof, are, for the purposes of California Civil Code Section 1951.4, as amended from time to time, and for all other purposes, reasonable at the time that the Lease was entered into, and shall be deemed to be reasonable at the time that Tenant seeks to assign or transfer this Lease or any interest herein, to sublet the Premises or any part thereof, to transfer or assign any right or privilege appurtenant to the Premises, or to allow any other person to occupy or use the Premises or any portion thereof.

25. TENANT'S DEFAULT

The occurrence of any one of the following events shall constitute an event of default on the part of Tenant ("Default"):

(a) The vacation or abandonment of the Premises by Tenant for a period of ten (10) consecutive days or any vacation or abandonment of the Premises by Tenant which would cause any insurance policy to be invalidated or otherwise lapse, or the failure of Tenant to continuously operate Tenant's business in the Premises, in each of the foregoing cases irrespective of whether or not Tenant is then in monetary default under this Lease. Notwithstanding the foregoing, in the event Tenant seeks to assign its interest under this Lease or to sublease the Premises in accordance with Paragraph 24 above, Tenant shall have tile right to vacate the Premises and to cease operating its business therein for a period of not exceeding ninety (90) days in the aggregate, provided that (i) throughout such period, Tenant diligently attempts to procure a suitable assignee or subtenant and to complete an assignment or sublease transaction, (ii) Tenant takes all actions required by Landlord to secure and safeguard the Premises during such period, and (iii) Tenant reimburses Landlord upon demand for any additional costs and expenses incurred by Landlord (including, without limitation, insurance expenses and costs of security) as a result of Tenant's vacation of the Premises. Tenant agrees to notice and service of notice as provided for in this Lease and waives any right to any other or further notice or service of notice which Tenant may have under any statute or law now or hereafter in effect;

(b) Failure to pay any installment of Rent or any other monies due and payable hereunder, said failure continuing for a period of three (3) days after notice of such default (which notice may be telephonic); provided, however, that Landlord shall only be required to give such notice one (1) time per calendar year and, thereafter, Tenant shall be in Default hereunder if it fails to pay any installment of Rent or any other monies due and payable hereunder within three (3) days after the date the same is due;

(c) A general assignment by Tenant or any guarantor or surety of Tenant's obligations hereunder (collectively, "Guarantor") for the benefit of creditors;

(d) The filing of a voluntary petition in bankruptcy by Tenant or any Guarantor, the filing by Tenant or any Guarantor of a voluntary petition for an arrangement, the filing by or against Tenant or any Guarantor of a petition, voluntary or involuntary, for reorganization, or the filing of an involuntary petition by the creditors of Tenant or any Guarantor, said involuntary petition remaining undischarged for a period of sixty (60) days;

(e) Receivership, attachment, or other judicial seizure of substantially all of Tenant's assets on the Premises, such attachment or other seizure remaining undismissed or undischarged for a period of sixty (60) days after the levy thereof;

(f) Death or disability of Tenant or any Guarantor, if Tenant or such Guarantor is a natural person, or the failure by Tenant or any Guarantor to maintain its legal existence, if Tenant or such Guarantor is a corporation, partnership, limited liability company, trust or other legal entity;

(g) Failure of Tenant to execute and deliver to Landlord any estoppel certificate, subordination agreement, or lease amendment within the time periods and in the manner required by Paragraphs 31, 32 or 43, and/or failure by Tenant to deliver to Landlord any financial statement within the time period and in the manner required by Paragraph 41;

(h) An assignment or sublease of this Lease or the Premises by Tenant contrary to the provision of Paragraph 24, unless such assignment or sublease is expressly conditioned upon Tenant having received Landlord's consent thereto;

(i) Failure of Tenant to restore the Security Deposit and/or the Letter of Credit to the amounts and within the time periods provided in Paragraphs 7 and 8 above;

(j) Failure in the performance of any of Tenant's covenants, agreements or obligations hereunder (except those failures specified as events of Default in any other subparagraphs of this Paragraph 25, which shall be governed by such other Paragraphs), which failure continues for ten, (10) days after written notice thereof from Landlord to Tenant, provided that, if Tenant has exercised reasonable diligence to cure such failure and such failure cannot be cured within such ten (10) day period despite reasonable diligence, Tenant shall not be in default under this subparagraph so long as Tenant thereafter diligently and continuously prosecutes the cure to completion and actually completes such cure within thirty (30) days after the giving of the aforesaid written notice;

(k) Chronic delinquency by Tenant in the payment of Rent, or any other periodic payments required to be paid by Tenant under this Lease. "Chronic delinquency" shall mean failure by Tenant to pay Rent, or any other payments required to be paid by Tenant under this Lease within three (3) days after written notice thereof for any three (3) months (consecutive or nonconsecutive) during any period of twelve (12) months. In the event of a Chronic delinquency, in addition to Landlord's other remedies for Default provided in this Lease, at Landlord's option, Landlord shall have the right to require that Rent be paid by Tenant quarterly, in advance;

(l) Chronic overuse by Tenant or Tenant's Agents of the number of undesignated parking spaces set forth in the Basic Lease Information. "Chronic overuse" shall mean use by Tenant or Tenant's Agents of a number of parking spaces greater than the number of parking spaces set forth in the Basic Lease Information more than three (3) times during the Term after written notice by Landlord;

(m) Any insurance required to be maintained by Tenant pursuant to this Lease shall be canceled or terminated or shall expire or be reduced or materially changed, except as permitted in this Lease; and

(n) Any failure by Tenant to discharge any lien or encumbrance placed on the Project or any part thereof in violation of this Lease within the applicable time period provided in Paragraph 20 above.

Tenant agrees that any notice given by Landlord pursuant to Paragraph 25(j), (k) or (l) above shall satisfy the requirements for notice under California Code of Civil Procedure Section 1161, and Landlord shall not be required to give any additional notice in order to be entitled to commence an unlawful detainer proceeding.

26. LANDLORD'S REMEDIES

(a) Termination. In the event of any Default by Tenant, then in addition to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect to so terminate this Lease then Landlord may recover from Tenant:

(i) the worth at the time of award of any unpaid Rent and any other sums due and payable which have been earned at the time of such termination; plus

(ii) the worth at the time of award of the amount by which the unpaid Rent and any other sums due and payable which would have been earned after termination until the time of award exceeds the amount of such rental loss Tenant proves could have been reasonably avoided; plus

(iii) the worth at the time of award of the amount by which the unpaid Rent and any other sums due and payable for the balance of the term of this Lease after the time of award exceeds the amount of such rental less that Tenant proves could be reasonably avoided; plus

(iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course would be likely to result therefrom, including, without limitation: (A) any costs or expenses incurred by Landlord: (1) in retaking possession of the Premises; (2) in maintaining, repairing, preserving, restoring, replacing, cleaning, altering, remodeling or rehabilitating the Premises or any affected portions of the Building or the Project, including such actions undertaken in connection with the reletting or attempted reletting of the Premises to a new tenant or tenants; (3) for leasing commissions, advertising costs and other expenses of reletting the Premises; or (4) in carrying the Premises, including taxes, insurance premiums, utilities and security precautions; (B) any unearned brokerage commissions paid in connection with this Lease; (C) reimbursement of any previously waived or abated Base Rent or Additional Rent or any free rent or reduced rental rate granted hereunder; and (D) any concession made or paid by Landlord to the benefit of Tenant in consideration of this Lease, if any, or assumptions by Landlord of any of Tenant's previous lease obligations; plus

(v) such reasonable attorneys' fees incurred by Landlord as a result of a Default, and costs in the event suit is filed by Landlord to enforce such remedy; and plus

(vi) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law.

As used in subparagraphs (i) and (ii) above, the "worth at the time of award" is computed by allowing interest at an annual rate equal to twelve percent (12%) per annum or the maximum rate permitted by law, whichever is less. As used in subparagraph (iii) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award, plus one percent (1%). Tenant waives redemption or relief from forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or under any other

pertinent present or future Law, in the event Tenant is evicted or Landlord takes possession of the Premises by reason of any Default of Tenant hereunder.

(b) Continuation of Lease. In the event of any Default by Tenant, then in addition to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the remedy described in California Civil Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant's Default and abandonment and recover Rent as it becomes due, provided that Tenant has the right to sublet or assign, subject only to reasonable limitations). In addition, Landlord shall not be liable in any way whatsoever for its failure or refusal to relet the Premises. For purposes of this Paragraph 26(b), the following acts by Landlord will not constitute the termination of Tenant's right to possession of the Premises:

(i) Acts of maintenance or preservation or efforts to relet the Premises, including, but not limited to, alterations, remodeling, redecorating, repairs, replacements and/or painting as Landlord shall consider advisable for the purpose of reletting the Premises or any part thereof, or

(ii) The appointment of a receiver upon the initiative of Landlord to protect Landlord's interest under this Lease or in the Premises.

(c) Re-entry. In the event of any Default by Tenant, Landlord shall also have the right, with or without terminating this Lease, in compliance with applicable law, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant.

(d) Reletting. In the event of the abandonment of the Premises by Tenant or in the event that Landlord shall elect to re-enter as provided in Paragraph 26(c) or shall take possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord does not elect to terminate this Lease as provided in Paragraph 26(a), Landlord may from time to time, without terminating this Lease, relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable with the right to make alterations and repairs to the Premises in Landlord's sole discretion. In the event that Landlord shall elect to so relet, then rentals received by Landlord from such reletting shall be applied in the following order: (i) to reasonable attorneys' fees incurred by Landlord as a result of a Default and costs in the event suit is filed by Landlord to enforce such remedies; (ii) to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; (iii) to the payment of any costs of such reletting; (iv) to the payment of the costs of any alterations and repairs to the Premises; (v) to the payment of Rent due and unpaid hereunder; and (vi) the residue, if any, shall be held by Landlord and applied in payment of future Rent and other sums payable by Tenant hereunder as the same may become due and payable hereunder. Should that portion of such rentals received from such reletting during any month, which is applied to the payment of Rent hereunder, be less than the Rent payable during the month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting.

(e) Termination. No re-entry or taking of possession of the Premises by Landlord pursuant to this Paragraph 26 shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of any Default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such Default.

(f) Cumulative Remedies. The remedies herein provided are not exclusive and Landlord shall have any and all other remedies provided herein or by law or in equity.

(g) No Surrender. No act or conduct of Landlord, whether consisting of the acceptance of the keys to the Premises, or otherwise, shall be deemed to be or constitute an acceptance of the surrender of the Premises by Tenant prior to the expiration of the Term, and such acceptance by Landlord of surrender by Tenant shall only flow from and must be evidenced by a written acknowledgment of acceptance of surrender signed by Landlord. The surrender of this Lease by Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects in writing that such merger take place, but shall operate as an assignment to Landlord of any and all existing subleases, or Landlord may, at its option, elect in writing to treat such surrender as a merger terminating Tenant's estate under this Lease, and thereupon Landlord may terminate any or all such subleases by notifying the sublessee of its election so to do within five (5) days after such surrender.

27. LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS

(a) Without limiting the rights and remedies of Landlord contained in Paragraph 26 above, if Tenant shall be in Default in the performance of any of the terms, provisions, covenants or conditions to be performed or complied with by Tenant pursuant to this Lease, then Landlord may at Landlord's option, without any obligation to do so, and without notice to Tenant perform any such term, provision, covenant, or condition, or make any such payment and Landlord by reason of so doing shall not be liable or responsible for any loss or damage thereby sustained by Tenant or anyone holding under or through Tenant or any of Tenant's Agents.

(b) Without limiting the rights of Landlord under Paragraph 27(a) above, Landlord shall have the right at Landlord's option, without any obligation to do so, to perform any of Tenant's covenants or obligations under this Lease (i) without notice to Tenant in the case of an emergency, as determined by Landlord in its sole and absolute judgment, or if Landlord otherwise determines in its sole discretion that such performance is necessary or desirable for the preservation of the rights and interests or safety of other tenants of the Building or the Project, and (ii) with five (5) days prior written or telephonic notice to Tenant if Landlord otherwise determines in its sole discretion that such performance is necessary or desirable for the proper management and operation of the Building or the Project.

(c) If Landlord performs any of Tenant's obligations hereunder in accordance with this Paragraph 27, the full amount of the cost and expense incurred or the payment so made or the amount of the loss so sustained shall immediately be owing by Tenant to Landlord, and Tenant shall promptly pay to Landlord upon demand, as Additional Rent, the full amount thereof with interest thereon from the date of payment by Landlord at the lower of (i) ten percent (10%) per annum, or (ii) the highest rate permitted by applicable law.

28. ATTORNEYS' FEES

(a) If either party hereto fails to perform any of its obligations under this Lease or if any dispute arises between the parties hereto concerning the meaning or interpretation of any provision of this Lease, then the defaulting party or the party not prevailing in such dispute, as the case may be, shall pay any and all costs and expenses incurred by the other party on account of such default and/or in enforcing or establishing its rights hereunder, including, without limitation, court costs and reasonable attorneys' fees and disbursements. Any such attorneys' fees and other expenses incurred by either party in enforcing a judgment in its favor under this Lease shall be recoverable separately from and in addition to any other amount included in such judgment, and such attorneys' fees obligation is intended to be severable from the other provisions of this Lease and to survive and not be merged into any such judgment.

(b) Without limiting the generality of Paragraph 28(a) above, if Landlord utilizes the services of an attorney for the purpose of collecting any Rent due and unpaid by Tenant or in connection with any

other breach of this Lease by Tenant, Tenant agrees to pay Landlord's actual attorneys' fees for such services, regardless of the fact that no legal action may be commenced filed by Landlord.

29. TAXES

Tenant shall be liable for and shall pay, prior to delinquency, all taxes levied against Tenant's Property. If any Alteration installed by Tenant or any of Tenant's Property is assessed and taxed with the Project or Building, Tenant shall pay such taxes to Landlord within ten (10) days after delivery to Tenant of a statement therefor.

30. EFFECT OF CONVEYANCE

The term "Landlord" as used in this Lease means, from time to time, the then current owner of the Building or the Project containing the Premises, so that, in the event of any sale of the Building or the Project and the transfer to the purchaser of any remaining portion of the Security Deposit and Letter of Credit then held by Landlord hereunder, Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder, and it shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale, that the purchaser of the Building or the Project has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder.

31. TENANT'S ESTOPPEL CERTIFICATE

From time to time, upon written request of Landlord, Tenant shall execute, acknowledge and deliver to Landlord or its designee, a written certificate stating: (a) the date this Lease was executed, the Commencement Date of the Term and the date the Term expires; (b) the date Tenant entered into occupancy of the Premises; (c) the amount of Rent and the date to which such Rent has been paid; (d) that this Lease is in full force and effect and has not been assigned, modified, supplemented or amended in any way (or, if assigned, modified, supplemented or amended, specifying the date and terms of any agreement so affecting this Lease); (e) that this Lease represents the entire agreement between the parties with respect to Tenant's right to use and occupy the Premises (or specifying such other agreements, if any); (f) that all obligations under this Lease to be performed by Landlord as of the date of such certificate have been satisfied (or specifying those as to which Tenant claims that Landlord has yet to perform); (g) that all required contributions by Landlord to Tenant on account of Tenant's improvements have been received (or stating exceptions thereto); (h) that on such date there exist no defenses or offsets that Tenant has against the enforcement of this Lease by Landlord (or stating exceptions thereto); (i) that no Rent or other sum payable by Tenant hereunder has been paid more than one (1) month in advance (or stating exceptions thereto); (j) that security has been deposited with Landlord, stating the original amount thereof and any increases thereto; and (k) any other matters evidencing the status of this Lease that may be required either by a lender making a loan to Landlord to be secured by a deed of trust covering the Building or the Project or by a purchaser of the Building or the Project. Any such certificate delivered pursuant to this Paragraph 31 may be relied upon by a prospective purchaser of Landlord's interest or a mortgagee of Landlord's interest or assignee of any mortgage upon Landlord's interest in the Premises. If Tenant shall fail to provide such certificate within fifteen (15) days of receipt by Tenant of a written request by Landlord as herein provided, such failure shall, at Landlord's election, constitute a Default under this Lease, and Tenant shall be deemed to have given such certificate as provided above without modification and shall be deemed to have admitted the accuracy of any information supplied by Landlord to a prospective purchaser or mortgagee.

32. SUBORDINATION

Landlord shall have the right to cause this Lease to be and remain subject and subordinate to any and all mortgages, deeds of trust and ground leases, if any ("Encumbrances") that are now or may hereafter be executed covering the Premises, or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of such advances, together with interest thereon and subject to all the terms and provisions thereof, provided only, that in the event of termination of any such ground lease or upon the foreclosure of any such mortgage or deed of trust, so long as Tenant is not in default, the holder thereof ("Holder") shall agree to recognize Tenant's rights under this Lease and to not disturb Tenant's possession of the Premises as long as Tenant shall pay the Rent and observe and perform all the provisions of this Lease to be observed and performed by Tenant. Within fifteen (15) days after Landlord's written request, Tenant shall execute, acknowledge and deliver any and all reasonable documents required by Landlord or the Holder to effectuate such subordination. If Tenant fails to do so, such failure shall constitute a Default by Tenant under this Lease. Notwithstanding anything to the contrary set forth in this Paragraph 32, Tenant hereby attorns and agrees to attorn to any person or entity purchasing or otherwise acquiring the Premises at any sale or other proceeding or pursuant to the exercise of any other rights, powers or remedies under such Encumbrance.

33. ENVIRONMENTAL COVENANTS

(a) Prior to executing this Lease, Tenant has completed, executed and delivered to Landlord a Hazardous Materials Disclosure Certificate ("Initial Disclosure Certificate"), a fully completed copy of which is attached hereto as Exhibit D and incorporated herein by this reference. Tenant covenants, represents and warrants to Landlord that the information on the Initial Disclosure Certificate is true and correct and accurately describes the Hazardous Materials which will be manufactured, treated, used or stored on or about the Premises by Tenant or Tenant's Agents. Tenant shall, on each anniversary of the Commencement Date and at such other times as Tenant desires to manufacture, treat, use or store on or about the Premises new or additional Hazardous Materials which were not listed on the Initial Disclosure Certificate, complete, execute and deliver to Landlord an updated Disclosure Certificate (each, an "Updated Disclosure Certificate") describing Tenant's then current and proposed future uses of Hazardous Materials on or about the Premises, which Updated Disclosure Certificates shall be in the same format as that which is set forth in Exhibit D or in such updated format as Landlord may require from time to time. Tenant shall deliver an Updated Disclosure Certificate to Landlord not less than thirty (30) days prior to the date Tenant intends to commence the manufacture, treatment, use or storage of new or additional Hazardous Materials on or about the Premises, and Landlord shall have the right to approve or disapprove such new or additional Hazardous Materials in its sole and absolute discretion. Tenant shall make no use of Hazardous Materials on or about the Premises except as described in the Initial Disclosure Certificate or as otherwise approved by Landlord in writing in accordance with this Paragraph 33 (a).

(b) As used in this Lease, the term "Hazardous Materials" shall mean and include any substance that is or contains: (i) any "hazardous substance" as now or hereafter defined in § 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA") (42 U.S.C. § 9601 et seq.) or any regulations promulgated under CERCLA; (ii) any "hazardous waste" as now or hereafter defined in the Resource Conservation and Recovery Act, as amended ("RCRA") (42 U.S.C. § 6901 et seq.) or any regulations promulgated under RCRA; (iii) any substance now or hereafter regulated by the Toxic Substances Control Act, as amended ("TSCA") (15 U.S.C. § 2601 et seq.) or any regulations promulgated under TSCA; (iv) petroleum, petroleum by-products, gasoline, diesel fuel, or other petroleum hydrocarbons; (v) asbestos and asbestos-containing material, in any form, whether friable or non-friable; (vi) polychlorinated biphenyls; (vii) lead and lead-containing materials; or (viii) any additional substance, material or waste (A) the

presence of which on or about the Premises (1) requires reporting, investigation or remediation under any Environmental Laws (as hereinafter defined), (2) causes or threatens to cause a nuisance on the Premises or any adjacent area or property or poses or threatens to pose a hazard to the health or safety of persons on the Premises or any adjacent area or property, or (3) which, if it emanated or migrated from the Premises, could constitute a trespass, or (B) which is now or is hereafter classified or considered to be hazardous or toxic under any Environmental Laws.

(c) As used in this Lease, the term "Environmental Laws" shall mean and include: (i) CERCLA, RCRA and TSCA; and (ii) any other federal, state or local laws, ordinances, statutes, codes, rules, regulations, orders or decrees now or hereinafter in effect relating to (A) pollution, (B) the protection or regulation of human health, natural resources or the environment, (C) the treatment, storage or disposal of Hazardous Materials, or (D) the emission, discharge, release or threatened release of Hazardous Materials into the environment.

(d) Tenant agrees that during its use and occupancy of the Premises it will: (i) not (A) permit Hazardous Materials to be present on or about the Premises except in a manner and quantity necessary for the ordinary performance of Tenant's business or (B) release, discharge or dispose of any Hazardous Materials on, in, at, under, or emanating from, the Premises, the Building or the Project; (ii) comply with all Environmental Laws relating to the Premises and the use of Hazardous Materials on or about the Premises and not engage in or permit others to engage in any activity at the Premises in violation of any Environmental Laws; and (iii) immediately notify Landlord of (A) any inquiry, test, investigation or enforcement proceeding by any governmental agency or authority against Tenant, Landlord or the Premises, Building or Project relating to any Hazardous Materials or under any Environmental Laws or (B) the occurrence of any event or existence of any condition that would cause a breach of any of the covenants set forth in this Paragraph 33.

(e) If Tenant's use of Hazardous Materials on or about the Premises results in a release, discharge or disposal of Hazardous Materials on, in, at, under, or emanating from, the Premises, the Building or the Project, Tenant agrees to investigate, clean up, remove or remediate such Hazardous Materials in full compliance with: (i) the requirements of (A) all Environmental Laws and (B) any governmental agency or authority responsible for the enforcement of any Environmental Laws; and (ii) any additional requirements of Landlord that are reasonably necessary to protect the value of the Premises, the Building or the Project.

(f) Upon reasonable notice to Tenant, Landlord may at its sole expense (except as otherwise provided herein) inspect the Premises and surrounding areas for the purpose of determining whether there exists on or about the Premises any Hazardous Material or other condition or activity that is in violation of the requirements of this Lease or of any Environmental Laws. Such inspections may include, but are not limited to, entering the Premises or adjacent property with drill rigs or other machinery for the purpose of obtaining laboratory samples. Landlord shall not be limited in the number of such inspections during the Term of this Lease, but shall use reasonable efforts to minimize any disruption to Tenant's business operations in the Premises. In the event (i) such inspections reveal the presence of any such Hazardous Material or other condition or activity in violation of the requirements of this Lease or, to the extent such violation results from the acts or actions of Tenant or Tenant's Agents, of any Environmental Laws, or (ii) Tenant or its Agents contribute or knowingly consent to the presence of any Hazardous Materials in, on, under, through or about the Premises, the Building or the Project or exacerbate the condition of or the conditions caused by any Hazardous Materials in, on, under, through or about the Premises, the Building or the Project, Tenant shall reimburse Landlord for the cost of such inspections within ten (10) days of receipt of a written statement therefor. Tenant will supply to Landlord such historical and operational information regarding the Premises and surrounding areas as may be reasonably requested to facilitate any such inspection and will make available for meetings appropriate personnel having knowledge of such matters. Tenant agrees to give Landlord at least sixty (60) days' prior notice of its intention to vacate

the Premises so that Landlord will have an opportunity to perform such an inspection prior to such vacation. The right granted to Landlord herein to perform inspections shall not create a duty on Landlord's part to inspect the Premises, or liability on the part of Landlord for Tenant's use, storage, treatment or disposal of Hazardous Materials, it being understood that Tenant shall be solely responsible for all liability in connection therewith.

(g) Landlord shall have the right, but not the obligation, prior or subsequent to a Default, without in any way limiting Landlord's other rights and remedies under this Lease, to enter upon the Premises, or to take such other actions as it deems necessary or advisable, to investigate, clean up, remove or remediate any Hazardous Materials or contamination by Hazardous Materials present on, in, at, under, or emanating from, the Premises, the Building or the Project in violation of Tenant's obligations under this Lease or under any Environmental Laws. Notwithstanding any other provision of this Lease, Landlord shall also have the right, at its election, in its own name or as Tenant's agent, to negotiate, defend, approve and appeal, at Tenant's expense, any action taken or order issued by any governmental agency or authority with regard to any such Hazardous Materials or contamination by Hazardous Materials. All costs and expenses paid or incurred by Landlord in the exercise of the rights set forth in this Paragraph 33 shall be payable by Tenant upon demand.

(h) Tenant shall surrender the Premises to Landlord upon the expiration or earlier termination of this Lease free of debris, waste or Hazardous Materials placed on, about or near the Premises by Tenant or Tenant's Agents, and in a condition which complies with all Environmental Laws and any additional requirements of Landlord that are reasonably necessary to protect the value of the Premises, the Building or the Project, including, without limitation, the obtaining of any closure permits or other governmental permits or approvals related to Tenant's use of Hazardous Materials in or about the Premises. Tenant's obligations and liabilities pursuant to the provisions of this Paragraph 33 shall survive the expiration or earlier termination of this Lease. If it is determined by Landlord that the condition of all or any portion of the Premises, the Building, and/or the Project is not in compliance with the provisions of this Lease with respect to Hazardous Materials, including, without limitation, all Environmental Laws, at the expiration or earlier termination of this Lease, then at Landlord's sole option, Landlord may require Tenant to hold over possession of the Premises until Tenant can surrender the Premises to Landlord in the condition in which the Premises existed as of the Commencement Date and prior to the appearance of such Hazardous Materials except for normal wear and tear, including, without limitation, the conduct or performance of any closures as required by any Environmental Laws. For purposes hereof, the term "normal wear and tear" shall not include any deterioration in the condition or diminution of the value of any portion of the Premises, the Building, and/or the Project in any manner whatsoever related to directly, or indirectly, Hazardous Materials. Any such holdover by Tenant will be with Landlord's consent, will not be terminable by Tenant in any event or circumstance and will otherwise be subject to the provisions of Paragraph 36 of this Lease.

(i) Tenant agrees to indemnify and hold harmless Landlord from and against any and all claims, losses (including, without limitation, loss in value of the Premises, the Building or the Project, liabilities and expenses (including attorneys' fees)) sustained by Landlord attributable to (i) any Hazardous Materials placed on or about the Premises, the Building or the Project by Tenant or Tenant's Agents, or (ii) Tenant's breach of any provision of this Paragraph 33.

(j) Notwithstanding anything in this Paragraph 33 to the contrary, Tenant shall not be responsible for the clean up or remediation of, and shall not be required to indemnify Landlord against any costs or liabilities attributable to, any Hazardous Materials placed on or about the Premises (i) by third parties not related to Tenant or Tenant's Agents, including, without limitation, any Hazardous Materials existing on the Premises prior to the Commencement Date, or (ii) by Landlord at anytime, except in either case to the extent that Tenant or Tenant's Agents have contributed to or exacerbated the presence of such Hazardous Materials or have failed to take reasonable actions to prevent such Hazardous Material from becoming placed on or about the Premises.

(k) The provisions of this Paragraph 33 shall survive the expiration or earlier termination of this Lease.

34. NOTICES

All notices and demands which are required or may be permitted to be given to either party by the other hereunder shall be in writing and shall be sent by United States mail, postage prepaid, certified, or by personal delivery or overnight courier, addressed to the addressee at Tenant's Address or Landlord's Address as specified in the Basic Lease Information, or to such other place as either party may from time to time designate in a notice to the other party given as provided herein. Copies of all notices and demands given to Landlord shall additionally be sent to Landlord's property manager at the address specified in the Basic Lease Information or at such other address as Landlord may specify in writing from time to time. Notice shall be deemed given upon actual receipt (or attempted delivery if delivery is refused), if personally delivered, or one (1) business day following deposit with a reputable overnight courier that provides a receipt, or on the third (3rd) day following deposit in the United States mail in the manner described above.

35. WAIVER

The waiver of any breach of any term, covenant or condition of this Lease shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of Rent by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. No delay or omission in the exercise of any right or remedy of Landlord in regard to any Default by Tenant shall impair such a right or remedy or be construed as a waiver. Any waiver by Landlord of any Default must be in writing and shall not be a waiver of any other Default concerning the same or any other provisions of this Lease.

36. HOLDING OVER

(a) Any holding over after the expiration of the Term, without the express written consent of Landlord, shall constitute a Default and, without limiting Landlord's remedies provided in this Lease, such holding over shall be construed to be a tenancy at sufferance, at a rental rate equal to the greater of one hundred fifty percent (150%) of (i) the fair market rental value for the Premises as determined by Landlord or (ii) the Base Rent last due in this Lease, plus Additional Rent, and shall otherwise be on the terms and conditions herein specified, so far as applicable; provided, however, in no event shall any renewal or expansion option or other similar right or option contained in this Lease be deemed applicable to any such tenancy at sufferance. Subject to Paragraph 36(b) below, if the Premises are not surrendered at the end of the Term or sooner termination of this Lease, and in accordance with the provisions of Paragraphs 12 and 33(h), Tenant shall indemnify, defend and hold Landlord harmless from and against any and all loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation any loss or liability resulting from any claim against Landlord made by any succeeding tenant or prospective tenant founded on or resulting from such delay and losses to Landlord due to lost opportunities to lease any portion of the Premises to any such succeeding tenant or prospective tenant, together with, in each case, actual attorneys' fees and costs.

(b) Notwithstanding the terms of Paragraph 36(a) above, in the event Tenant desires to remain in possession of the Premises after the Expiration Date, Tenant shall provide Landlord with not less than thirty (30) days written notice prior to the Expiration Date requesting the right to so hold-over possession for a specified period of time. In the event Landlord consents in writing to such hold-over, then Tenant shall pay to Landlord the hold-over rental rate set forth in Paragraph 36(a), but Tenant shall have no liability to Landlord under the indemnity set forth in the last sentence of Paragraph 36(a). If Landlord does not so consent to such hold-over, or if Landlord permits Tenant to hold-over for a specified period and if Tenant has not vacated the Premises by the end of the period so specified by Landlord, then Tenant shall remain fully liable to Landlord under the aforesaid indemnity.

37. SUCCESSORS AND ASSIGNS

The terms, covenants and conditions of this Lease shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all of the parties hereto. If Tenant shall consist of more than one entity or person, the obligations of Tenant under this Lease shall be joint and several.

38. TIME

Time is of the essence of this Lease and each and every term, condition and provision herein.

39. BROKERS

Landlord and Tenant each represents and warrants to the other that neither it nor its officers or agents nor anyone acting on its behalf has dealt with any real estate broker except the Broker(s) specified in the Basic Lease Information in the negotiating or making of this Lease, and each party agrees to indemnify and hold harmless the other from any claim or claims, and costs and expenses, including attorneys' fees, incurred by the indemnified party in conjunction with any such claim or claims of any other broker or brokers to a commission in connection with this Lease as a result of the actions of the indemnifying party.

40. LIMITATION OF LIABILITY

Tenant agrees that, in the event of any default or breach by Landlord with respect to any of the terms of the Lease to be observed and performed by Landlord: (a) Tenant shall look solely to the then-current landlord's interest in the Building for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord; (b) no other property or assets of Landlord, its partners, shareholders, officers, directors, employees, investment advisors, or any successor in interest of any of them (collectively, the "Landlord Parties") shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies; (c) no personal liability shall at any time be asserted or enforceable against the Landlord Parties; and (d) no judgment will be taken against the Landlord Parties. The provisions of this section shall apply only to the Landlord and the parties herein described, and shall not be for the benefit of any insurer nor any other third party.

41. FINANCIAL STATEMENTS

Within fifteen (15) days after Landlord's request, Tenant shall deliver to Landlord the then current financial statements of Tenant (including interim periods following the end of the last fiscal year for which annual statements are available), prepared or compiled by a certified public accountant, including a balance sheet and profit and loss statement for the most recent prior year, all prepared in accordance with generally accepted accounting principles consistently applied. Landlord shall not request Tenant's financial statements more than one (1) time per calendar year, except to the extent that Landlord is involved in a sale or financing of the Project.

42. RULES AND REGULATIONS

Tenant agrees to comply with such reasonable rules and regulations as Landlord may adopt from time to time for the orderly and proper operation of the Building and the Project. Such rules may include but shall not be limited to the following: (a) restriction of employee parking to a limited, designated area or areas; and (b) regulation of the removal, storage and disposal of Tenant's refuse and other rubbish at the sole cost and expense of Tenant. The then current rules and regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant. Landlord shall not be responsible to

Tenant for the failure of any other person to observe and abide by any of said rules and regulations. Landlord's current rules and regulations are attached to this Lease as Exhibit C.

43. MORTGAGEE PROTECTION

(a) Modifications for Lender. If, in connection with obtaining financing for the Project or any portion thereof, Landlord's lender shall request reasonable modifications to this Lease as a condition to such financing, Tenant shall not unreasonably withhold, delay or defer its consent to such modifications, provided that such modifications do not materially adversely affect Tenant's rights or increase Tenant's obligations under this Lease.

(b) Rights to Cure. Tenant agrees to give to any trust deed or mortgage holder ("Holder"), by registered mail, at the same time as it is given to Landlord, a copy of any notice of default given to Landlord, provided that, prior to such notice, Tenant has been notified, in writing (by way of notice of assignment of rents and leases, or otherwise) of the address of such Holder. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then the Holder shall have an additional twenty (20) days after expiration of such period, or after receipt of such notice from Tenant (if such notice to the Holder is required by this Paragraph 43(b)), whichever shall last occur within which to cure such default or if such default cannot be cured within that time, then such additional time as may be necessary if within such twenty (20) days, any Holder has commenced and is diligently pursuing the remedies necessary to cure such default (including, but not limited to, commencement of foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated.

44. ENTIRE AGREEMENT

This Lease, including, the Exhibits and any Addenda attached hereto, which are hereby incorporated herein by this reference, contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties, not embodied herein or therein, shall be of any force and effect.

45. INTEREST

Any installment of Rent and any other sum due from Tenant under this Lease which is not received by Landlord within ten (10) days from when the same is due shall bear interest from the date such payment was originally due under this Lease until paid at an annual rate equal to the maximum rate of interest permitted by law. Payment of such interest shall not excuse or cure any Default by Tenant. In addition, Tenant shall pay all costs and attorneys' fees incurred by Landlord in collection of such amounts.

46. CONSTRUCTION

This Lease shall be construed and interpreted in accordance with the laws of the State of California. The parties acknowledge and agree that no rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall be employed in the interpretation of this Lease, including the Exhibits and any Addenda attached hereto. All captions in this Lease are for reference only and shall not be used in the interpretation of this Lease. Whenever required by the context of this Lease, the singular shall include the plural, the masculine shall include the feminine, and vice versa. If any provision of this Lease shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Lease and all such other provisions shall remain in full force and effect.

47. REPRESENTATIONS AND WARRANTIES OF TENANT

Tenant hereby makes the following representations and warranties, each of which is material and being relied upon by Landlord, is true in all respects as of the date of this Lease, and shall survive the expiration or termination of the Lease.

(a) If Tenant is an entity, Tenant is duly organized, validly existing and in good standing under the laws of the state of its organization and the persons executing this Lease on behalf of Tenant have the full right and authority to execute this Lease on behalf of Tenant and to bind Tenant without the consent or approval of any other person or entity. Tenant has full power, capacity, authority and legal right to execute and deliver this Lease and to perform all of its obligations hereunder. This Lease is a legal, valid and binding obligation of Tenant, enforceable in accordance with its terms.

(b) Tenant has not (i) made a general assignment for the benefit of creditors, (ii) filed any voluntary petition in bankruptcy or suffered the f ling of an involuntary petition by any creditors, (iii) suffered the appointment of a receiver to take possession of all or substantially all of its assets, (iv) suffered the attachment or other judicial seizure of all or substantially all of its assets, (v) admitted in writing its inability to pay its debts as they come due, or (vi) made an offer of settlement, extension or composition to its creditors generally.

48. SECURITY

(a) Tenant acknowledges and agrees that, while Landlord may engage security personnel to patrol the Building or the Project, Landlord is not providing any security services with respect to the Premises, the Building or the Project and that Landlord shall not be liable to Tenant for, and Tenant waives any claim against Landlord with respect to, any loss by theft or any other damage suffered or incurred by Tenant in connection with any unauthorized entry into the Premises or any other breach of security with respect to the Premises, the Building, or the Project.

(b) Tenant hereby agrees to the exercise by Landlord and Landlord's Agents, within their sole discretion, of such security measures as, but not limited to, the evacuation of the Premises, the Building or the Project for cause, suspected cause or for drill purposes, the denial of any access to the Premises, the Building or the Project and other similarly related actions that it deems necessary to prevent any threat of property damage or bodily injury. The exercise of such security measures by Landlord and Landlord's Agents, and the resulting interruption of service and cessation of Tenant's business, if any, shall not be deemed an eviction or disturbance of Tenant's use and possession of the Premises, or any part thereof, or render Landlord or Landlord's Agents liable to Tenant for any resulting damages or relieve Tenant from Tenant's obligations under this Lease.

49. JURY TRIAL WAIVER

Tenant hereby waives any right to trial by jury with respect to any action or proceeding (a) brought by Landlord, Tenant or any other party, relating to (i) this Lease and/or any understandings or prior dealings between the parties hereto, or (ii) the Premises, the Building or the Project or any part thereof, or (b) to which Landlord is a party. Tenant hereby agrees that this Lease constitutes a written consent to waiver of trial by jury pursuant to the provisions of California Code of Civil Procedure Section 631, and Tenant does hereby constitute and appoint Landlord its true and lawful attorney-in-fact, which appointment is coupled with an interest, and Tenant does hereby authorize and empower Landlord, in the name, place and stead of Tenant, to file this Lease with the clerk or judge of any court of competent jurisdiction as a statutory written consent to waiver of trial by jury.

Landlord and Tenant have executed and delivered this Lease as of the Lease Date specified in the Basic Lease Information.

		LANDLORD:
		HARBOR INVESTMENT PARTNERS, a California general partnership
		By:		UBS Brinson Realty Investors LLC Its Investment Advisor and Agent
		By:		/s/ Cynthia Stevenin Vice President
		TENANT:
		X.COM, a Delaware corporation
		By:		/s/
		Name:		William Harris
		Title:		President

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LEASE AGREEMENT
EX-10.13 5 a2060419zex-10_13.htm EXHIBIT 10.13 Prepared by MERRILL CORPORATION
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EXHIBIT 10.13

LEASE

THIS LEASE AGREEMENT (this "Lease") is entered into as of this 25 day of April, 2000, between Metro-Omaha Associates, L.L.C., a Nebraska limited liability company ("Landlord"), and X.Com Corporation, a California Corporation ("Tenant").

1. Lease Grant. Subject to the terms of this Lease, Landlord leases to Tenant, and Tenant leases from Landlord premises comprised of approximately 24,359 rentable square feet as depicted in the plan attached as Exhibit A (the "Premises") in the office building known as The Metropolitan Business Center located on the majority of the south wing of the fourth floor and the entire third floor at 11128 John Galt Boulevard, Omaha, Nebraska (collectively, the "Building"). As hereinafter used, the term "the Premises" shall refer to the combination of the Initial Premises and the Secondary Premises, as those terms are hereafter defined. Provided such determination is made on or before May 15, 2000, the actual rentable area of the Premises shall be determined in accordance with the Standard Method for Measuring "Floor Area in Office Buildings, Approved June 7, 1996 ("BOMA Standards") by the American National Standards Institute, Inc. (ANSI/BOMA 265.1-1996). The land on which the Building is located is described on Exhibit B. The term "Building" includes the related land, driveways, parking facilities, and similar improvements.

2. Term. Except as hereinafter provided, the term of this Lease for the 1,242 rentable square feet of space on the fourth floor of the Building depicted in the plan attached as Exhibit A-1 (the "Initial Premises") shall commence on April 17, 2000, or substantial completion of improvements to the Initial Premises so as to place them in the condition referred to in paragraph 7, below, and expire at 11:59 p.m. on May 31, 2006 (the "Expiration Date") and the term of this Lease for the 23,117 rentable square feet of space on the third and fourth floors of the Building depicted in the plan attached as Exhibit A-2 (the "Secondary Premises") shall commence on June 1, 2003, and expire on the Expiration Date. As hereinafter used, the term "Commencement Date" shall refer to either April 17, 2000, with respect to the initial Premises or June 1, 2003, with respect to the Secondary Premises, and the term "Term" shall refer to the term for the Initial Premises or the term for the Secondary Premises, as the case may be. If the Commencement Date is not the First day of a calendar month, then the Term shall be extended by the number of days between the Commencement Date and the first day of the next month. In the event that Tenant is, at any time, in default beyond all applicable cure periods under the terms and conditions of Tenant's Sublease with ConAgra, Inc., dated the 25 day of April, 2000, for a portion of the Premises, Landlord may, at Landlord's option, terminate this Lease prior to the Commencement Date upon fifteen (15) days prior written notice to Tenant.

3. Rent.

(a) Basic Rent. "Basic Rent" (herein so called) shall be as follows:

Months 4/17/2000	—	$1,397.25 Per month
5/31/2002
Months 6/1/2002	—	$1,552.50 Per month
5/31/03
Months 6/1/03 5/31/04	—	$30,448.75 Per month

Months 6/1/04 5/31/05	—	$31,463.71 Per month

Months 6/1/05 5/31/06	—	$32,470.67 Per month

This Basic Rental Rate shall be adjusted as defined in paragraph 3(c).

(b) Payment. Tenant shall timely pay to Landlord Basic Rent and all additional sums to be paid by Tenant to Landlord under this Lease (collectively, the "Rent"), without deduction or set off, at Landlord's address provided for in this Lease or by wire transfer to an account of Landlord, if Landlord provides Tenant with routing information for such account, or as otherwise specified by Landlord. Basic Rent, adjusted as herein provided, shall be payable monthly in advance, and shall be accompanied by all applicable state and local sales or use taxes. The first monthly installment of Basic Rent shall be payable contemporaneously with the execution of this Lease; thereafter, Basic Rent shall be payable on the first day of each month beginning on the first day of the second full calendar month of the Term. The monthly Basic Rent for any partial month at the beginning or ending of the Term shall equal the product of 1/365 of the annual Basic Rent in effect during the partial month and the number of days in the partial month from and after the Commencement Date, and shall be due on the Commencement Date.

(c) Rental Adjustment. Beginning June 1, 2000, Tenant shall, for each fiscal year from June 1 to May 31, through May 31, 2003, pay to Landlord as additional rent ("Additional Rent") .9605 percent (the Proportion which the rentable square feet of the initial Premises bears to the total rentable square feet of the Building) of the increase (if any) in the Operating Costs of the Building (as hereinafter defined) for such fiscal year over the Operating Costs of the Building for the Base Year (as hereinafter defined). Beginning June 1, 2003, Tenant shall, for each fiscal year from June 1 to May 31, during the remainder of the Term, pay to Landlord as additional rent ("Additional Rent") 18.8387 percent (being the proportion which the rentable square feet of the Initial Premises and the Secondary Premises, combined, bear to the total rentable square feet of the Building) of the increase (if any) in the Operating Costs of the Building (as hereinafter defined) for such fiscal year over the Operating Costs of the building for the Base Year (as hereinafter defined).

(1) Definitions. The Operating Costs of the building are hereby defined as all real estate taxes and assessments on the real property (land and Building) of which the Premises are a part, heat, air conditioning, water and sewer use fees, utilities, insurance, janitorial and cleaning service, management fees (not to exceed 3¹/2%), salaries, wages, payroll taxes, and other personnel cost of engineers, superintendents, watchmen and other building employees, charges, under maintenance and service contracts for chiller, boilers, controls and/or elevators,

exterior window cleaning and building, plaza and parking lot maintenance and repair, personal property taxes (if any) in connection with personal property used in the operation of the Building, and maintenance, operation and repair expenses and supplies which are deducted for such calendar year (and not capitalized) for Federal Income Tax purposes; provided, however, that Operating Costs of the Building shall not include leasing commissions, payments of principal and interest on any mortgages, deeds of trust or other encumbrances upon the Building or (i) rent paid to any ground lessor, (ii) the cost of constructing tenant improvement for any other tenant of the Building; (iii) the cost of special services, goods, or materials provided to any other tenant of the Building; (iv) repairs covered by proceeds of insurance or from funds provided by Tenant or any other tenant of the Building (or where any other tenant of the Building is obligated to make such repairs or pay the cost of same); (v) legal fees, advertising costs, or other related expenses incurred by Landlord in connection with the leasing of space to individual tenants of the Building; (vi) repairs, alterations, additions, improvements, or replacements needed to rectify or correct any defects in the original design, materials, or workmanship of Building or common areas; (vii) damage and repairs necessitated by the willful misconduct of Landlord, Landlord' s employees, contractors, or agents; (viii) executive salaries or salaries of service personnel to the extent that such personnel perform services not in connection with the management, operation, repair, or maintenance of the Building; (ix) Landlord's general overhead expenses not related to the Building; (x) legal fees, accountants' fees, and other expenses incurred in connection with disputes of tenants or other occupants of the Building, unless such expense is necessary for the benefit of the other tenants including Tenant, or associated with the enforcement of the terms of any leases with tenants or the defense of Landlord's title to or interest in the Building or any part thereof, (xi) costs incurred due to a violation by Landlord or any other tenant of the Building of the terms and conditions of a lease; (xii) costs of any service provided to Tenant or other occupants of the Building for which Landlord is reimbursed; and (xiii) costs and expenses which would be capitalized under generally accepted accounting principles. Real Estate taxes for the Base Year for subsequent calendar years shall be deemed to be the taxes payable in the respective calendar years, even though the levy or assessment thereof may be for a different fiscal year, and shall include general real estate taxes, special assessments, franchise taxes to the extent based upon the value of in lieu of or partially in lieu of general real estate taxes. The Base Year for the Initial Premises is hereby defined as the fiscal year from June 1, 2000, to May 31, 2001. Commencing June 1, 2003, the Base Year for the Premises shall be defined as the fiscal year from June 1, 2003, to May 31, 2004.

(2) Statement for Tenant On or before the first day of August, 2001, and on or before that day in each subsequent year, and on or before the first day of August immediately following the Expiration Date or earlier termination of the Term, Landlord will furnish a comparative statement which shall show a comparison of all pertinent items and information applicable to the Base Year and to the calendar year preceding the year in which the comparative statement is submitted and the amount, if any, of the increase in rent to be enforced as hereinafter set forth. The failure of Landlord to furnish a comparative statement, for any year in accord with this Paragraph 33(c)(2) shall be without prejudice to the right of Landlord to furnish comparative statements in subsequent years

(3) Payment of Adjusted Rental Within 30 days after the delivery of the first comparative statement referenced in Paragraph 3(c)(2) above, Tenant shall pay to Landlord, as adjusted rental a lump sum payable equal to the amount (if any) of Tenant's proportional share of such increase for the previous fiscal year compared to the Base Year (the "Total Rent Increase"). In subsequent years, the lump sum payment due hereunder (if any) shall be reduced by subtracting the prior year Total Rent Increase from the current year Total Rent Increase. If such payments are required, Tenant shall pay in addition, a further lump sum

payment equal to 1/12th of the Total Rent Increase for each month that has passed in the fiscal calendar year (presumably 3/12th of said amount if the comparative statement is served in August) but crediting Tenant, after the first year, with the 1/12th amount payments carried over from the previous year. Thereafter, Tenant shall pay 1/12th or the current year Total Rent Increase until the next comparative statement is served. The additional rent due to the Landlord as disclosed by the comparative statement furnished on or before the 1^st day of August immediately following the expiration or earlier termination of this lease, shall be paid within 30 days after the rendition of such comparative statement.

(4) Tenant's Audit Rights. Not more often than once each calendar year, Tenant, upon thirty (30) days advance written notice thereof to Landlord, at Tenant's sole cost and expense, may retain an independent Certified Public Accountant reasonably acceptable to Landlord, to review and audit Landlord's books and records with regard to the Operating Expenses for the Building and the calculations of Tenant's proportionate share thereof. If it is reasonably determined by such auditors that Tenant overpaid its share of any Increase in Operating Expenses, Landlord shall refund to Tenant the amount of such overpayment within thirty (30) days. If it is reasonably determined by such auditors that Tenant underpaid its share of any Increase in Operating Expenses, Tenant shall pay to Landlord the amount of such 3 days. If it is reasonably determined by such auditors that Tenant overpaid its share of any Increase in Operating Expenses by more than five percent (5%), Landlord shall reimburse Tenant for the reasonable costs of Tenant's audit.

Basic Rent to be paid per month, and the percentage used to determine "Additional Rent," set forth above, shall be adjusted to reflect the actual rentable area of the Premises as determined according to BOMA Standards in accordance with Paragraph 1, above, provided such termination is made on or before May 15, 2000.

4. Delinquent Payment: Handling Charges. All past due payments required of Tenant hereunder shall bear interest from fifteen (15) days after written notice that same is due until paid at the lesser of 10% per annum (the "Interest Rate") or the maximum lawful rate of interest. In no event, however, shall the charges permitted under this Section 6(a) or elsewhere in this Lease, to the extent they are considered to be interest under law, exceed the maximum lawful rate of interest.

5. Hours of Operation. The hours of operation for the Building are 7:00 a.m. to 7:00 p.m., Monday through Friday, are 8:00 a.m. to 12:00 p.m. on Saturday, excluding, federal, state or local holidays. Notwithstanding the foregoing, Tenant shall have access to the Building and Premises twenty-four (24) hours per day, seven (7) days per week.

6. Landlord's Obligations.

(a) Services. Landlord agrees to furnish services to the Premises during reasonable and usual business hours as are established in the rules and regulations of the Building wherein "the Premises are situated (said rules and regulations being attached hereto, marked Exhibit "D" and by this reference made a part hereof) and provided Tenant is not in default under any of the provisions of this Lease, the following services at Landlord's sole expense (subject, however, to the provisions of Paragraph 3(c) of this Lease): Heating Ventilation, Air Conditioning, Electrical Access (provided the cost of electrical service is to be paid by Tenant pursuant to Paragraph 6(c)) and Janitorial Services in the manner customary in a first class office building. Except for Landlord's gross negligence or willful misconduct, it is agreed that the Landlord shall not be liable for damages nor shall the rental hereinbefore stipulated be abated for failure to furnish any service above mentioned, or any part hereof as aforesaid, when such failure to furnish or delay in furnishing is occasioned by needful repairs, renewals or improvements, or in whole or in part by any strike or labor controversy or by any accident or casualty whatsoever, or by any act or default of the Tenant, nor for any other cause or causes beyond the control of the Landlord.

(b) Restoration of Services. Landlord shall use best reasonable efforts to restore any service required of it that becomes unavailable; however, such unavailability shall not render Landlord liable for any damages caused thereby, be a constructive eviction of Tenant, constitute a breach of any implied warranty, or entitle Tenant to any abatement of Tenant's obligations hereunder.

(c) Electrical. Electrical service to the Premises shall be measured by a separate meter service the Premises, which shall be installed at Landlord's expense, and Tenant shall pay, directly to the utility providing such service to Tenant, as and when its comes due, the charge for electrical service used in the Premises.

7. Condition of Premises. The Initial Premises shall be delivered to Tenant in the condition described on Exhibit "C" attached hereto [Landlord shall also perform the work described in Exhibit C to the Subleased Premises under the ConAgra Sublease]. In addition, Landlord shall provide to Tenant a finish allowance ("Finish Allowance") of up to Twenty-Four Thousand and No/100's Dollars ($24,000.00) to be paid to Tenant (provided Tenant is not in default of the terms and conditions of this Lease) within 30 days after Tenant delivers to Landlord copies of receipts or invoices for the costs of such improvements. Tenant will have received a Finish Allowance under the terms of a Sublease with ConAgra, Inc., dated the 25 day of April, 2000, pursuant to which Sublease Tenant will have occupied the Secondary Premises prior to June 1, 2003). Tenant will accept the Initial Premises in its "AS IS" condition as described on Exhibit "C" and will accept the Secondary Premises in its "AS IS" condition on June 1, 2003, and Landlord shall have no obligation hereunder to perform any additional work therein (including, without limitation, demolition of any improvements existing therein or construction of any tenant finish work or other improvements therein). Other than as provided in Section 29, below, in the event Tenant exercises it right to lease the Expansion Space identified therein, Landlord shall have no obligation hereunder to provide any additional Finish Allowances.

8. Improvements: Alterations: Repairs: Maintenance.

(a) Improvements: Alterations. Improvements to the Premises shall be installed at Tenant's expense only except for the Finish Allowance referred to above in accordance with plans and specifications which have been previously submitted to, and approved in writing by, Landlord. No alterations or physical additions in or to the Premises may be made without Landlord's prior written consent, which shall not be unreasonably withheld, or delayed; however, Landlord may withhold its consent to any alteration or addition that would affect the Building's structure or its HVAC, plumbing, electrical, or mechanical systems. Tenant shall not paint or install lighting or decorations, signs, window or door lettering, or advertising media of any type which would affect the appearance of the exterior of the Building or of any common areas of the Building without the prior written consent of Landlord, which shall not be unreasonably withheld, or delayed. All alterations, additions, or improvements made in or upon the Premises shall, at Landlord's option, either be removed by Tenant prior to the end of the Term (and Tenant shall repair all damage caused thereby), or shall remain on the Premises at the end of the Term without compensation to Tenant; provided, however, Landlord shall notify Tenant at the time of any such approval whether Landlord will require Tenant to remove such improvements at the end of the Term. All alterations, additions, and improvements shall be constructed, maintained, and used by Tenant, at its risk and expense, in accordance with all Laws; Landlord's approval of the plans and specifications therefor shall not be a representation by Landlord that such alterations, additions, or improvements comply with any Law. Notwithstanding any other provision in this Section, Tenant shall be entitled to make nonstructural, cosmetic alterations or improvements to the Premises without Landlord's consent or approval; provided, however, any alterations or improvements exceeding an aggregate value of $25,000 in any calendar year shall require Landlords approval.

(b) Repairs: Maintenance. Tenant shall maintain the Premises in a clean, safe, and operable condition, and shall not permit or allow to remain any waste or damage to any portion of the

Premises. Tenant shall repair or replace, subject to Landlord's direction and supervision, any damage to the Building caused by a Tenant Party. If Tenant fails to make such repairs or replacements within fifteen (15) days after the occurrence of such damage, then Landlord may make the same at Tenant's cost. If any such damage occurs outside of the Premises, then Landlord may elect to repair such damage at Tenant's expense, rather than having Tenant repair such damage but Landlord shall provide Tenant with five (5) days notice. The cost of all repair or replacement work performed by Landlord under this Section 8 shall be paid by Tenant to Landlord within 30 days after Landlord has invoiced Tenant therefor.

(c) Performance of Work. All work described in this Section 8 shall be performed only by contractors and subcontractors approved in writing by Landlord, such approval not to be unreasonably withheld, or delayed. Tenant shall cause all contractors and subcontractors to procure and maintain insurance coverage naming Landlord as an additional insured against such risks, in such amounts, and with such companies as Landlord may reasonably require. All such work shall be performed in accordance with all Laws and "in a good and workmanlike manner so as not to damage the Premises, the Building, or the components thereof.

(d) Mechanic's Liens. Tenant shall not permit any mechanic's liens to be filed against the Premises or the Building for any work performed, materials furnished, or obligation incurred by or at the request of Tenant. If such a lien is filed, then Tenant shall, within 30 days after Landlord has delivered notice of the filing thereof to Tenant, either pay the amount of the lien or diligently contest such lien and deliver to Landlord a bond or other security reasonably satisfactory to Landlord. If Tenant fails to timely take such action, then Landlord may pay the lien claim, and any amounts so paid, including expenses and interest, shall be paid by Tenant to Landlord within ten days after Landlord has invoiced Tenant therefor.

9. Use. Tenant shall use the Premises only for office use (the "Permitted Use") and shall comply with all Laws relating to the particular use, condition access to, and occupancy of the Premises. The Premises shall not be used for any use which is disreputable, creates extraordinary fire hazards, or results in an increased rate of insurance on the Building or its contents, or for the storage of any hazardous materials or substances. If, because of a Tenant's act, the rate of insurance on the Building or its contents increases, then such acts shall be an Event of Default, Tenant shall pay to Landlord the amount of such increase on demand, and acceptance of such payment shall not waive any of "Landlord's other rights. Tenant shall conduct its business so as not to create any nuisance or unreasonably interfere with other tenants or Landlord in its management of the Building.

10. Parking. Tenant shall have nonexclusive use of the parking area associated with the Building (the "Parking Area") during the initial and any renewal Term subject to such terms, conditions and regulations as are from time to time applicable to users of the Parking Area.

11. Assignment and Subletting.

(a) Landlord's Consent Required. Tenant shall not assign or sublet all or any part of Tenant's interest in this Lease or in the Premises, without Landlord's prior written consent, which Landlord shall not withhold or delay unreasonably.

(b) Tenant Affiliate. Notwithstanding the provisions of Section 11(a), Tenant may assign or sublet the Premises, or any portion thereof, without Landlord's consent, to any Affiliate of Tenant provided that said assignee assumes, in full, the obligations of Tenant under this Lease.

(c) Release of Tenant. Should Landlord provide its consent pursuant to Section 11(a), or in the event of an assignment or subletting pursuant to Section 11(b), Tenant shall not be relieved of any obligations hereunder including the financial obligation.

(d) Profits of Sublease. Any profits received form the sublease shall be divided equally between Landlord and Tenant, after the amortization of subleasing costs.

12. Insurance; Waivers; Subrogation; Indemnity.

(a) Insurance. Tenant shall maintain throughout the Term the following insurance policies: (1) commercial general liability insurance in amounts of $1,000,000 per occurrence with $2,000,000 in the aggregate or such other amounts as Landlord may from time to time reasonably require, insuring Tenant, Landlord, Landlord's agents and their respective affiliates against all liability for injury to, or death of, a person or persons or damage to property arising from the use and occupancy of the premises, only to the extent of Tenant's negligent acts or omissions or that of it agents, contractors or employees for which it is responsible, (2) insurance covering the full value of Tenant's property and improvements, and other property (including property of others) in the Premises, (3) contractual liability insurance sufficient to cover Tenant's indemnity obligations hereunder, and (4) worker's "compensation insurance, containing a waiver of subrogation endorsement acceptable to Landlord. Tenant's insurance shall provide primary coverage to Landlord when any policy issued to Landlord provides duplicate or similar coverage, and in such circumstance Landlord's policy will be excess over Tenant's policy. Tenant shall furnish to Landlord certificates of such insurance and such other evidence satisfactory to Landlord of the maintenance of all insurance coverages required hereunder, and Tenant shall obtain a written obligation on the part of each insurance company to notify Landlord at least thirty (30) days before cancellation or a material change of any such insurance policies. All such insurance policies shall be in form, and issued by companies, reasonably satisfactory to Landlord.

Landlord shall maintain throughout the Term the following insurance policies: (1) commercial general liability insurance in the amounts of $1,000,000.00 per occurrence and $2,000,000.00 in the aggregate, insuring Landlord and Tenant and their respective affiliates against all liability for injury to or death of, a person or persons or damage to property arising from the use and occupancy of the Building, only to the extent of Landlord's negligent acts or omissions; (2) contractual liability insurance sufficient to cover Landlord's indemnity obligations hereunder; and (3) worker's compensation insurance, containing a waiver of subrogation endorsement reasonably acceptable to Tenant.

(b) Waiver of Negligence: No Subrogation. Landlord and Tenant each waives any claim it might have against the other for any injury to or death of any person or persons or damage to or theft, destruction, loss, or loss of use of any property (a "Loss"), to the extent same is insured against under any insurance policy that covers the Building, the Premises, Landlord's or Tenant's futures, personal property, leasehold improvements, or business, or, in the case of Tenant's waiver, is required to be insured against under the terms hereof; however, Landlord's waiver shall not include any deductible amounts on insurance policies carried by Landlord or to any coinsurance penalty which Landlord may sustain. Each party shall cause its insurance carrier to endorse all applicable policies waiving the carrier's rights of recovery under subrogation or otherwise against the other party.

(c) Mutual Indemnity. Subject to Section 12(b), except for the gross negligence or willful misconduct of the indemnitee., Landlord and Tenant (individually, "Indemnitor") shall indemnify, defend and protect the other, its affiliates and their representatives and agents (collectively, "Indemnitee") from and against all claims, demands, liabilities, causes of action, suits, Judgments, damages and expenses (including reasonable attorneys' fees) arising from (A) where Landlord is the Indemnitee, (1) any occurrence on the Premises or (2) Tenant's failure to perform its obligations under this Lease; and (B) where Tenant is the Indemnitee, Landlord's operation and maintenance of the Building excluding the Premises. These indemnity provisions shall survive termination or expiration of this Lease for one (1) year. If any proceeding is filed for which indemnity is required hereunder the Indemnitor agrees, upon the Indenmitee's request therefor to

defend the Indemnitee in such proceeding, at its sole cost utilizing counsel satisfactory to the Indemnitee.

13. Hazardous or Toxic Materials. As used herein, "Hazardous or Toxic Materials" shall include but not be limited to asbestos containing materials ("ACM") petroleum products, radioactive materials, polychlorinated biphenyls (PCBs) and substances or compounds containing PCBs and all other materials, substances, wastes, and chemicals classified defined, listed, or regulated as, or containing, a "hazardous substances," "hazardous materials," or "toxic substances," "pollutant." "contaminant," "solid waste" under any Environmental Law or which may become regulated by or under the authority of any Environmental Law. As used herein, the term "Environmental Laws" shall include any and all local, state or federal laws, statutes, rules, regulations, ordinances orders, permits, licenses or other applicable governmental restrictions, guidelines or legal requirements, relating directly or indirectly to human health or safety or environment, or the presence, handling, treatment, storage, disposal, recycling, reporting, remediation, investigation, or monitoring of hazardous or toxic material including but not limited to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq.

Tenant shall not be responsible for, nor shall the provisions of Section 13 of this "Lease apply to any Hazardous or Toxic Materials in, on or under the Premises prior to the May 1, 2000 or at any time if not placed there by Tenant. In addition, Tenant shall have no responsibility for the exacerbation of, or release of any pre-existing Hazardous or Toxic Materials contamination, in, on or under the Premises or the Building, including ACM's, as a result of any of Tenant's alterations or improvements.

14. Subordination: Attornment: Notice to Landlord's Mortgagee.

(a) Subordination. This Lease shall be subordinate to any deed of trust, mortgage, or other security instrument, or any ground lease master lease, or primary lease, that now or hereafter covers all or any part of the Premises (the mortgagee under any such mortgage or the lessor under any such lease is referred to herein as a "Landlord's Mortgagee"), provided Landlord's Mortgagee agrees in writing not to disturb Tenant's quiet enjoyment of the Premises so long as Tenant is not in default of this Lease beyond all applicable cure periods and Tenant attorns to Landlord's Mortgagee after the latter has succeeded to Landlord's interest in the Building. Any Landlord's Mortgage may elect, at any time, unilaterally, to make this Lease superior to its mortgage, ground lease, or other interest in the Premises by so notifying Tenant in writing.

(b) Attornment. Tenant shall attorn to any party succeeding to Landlord's interest in the Premises, whether by purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination of lease, or otherwise, upon such party's request, and shall execute such agreements confirming such attornment as such parry may reasonably request.

(c) Notice to Landlord's Mortgagee. Tenant shall not seek to enforce any remedy it may have for any default on the part of Landlord without first giving written notice by certified mail, return receipt requested, specifying the default in reasonable detail, to any Landlord's Mortgagee whose address has been given to Tenant, and affording, such Landlord's Mortgagee a reasonable opportunity to perform Landlord's obligations hereunder.

15. Rules and Regulations. Tenant shall comply with the rules and regulations of the Building which are attached hereto as Exhibit D. Landlord may, from time to time, change such rules and regulations for the safety, care, or cleanliness of the Building and related facilities, provided that such changes axe applicable to all tenants of the Building and will not unreasonably interfere with Tenant's use of the Premises. Tenant shall be responsible for the compliance with such rules and regulations by each Tenant Party.

16. Condemnation.

(a) Total Taking. If the entire Building or Premises are taken by right of eminent domain or conveyed in lieu thereof (a "Taking") this Lease shall terminate as of the date of the Taking, provided that Landlord shall have notified Tenant of such Taking.

(b) Partial Taking—Tenant's Rights. If any part of the Building becomes subject to a Taking and such Taking will prevent Tenant from conducting its business in the Premises in a manner reasonably comparable to that conducted immediately before such Taking for a period of more than one hundred and fifty (150) days, then Tenant may terminate this Lease as of the date of such Taking by giving written notice to Landlord within thirty (30) days after the Taking, and Rent shall be apportioned as of the date of such Taking. If Tenant does not terminate this Lease, then Rent shall be abated on a reasonable basis as to that portion of the Premises rendered untenantable by the Taking.

(c) Partial Taking—Landlord's Rights. If any material portion, but less Than all, of the Building becomes subject to a Taking, or if Landlord is required to pay any of the proceeds received for a Taking to a Landlord's Mortgagee, then Landlord may terminate this Lease by delivering written notice thereof to Tenant within thirty (30) days after such Taking, and Rent shall be apportioned as of the date of such Taking. If Landlord does not so terminate this Lease, then this Lease will continue, but if any portion of the Premises has been taken, Rent shall abate as provided in the last sentence of Section 16(b).

(d) Award. If any Taking occurs, then Landlord shall receive the entire award or other compensation for the land on which the Building is situated, the Building, and other improvements taken, and Tenant may separately pursue a claim (to the extent it will not reduce Landlord's award) against the condemnor for the value of Tenant's personal property which Tenant is entitled to remove under this Lease, moving costs, loss of business, and other claims it may have.

17. Fire or Other Casualty.

(a) Repair Estimate. If the Premises or the Building are damaged by fire or other casualty, (a "Casualty"), Landlord shall, within thirty (30) days after such Casualty, deliver to Tenant a good faith estimate (the "Damage Notice") of the time needed to repair the damage caused by such Casualty.

(b) Landlord's and Tenant's Rights. If a material portion of the Premises or the Building is damaged by Casualty such that Tenant is prevented from conducting its business in the premises in a manner reasonably comparable to that conducted immediately before such Casualty and Landlord estimates that the damage caused thereby cannot be repaired within one hundred and fifty (150) days after the Casualty, then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within thirty (30) days after the Damage Notice has been delivered to Tenant. If Tenant does not so timely terminate this Lease, then (subject to Section 17(c)) Landlord shall repair the Building or the Premises, as the case may be, as provided below, and Rent for the portion of the Premises rendered unusable for Tenant's purposes by the damage or repair shall be abated on a reasonable basis from the date of damage until the completion of the repair, unless a Tenant Parry caused such damage, in which case, Tenant shall continue to pay Rent without abatement.

(c) Landlord's Rights. If a Casualty damages a material portion of the Building, and Landlord makes a good faith determination that restoring the Premises would be uneconomical, or if Landlord is required to pay any insurance proceeds arising out of the Casualty to a Landlord's Mortgagee, then Landlord may terminate this Lease by giving written notice of its election to terminate within thirty (30) days after the Damage Notice has been delivered to Tenant, and Basic Rent and Additional Rent shall be abated as of the date of the Casualty. Notwithstanding the foregoing, any insurance proceeds arising out of the Casualty must be used for the restoration of the office building provided they are not required to be paid to Landlord's Mortgagee.

(d) Repair Obligation. If neither party elects to terminate this Lease following a Casualty, then Landlord shall, within a reasonable time after such Casualty, begin to repair the Building and the Premises and shall proceed with reasonable diligence to restore the Building Premises to substantially the same condition as they existed immediately before such Casualty; however, Landlord shall not be required to repair or replace any of the furniture equipment, fixtures, and other improvements which may have been placed by, or at the request o Tenant or other occupants in the Building or the Premises, and Landlord's "obligation to repair or restore the Building or Promises shall be limited to the extent of the insurance proceeds actually received by Landlord for the Casualty in question.

18. Personal Property Taxes. Tenant shall be liable for all taxes levied or assessed against personal property, furniture, or fixtures placed by Tenant in the Premises. If any taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property and Landlord elects to pay the same, or if the assessed value of Landlord's property is increased by inclusion of such, personal property, furniture or Fixtures and Landlord elects to pay the taxes based on such increase, then Tenant shall pay to Landlord, within thirty (30) days after Landlord has invoiced Tenant therefor, the part, of such taxes for which Tenant is primarily liable hereunder; however, Landlord shall not pay such amount if Tenant notifies Landlord that it will contest the validity or amount of such taxes before Landlord makes such payment, and thereafter diligently proceeds with such contest in accordance with law and if the nonpayment thereof does not pose a threat of loss or seizure of the Building or interest of Landlord therein or impose any fee or penalty against Landlord.

19. Events of Default. Each of the following occurrences shall be an "Events of Default":

(a) Tenant's failure to pay Rent within ten (10) days after Landlord has delivered notice to Tenant that the same is due;

(b) Tenant fails to provide any estoppel certificate verifying factual information supplied on the certificate by Landlord as called for in this Lease and such failure shall continue for ten (10) days after written notice thereof from Landlord to Tenant;

(c) Tenant's failure to perform, comply with, or observe any other agreement or obligation of Tenant under this Lease and the continuance of such failure for a period of more than thirty (30) days after Landlord has delivered to Tenant written notice thereof provided, if the nature of Tenant's failure is such that more time is reasonably required in order to cure, there shall be no Event of Default if Tenant commences to cure within such period and thereafter reasonably seeks to cure such failure to completion, and

(d) The filing of a petition by or against Tenant (the term "Tenant" shall include, for the purpose of this Section 19(d), any guarantor of Tenant's obligations hereunder) (1) in any bankruptcy or other insolvency proceeding; (2) seeking any relief under any state or federal debtor relief law; (3) for the appointment of a liquidator or receiver for all or substantially all of Tenant's property or for Tenant's interest in this Lease; or (4) for the reorganization or modification of Tenant's capital structure; however, if such a petition is filed against Tenant, then such filing shall not be an Event of Default unless Tenant fails to have the proceedings initiated by such petition dismissed within ninety (90) days after the filing thereof.

20. Remedies. Upon any Event of Default, Landlord may, in addition to all other rights and remedies afforded Landlord hereunder or by law or equity, take any of the following actions:

(a) Terminate this Lease by giving Tenant written notice thereof, in which event Tenant shall pay to Landlord the sum of (1) all Rent accrued hereunder through the date of termination, (2) all amounts due under Section 21(a), and (3) an amount equal to (A) the total Rent that Tenant would have been required to Day for the remainder of the Term discounted to present value at a per annum rate equal to the "Prime Rate" as published on the date this Lease is terminated by The Wall Street Journal, Central Edition, in its listing of "Money Rates" minus one percent, minus (B) the then present fair rental value of the Premises for such period, similarly discounted;

(b) Terminate Tenant's right to possess the Premises without terminating this Lease by giving written notice thereof to Tenant, in which event Tenant shall pay to Landlord (1) all Rent and other amounts accrued hereunder to the date of termination of possession (2) all amounts due from time to time under Section 21(a), and (3) all Rent and other net sums required hereunder to be paid by Tenant during the remainder of the Term, diminished by any net sums thereafter received by Landlord through reletting the Premises during such period, after deducting all costs incurred by Landlord in reletting the Premises. Landlord shall use reasonable efforts to relet the Premises on such terms as Landlord in its sole discretion may determine (including a term different from the Term, rental concessions, and alterations to, and improvement of, the Premises); however, Landlord shall not be obligated to relet the Premises before leasing other portions of the Building. Landlord shall not be liable for, nor shall Tenant's obligations hereunder be diminished because of, Landlord's failure to relet the Premises or to collect rent due for such reletting. Reentry by Landlord in the Premises shall not affect Tenant's obligations hereunder for the unexpired Term; rather, Landlord may, from time to time, bring an action against Tenant to collect amounts due by Tenant, without the necessity Landlord's waiting until the expiration of the Term. Unless Landlord delivers written notice to Tenant expressly stating that it has elected to terminate this Lease, all actions taken by Landlord to dispossess or exclude Tenant from the Premises shall be deemed to be taken under this Section 20(b). If Landlord elects to proceed under this Section 20(b), it may at any time elect to terminate this Lease under Section 20(a); or

(c) Additionally, without notice, Landlord may alter locks or other security devices at the Premises to deprive Tenant of access thereto, and Landlord shall not be required to provide a new key or right of access to Tenant.

21. Payment by Tenant: Non-Waiver.

(a) Payment by Tenant. Upon any Event of Default, Tenant shall pay to Landlord all costs incurred by Landlord (including court costs and reasonable attorneys' fees and expenses) in (1) obtaining possession of the Premises, (2) removing and storing Tenant's or any other occupant's property, (3) repairing and restoring the Premises to the condition Section 22 requires, (4) if Tenant is dispossessed of the Premises and this Lease is not terminated, reletting all or any part of the Premises (including brokerage commissions, cost of tenant finish work, and other costs incidental to such reletting), (5) performing Tenant's obligations which Tenant failed to perform, and (6) enforcing, or advising Landlord of; its rights, remedies, and recourses arising out of the Event of Default. To the full extent permitted by law, Landlord and Tenant agree the federal and state courts of Nebraska shall have exclusive jurisdiction over any matter relating to or arising from this Lease and the parties' rights and obligations under this Lease.

(b) No Waiver. Landlord's acceptance of Rent following an Event of Default shall not waive Landlord' s rights regarding such Event of Default. No waiver by Landlord of any violation or breach of any of the terms "contained herein shall waive Landlord's rights regarding any future violation of such term. Landlord's acceptance of any partial payment of Rent shall not waive Landlord's rights with regard to the remaining portion of the Rent that is due, regardless of any endorsement or other statement on any instrument delivered in payment of Rent or any writing delivered in connection therewith; accordingly, Landlord's acceptance of a partial payment of Rent shall not constitute an accord and satisfaction of the full amount of the Rent that is due.

22. Surrender of Premises. No act by Landlord shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless it is in writing and signed by Landlord. At the expiration or termination of this Lease, Tenant shall deliver to Landlord the Premises with all improvements located therein in good repair and condition, broom-clean, reasonable wear and tear (and condemnation and Casualty damage not caused by Tenant, as to which Sections 16 and 17 shall control) excepted, and shall deliver to Landlord all keys to the Premises. Provided that Tenant has performed all of its obligations hereunder, Tenant may remove all trade fixtures, furniture, and personal property placed in the Premises by Tenant. Tenant shall not be required to remove any of the initial Tenant Improvements made to the Premises during the tem of the Sublease with ConAgra, Inc. nor any other improvement or alteration unless Landlord specifically requires such removal at lease termination at the time Landlord grants its consent to such improvement or alteration. Tenant shall repair all damage caused by such removal. All items not so removed shall be deemed to have been abandoned by Tenant and may be appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord without notice to Tenant and without any obligation to account for such items. The provisions of this Section 22 shall survive the end of the Term.

23. [Intentionally Left Blank].

24. Holding Over. If Tenant fails to vacate the Premises at the end of the Term, then Tenant shall be a tenant at will and, in addition to all other damages and remedies to which Landlord may be entitled for such holding over, Tenant shall pay, in addition to the other Rent, a daily Basic Rent equal to 125% for the first 90 days, 150% for the next 90 days of the daily Basic Rent payable during the last month of the Term. The provisions of this Section 24 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law. If Tenant fails to surrender the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys' fees) and liability resulting from such failure, including, without limiting, the generality of the foregoing, any claims made by any succeeding tenant founded upon such failure to surrender, and any lost profits to Landlord resulting therefrom.

25. Certain Rights Reserved by Landlord. Provided that the exercise of such rights does not unreasonably interfere with Tenant's access to or occupancy of the Premises (24 hours per day, 7 days per week), Landlord shall have the following rights:

(a) To decorate and to make inspections, repairs, alterations, additions, changes, or improvements, whether structural or otherwise, in and about the Building, or any part thereof except that doing so in the Premises shall require 14 hours prior written notice except in the event of emergency; to enter upon the Premises (with 24 hours prior written notice other than in the event of emergency) and, during the continuance of any such work, to temporarily close doors, entryways, public space, and corridors in the Building; to change the name of the Building: and to change the arrangement and location of entrances or passageways, doors, and doorways, corridors, elevators, stairs, restrooms or other public parts of the Building;

(b) To take such reasonable measures as Landlord deems advisable for the security of the Building and its occupants; evacuating the Building for cause, suspected cause, or for drill purposes; temporarily denying access to "the Building; and closing the Building after normal business hours and on Sundays and holidays, subject, however, to Tenant's right to enter when the Building is closed after normal business hours under such reasonable regulations as Landlord may prescribe from time to time; and

(c) To enter the Premises at reasonable hours to show the "Premises to prospective purchasers, lenders, or, during the last 6 months of the Term, tenants. Landlord shall make reasonable efforts to minimize interference with Tenant's normal business operations.

26. Security Deposit. Tenant has deposited with Landlord the sum of Zero ($0.00) Dollars. Said sum shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants and conditions of this Lease to be kept and performed by Tenant during, the term hereof. If Tenant defaults with respect to any provision of this Lease, including, but not limited to the provisions relating to the payment of rent, the Landlord may (but shall not be required to) use, apply or retain all or any part of this security deposit for the payment of any rent or any other sum in default, or for the payment of any other amount which Landlord expend or become obligated to spend by reason of Tenant's default or to compensate the Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. Landlord shall not be required to keep this security deposit separate from its general funds, and Tenant shall not be entitled to interest on such deposit. If Tenant shall fully and faithfully perform every provision of this lease to be performed by it, the security deposit or any balance thereof shall be returned to Tenant (or at Landlord's option, to the last assignee of Tenant's interest hereunder) at the expiration of the lease term. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer said deposit of Landlord's successor in interest.

27. Right to Renew. At the end of the initial Term of the Lease, provided Tenant is not in Default under the terms of this Lease, Tenant shall have the Option to Renew the term of this Lease for one (1) period of one (1) year hereinafter ("Renewal Term") provided that Tenant gives Landlord advance written notice of its intent to exercise this Option to Renew six (6) months prior to the end of the initial Term. The Renewal Term shall be governed by all the terms, covenants, and conditions of the Lease applicable to the initial term except that the rental rate for the Renewal Term shall be an amount equal to $33,493.63 per month for each month during the Renewal Term based on 24,359 rentable square feet.

28. Expansion Rights. At the Commencement Date, Tenant shall have the right to lease the approximately 13,076 rentable square feet of space shown on Exhibit "D" hereto ("Expansion Space"). Tenant shall, by written notice, within ten (10) days of the Commencement Date, notify Landlord of its election to lease the Expansion Space. In the event Tenant elects to lease the Expansion Space, it shall

be on the same terms and conditions as contained in this Lease, and the definition of Premises as set forth in Section 1 of this Lease shall be deemed to include the Expansion Space.

29. Provided Tenant exercises its right to lease the Expansion Space, Landlord shall provide to Tenant a Finish Allowance of up to $60,000, which amount, provided Tenant is not in default of the terms and conditions of this Lease, shall be paid to Tenant within 30 days after Tenant delivers to Landlord copies of receipts or invoices for the costs of improvements made to the Expansion Space. Tenant must apply One Hundred percent (100%) of the Finish Allowance to the improvements to [Premises] which shall include, but not be limited to, architectural fees, cabling for phone lines, carpet and paint.

Initial

30. Miscellaneous.

(a) Landlord Transfer. Landlord may transfer any portion of the Building and any of its rights under this Lease. Landlord shall thereby be released from any further obligations hereunder, provided that the assignee assumes Landlord's obligations hereunder in writing.

(b) Landlord's Liability. The liability of Landlord to Tenant for any default by Landlord under the terms of this Lease shall be limited to Tenant's actual direct, but not consequential, damages therefor and shall be recoverable only from the interest of Landlord in the Building, and Landlord shall not be personally liable for any deficiency. This Section shall not limit any remedies which Tenant may have for Landlord's defaults which do not involve the personal liability of Landlord.

(c) Force Majeure. Excluding a party's obligations under this Lease that can be performed by the payment of money (e.g., payment of Rent and maintenance of insurance), whenever a period of time is herein prescribed for action to be taken by either party hereto, such party shall not be liable or responsible for, and there shall be excluded from the computation of any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations, or restrictions, or any other causes of any kind whatsoever which are beyond the control of such party.

(d) Brokerage. Except for The Mega Corporation, whose commission shall be paid by Landlord, Tenant and Landlord shall each indemnify the other against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any broker or agent claiming the same by, through, or under the indemnifying party.

(e) Estoppel Certificates. From time to time, Tenant shall furnish to any party designated by Landlord, within fifteen days after Landlord has made a request therefor, a certificate signed by Tenant containing such factual certifications and representations as to this Lease as Landlord may reasonably request.

(f) Notices. All notices and other communications given pursuant to this Lease shall be in writing and shall be (1) mailed by first class, United States Mail, postage prepaid, certified, with return receipt requested, and addressed to the parties hereto at the address specified next to their signature block, (2) hand delivered to the intended address, or (3) sent by prepaid telegram, cable,

facsimile transmission, or telex followed by a confirmatory letter. A copy of all notices to Tenant shall be delivered in one of the afore described methods to:

X.COM Corporation				Metro-Omaha Associates, LLC
				c/o The MEGA Corporation
				14301 FNB Parkway, Suite 100
				Omaha, NE 68154
Phone:				Phone: 402-697-5881
Fax:				Fax: 402-334-8976
Attn:				Attn: Property Management
				Cc: Metro-Omaha Associates, LLC One Pacific Place, Suite 450 1125 South 103rd Street Omaha, Nebraska 68124-0171 Attention: Thomas Hotz Phone: (402) 393-1300 Facsimile: (402) 393-2369

All notices shall be effective upon delivery to the address of the addressee. The parties hereto may change their addresses by giving notice thereof to the other in conformity with this provision.

(g) Separability. If any clause or provision of this Lease is illegal, invalid, or unenforceable under present or future laws, then the remainder of this Lease shall not be affected thereby and in lieu of such clause or provision, there shall be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid, or unenforceable clause or provision as may be possible and be legal, valid, and unenforceable.

(h) Amendments and Binding Effect. This Lease may not be amended except by instrument in writing signed by Landlord and Tenant. No provision of this Lease shall be deemed to have been waived by Landlord unless such waiver is in writing signed by Landlord and no custom or practice which may evolve between the parties in the administration of the terms hereof shall waive or diminish the right of Landlord to insist upon the performance by Tenant in strict accordance with the terms hereof. The terms and conditions contained in this Lease shall inure to the benefit of and be binding upon the parties hereto, and upon their respective successors in interest and "legal representatives, except as otherwise herein expressly provided. This Lease is for the sole benefit of Landlord and Tenant, and, other than Landlord's Mortgagee, no third party shall be deemed a third party beneficiary hereof.

(i) Quiet Enjoyment. Provided Tenant has performed all of its obligations hereunder, Tenant shall peaceably and quietly hold and enjoy the Premises for the Term, without hindrance from Landlord or any parry claiming by, through, or under Landlord but not otherwise, subject to the terms and conditions of this Lease.

(j) No Merger. There shall be no merger of the leasehold estate hereby created with the fee estate in the Premises or any part thereof if the same person acquires or holds, directly or indirectly, this Lease or any interest in this Lease and the fee estate in the leasehold Premises or any interest in such fee estate.

(k) No Offer. The submission of this Lease to Tenant shall not be construed as an offer, and Tenant shall not have any rights under this Lease unless Landlord executes a copy of this Lease and delivers it to Tenant.

(l) Entire Agreement. This Lease constitutes the entire agreement between Landlord and Tenant regarding the subject matter hereof and supersedes all oral statements and prior writings relating thereto. Except for those set forth in this Lease, no representations, warranties or agreements have been made by Landlord or Tenant to the other with respect to this Lease or the obligations of Landlord or Tenant in connection therewith. The normal rule of construction that any ambiguities be resolved against the drafting party shall not apply to the interpretation of this Lease or any exhibits or amendments hereto.

(m) Waiver of Jury Trial. To the maximum extent permitted by law, Landlord and Tenant each waive right to trial by jury in any litigation arising out of or with respect to this Lease.

(n) Governing Law. This Lease shall be governed by and construed in accordance with the laws of the State of Nebraska.

(o) Joint and Several Liability. If Tenant is comprised of more than one party, each such party shall be jointly and severally liable for Tenant's obligations under this Lease.

(p) Financial Reports. Within fifteen (15) days after Landlord's request, Tenant will furnish to Landlord Tenant's most recent audited financial statements (including any notes to them) or, at Tenant's option, the most recent audited financial statements (including any notes to them) of an entity that controls Tenant, or, if no such audited statements have been prepared, such other financial statements (and notes to them) as may have been prepared for Tenant or, at Tenant's option, an entity that controls Tenant by an independent certified public accountant in Accordance Accepted Accounting Principles by an independent certified public accountant, or at Tenant's option, by an officer of Tenant or an officer of an entity that controls Tenant. Landlord will not disclose any aspect of any such financial statements except (1) to Landlord's lenders or prospective purchasers of the Building, (2) if required by court order in the case of disclosures pursuant to clauses (1) and (2) of the preceding sentence, such disclosures shall be made only after Tenant gives its specific consent to such disclosure and after the party receiving such information has signed a confidentiality statement reasonably acceptable to Tenant.

(q) Telecommunications. Tenant and its telecommunications companies, including a but not limited to local exchange telecommunications companies and alternative access vendor services companies shall have no right of access to and within the Building, for the installation and operation of telecommunications systems including but not limited to voice, video, data, and any other telecommunications services provided over wire, fiber optic, microwave, wireless, and any other transmission systems, for part or all of Tenant's telecommunications within the Building and from the Building to any other location without Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed.

(r) General Definitions. The following terms shall have the following meanings: "Laws" means all federal, state, and local laws, rules and regulations, all court orders, all governmental directives and governmental orders, and all restrictive covenants affecting the Property, and "Law" means any of the foregoing; "Affiliate" means any person or entity, which, directly or indirectly, controls, is controlled by, or is under common control with the party "in question, any entity resulting from merger or consolidation with the party in question, or any person or entity which acquires all the assets of the party in question as a going concern of the business that is being conducted at a single site; "Tenant Party" shall include Tenant, any assignees claiming by, through, or under Tenant, any subtenants claiming by, through, or under Tenant, and any agents, contractors, employees invitees of the foregoing parties and "including" means including without limitation.

(s) Confidentiality. Tenant acknowledges that the terms and conditions of this Lease are to remain confidential for Landlord's benefit, and may not be disclosed by Tenant to anyone, by any

manner or means, directly or indirectly, without Landlord's prior written consent. The consent by Landlord to any disclosures shall not be deemed to be a waiver on the part of Landlord of any prohibition against any future disclosure.

(t) List of Exhibits. All exhibits and attachments attached hereto are incorporated herein by this reference.

Exhibit A	—	Outlines of Premises
Exhibit B	—	Legal Description of Building
Exhibit C	—	Condition of Initial Premises
Exhibit D	—	Building Rules and Regulations

TENANT:
X.Com Corporation
By:	/s/ William Harris
Name:
Title:
Address:

	Attn:
	Phone:
	Fax:
LANDLORD
Metro-Omaha Associates, LLC
By:	/s/ Thomas G. Hotz
	Thomas G. Hotz, Managing Member
		One Pacific Place, Suite 450 1125 South 103^rd Street Omaha, Nebraska 68124-0171 Attention: Thomas Hotz Phone: (402) 393-1300 Facsimile: (402) 393-2369

LEASE AMENDMENT AGREEMENT

THIS LEASE AMENDMENT AGREEMENT (hereinafter "Agreement") is made as of the 25^th day of June, 2000, by and between METRO-OMAHA ASSOCIATES, LLC, a Nebraska limited liability company (hereinafter "Landlord") and X.COM CORPORATION, a California corporation (hereinafter "Tenant").

RECITALS

A. By a Lease dated the 25^th day of April, 2000, (hereinafter the "Lease"), Tenant let from Landlord approximately 24,359 rentable square feet of area, on the third and fourth floors (the "Premises") at 11128 John Galt Boulevard, Omaha, Nebraska (the "Building").

B. Landlord and Tenant wish to add an additional 13,076 rentable square feet of space to the Premises in accordance with Tenant's exercise of the Expansion Rights contained in Paragraph 28 of the Lease.

NOW, THEREFORE, in consideration of the mutual promises herein contained, IT IS HEREBY AGREED AS FOLLOWS:

1. Construction. This Agreement shall be construed in conjunction with the Lease and, except as amended hereby, all of the terms, covenants and conditions of the Lease and all exhibits, addenda, amendments and extensions thereto to date, shall remain in full force and effect and are hereby ratified and confirmed.

2. Defined Terms. All terms used herein shall have the meanings ascribed to them in the Lease unless otherwise defined herein.

3. The first sentence of Paragraph 1. Lease Grant shall be amended to provide as follows:

Subject to the terms of this Lease, Landlord leases to Tenant, and Tenant leases from Landlord premises comprised of approximately 37,435 rentable square feet as depicted on the plan attached as Exhibit A (the "Premises") in the office building known as Metropolitan Business Center located on the majority of the south wing of the fourth floor and the entire third floor of 11128 John Galt Boulevard, Omaha, Nebraska (the "Building").

4. The first sentence of Paragraph 2. Term shall be amended to provide as follows:

Except as hereinafter provided, the term of this Lease for the 1,242 rentable square feet of space on the fourth floor of the Building depicted in the plan attached as Exhibit A-1 (the "Initial Premises") shall commence on April 17, 2000, or substantial completion of improvements to the Initial Premises so as to place them in the condition referred to in paragraph 7, below, and expire at 11:59 p.m. on May 31, 2001 (the "Expiration Date") and the term of this Lease for the 36,193 rentable square feet of space on the third and fourth floors of the Building depicted in the plans attached as Exhibits A-2 and A-3 (collectively, the "Secondary Premises") shall commence on June 1, 2003, and expire on the Expiration Date.

5. Subparagraph (a) of Paragraph 3. Rent shall be amended to provide as follows:

Months 04/17/2000 to 05/31/2002—$1,397.25 per month
Months 06/01/2002 to 05/31/2003—$1,552.50 per month
Months 06/01/2003 to 05/31/2004—$46,793.75 per month
Months 06/01/2004 to 05/31/2005—$48,353.54 per month
Months 06/01/2005 to 05/31/2006—$49,913.33 per month

6. The second sentence of Subparagraph (c) of Paragraph 3. Rent shall be amended to provide as follows:

Beginning June 1, 2003, Tenant shall, for each fiscal year from June 1 to May 31, during the remainder of the Term, pay to Landlord as Additional Rent ("Additional Rent") 28.9514% (being the proportion which the rentable square feet of the Initial Premises and the Secondary Premises, combined, bear to the total rental square feet of the Building) of the increase (if any) in the Operating Costs of the Building (as hereinafter defined) for such fiscal year over the Operating Costs of the Building for the Base Year (as hereinafter defined).

7. Paragraph 7. Condition of the Premises shall be amended to provide as follows:

7. Condition of the Premises. Landlord, at Landlord's expense, shall deliver the Initial Premises depicted in the Plan attached as Exhibit A-1 in the condition described on Exhibit C-1. Landlord, at Landlord's expense, shall deliver that portion of the Secondary Premises depicted in the Plan attached as Exhibit A-2 in the condition described on Exhibit C-2. Landlord, at Landlord's expense, shall deliver that portion of the Secondary Premises depicted in the Plan attached as Exhibit A-3 in the condition described in Exhibit C-3. Landlord and Tenant acknowledge that Tenant will occupy the Secondary Premises prior to June 1, 2003, as a subtenant, pursuant to a Sublease dated April 25, 2000, as amended, between ConAgra, Inc., and Tenant, and that the Initial and Secondary Premises have been, or will be, placed in the conditions identified on Exhibits C-1, C-2 and C-3, satisfying Landlord's obligations under this Paragraph 7, by August 1, 2000. In addition, Landlord shall provide to Tenant a Finish Allowance ("Finish Allowance") of up to Twenty-Four Thousand and No/100 Dollars ($24,000.00) to be paid to Tenant (provided Tenant is not in default of the terms and conditions of this Lease) within thirty (30) days after Tenant delivers to Landlord copies of receipts or invoices, and Lien Waivers, for the cost of such improvements.

8. Paragraph 9. Use shall be amended by the addition of the following sentence:

No more than three hundred (300) people shall be permitted to occupy the Premises at any one time without the prior written consent of Landlord.

9. Subparagraph (a) of Paragraph 14. Subordination: Attornment: Notice to Landlord's Mortgagee shall be amended by the addition of the following sentence:

Landlord shall use commercially reasonable efforts to obtain for the benefit of Tenant commercially reasonable nondisturbance agreements from any and all current ground lessors and holders of deeds of trust or mortgages covering the Premises or the Building.

10. The second sentence of Paragraph 27. Right to Renew shall be amended to provide as follows:

The Renewal Term shall be governed by all the terms, covenants, and conditions of the Lease applicable to the initial term except that the rental rate for the Renewal Term shall be an amount equal to $51,473.13 per month for each month during the Renewal Term based on 37,435 rentable square feet.

11. The first sentence of paragraph 29. shall be amended to provide as follows:

Provided Tenant exercises its right to lease the Expansion Space, Landlord shall provide to Tenant a Finish Allowance of up to $70,000.00, which amount (i) may be utilized by Tenant while it occupies the Secondary Premises as a subtenant pursuant to a Sublease dated April 25, 2000, as amended, between ConAgra, Inc. and Tenant, and (ii) provided Tenant is not in default of the terms and conditions of this Lease, shall be paid to Tenant within 30 days after Tenant delivers to Landlord copies of receipts or invoices for the costs of improvements made to the Expansion Space.

12. Broker. Tenant represents to Landlord that except for The Mega Corporation (the "Broker"), Tenant has not dealt with any real estate broker, salesperson or finder in connection with this Agreement, and no other such person initiated or participated in the negotiation of this Agreement or is entitled to any commission in connection herewith. Tenant hereby agrees to indemnify, defend and hold Landlord, its property manager and their respective employees harmless from and against any and all liabilities, claims, demands, actions, damages, costs and expenses (including attorneys fees) arising from a claim for a fee or commission made by any broker, other than the Broker, claiming to have acted by or on behalf of the Tenant in connection with this Agreement.

13. Submission. Submission of this Agreement by Landlord or Landlord's representatives to Tenant for examination and/or execution shall not in any manner bind Landlord and no obligations of Landlord shall arise under this Agreement unless and until this Agreement is fully executed.

14. Parking. Tenant shall have non-exclusive use of the parking area associated with the Building (the "Parking Area") during the initial and any renewal Terms subject to such terms, conditions and regulations as are from time to time applicable to uses of the Parking Area delivered by Landlord and Tenant; provided, however, the execution and delivery by Tenant of this Agreement to Landlord or Landlord's representatives shall constitute an irrevocable offer by Tenant to lease the Premises in the Building on the terms and conditions contained in this Agreement, which offer may not be revoked for thirty (30) days after such delivery.

IN WITNESS WHEREOF, Landlord and Tenant have caused this LEASE AMENDMENT AGREEMENT to be executed by their duly authorized officers, as of the day and year first above written.

TENANT: X.COM CORPORATION		LANDLORD: METRO-OMAHA ASSOCIATES, LLC
By:	/s/ Powell	By:	/s/ Thomas G. Hotz
Title:	Director of Customer Service	Name:	Thomas G. Hotz
		One Pacific Place, Suite 450 1125 South 103^rd Street Omaha, Nebraska 68124-0171 Attention: Thomas Hotz Phone: (402) 383-1300 Facsimile: (402) 393-2369

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LEASE AMENDMENT AGREEMENT
EX-10.14 6 a2060419zex-10_14.htm EXHIBIT 10.14 Prepared by MERRILL CORPORATION
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EXHIBIT 10.14

SUBLEASE

THIS SUBLEASE, dated as of April 25, 2000, is made between ConAgra, Inc., a Delaware corporation ("ConAgra, Inc.) and X.Com Corporation, a California corporation ("X.Com").

WHEREAS, by Lease dated January , 2000 (the "Master Lease") by and between Metro-Omaha Associates, L.L.C., as Landlord ("Landlord") and ConAgra, as Tenant, Landlord leased to ConAgra certain premises located on the third and fourth floors (the "Premises") of the building commonly known as 11128 John Galt Boulevard, Omaha, Nebraska (the "Building") (a copy of the Master Lease is attached hereto as Exhibit "A"); and

WHEREAS, X.Com desires to sublease from ConAgra a portion of the Premises.

NOW, THEREFORE, in consideration of the mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

1. Sublease. Subject to the consent of Landlord, ConAgra hereby subleases to X.Com and X.Com subleases from ConAgra that portion of the Premises consisting of approximately 23,117 rentable square feet of space composed of approximately 12,812 rentable square feet of space on the third floor and 10,305 rentable square feet of space on the fourth floor of the Building as shown on Exhibit "B" hereto (the "Subleased Premises"). Following completion of the Construction Plan as set forth in Exhibit "C", the actual rentable area of the Subleased Premises shall be determined in accordance with the Standard Method for Measuring Floor Area in Office Buildings, Approved June 7, 1996 ("BOMA Standards") by the American National Standards Institute, Inc. (ANSI/BOMA 265.1-1996). X.Com agrees to comply with all terms, covenants, conditions and obligations of the "Tenant" identified in the Master Lease as if X.Com were the "Tenant" under such Master Lease, including but not limited to all rules and regulations of the Building referred to in paragraph 14 of the Master Lease.

2. Term. The "Term" of this Sublease shall commence on April 17, 2000, ("Commencement Date") and, unless terminated earlier in accordance with the terms of this Sublease, shall end on May 31, 2003 ("Expiration Date"). X.Com may have access to that portion of the Subleased Premises on the fourth floor from and after April 1, 2000, and may have access to that portion of the Subleased Premises on the third floor from and after May 1, 2000. In the event X.Com accesses the Subleased Premises, or any part thereof, for purposes of constructing improvements prior to April 17, 2000, X.Com shall be subject to all terms, covenants and conditions of the Sublease and the Master Lease other than those relating to payment for Basic Rent or Additional Rent. In the event that ConAgra's right to possession shall be terminated for any reason, this Sublease shall terminate simultaneously with the termination of ConAgra's right to possession.

3. Use. X.Com shall occupy and use the Subleased Premises only for office use in the conduct of X.Com's business and not for any other purposes. No more than two hundred fifty (250) people shall be permitted to occupy the Subleased Premises at any one time without the prior written consent of ConAgra and Landlord.

4. Rent. X.Com shall pay, without deduction or setoff, as Basic Rent to ConAgra the total sum of the following:

4/17/2000 through 5/31/2002 - $26,006.63 per month
6/01/2002 through 5/31/2003 - $28,896.25 per month

The above rental is computed at the rate of $13.50 per rentable square foot per rentable square foot per year net of electrical charges for the period through May 31, 2002 and at the rate of $15.00 per rentable square foot per year net of electrical charges for the period June 1, 2002, through May 31, 2003. Rental due for any portion of a month shall be prorated.

The first such installment of Basic Rent shall be due and payable upon execution of this Sublease and, except as provided in paragraph 2, above, shall thereafter be due and payable in advance on the first day of each calendar month of the Term commencing with May, 2000. In addition to the foregoing, X.Com shall be responsible for and pay (i) to the utility providing such service all charges for electric service used in the Subleased Premises as and when such charges come due, and (ii) to ConAgra 63.8715 per cent of the "Additional Rent" due from ConAgra to Landlord pursuant to paragraph 3(c) of the Master Lease as and when such "Additional Rent" is due from ConAgra to Landlord. All sums required to be paid by X.Com hereunder to ConAgra are sometimes collectively referred to as, and shall constitute, "rent". All rent and other sums payable hereunder shall be payable at the office of The Mega Corporation, 14301 FNB Parkway, Suite 100, Omaha, Nebraska, 68154, or at such other location or to any agent designated in writing by ConAgra. X.Com shall, in addition to any other sums hereunder, pay a late charge ("Late Charge") equal to five percent (5%) of any amount due hereunder that has not been paid to ConAgra within five (5) days after written notice that such amount is due, provided, however, that to the extent that this provision for Late Charge duplicates any provision in the Master Lease, then X.Com shall be required only to pay the greater of (a) the Late Charge provided in the Master Lease, or (b) the Late Charge provided herein.

Basic Rent to be paid per month, as set forth above, and the percentage of the "Additional Rent" due from ConAgra to Landlord to be paid by X.Com shall be adjusted to reflect the actual rentable area of the Subleased Premises determined according to BOMA Standards in accordance with Paragraph 1, above.

5. Security Deposit. X.Com has, upon execution of this Sublease, deposited with ConAgra the sum of $54,000.00 to be held by ConAgra as security for the faithful performance by X.Com of all the terms, covenants, and conditions of this Sublease to be kept and performed by X.Com during the Term hereof. If X.Com fails to keep or perform any of the terms, covenants or conditions of this Sublease, including but not limited to the provisions relating to the payment of Basic Rent and Additional Rent, ConAgra may (but shall not be required to) use, apply or retain all or any part of said security deposit to perform X.Com's obligations and if the security deposit is so used or applied, X.Com shall within five (5) days after written demand therefor, deposit cash with ConAgra in an amount sufficient to restore the security deposit to its original amount and ConAgra's failure to do so shall be material breach of this Sublease. ConAgra shall not be required to keep this security deposit separate from its general funds, and X.Com shall not be entitled to interest on such deposit. If X.Com shall fully and faithfully perform every provision of this Sublease to be performed by it, the security deposit or any balance thereof shall be returned to X.Com at the expiration of the Term. In the event ConAgra unconditionally assigns its rights under the Master Lease, said security deposit shall be transferred and paid to ConAgra's successor in interest and X.Com shall thereafter look solely to said successor for the return of and accounting for said security deposit and ConAgra shall have no further liability therefor.

6. Condition of Premises. The Subleased Premises shall be delivered to X.Com in its "AS IS" condition. X.Com agrees that ConAgra has no obligation to alter or repair the Subleased Premises or to prepare the same in any way for X.Com's occupancy or use. All improvements to the Subleased Premises shall be constructed at X.Com's sole cost and expense, except as set forth in paragraph 12. Notwithstanding the foregoing, ConAgra hereby grants to X.Com a finish allowance ("Finish Allowance") of up to $216,000.00 to be expended by X.Com on improvements to the Subleased Premises, including but not limited to architectural fees, cabling for computer and phone lines, legal fees, carpet and paint. The following provisions of this paragraph 6 shall govern the use and payment of such Finish Allowance:

(a) With the exception of those improvements in the preceding sentence, the Finish Allowance shall be used only for those additional items which are mutually agreed upon by the ConAgra and X.Com and designated as items for which the Finish Allowance shall be used.

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(b) All provisions of paragraph 8 of the Master Lease shall apply to such Finish Allowance and the improvements for which it is used.

(c) Upon completion of the improvements for which the Finish is used, ConAgra shall pay to X.Com, in cash, upon presentation of lien waivers executed by the persons or entities constructing such improvements and receipts from such persons showing payment for the improvements for which reimbursement is sought, up to the amount of the Finish Allowance. X.Com shall be solely responsible for the payment of any labor, materials or other costs for improvements in excess of the amount of the Finish Allowance. In the event the cost of improvements for which the Finish Allowance is sought and is payable does not equal $216,000.00, ConAgra shall be entitled to retain the difference.

7. Care of Premises. X.Com shall not damage or deface the walls, floors, ceilings, nor make holes for the hanging of pictures (other than with standard picture hangers) or make or suffer to be made any waste, obstruction or unlawful, improper or offensive use of the Subleased Premises, or make any improvements, alterations, changes, additions, repairs or replacements in or to the Subleased Premises without ConAgra's and Landlord's prior written consent. X.Com shall not cause damage to any part of the Building or the property of Landlord or ConAgra nor disturb the quiet enjoyment of any other tenant in the Building.

8. Inspection. ConAgra and Landlord shall have the right at any time in case of emergency and at other reasonable times upon 24 hours prior written notice, to enter the Subleased Premises to inspect the same and to make such repairs and alterations as either ConAgra or Landlord shall see fit, provided ConAgra and Landlord shall use reasonable efforts not to disrupt X.Com's business.

9. Surrender of Subleased Offices. Upon the termination of this Sublease, X.Com shall immediately vacate and surrender the Subleased Premises. The Subleased Premises shall be surrendered in the same condition as they were at the Commencement Date (except X.Com shall have no obligation to remove any initial tenant improvements or other improvements consented to by ConAgra and Landlord), ordinary wear and tear and damage by fire or other casualty not caused by X.Com excepted. Notwithstanding the foregoing, if X.Com has entered into a Lease Agreement with Landlord for a term that commences on the expiration of the Sublease, the terms of the Lease shall control and X.Com shall not be required to vacate and surrender the Subleased Premises.

10. Assignment and Subletting.

(a) Consent Required. X.Com shall not assign or sublet all or any part of X.Com's interest in this Sublease or in the Subleased Premises, without ConAgra's and Landlord's prior written consent, which consents shall not be withheld or delayed unreasonably.

(b) Release of X.Com. Should ConAgra and Landlord provide their consents pursuant to paragraph 10(a), or in the event of an assignment or subletting pursuant to paragraph 10(b), X.Com shall not be relieved of any obligations hereunder including the financial obligation.

(c) Profits of Sublease. Any profits received from the sublease shall be divided equally between ConAgra, Landlord and X.Com, after the amortization of subleasing costs.

11. ConAgra's Obligations. ConAgra shall have no obligation to provide X.Com with any services or to fulfill any of the other obligations which Landlord is required to provide or fulfill under the Master Lease, nor shall ConAgra have an obligation to repair, restore or rebuild any damaged or destroyed portion of the Building or improvements on the Subleased Premises or any fixtures or equipment therein. ConAgra does not warrant the Landlord will perform its obligations under the Master Lease and X.Com shall not be relieved of any of its obligations hereunder for any failure of the Landlord to perform any services except X.Com shall be relieved of its obligations only to the extent that ConAgra is relieved under the Master Lease. Notwithstanding the foregoing, ConAgra shall use reasonable and diligent efforts to cause Landlord to perform its obligations under the Master Lease.

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12. Utilities. Electrical service to the Subleased Premises shall be measured by a separate meter serving the Subleased Premises, which shall be installed at Landlord's expense, and X.Com shall pay, directly to the utility providing such service to X.Com, as and when it comes due, all charges for electric service used in the Subleased Premises.

13. Other Services. Landlord shall provide those services set forth, and in accordance with, paragraph 6 of the Master Lease.

14. Right of First Refusal. X.Com shall have a Right of First Refusal upon the following terms and conditions:

(a) Eligibility to Exercise Right of Refusal: Provided that (1) X.Com is not in default of any term or condition of this Sublease or of the Master Lease, and (b) this Sublease and the Master Lease are still in full force and effect and that neither one has been terminated, X.Com is given the Right of Refusal as hereinafter defined.

(b) Right of Refusal: During the term of the Sublease, X.Com shall have a Right of First Refusal to lease the remaining approximately 13,076 rentable square feet of the Premises as shown on Exhibit "B" hereto ("Expansion Space"). If ConAgra receives from a bona fide third party prospective subtenant a written offer to sublease said Expansion Space which ConAgra and Landlord are willing to accept, then ConAgra shall notify X.Com in writing of such offer. If X.Com does not give ConAgra written notice of its agreement to sublease the Expansion Space within ten (10) days of receiving such notice from ConAgra, and execute a sublease amendment for all of such Expansion Space within thirty (30) days after receiving such notification from ConAgra, X.Com shall have no further rights to such Expansion Space and ConAgra shall have no liability to X.Com with respect to such Expansion Space.

(c) Terms: If X.Com exercises its Right of First Refusal to sublease the Expansion Space in accordance with this paragraph 14, the following terms shall apply:

(i) All of the terms, covenants and conditions for the Expansion Space, including but not limited to Base Rent and Additional Rent, shall be those as are contained in the offer by the prospective subtenant.

(ii) X.Com must sublease all of the Expansion Space.

(d) Right Personal: The Right of First Refusal granted to X.Com in this paragraph 14 is personal to X.Com or an Affiliate of X.Com to whom the Subleased Premises has been assigned or sublet, and which assignment or subletting has been approved by ConAgra and Landlord in accordance with paragraph 10, and may be exercised only by X.Com or such approved Affiliate while occupying the Subleased Premises. This Right of First Refusal may not be assigned separate or apart from this Sublease, nor may this Right of First Refusal be separated from this Sublease in any manner, either by reservation or otherwise.

15. Waivers. All waivers must be in writing and signed by the waiving party. ConAgra's or X.Com's failure to enforce any provision of this Sublease or its payment or acceptance of rent shall not be a waiver and shall not prevent either party from enforcing any provision of this Sublease in the future. No waiver by ConAgra or X.Com of any provision or default hereunder, whether in a single instance or repeatedly, shall be deemed a future waiver of such provision or default or of any other provision or default.

16. Subordination. This Sublease and all rights of X.Com are and shall be subject and subordinate to the Master Lease and to all mortgages, ground leases, leasehold mortgages, encumbrances, covenant, restriction and other rights, if any, to which the Master Lease and ConAgra's interest herein are subject and subordinate.

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17. Indemnification. X.Com agrees not to do or permit to be done any act or thing or neglect to take any action which will constitute a breach or violation of any of the terms, covenants or conditions or provision of the Master Lease or which will make ConAgra liable for any damages, claims, fines, costs or penalties under the Master Lease. X.Com agrees to indemnify ConAgra and hold ConAgra harmless from and against all loss, liability obligation, damage, penalty, cost, charge and expense of any kind whatsoever (including, but not limited to, reasonably attorneys' fees) whenever asserted or occurring, which ConAgra may incur or pay out, or which may be asserted against ConAgra (i) by any reason or any failure of or by X.Com to perform or comply with any and all of the terms, covenants, conditions and provisions of this Sublease, (ii) by reason of any breach or violation of (or caused by) X.Com of the terms, covenants, conditions and provisions of the Master Lease, (iii) by reason of any work or thing of whatsoever kind done in, on or about the Subleased Premises or the Building by X.Com or (iv) by reason of the negligence or willful act or omission of X.Com.

18. Hazardous or Toxic Materials. As used herein, "Hazardous or Toxic Materials" shall include but not be limited to asbestos containing materials ("ACM") petroleum products, radioactive materials, polychlorinated biphenyls (PCBs) and substances or compounds containing PCBs and all other materials, substances, wastes, and chemicals classified, defined, listed, or regulated as, or containing, a "hazardous substances," "hazardous materials," or "toxic substances," "pollutant," "contaminant," "solid waste" under any Environmental Law or which may become regulated by or under the authority of any Environmental Law. As used herein, the term "Environmental Laws" shall include any and all local, state or federal laws, statutes, rules, regulations, ordinances, orders, permits, licenses or other applicable governmental restrictions, guidelines or legal requirements, relating directly or indirectly to human health or safety or environment, or the presence, handling, treatment, storage, disposal, recycling, reporting, remediation, investigation, or monitoring of hazardous or toxic material including but not limited to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq.

X.Com shall not be responsible for, nor shall the provisions of Section 17 of this Sublease or any similar provision or provisions of the Master Lease apply to any Hazardous or Toxic Materials in, on or under the Subleased Premises prior to the Commencement Date or at any time if not placed there by X.Com. In addition, X.Com shall have no responsibility for the exacerbation of, or release of any pre-existing Hazardous or Toxic Materials contamination, in, on or under the Subleased Premises or the Building, including ACM's, as a result of any of X.Com's alterations or improvements.

19. Insurance; Mutual Waiver. X.Com shall maintain throughout the Term insurance of the type and in the amounts required of ConAgra in paragraph 12 of the Master Lease and shall also be solely responsible for insuring its personal property located on the Subleased Premises. X.Com shall provide documentation evidencing that such insurance is in force. All such insurance policies shall be in a form, and issued by companies, reasonably satisfactory to Landlord and ConAgra and shall provide that such policies may not be cancelled without thirty (30) days prior written notice to ConAgra. ConAgra and X.Com each hereby waive any and all rights of recovery against the other, or against the officers, employees, agents or representatives of the other, for loss of or damage to its property or the property of others under its control, if such loss or damage is covered by any insurance policy in force (whether or not described in this Sublease) at the time of such loss or damage.

20. Events Of Default. The occurrence of any one or more of the following events shall constitute a material default of this Lease by X.Com:

(a) The failure by X.Com to make any payment of Rent payable in monthly installments pursuant to Paragraph 4 hereof within five (5) days after written notice that such payment is due.

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(b) The failure by X.Com to make any payment of Additional Rent or any other payment required to be made by X.Com under this Sublease within five (5) days after written notice that such payment is due.

(d) The failure by X.Com to observe or perform any of the covenants, conditions or provisions of this Sublease or the Master Lease to be observed or performed by X.Com, where such failure shall continue for a period of thirty (30) days after written notice thereof from ConAgra to X.Com, provided, however, that if the nature of X.Com's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then X.Com shall not be deemed to be in default if X.Com commences such cure within said thirty (30) day period and thereafter diligently pursues such cure to completion.

(e) (i) The making by X.Com of any general arrangement or general assignment for the benefit of creditors; (ii) X.Com becoming a "debtor" as defined in 11 U.S.C. §101 or any successor statute thereto (unless, in the case of a petition filed against X.Com, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of X.Com's assets located at the Premises or of X.Com's interest in this Sublease, or (iv) the attachment, execution, or other judicial seizure of substantially all of X.Com's assets located at the Subleased Premises or of X.Com's interest in this Sublease, where such seizure is not discharged within thirty (30) days.

(f) The discovery by ConAgra that any financial statement or information given to ConAgra by X.Com or by any guarantor of X.Com's obligation hereunder was knowingly false when presented to ConAgra.

21. ConAgra's Remedies. In the event of any default or breach of this Sublease by X.Com, ConAgra may at any time thereafter, without further notice or demand and without limiting ConAgra in the exercise of any right or remedy which ConAgra may have by reason of such default:

(a) Terminate X.Com's right to possession of the Subleased Premises by any lawful means, in which case this Sublease and the term hereof shall terminate and X.Com shall immediately surrender possession of the Subleased Premises to ConAgra. In such event ConAgra shall be entitled to recover from X.Com all damages incurred by ConAgra by reason of X.Com's default including, but not limited to, the cost of recovering possession of the Subleased Premises; expenses of reletting, including necessary renovation and alteration of the Subleased Premises, reasonable attorneys fees, and any real estate commission actually paid; Basic Rent and Additional Rent that would have been paid through the end of the Term had the Sublease not been terminated due to X.Com's default; and that portion of the leasing commission paid by ConAgra applicable to the unexpired term of this Sublease; and/or

(b) Maintain X.Com's right to possession, in which case this Sublease shall continue in effect whether or not X.Com shall have vacated or abandoned the Subleased Premises. In such event ConAgra shall be entitled to enforce all of ConAgra's rights and remedies under this Sublease, including the right to recover the Basic Rent and Additional Rent as it becomes due hereunder; and/or

(c) Enter the Subleased Premises at any time to cure any default without thereby incurring any liability to X.Com or anyone claiming through or under X.Com. Any expenses incurred by ConAgra in connection with any such performance or involved in collecting or endeavoring to collect rent or enforcing or endeavoring to enforce any rights against X.Com under or in connection with this Sublease or pursuant to law shall be paid by X.Com as Additional Rent on demand; and/or

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(d) Pursue in connection with any other remedies now or hereafter available to ConAgra under the laws or judicial decisions of the state of where the Subleased Premises are located.

The remedies provided under this paragraph 20 are nonexclusive and may be combined with other remedies hereunder available to ConAgra for X.Com's material default or breach hereunder.

22. ConAgra's Rights Under Master Lease. Provided this Sublease has not been terminated pursuant to paragraph 20, above, as a result of X.Com's default, ConAgra will not exercise its Right to Renew as contained in paragraph 26 of the Master Lease or it Right to Terminate as contained in paragraph 27 of the Master Lease.

23. Notices. All notices required or desired to be given under this Sublease shall be in writing and shall be deemed delivered (i) when delivered personally; or (ii) three (3) days after deposit in the United States mail, certified or registered mail with return receipt requested, postage prepaid; or (iii) one day after deposit with a nationally recognized overnight courier service, delivery charges prepaid, addressed as follows:

(a) If to ConAgra:

ConAgra, Inc.
One ConAgra Drive
Omaha, Nebraska 68102
Attn.: Vice-President—Controller

(b) If to X.Com:

		X.Com Corporation,

		Omaha, Nebraska

Copies of notices are provided for informational purposes only and failure to give or receive such copy shall not affect the validity or timeliness of notice appropriately given to the designated notice recipient for each party hereto.

24. Force Majeure. If ConAgra cannot perform any of its obligations hereunder due to events beyond its control, the time for performing such obligations shall be extended by a period of time equal to the duration of such events. Events beyond ConAgra's control include, but are not limited to, acts of God, war, civil commotion, labor disputes, strikes, fire, flood or other casualty, shortages of labor or material government regulation of restriction, conditions of the Building, matters which are the responsibility of the Landlord under the Master Lease and weather conditions.

25. Miscellaneous.

(a) Captions, etc. The captions of this Sublease are included for convenience only and are not intended to modify or influence the meaning of any paragraph hereof. Whenever required by the context of this Sublease, the singular shall include the plural and vice versa; the masculine, feminine and neuter genders shall each include the other. In any provision relating to the conduct, acts or omissions of X.Com, the term "X.Com" shall include X.Com's agents, employees, contractors, licensees, invitees, successors or others with X.Com's express or implied permission, however, ConAgra shall have no obligation to any party other than X.Com specifically identified in the introductory paragraph hereof.

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(b) Entire Agreement; Amendments. This Sublease constitutes the entire agreement of the parties with regard to the Subleased Premises and supersedes all prior written and oral agreements and representations. All amendments to this Sublease must be in writing and signed by all parties.

(c) Governing Law. This Sublease shall be governed by and construed in accordance with the laws of the State of Nebraska.

(d) Power of Authority. Each person signing this Sublease represents and warrants that he has full authority to do so and that this Sublease binds the corporation on whose behalf it is executed.

IN WITNESS WHEREOF, the parties have executed and delivered this instrument as of the date first above written.

ConAgra, Inc.		X.Com Corporation
By:	/s/ JAY D. BOLDING	By:	/s/ WILLIAM HARRIS

Printed Name:	Jay D. Bolding	Printed Name:

Title:	Vice President/Controller	Title:

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CONSENT TO SUBLEASE BY MASTER LESSOR

The undersigned, Metro-Omaha Associates, LLC ("Landlord"), as Landlord under the Master Lease, subject to the terms and conditions contained in this Consent, hereby consents to the foregoing Sublease between ConAgra, Inc. and X.Com, but without thereby releasing ConAgra, Inc. as Tenant under the Master Lease from any liability or obligation to Landlord under the Master Lease. This consent is further based on the following:

1. Landlord represents that ConAgra is not in breach of the Master Lease.

2. In consenting to this Sublease, Landlord acknowledges and agrees that X.Com is not responsible for any Hazardous or Toxic Materials, as such are defined in the Sublease, in, on or under the Subleased Premises prior to the Commencement Date or at any time if not caused by X.Com.

3. X.Com shall not be responsible for the exacerbation or release of any pre-existing Hazardous or Toxic Materials as a result of any alterations or improvements to the Subleased Premises.

Landlord shall indemnify and hold X.Com harmless of, from and against any and all claims, expenses, loss or liability incurred or suffered by X.Com as a result of Hazardous or Toxic Materials in, under or on the Subleased Premises, that were not brought on the Subleased Premises by X.Com. The obligations of Landlord under this section shall survive the expiration of the Sublease.

4. Landlord having delivered to X.Com prior to X.Com's execution of the Sublease a copy of the Environmental Evaluation dated May 19, 1988.

5. Landlord shall pay, at its sole cost and expense, the remeasuring of the Subleased Premises as set forth in Section 1 of the Sublease.

6. Landlord, at its sole cost and expense, shall place the Subleased Premises in the "Commencement Date Condition" identified on the Construction Plan attached to the Sublease as Exhibit "C".

7. Landlord shall pay, at its sole cost and expense, the cost to separately meter the utilities to the Subleased Premises as set forth in Section 12 of this Sublease.

CONSENTED AND ACCEPTED IN ACCORDANCE WITH THE PROVISIONS OF THE MASTER LEASE THIS 25 DAY OF APRIL, 2000.

		LANDLORD: Metro-Omaha Associates, L.L.C.,
		By:	/s/ THOMAS G. HOTZ
			Thomas G. Hotz, Managing Member

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EXHIBIT "A"

Conagra, Inc.

TENANT

Lease Space at
11128 John Galt Boulevard
Omaha, Nebraska

METRO-OMAHA ASSOCIATES, LLC

LANDLORD

January 2000

TABLE OF CONTENTS

1.	Lease Grant	1
2.	Term	1
3.	Rent	1
	(a) Basic Rent	1
	(b) Payment	1
	(c) Rental Adjustment	1
4.	Delinquent Payment; Handling Charges	2
5.	Hours of Operations	2
6.	Landlord's Obligations	3
	(a) Services	3
	(b) Restoration of Services	3
7.	Condition of Premises	3
8.	Improvement; Alterations; Repairs; Maintenance	3
	(a) Improvement; Alterations	3
	(b) Repairs; Maintenance	4
	(c) Performance of Work	4
	(d) Mechanic's Liens	4
9.	Use	4
10.	Parking	5
11.	Assignment and Subletting	5
	(a) Landlord's Consent Required	5
	(b) Tenant Affiliate	5
	(c) Release of Tenant	5
	(d) Profits of Sublease	5
12.	Insurance; Waivers; Subrogation; Indemnity	5
	(a) Insurance	5
	(b) Waiver of Negligence; No Subrogation	5
	(c) Mutual Indemnity	6
13.	Subordination; Attornment; Notice to Landlord's Mortgagee	6
	(a) Subordination	6
	(b) Attornment	6
	(c) Notice to Landlord's Mortgagee	6
14.	Rules and Regulations	6
15.	Condemnation	6
	(a) Total Talking	6
	(b) Partial Taking—Tenant's Rights	6
	(c) Partial Taking—Landlord's Rights	7
	(d) Award	7
16.	Fire or Other Casualty	7
	(a) Repair Estimate	7
	(b) Landlord's and Tenant's Rights	7
	(c) Landlord's Rights	7
	(d) Repair Obligation	7
17.	Personal Property Taxes	7
18.	Events of Default	8
19.	Remedies	8
20.	Payment by Tenant; Non-Waiver	9
	(a) Payment by Tenant	9

	(b) No Waiver	9
21.	Surrender of Premises	9
22.	[Intentionally Left Blank]	9
23.	Holding Over	9
24.	Certain Rights Reserved by Landlord	10
25.	Security Deposit	10
26.	Right to Renew	10
27.	Right to Terminate	11
28.	Miscellaneous	11
	(a) Landlord Transfer	11
	(b) Landlord's Liability	11
	(c) Force Majeure	11
	(d) Brokerage	11
	(e) Estoppel Certificates	11
	(f) Notices	11
	(g) Separability	12
	(h) Amendments; and Binding Effect	12
	(i) Quiet Enjoyment	12
	(j) No Merger	12
	(k) No Offer	12
	(l) Entire Agreement	13
	(m) Waiver of Jury Trial	13
	(n) Governing Law	13
	(o) Joint and Several Liability Financial Reports	13
	(p) [Intentionally Left Blank]	13
	(q) Telecommunications	13
	(r) General Definitions	13
	(s) [Intentional Left Blank]	13
	(t) List of Exhibits	14

LIST OF EXHIBITS

Exhibit A—Outline of Premises
Exhibit B—Legal Description of Building
Exhibit C—Building Rules and Regulations

LEASE

THIS LEASE AGREEMENT (this "Lease") is entered into as of this day of January, 2000, between Metro-Omaha Associates, L.L.C., a Nebraska limited liability company ("Landlord"), and ConAgra, Inc., a Delaware Corporations ("Tenant").

1. Lease Grant. Subject to the terms of this Lease, Landlord leases to Tenant, and Tenant leases from Landlord premises comprised of approximately 36,193 rentable square feet as depicted in the plan attached as Exhibit A (the "Premises") in the office building known as The Metropolitan Business Center located on the majority of the south wing of the fourth floor and the entire third floor at 11128 John Galt Boulevard, Omaha, Nebraska (collectively, the "Building"). The land on which the Building is located is described on Exhibit B. The term "Building" includes the related land, driveways, parking facilities, and similar improvements.

2. Term. The term of this Lease shall be thirty-eight (38) months, commencing on April 1, 2000 (the "Commencement Date"), and expiring at 11:59 p.m. on the date that is (38) months following the Commencement Date (the "Term", which definition shall include all renewals of the initial Term). If the Commencement Date is not the First day of a calendar month, then the Term shall be extended by the number of days between the Commencement Date and the first day of the next month.

3. Rent.

(a) Basic Rent. "Basic Rent" (herein so called) shall be as follows:

Months	1-2	$	21,866.60	Per month

Months	3-12	$	43,733.21	Per month

Months	13-24	$	44,487.23	Per month

Months	25-38	$	45,241.25	Per month

This Basic Rental Rate shall be adjusted as defined in paragraph 3(c).

(b) Payment. Tenant shall timely pay to Landlord Basic Rent and all additional sums to be paid by Tenant to Landlord under this Lease (collectively, the "Rent"), without deduction or set off, at Landlord's address provided for in this Lease or by wire transfer to an account of Landlord, if Landlord provides Tenant with routing information for such account, or as otherwise specified by Landlord, Basic Rent, adjusted as herein provided, shall be payable monthly in advance, and shall be accompanied by all applicable state and local sales or use taxes. The first montly installment of Basic Rent shall be payable contemporaneously with the execution of this Lease; thereafter, Basic Rent shall be payable contemporaneously with the execution of this Lease; thereafter. Basic Rent shall be payable on the first day of each month beginning on the first day of the the second full calendar month of the Term. The monthly Basic Rent for any partial month at the beginning of the Term shall equal the product of 1/365 of the annual Basic Rent in effect during the partial month and the number of days in the partial month from and after the Commencement Date, and shall be due on the Commencement Date.

(c) Rental Adjustment. Beginning June 1, 2002, Tenant shall, for each fiscal year from June 1 to May 30 after the Base Year (hereinafter defined) pay to Lessor as additional rent ("Additional Rent") 27.9908 percent (being the proportion which the rentable square feet of the Demised Premises bears to the total rentable square feet of the Building, hereinbefore referred to as Lessee's Proportionate Share) of the increase (if any) in the Operating Costs of the Building (as hereinafter defined) such fiscal year over the Operating Costs of the building for the Base Year.

(1) Definitions - The Operating Costs of the building are hereby defined as all real estate taxes and assessments on the real property (land and Building) of which the Demise Premises are

a part, heat, air conditioning, water and sewer use fees, utilities, insurance, janitorial and cleaning service, management fees, salaries, wages, payroll taxes, and other personnel cost of engineers, superintendents, watchmen and other building employees, charges under maintenance and service contracts for chiller, boilers, controls and/or elevators, exterior window cleaning and building, plaza and parking lot maintenance and repair, personal property taxes (if any) in connection with personal property used in the operation of the Building, and maintenance, operation and repair expenses and supplies which are deducted for such calendar year (and not capitalized) for Federal Income Tax purposes; provided, however, that Operating Costs of the Building shall not include leasing commissions, payments of principal and interest on any mortgages, deeds of trust or other encumbrances upon the Building. Real Estate taxes for the Base Year for subsequent calendar years shall be deemed to be the taxes payable in the respective calendar years, even though the levy or assessment thereof may be for a different fiscal year, and shall include general real estate taxes, special assessments, franchise taxes to the extent based upon the value of in lieu of or partially in lieu of general real estate taxes. The Base Year is hereby defined as the fiscal year from June 1, 2000 to May 30, 2001.

(2) Statement for Tenant - On or before the first day of August, and on or before that day in each subsequent year, and on or before the first day of August immediately following the expiration or earlier termination of the term, Landlord will furnish a comparative statement which shall show a comparison of all pertinent items and information applicable to the Base Year and to the calendar year preceding the year in which the comparative statement is submitted and the amount, if any, of the increase in rent to be enforced as hereinafter set forth. The failure of Landlord to furnish a comparative statement, for any year in accord with this Paragraph B shall be without prejudice to the right of Landlord to furnish comparative statements in subsequent years.

(3) Payment of Adjusted Rental - Within fifteen (15) days after the delivery of the first comparative statement referenced in Paragraph (b) above, Tenant shall pay to Landlord, as adjusted rental a lump sum payable equal to the amount (if any) of Tenant's proportional share of such increase for the previous calendar year compared to the Base Year (the "Total Rent Increase"). In subsequent years, the lump sum payment due hereunder (if any) shall be reduced by subtracting the prior year Total Rent Increase from the current year Total Rent Increase. If such payments are required, Tenant shall pay in addition, a further lump sum payment equal to 1/12^th of the Total Rent Increase for each month that has passed in the current calendar year (presumably 3/12^th of said amount if the comparative statement is served in August) but crediting Tenant, after the first year, with the 1/12^th amount payments carried over from the previous year. Thereafter, Tenant shall pay 1/12^th or the current year Total Rent Increase until the next comparative statement is served. The additional rent due to the Landlord as disclosed by the comparative statement furnished on or before the 1^st day of August immediately following the expiration or earlier termination of this lease, shall be paid within fifteen (15) days after the rendition of such comparative statement.

4. Delinquent Payment; Handling Charges. All past due payments required of Tenant hereunder shall bear interest from the date due until paid at the lesser of 10% per annum (the "Interest Rate") or the maximum lawful rate of interest. In no event, however, shall the charges permitted under this Section 6(a) or elsewhere in this Lease, to the extent they are considered to be interest under law, exceed the maximum lawful rate of interest.

5. Hours of Operation. The hours of operation for the Building are 7:00 a.m. to 7:00 p.m., Monday through Friday, are 8:00 a.m. to 12:00 p.m. on Saturday, excluding federal, state or local holidays.

6. Landlord's Obligations.

(a) Services. Landlord agrees to furnish services to the Demised Premises during reasonable and usual business hours as are established in the rules and regulations of the Building wherein the Demise Premises are situated (said rules and regulations being attached hereto, marked Exhibit "C" and by this reference made a part hereof) and provided Tenant is not in default under any of the provisions of this Lease, the following services at Landlord's sole expense (subject, however, to the provisions of Paragraph 3(c) of this Lease): Heating, Ventilation, Air Conditioning, Electrical and Janitorial Services in the manner customary in a first-class office Building. It is hereby agreed that the Landlord shall have the right to discontinue any service above-mentioned or any part thereof whenever and during any period for which bills or rent or other service are not promptly paid by the Tenant. It is agreed that the Landlord shall not liable for damages nor shall the rental hereinbefore stipulated be abated for failure to furnish any service above mentioned, or any part hereof as aforesaid, when such failure to furnish or delay in furnishing is occasioned by needful repairs, renewals or improvements, or in whole or in part by any strike or labor controversy or by any accident or casualty whatsoever, or by any act or default of the Tenant or other parties, or by any unauthorized act or default of the Tenant or other parties, or by any unauthorized act or default of any employee of the Landlord, nor for any other cause or causes beyond the control of the Landlord.

It is further understood and agreed that in the event that Tenant should decide to install high consumption electrical equipment, Tenant will first submit all plans and specifications of such installation to the Landlord for written approval, which approval shall not be unreasonably withheld. Any such installation is to be at Tenant's expense. The cost of electrical current to operate said equipment is to be determined before the time of installation and charged as additional rent. In case Landlord and Tenant are unable to agree upon said charge, Tenant, upon written notice from Landlord, will be required to install, at the Tenant's expense, metering devices and circuits of Omaha Public Power District, or successor, and pay all electrical charges directly to the electric company.

(b) Restoration of Services. Landlord shall use best reasonable efforts to restore any service required of it that becomes unavailable; however, such unavailability shall not render Landlord liable for any damages caused thereby, be a constructive eviction of Tenant, constitute a breach of any implied warranty, or entitle Tenant to any abatement of Tenant's obligations hereunder.

7. Condition of Premises. Tenant hereby accepts the Premises in their "AS IS" condition, and Landlord shall have no obligation to perform any work therein (including, without limitation, demolition of any improvements existing therein or construction of any tenant finishwork or other improvements therein); provided however, Landlord must complete the renovations to the common areas prior to the Commencement Date, and provided further that Landlord warrants that the heating, ventilating and air-conditioning systems in the Building are in good working order as of the Commencement Date. Landlord shall provide to Tenant an improvement allowance equal to Seventy Five Thousand and no/100 dollars ($75,000), which amount shall be paid to Tenant within 30 days after Tenant delivers to Landlord copies of receipts or invoices for the costs of such improvements. Tenant must apply One Hundred percent (100%) of the allowance to the improvements.

8. Improvements; Alterations; Repairs; Maintenance.

(a) Improvements; Alterations. Improvements to the Premises shall be installed at Tenant's expense only except for Landlord's allowance above in accordance with plans and specifications which have been previously submitted to, and approved in writing by, Lanlord. No alterations or physical additions in or to the Premises may be made without Landlord's prior written consent, which shall not be unreasonably withheld, or delayed; however, Landlord may withhold its consent to any alteration or addition that would affect the Building's structure or its HVAC, plumbing, electrical, or mechanical systems. Tenant shall not paint or install lighting or decorations, signs, window or door lettering, or advertising media of any type which would affect the appearance of the exterior of the Building or of

any common areas of the Building without the prior written consent of Landlord, which shall not be unreasonably withheld, or delayed. All alterations, additions, or improvements made in or upon the Premises shall, at Landlord's option, either be removed by Tenant prior to the end of the Term (and Tenant shall repair all damage caused thereby), or shall remain on the Premises at the end of the Term without compensation to Tenant; provided, however, Landlord shall notify Tenant at the time of any such approval whether Landlord will require Tenant to remove such improvements at the end of the Term. All alterations, additions, and improvements shall be constructed, maintained, and used by Tenant, at its risk and expense, in accordance with all Laws; Landlord's approval of the plans and specifications therefor shall not be a representation by Landlord that such alterations, additions, or improvements comply with any Law. Notwithstanding any other provision in this Section, Tenant shall be entitled to make nonstructural, cosmetic alterations or improvements to the Premises without Landlord's consent or approval; provided however, any alterations or improvements exceeding an aggregate value of $25,000 in any calendar year shall require Landlord's approval.

(b) Repairs; Maintenance. Tenant shall maintain the Premises in a clean, safe, and operable condition, and shall not permit or allow to remain any waste or damage to any portion of the Premises. Tenant shall repair or replace, subject to Landlord's direction and supervision, any damage to the Building caused by a Tenant Party. If Tenant fails to make such repairs or replacements within thirty (30) days after the occurrence of such damage, then Landlord may make the same at Tenant's cost. If any such damage occurs outside of the Premises, then Landlord may elect to repair such damage at Tenant's expense, rather than having Tenant repair such damage but Landlord shall provide Tenant with five (5) days notice. The cost of all repair or placement work performed by Landlord under this Section 8 shall be paid by Tenant to Landlord within ten days after Landlord has invoiced Tenant therefor.

(c) Performance of Work. All work described in this Section 8 shall be performed only by contractors and subcontractors approved in writing by Landlord, such approval not to be unreasonably withheld, or delayed. Tenant shall cause all contractors and subcontractors to procure and maintain insurance coverage naming Landlord as an additional insured against such risks, in such amounts, and with such companies as Landlord may reasonably require. All such work shall be performed in accordance with all Laws and in a good and workmanlike manner so as not to damage the Premises, the Building, or the components thereof.

(d) Mechanic's Liens. Tenant shall not permit any mechanic's liens to be filed against the Premises or the Building for any work performed, materials furnished, or obligation incurred by or at the request of Tenant. If such a lien is filed, then Tenant shall, within ten days after Landlord has delivered notice of the filing thereof to Tenant, either pay the amount of the lien or diligently contest such lien and deliver to Landlord a bond or other security reasonably require satisfactory to Landlord. If Tenant fails to timely take either such action, then Landlord may pay the lien claim, and any amounts so paid, including expenses and interest, shall be paid by Tenant to Landlord within ten days after Landlord has invoiced Tenant therefor.

9. Use. Tenant shall use the Premises only for office use (the "Permitted Use") and shall comply with all Laws relating to the use, condition, access to, and occupancy of the Premises. The Premises shall not be used for any use which is disreputable, creates extraordinary fire hazards, or results in an increased rate of insurance on the Building or its contents, or for the storage of any hazardous materials or substances. If, because of a Tenant's act, the rate of insurance on the Building or its contents increases, then such acts shall be an Event of Default, Tenant shall pay to Landlord the amount of such increase on demand, and acceptance of such payment shall not waive any of Landlord's other rights. Tenant shall conduct its business so as not to create any nuisance or unreasonably interfere with other tenants or Landlord in its management of the Building.

10. Parking. Tenant shall have non-exclusive use of the parking area associated with the Building (the "Parking Area") during the initial and any renewal Terms subject to such terms, conditions and regulations as are from time to time applicable to users of the Parking Area.

11. Assignment and Subletting.

(a) Landlord's Consent Required. Tenant shall not assign or sublet all or any part of Tenant's interest in this Lease or in the Premises, without Landlord's prior written consent, which Landlord shall not withhold or delay unreasonably.

(b) Tenant Affiliate. Notwithstanding the provisions of Section 11(a), Tenant may assign or sublet the Premises, or any portion thereof, without Landlord's consent, to any Affiliate of Tenant, provided that said assignee assumes, in full, the obligations of Tenant under this Lease.

(c) Release of Tenant. Should Landlord provide its consent pursuant to Section 11(a), or in the event of an assignment or subletting pursuant to Section 11(b), Tenant shall not be relieved of any obligations hereunder including the financial obligation.

(d) Profits of Sublease. Any profits received form the sublease shall be divided equally between Landlord and Tenant, after the amortization of subleasing costs.

12. Insurance; Waivers; Subrogation; Indemnity.

(a) Insurance. Tenant shall maintain throughout the Term the following insurance policies: (1) commercial general liability insurance in amounts of $1,000,000 per occurrence with $2,000,000 in the aggregate or such other amounts as Landlord may from time to time reasonably require, insuring Tenant, Landlord, Landlord's agents and their respective affiliates against all liability for injury to, or death of, a person or persons or damage to property arising from the use and occupancy of the Premises, only to the extent of Tenant's negligence, acts or omissions (2) contractual liability insurance sufficient to cover Tenant's indemnity obligations hereunder, and (3) worker's compensation insurance, containing a waiver of subrogation endorsement reasonably acceptable to Landlord. Tenant's insurance shall provide primary coverage to Landlord when any policy issued to Landlord provides duplicate or similar coverage, and in such circumstance Landlord's policy will be excess over Tenant's policy. Tenant shall furnish to Landlord certificates of such insurance and such other evidence satisfactory to Landlord of the maintenance of all insurance coverage required hereunder, and Tenant shall obtain a writhen obligation on the part of each insurance company to notify Landlord at least thirty (30) days before cancellation or a material change of any such insurance policies. All such insurance policies shall be in form, and issued by companies, reasonably satisfactory to Landlord.

Landlord shall maintain throughout the Term the following insurance policies: (1) commercial general liability insurance in the amounts of $ 1,000,000 per occurrence and $2,000,000 in the aggregate, insuring Landlord and Tenant and their respective affiliates against all liability for injury to, or death of, a person or persons or damage to property arising from the use and occupancy of the Building, only to the extent of Landlord's negligence, acts or omissions; (2) contractual liability insurance sufficient to cover Landlord's indemnity obligations hereunder; and (3) worker's compensation insurance, containing a waiver of subrogation endorsement reasonably acceptable to Tenant.

(b) Waiver of Negligence; No Subrogation. Landlord and Tenant each waives any claim it might have against the other for any injury to or death of any person or persons or damage to or theft, destruction, loss, or loss of use of any property (a "Loss"), to the extent the same is insured against under any insurance policy that covers the Building, the Premises, Landlord's or Tenant's futures, personal property, leasehold improvements, or business, or, in the case of Tenant's waiver, is required to be insured against under the terms hereof; however, Landlord's waiver shall not include any deductible amounts on insurance policies carried by Landlord or to any coinsurance penalty which Landlord may

sustain. Each party shall cause its insurance carrier to endorse all applicable policies waiving the carrier's rights of recovery under subrogation or otherwise against the other party.

(c) Mutual Indemnity. Subject to Section 12(b), except for the gross negligence or willful misconduct of the indemnitee, Landlord and Tenant (individually, "Indemnitor") shall indemnify, defend and protect the other, its affiliates and their representatives and agents (collectively, "Indemnitee") from and against all claims, demands, liabilities, causes of action, suits, judgments, damages and expenses (including reasonable attorneys' fees) arising from (A) where Landlord is the Indemnitee, (1) any occurrence on the Premises or (2) Tenant's failure to perform its obligations under this Lease; and (B) where Tenant is the Indemnitee, Landlord's operation and maintenance of the Building excluding the Premises. These indemnity provisions shall survive termination or expiration of this Lease for one (1) year. If any proceeding is filed for which indemnity is required hereunder, the Indemnitor agrees, upon the Indemnitee's request therefor, to defend the Indemnitee in such proceeding at its sole cost utilizing counsel satisfactory to the Indemnitee.

13. Subordination; Attornment; Notice to Landlord's Mortgagee.

(a) Subordination. This Lease shall be subordinate to any deed of trust, mortgage, or other security instrument, or any ground lease, or primary lease, that now or hereafter covers all or any part of the Premises (the mortgagee under any such mortgage or the lessor under any such lease if referred to herein as as "Landlord's Mortgagee"), provided Landlord's Mortgagee agrees in writing not to disturb Tenant's quiet enjoyment of the Premises so long as Tenant is not in default of this Lease beyond all applicable cure periods and Tenant attorns to Landlord's Mortgagee after the latter has succeeded to Landlord's interest in the Building. Any Landlord's Mortgagee may elect, at any time, unilaterally, to make this Lease superior to its mortgage, ground lease, or other interest in the Premises by so notifying Tenant in writing.

(b) Attornment. Tenant shall attorn to any party succeeding to Landlord's interest in the Premises, whether by purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination of lease, or otherwise, upon such party's request, and shall execute such agreements confirming such attornment as such party may reasonably request.

(c) Notice to Landlord's Mortgagee. Tenant shall not seek to enforce any remedy it may have for any default on the part of Landlord without first giving written notice by certified mail, return receipt requested, specifying the default in reasonable detail, to any Landlord's Mortgagee whose address has been given to Tenant, and affording such Landlord's Mortgagee a reasonable opportunity to perform Landlord's obligations hereunder.

14. Rules and Regulations. Tenant shall comply with the rules and regulations of the Building which are attached hereto as Exhibit C. Tenant shall be responsible for the compliance with such rules and regulations by each Tenant Party.

15. Condemnation.

(a) Total Taking. If the entire Building or Premises are taken by right of eminent domain or conveyed in lieu thereof (a "Taking"), this Lease shall terminate as of the date of the Taking, provided that Landlord shall have notified Tenant of such Taking.

(b) Partial Taking - Tenant's Rights. If any part of the Building becomes subject to a Taking and such Taking will prevent Tenant from conducting its business in the Premises in a manner reasonably comparable to that conducted immediately before such Taking for a period of more than one hundred and fifty (150) days, then Tenant may terminate this Lease as of the date of such Taking by giving written notice to Landlord within thirty (30) days after the Taking, and Rent shall be apportioned as of the date of such Taking. If Tenant does not terminate this Lease, then Rent shall be abated on a reasonable basis as to that portion of the Premises rendered untenantable by the Taking.

(c) Partial Taking - Landlord's Rights. If any material portion, but less than all, of the Building becomes subject to a Taking, or if Landlord is required to pay any of the proceeds received for a Taking to a Landlord's Mortgagee, then Landlord may terminate this Lease by delivering written notice thereof to Tenant within thirty (30) days after such Taking, and Rent shall be apportioned as of the date of such Taking. If Landlord does not so terminate this Lease, then this Lease will continue, but if any portion of the Premises has been taken, Rent shall abate as provided in the last sentence of Section 15(b).

(d) Award. If any Taking occurs, then Landlord shall receive the entire award or other compensation for the land on which the Building is situated, the Building, and other improvements taken, and Tenant may separately pursue a claim (to the extent it will not reduce Landlord's award) against the condemnor for the value of Tenant's personal property which Tenant is entitled to remove under this Lease, moving costs, loss of business, and other claims it may have.

16. Fire or Other Casualty.

(a) Repair Estimate. If the Premises or the Building are damaged by fire or other casualty (a "Casualty"), Landlord shall, within thirty (30) days after such Casualty, deliver to Tenant a good faith estimate (the "Damage Notice") of the time needed to repair the damage caused by such Casualty.

(b) Landlord's and Tenant's Rights. If a material portion of the Premises or the Building is damaged by Casualty such that Tenant is prevented from conducting its business in the Premises in a timely manner reasonably comparable to that conducted immediately before such Casualty and Landlord estimates that the damage caused thereby cannot be repaired within one hundred and fifty (150) days after the Casualty, then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within thirty (30) days after the Damage Notice has been delivered to Tenant if Tenant does not so timely terminate this Lease, then (subject to Section 16(c)) Landlord shall repair the Building or the Premises rendered untenantable by the damage shall be abated on a reasonable basis from the date of damage until the completion of the repair, unless a Tenant Party caused such damage, in which case, Tenant shall continue to pay Rent without abatement.

(c) Landlord's Rights. If a Casualty damages a material portion of the Building, and Landlord makes a good faith determination that restoring the Premises would be uneconomical, or if Landlord is required to pay any insurance proceeds arising out of the Casualty to a Landlord's Mortgagee, then Landlord may terminate this Lease by giving written notice of its election to terminate within thirty (30) days after the Damage Notice has been delivered to Tenant, and Basic Rent and Additional Rent shall be abated as of the date of the Casualty.

(d) Repair Obligation. If neither party elects to terminate this Lease following a Casualty, then Landlord shall, within a reasonable time after such Casualty, begin to repair the Building and the Premises and shall proceed with reasonable diligence to restore the Building and Premises to substantially the same condition as they existed immediately before such Casualty; however, Landlord shall not be required to repair or replace any of the furniture, equipment, fixtures, and other improvements which may have been placed by, or at the request of, Tenant or other occupants in the Building or the Premises, and Landlord's obligation to repair or restore the Building or Premises shall be limited to the extent of the insurance proceeds actually received by Landlord for the Casualty in question.

17. Personal Property Taxes. Tenant shall be liable for all taxes levied or assessed against personal property, furniture, or fixtures placed by Tenant in the Premises. If any taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property and Landlord elects to pay the same, or if the assessed value of Landlord's property is increased by inclusion of such personal property, furniture or fixtures and Landlord elects to pay the taxes based on such increase, then Tenant shall pay to Landlord, within thirty (30) days after Landlord has invoiced Tenant therefor, the part of such taxes

for which Tenant is primarily liable hereunder; however, Landlord shall not pay such amount if Tenant notifies Landlord that it will contest the validity or amount of such taxes before Landlord makes such payment, and thereafter diligently proceeds with such contest in accordance with law and if the non-payment thereof does not pose a threat of loss or seizure of the Building or interest of Landlord therein or impose any fee or penalty against Landlord.

18. Events of Default. Each of the following occurrences shall be an "Events of Default":

(a) Tenant's failure to pay Rent with ten (10) days after Landlord has delivered notice to Tenant that the same is due;

(d) The filing of a petition by or against Tenant (the term "Tenant" shall include, for the purpose of this Section 18(e), any guarantor of Tenant's obligations hereunder) (1) in any bankruptcy or other insolvency proceeding; (2) seeking any relief under any state or federal debtor relief law; (3) for the appointment of a liquidator or receiver for all or substantially all of Tenant's property or for Tenant's interest in this Lease; or (4) for the reorganization or modification of Tenant's capital structure; however, if such a petition is filed against Tenant, then such filing shall not be an Event of Default unless Tenant fails to have the proceedings initiated by such petition dismissed within ninety (90) days after the filing thereof.

19. Remedies. Upon any Event of Default, Landlord may, in addition to all other rights and remedies afforded Landlord hereunder or by law or equity, take any of the following actions:

(a) Terminate this Lease by giving Tenant written notice thereof, in which event Tenant shall pay to Landlord the sum of (1) all Rent accrued hereunder through the date of termination, (2) all amounts due under Section 20(a), and (3) an amount equal to (A) the total Rent that Tenant would have been required to pay for the remainder of the Term discounted to present value at a per annum rate equal to the "Prime Rate" as published on the date this Lease is terminated by The Wall Street Journal, Central Edition, in its listing of "Money Rates" minus one percent, minus (B) the then present fair rental value of the Premises for such period, similarly discounted;

unexpired Term; rather, Landlord may, from time to time, bring an action against Tenant to collect amounts due by Tenant, without the necessity of Landlord's waiting until the expiration of the Term. Unless Landlord delivers written notice to Tenant expressly stating that it has elected to terminate this Lease, all actions taken by Landlord to dispossess or exclude Tenant from the Premises shall be deemed to be taken under this Section 19(b). If Landlord elects to proceed under this Section 19(b), it may at any time elect to terminate this Lease under Section 19(a); or

20. Payment by Tenant; Non-Waiver.

(a) Payment by Tenant. Upon any Event of Default, Tenant shall pay to Landlord all costs incurred by Landlord (including court costs and reasonable attorneys' fees and expenses) in (1) obtaining possession of the Premises, (2) removing and storing Tenant's or any other occupant's property, (3) repairing and restoring the Premises to the condition Section 21 requires, (4) if Tenant is dispossessed of the Premises and this Lease is not terminated, reletting all or any part of the Premises (including brokerage commissions, cost of tenant finish work, and other costs incidental to such reletting), (5) performing Tenant's obligations which Tenant failed to perform, and (6) enforcing, or advising Landlord of its rights, remedies, and recourses arising out of the Event of Default. To the full extent permitted by law, Landlord and Tenant agree the federal and state courts of Nebraska shall have exclusive jurisdiction over any matter relating to or arising from this Lease and the parties' rights and obligations under this Lease.

(b) No Waiver. Landlord's acceptance of Rent following an Event of Default shall not waive Landlord's rights regarding such Event of Default. No waiver by Landlord of any violation or breach of any of the terms contained herein shall waive Landlord's rights regarding any future violation of such term. Landlord's acceptance of any partial payment of Rent shall not waive Landlord's rights with regard to the remaining portion of the Rent that is due, regardless of any endorsement or other statement on any instrument delivered in payment of Rent or any writing delivered in connection therewith; accordingly, Landlord's acceptance of a partial payment of Rent shall not constitute an accord and satisfaction of the full amount of the Rent that is due.

21. Surrender of Premises. No act by Landlord shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless it is in writing and signed by Landlord. At the expiration or termination of this Lease, Tenant shall deliver to Landlord the Premises with all improvements located therein in good repair and condition, broom-clean, reasonable wear and tear (and condemnation and Casualty damage not caused by Tenant, as to which Sections 15 and 16 shall control) excepted, and shall deliver to Landlord all keys to the Premises. Provided that Tenant has performed all of its obligations hereunder, Tenant may remove all unattached trade fixtures, furniture, and personal property placed in the Premises by Tenant, and shall remove such alterations, additions, improvements, trade fixtures, personal property, equipment wiring, and furniture as Landlord may request. Tenant shall repair all damage caused by such removal. All items not so removed shall be deemed to have been abandoned by Tenant and may be appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord without notice to Tenant and without any obligation to account for such items. The provisions of this Section 21 shall survive the end of the Term.

22. [Intentionally Left Blank]

23. Holding Over. If Tenant fails to vacate the Premises at the end of the Term, then Tenant shall be a tenant at will and, in addition to all other damages and remedies to which Landlord may be entitled for such holding over, Tenant shall pay, in addition to the other Rent, a daily Basic Rent equal to 125% for the first 90 days, 150% for the next 90 days of the daily Basic Rent payable during the last

month of the Term. The provisions of this Section 23 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law. If Tenant fails to surrender the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys' fees) and liability resulting from such failure, including, without limiting the generality of the foregoing, any claims made by any succeeding tenant founded upon such failure to surrender, and any lost profits to Landlord resulting therefrom.

24. Certain Rights Reserved by Landlord. Provided that the exercise of such rights does not unreasonably interfere with Tenant's access to or occupancy of the Premises (24 hours per day, 7 days per week), Landlord shall have the following rights:

(a) To decorate and to make inspections, repairs, alterations, additions, changes, or improvements, whether structural or otherwise, in and about the Building, or any part thereof, but not the Premises; to enter upon the Premises and, during the continuance of any such work, to temporarily close doors, entryways, public space, and corridors in the Building; to change the name of the Building; and to change the arrangement and location of entrances or passageways, doors, and doorways, corridors, elevators, stairs, restrooms, or other public parts of the Building;

(b) To take such reasonable measures as Landlord deems advisable for the security of the Building and its occupants; evacuating the Building for cause, suspected cause, or for drill purposes; temporarily denying access to the Building; and closing the Building after normal business hours and on Sundays and holidays, subject, however, to Tenant's right to enter when the Building is closed after normal business hours under such reasonable regulations as Landlord may prescribe from time to time; and

(c) To enter the Premises at reasonable hours to show the Premises to prospective purchasers, lenders, or, during the last 4 months of the Term, tenants.

25. Security Deposit. Tenant has deposited with Landlord the sum of Zero ($0.00) Dollars. Said sum shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Lease, including, but not limited to the provisions relating to the payment of rent, the Landlord may (but shall not be required to) use, apply or retain all or any part of this security deposit for the payment of any rent or any other sum in default, or for the payment of any other amount which Landlord expend or become obligated to spend by reason of Tenant's default or to compensate the Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. Landlord shall not be required to keep this security deposit separate from its general funds, and Tenant shall not be entitled to interest on such deposit. If Tenant shall fully and faithfully perform every provision of this lease to be performed by it, the security deposit or any balance thereof shall be returned to Tenant (or at Landlord's option, to the last assignee of Tenant's interest hereunder) at the expiration of the Lease term. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer said deposit of Landlord's successor in interest.

26. Right to Renew. At the end of the initial Term of the Lease, provided Tenant is not in Default under the terms of this Lease, Tenant shall have the Option to Renew the term of this Lease for one (1) period of one (1) year hereinafter ("Renewal Term") provided that Tenant gives Landlord advance written notice of its intent to exercise this Option to Renew six (6) months prior to the end of the initial Term. The Renewal Term shall be governed by all the terms, covenants, and conditions of the Lease applicable to the initial term except that the rental rate for the Renewal Term shall be an amount equal to $49,765.38 per month for each month during the Renewal Term based on 36,193 rentable square feet.

27. Right to Terminate. Tenant shall have the one time right to terminate this Lease on the last day of thirtieth (30^th) month by giving written notice of such interest not less than six (6) months prior to the last day of the thirtieth (30^th) month and by tendering to Landlord a termination fee of $35,000 payable at the notice date.

28. Miscellaneous.

(a) Landlord Transfer. Landlord may transfer any portion of the Building and any of its rights under this Lease. Landlord shall thereby be released from any further obligations hereunder, provided that the assignee assumes Landlord's obligations hereunder in writing.

(b) Landlord's Liability. The liability of Landlord to Tenant for any default by Landlord under the terms of this Lease shall be limited to Tenant's actual direct, but not consequential, damages therefor and shall be recoverable only from the interest of Landlord in the Building, and Landlord shall not be personally liable for any deficiency. This Section shall not limit any remedies which Tenant may have for Landlord's defaults which do not involve the personal liability of Landlord.

(c) Force Majeure. Excluding a party's obligations under this Lease that can be performed by the payment of money (e.g., payment of Rent and maintenance of insurance), whenever a period of time is herein prescribed for action to be taken by either party hereto, such party shall not be liable or responsible for, and there shall be excluded from the computation of any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations, or restrictions, or any other causes of any kind whatsoever which are beyond the control of such party.

(d) Brokerage. Except for The Mega Corporation and P.J. Morgan Real Estate Company, whose commission(s) shall be paid by Landlord, Tenant and Landlord shall each indemnify the other against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any broker or agent claiming the same by, through, or under the indemnifying party.

(e) Estoppel Certificates. From time to time, Tenant shall furnish to any party designated by Landlord, within fifteen days after Landlord has made a request therefor, a certificate signed by Tenant containing such factual certifications and representations as to this Lease as Landlord may reasonably request.

(f) Notices. All notices and other communications given pursuant to this Lease shall be in writing and shall be (1) mailed by first class, United States Mail, postage prepaid, certified, with return receipt requested, and addressed to the parties hereto at the address specified next to their signature block, (2) hand delivered to the intended address, or (3) sent by prepaid telegram, cable, facsimile

transmission, or telex followed by a confirmatory letter. A copy of all notices to Tenant shall be delivered in one of the afore described methods to:

ConAgra, Inc. One ConAgra Drive Omaha, Nebraska 68102		Metro-Omaha Associates, LLC The MEGA Corporation 14301 FNB Parkway, Suite 100 Omaha, NE 68154
Phone: 402-595-4104 Fax: 402-595-4611 Attn: Vice President—Controller		Phone: 402-697-5881 Fax: 402-334-8976 Attn: Property Management
		Cc: Metro-Omaha Associates, LLC One Pacific Place, Suite 450 1125 South 103^rd Street Omaha, Nebraska 68124-0171 Attention: Thomas Hotz Phone: (402) 393-1300 Facsimile: (402) 393-2369

All notices shall be effective upon delivery to the address of the addressee. The parties hereto may change their addresses by giving notice thereof to the other in conformity with this provision.

(g) Separability. If any clause or provision of this Lease is illegal, invalid, or unenforceable under present or future laws, then the remainder of this Lease shall not be affected thereby and in lieu of such clause or provision, there shall be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid, or unenforceable clause or provision as may be possible and be legal, valid, and enforceable.

(h) Amendments; and Binding Effect. This Lease may not be amended except by instrument in writing signed by Landlord and Tenant. No provision of this Lease shall be deemed to have been waived by Landlord unless such waiver is in writing signed by Landlord, and no custom or practice which may evolve between the parties in the administration of the terms hereof shall waive or diminish the right of Landlord to insist upon the performance by Tenant in strict accordance with the terms hereof. The terms and conditions contained in this Lease shall inure to the benefit of and be binding upon the parties hereto, and upon their respective successors in interest and legal representatives, except as otherwise herein expressly provided. This Lease is for the sole benefit of Landlord and Tenant, and, other than Landlord's Mortgagee, no third party shall be deemed a third party beneficiary hereof.

(i) Quiet Enjoyment. Provided Tenant has performed all of its obligations hereunder, Tenant shall peaceably and quietly hold and enjoy the Premises for the Term, without hindrance from Landlord or any party claiming by, through, or under Landlord, but not otherwise, subject to the terms and conditions of this Lease.

(j) No Merger. There shall be no merger of the leasehold estate hereby created with the fee estate in the Premises or any part thereof if the same person acquires or holds, directly or indirectly, this Lease or any interest in this Lease and the fee estate in the leasehold Premises or any interest in such fee estate.

(k) No Offer. The submission of this Lease to Tenant shall not be construed as an offer, and Tenant shall not have any rights under this Lease unless Landlord executes a copy of this Lease and delivers it to Tenant.

(l) Entire Agreement. This Lease constitutes the entire agreement between Landlord and Tenant regarding the subject matter hereof and supersedes all oral statements and prior writings relating thereto. Except for those set forth in this Lease, no representations, warranties, or agreements have been made by Landlord or Tenant to the other with respect to this Lease or the obligations of Landlord or Tenant in connection therewith. The normal rule of construction that any ambiguities be resolved against the drafting party shall not apply to the interpretation of this Lease or any exhibits or amendments hereto.

(m) Waiver of Jury Trial. To the maximum extent permitted by law, Landlord and Tenant each waive right to trial by jury in any litigation arising out of or with respect to this Lease.

(n) Governing Law. This Lease shall be governed by and construed in accordance with the laws of the State of Nebraska.

(o) Joint and Several Liability. If Tenant is comprised of more than one party, each such party shall be jointly and severally liable for Tenant's obligations under this Lease.

(p) [Intentionally Left Blank]

(q) Telecommunications. Tenant and its telecommunications companies, including but not limited to local exchange telecommunications companies and alternative access vendor services companies shall have no right of access to and within the Building, for the installation and operation of telecommunications systems including but not limited to voice, video, data, and any other telecommunications services provided over wire, fiber optic, microwave, wireless, and any other transmission systems, for part or all of Tenant's telecommunications within the Building and from the Building to any other location without Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed.

(r) General Definitions. The following terms shall have the following meanings: "Laws" means all federal, state, and local laws, rules and regulations, all court orders, all governmental directives and governmental orders, and all restrictive covenants affecting the Property, and "Law" means any of the foregoing; "Affiliate" means any person or entity which, directly or indirectly, controls, is controlled by, or is under common control with the party in question, any entity resulting from merger or consolidation with the party in question, or any person or entity which acquires all the assets of the party in question as a going concern of the business that is being conducted at a single site; "Tenant Party" shall include Tenant, any assignees claiming by, through, or under Tenant, any subtenants claiming by, through, or under Tenant, and any agents, contractors, employees, invitees of the foregoing parties; and "including" means including, without limitation.

(s) [Intentionally Left Blank]

(t) List of Exhibits. All exhibits and attachments hereto are incorporated herein by this reference.

Exhibit A—      Outline of Premises
Exhibit B—      Legal Description of Building
Exhibit C—      Building Rules and Regulations

		TENANT:
		ConAgra, Inc.
		By:		/s/ J.P. O'DONNELL
		Name:		J.P. O'Donnell
		Title:		Executive VP, CFO, Corporate Secretary
		Address:		One ConAgra Drive Omaha, NE 68102 Attn: Vice President—Controller Phone: (402) 595-4104 Fax: (402) 595-4611
		LANDLORD:
		Metro-Omaha Associates, LLC
		By:		/s/ THOMAS G. HOTZ
		Name:		Thomas G. Hotz
		Title:		Managing Member One Pacific Place, Suite 450 1125 South 103rd Street Omaha, Nebraska 68124-0171 Attention: Thomas Hotz Phone: (402) 393-1300 Facsimile: (402) 393-2369

SUBLEASE AMENDMENT AGREEMENT

THIS SUBLEASE AMENDMENT AGREEMENT (hereinafter "AGREEMENT") is made as of the 18^th day of July, 2000, by and between CONAGRA, INC., a Delaware corporation (hereinafter "ConAgra") and X.COM CORPORATION, a California corporation (hereinafter "X.COM").

RECITALS

A. By a Sublease dated the April 25, 2000, (hereinafter the "Sublease"), X.COM let from CONAGRA approximately 23,117 rentable square feet of space, on the third and fourth floors (the "Subleased Premises") of the building commonly known as 11128 John Galt Boulevard, Omaha, Nebraska (the "Building").

B. Pursuant to Section 14(b) of the Sublease, X.COM has exercised its right of first refusal to increase the size of the Subleased Premises by adding approximately 13,076 rentable square feet on the third floor of the Building.

NOW, THEREFORE, in consideration of the mutual promises herein contained, IT IS HEREBY AGREED AS FOLLOWS:

1. Construction. This AGREEMENT shall be construed in conjunction with the Sublease and, except as amended hereby, all of the terms, covenants and conditions of the Sublease and all exhibits, addenda, amendments and extensions thereto to date, shall remain in full force and effect and are hereby ratified and confirmed.

2. Defined Terms. All terms used herein shall have the meanings ascribed to them in the Sublease unless otherwise defined herein.

3. Effective Date. The effect date of this AGREEMENT (the "Effective Date") shall be September 1, 2000.

4. From and after the Effective Date, the Subleased Premises shall be deemed to include all 36,193 square feet of the leased Premises leased by ConAgra from Landlord Pursuant to the Master Lease (as those terms are defined in the Sublease), composed of approximately 25,888 rentable square feet of space on the third floor of the Building and 10,305 rentable square feet of space on the fourth floor of the Building.

5. From and after the Effective Date, the Basic Rent during the remaining term of the Sublease shall be as follows:

9/01/2000 through 5/31/2002		—		$42,351.63 per month
6/01/2002 through 5/31/2003		—		$45,241.25 per month

The above renal is computed at a rate of $13.50 per rentable square foot per year net of electrical charges for the period through May 31, 2002 for the portion of the Subleased Premises originally subleased pursuant to the Sublease and at the rate of $15.00 per rentable square foot per year net of electrical charges for the space added pursuant to this Amendment for the period through May 31, 2002, and at the rate of $15.00 per rentable square foot per year net of electrical charges for the period June 1, 2002, through May 31, 2003. Rental due for any portion of a month shall be prorated.

6. From and after the Effective Date the second sentence of the second paragraph of Paragraph 4. Rent shall be amended to provide as follows:

In addition to the foregoing, X.Com shall be responsible for and pay (i) to the utility providing such service all charges for electrical service used in the Subleased Premises as and

when such charges come due, and (ii) to ConAgra 100 percent of the "Additional Rent" due from ConAgra to Landlord pursuant to Paragraph 3(c) of the Master Lease as and when such "Additional Rent" is due from ConAgra to Landlord.

IN WITNESS WHEREOF, ConAgra and X.Com have caused this SUBLEASE AMENDMENT AGREEMENT to be executed by their duly authorized officers, as of the day and year first above written.

ConAgra, Inc.		X.Com Corporation


By:	/s/ JAMES O'DONNELL	By:	/s/ ELIZABETH A. POWELL
Printed Name:	James O'Donnell	Printed Name:	Elizabeth A. Powell
Title:	CFO/ConAgra	Title:	Director of Customer Service

CONSENT TO SUBLEASE AMENDMENT AGREEMENT BY MASTER LESSOR

The undersigned, Metro-Omaha Associates, LLC ("Landlord"), as Landlord under the Master Lease, subject to the terms and conditions contained in this Consent, hereby consents to the attached SUBLEASE AMENDMENT AGREEMENT between ConAgra, Inc. and X.Com, but without thereby releasing ConAgra, Inc., as Tenant under the Master Lease from any liability or obligation to Landlord under the Master Lease. This consent is further based on the following:

1. Landlord represents that ConAgra is not in breach of the Master Lease.

2. In consenting to this SUBLEASE AMENDMENT AGREEMENT, Landlord acknowledges and agrees that X.Com is not responsible for any Hazardous or Toxic Materials, as such are defined in the Sublease, in, on or under the Subleased Premises prior to the Commencement Date or at any time if not caused by X.Com.

3. X.Com shall not be responsible for the exacerbation or release of any pre-existing Hazardous or Toxic Materials as a result of any alternations or improvements to the Subleased Premises.

Landlord shall indemnify and hold X.Com harmless of, from and against any and all claims, expenses, loss's or liability incurred or suffered by X.Com as a result of Hazardous or Toxic Materials in, under or on the Subleased Premises, that were not brought on the Subleased Premises by X.Com. The obligations of Landlord under this section shall survive the expiration of the Sublease.

4. Landlord shall pay, at its sole cost and expense, the re-measuring of the Subleased Premises as set forth in Section 1 of the Sublease.

5. Landlord, at its sole cost and expense, shall place the Subleased Premises in the condition depicted on Exhibit C-3 attached to the LEASE AMENDMENT AGREEMENT.

6. Landlord shall pay, at its sole cost and expense, the cost to separately meter the utilities to the Subleased Premises as set forth in Section 12 of this Sublease.

7. Landlord shall use commercially reasonable efforts to obtain for the benefit of X.Com commercially reasonable non-disturbance agreements from any and all current groundlessors and holders of deeds of trust or mortgages covering the Building or the Subleased Premises.

8. In the event the Master Lease expires or terminates for any reason during the term of the Sublease, or if ConAgra surrenders the Master Lease to Landlord during the term of the Sublease, and so long as X.Com is not in default under the Sublease beyond any applicable notice or cure period, Landlord shall continue the Sublease with the same effect as if Landlord and X.Com had entered into a lease for that date and for a term equal to the then unexpired term of the Sublease, and on the same terms and conditions in the Sublease. In that event, X.Com will attorn to Landlord, and Landlord and X.Com will have the same rights, obligations and remedies under the Sublease as were had by ConAgra and X.Com. However, in no event shall Landlord (a) be liable for any act or omission of ConAgra, (b) be subject to any offsets or defenses that X.Com had or might have against ConAgra, (c) be obligated to cure any default of ConAgra under the Sublease, (d) be bound by any payment of rent or other payment paid by X.Com to ConAgra in advance of any periods reserved for that in the Sublease, (e) be bound by any modification or amendment of the Sublease made without the written consent of Landlord, or (f) be liable for the return of any security deposit not actually received by Landlord.

CONSENTED AND ACCEPTED IN ACCORDANCE WITH THE PROVISIONS OF THE MASTER LEAST THIS 18 DAY OF Apr. 2000.

LANDLORD:
Metro-Omaha Associates, L.L.C.

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EX-10.22 7 a2060419zex-10_22.htm EXHIBIT 10.22 Prepared by MERRILL CORPORATION
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Exhibit 10.22

BASIC LEASE INFORMATION

LEASE DATE:		August 15, 2001
TENANT:		PayPal, Inc., a Delaware corporation
TENANT'S ADDRESS:		Until the Term Commencement Date:
		1840 Embarcadero Road Palo Alto, CA 94303 Phone: (650) 251-1100 Fax: (650)251-1101
		After the Term Commencement Date:
		303 Bryant Street Mountain View, CA 94039
LANDLORD:		BRYANT STREET ASSOCIATES, LLC, a California limited liability company
LANDLORD'S ADDRESS:		3197 Park Boulevard Palo Alto, CA 94306 Phone: (650) 849-9900 Fax: (650)849-9924 Attention: Dan Cunningham
BUILDING:		A three (3) story building (the "Building") totaling approximately 56,030 square feet and a two (2) level below grade parking lot located on approximately .43 acres of land known as 303 Bryant Street, Mountain View, California 94039 which legal description is contained herein in Exhibit A-1.
PREMISES:		Approximately 50,210 square feet of the Building to be known as 303 Bryant Street, Mt. View, California 94039 as shown herein in Exhibit A-2, comprised of all of the first floor except for the retail space, all of the second and third floors of the Building, and all of the two (2) level below grade parking lot.
PERMITTED USE:		General Office, Research and Development, and other related legal uses.
PARKING STALLS:		All below grade parking consisting of approximately Ninety-One (91) parking stalls under the Building.
TERM COMMENCEMENT DATE:		January 1, 2002
LENGTH OF TERM:		One Hundred Twenty-six (126) months

RENT:
Base Rent

Months of Term	Rent Per Rentable Square Foot
Months 1-6	$	1.75 psf per month
Months 7-12	$	3.50 psf per month
Months 13-24	$	3.90 psf per month
Months 25-36	$	4.06 psf per month
Months 37-48	$	4.22 psf per month
Months 49-60	$	4.39 psf per month
Months 61-72	$	4.56 psf per month
Months 73-84	$	4.74 psf per month
Months 85-96	$	4.93 psf per month
Months 97-108	$	5.13 psf per month
Months 109-120	$	5.34 psf per month
Months 121-126	$	5.55 psf per month

Estimated First Year Basic Operating Cost		$.60 psf per month, rentable.
SECURITY DEPOSIT:		Letter of Credit equal to One Million Two Hundred Eighty Thousand Three Hundred Fifty-Five and no/100^th Dollars ($1,280,355.00).
TENANT'S PROPORTIONATE SHARE:		Subject to change, but based on the total rentable square feet of the Premises divided by the total useable square feet of the Building, estimated as follows:

		Of Premises		100	%
		Of Building:		89.6	%

BROKER:

Cornish & Carey Commercial
245 Lytton Avenue, Suite #150
Palo Alto, CA 94301

The foregoing Basic Lease information is incorporated into and made a part of this Lease. Defined terms in the Lease shall have the meanings ascribed to them in the Basic Lease Information unless otherwise stated. Each reference in this Lease to any of the Basic Lease Information shall mean the respective information above and shall be construed to incorporate all of the terms provided under the particular Lease paragraph pertaining to such information. In the event of any conflict between the Basic Lease Information and the Lease, the latter shall control. The term "days" as used in this Lease means "calendar days" unless the specific term "business days" is used.

TABLE OF CONTENTS

BASIC LEASE INFORMATION		1
TABLE OF CONTENTS		3
PREMISES		5
TERM		5
POSSESSION		6
USE		6
RULES AND REGULATIONS		8
RENT		8
BASIC OPERATING COST		9
INSURANCE AND INDEMNIFICATION		13
WAIVER OF SUBROGATION		15
LANDLORD'S REPAIRS AND SERVICES		15
TENANT'S REPAIRS		16
ALTERATIONS		16
SIGNS		17
INSPECTION/POSTING NOTICES		17
UTILITIES		18
SUBORDINATION		18
FINANCIAL STATEMENTS		19
ESTOPPEL CERTIFICATE		19
SECURITY DEPOSIT		20
TENANT'S REMEDIES		20
ASSIGNMENT AND SUBLETTING		20
AUTHORITY OF PARTIES		22
CONDEMNATION		22
CASUALTY DAMAGE		23
HOLDING OVER		24
DEFAULT		25
LIENS		27
TRANSFERS BY LANDLORD		27
RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS		27
WAIVER		28
NOTICES		28
ATTORNEYS' FEES		29
SUCCESSORS AND ASSIGNS		29
FORCE MAJEURE		29
BROKERAGE COMMISSION		29
MISCELLANEOUS		30
ADDITIONAL PROVISIONS		31

Exhibits:

Exhibit A-1		Legal Description
Exhibit A-2		Premises
Exhibit B-1		Building Construction
Exhibit B-2		Building Standards
Exhibit B-3		Moveable Equipment and Trade Fixtures
Exhibit B-4		Performance Schedule

Exhibit C		Landlord's Scope of Work
Exhibit D		Tenant Estoppel Certificate
Exhibit E		Rules and Regulations for Tenant's Contractor
Exhibit F		Disclosed Hazardous Materials List
Exhibit G		Estimated First Year Basic Operating Cost

LEASE

THIS LEASE is made as of this 15th day of August, 2001 (the "Effective Date"), by and between BRYANT STREET ASSOCIATES, LLC, a California limited liability company, (hereinafter called "Landlord") and PayPal, INC., a Delaware corporation (hereinafter called "Tenant").

PREMISES

1.: Landlord hereby leases to Tenant, and Tenant leases from Landlord, the Premises, for the Term, at the rental, and upon all of the terms and conditions set forth in this Lease. The Premises is part of the rentable area of 303 Bryant Street (sometimes referred to herein as the "Building") and is depicted on Exhibit A-2. The Premises comprises approximately 89.6% percent of the Building. The Building shell, the parking garage, and landscaping shall be constructed by Landlord in the manner depicted on Exhibit C hereto ("Initial Building Specifications"). The Initial Building Specifications include, the Building shell, roof, all exterior windows and doors, and Building Core (the "Warm Shell") as defined in Exhibit B-1. Landlord agrees to furnish Tenant with an Interior Improvement allowance of Twenty-Five dollars and no/100 ($ 25.00) per square foot of rentable area within the Premises as part of the Building Improvements (e.g., $ 1,255,250.00 if the rentable area within the Premises is 50,210 square feet). This allowance shall be considered Landlord's total monetary contribution with respect to the Interior Improvements, which allowance shall be used for the payment of the direct cost of constructing the Interior Improvements as generally described in Exhibit B-1 hereto (the Interior Improvements"). Landlord shall, at Tenant's sole cost and expense, (providing Landlord meets conditions set forth below in this paragraph) contract with Vance Brown, Inc. to construct the Interior Improvements (as defined in Exhibit B-1 hereto) for the Premises in the manner described in Exhibit B-2 hereto (the "Interior Improvements"). Tenant retains the right to have an independent contractor provide a detailed competitive bid (of equal scope) for the cost of constructing the interior improvements. If the bid of the independent contractor is 10% below the bid of Vance Brown, Inc. for construction of interior improvements the tenant will have the option of using the independent contractor, providing Vance Brown, Inc. will not agree to construct interior improvements for the lower price. Tenant shall be responsible for funding any and all improvements relating to the Interior Improvements in excess of those costs that are paid for with Landlord's allowance as set forth above. If the total Interior Improvement costs exceed the Landlord's allowance, Tenant shall pay a proportionate share of each progress payment due to the contractor constructing the Interior Improvements, which bears the same relationship to the total amount of the progress payment in question as the amount the Tenant is obligated to pay for the cost of constructing the Interior Improvements. For purposes of illustration only, if the total cost of constructing the interior improvements is $1,300,000.00 then the Tenant's share thereof would be $44,750.00 (the excess over the Landlord's total allowance of $1,255,250.00) or 3.44% of the total cost. If the first progress payment due the contractor is $100,000 then the Tenant's share of such progress payment would be $3,400 (or 3.4% of such payment).

TERM

2.: The Term of this Lease ("Term") shall commence on January 1, 2002 ("Term Commencement Date") and shall continue in full force and effect for the number of months specified as the Length of Term in the Basic Lease Information or until this Lease is terminated or as otherwise provided herein. In the event the Landlord does not deliver the building, complete with shell and interior improvements in the condition set forth above (so long as Landlord's Contractor constructs tenant improvements on behalf of Tenant and Tenant shall have complied with obligations provided herein including Exhibit B-4 Performance Schedule), the

Term Commencement Date shall be extended until such time as the building is delivered in the condition set forth above. If the Term Commencement Date is a date other than the first day of the calendar month, the Term shall be the number of months of the Length of Term in addition to the remainder of the calendar month following the Term Commencement Date. Within ten (10) days after requested by Landlord or Tenant, Landlord and Tenant shall execute an amendment to this Lease stating and confirming the Term Commencement Date and Tenant's acceptance of the Premises.

POSSESSION

3.: Landlord shall deliver, and Tenant shall accept delivery of and take immediate possession of the Premises, on the earlier of (i) the Early Possession Date (hereinafter defined), or (ii) the Term Commencement Date (the "Delivery Date"). Landlord and Tenant shall diligently pursue Substantial Completion and delivery of the Premises to Tenant, by diligently pursuing compliance with the Performance Schedule set forth on Exhibit B-4 attached hereto. Landlord shall have no liability to Tenant if the Term Commencement Date is delayed as the result of Force Majeure or if caused by a Tenant Delay. Landlord shall permit Tenant, or Tenant's agents to enter the Premises prior to the Term Commencement Date ("Early Possession"), for the purpose of installing Tenant's equipment and fixtures and occupying the Premises. The term "Fixture" or "Trade Fixture" shall be defined as anything attached in any manner to Landlord's property. All portable, unattached items are Tenant's property. Tenant and Landlord agree that Tenant does not own any Trade Fixtures to be located on or in the Premises except those items listed in Exhibit B-3 or otherwise agreed to in a separate writing between Landlord and Tenant. Landlord owns all remaining Trade Fixtures. If Tenant takes Early Possession, from and after the date on which Tenant or its agent first enters the Premises therefor, all of the terms and conditions of this Lease (including, but not limited to, insurance and indemnity provisions) shall be applicable to Tenant's occupancy, save and except for the requirement to pay Base Rent.

USE

4.: A. General. Tenant shall use the Premises for the Permitted Use and for no other use or purpose. Tenant shall control Tenant's employees, agents, customers, visitors, invitees, licensees, contractors, assignees and subtenants (collectively, "Tenant's Parties"). Tenant and Tenant's Parties shall have exclusive use of the two level underground parking garage. Tenant and Tenant's Parties shall have the nonexclusive right to use, in common with other parties occupying the Building, the driveways adjacent to the Building and other common areas subject to such rules and regulations not in conflict with this Lease as Landlord may from time to time prescribe.

B. Limitations. Tenant shall not permit any odors, smoke, dust, gas, substances, noise or vibrations to emanate from the Premises, nor take any action which would constitute a nuisance or would disturb, obstruct or endanger any other tenants of the Building or interfere with their use of their respective premises. Storage outside the Premises of materials, vehicles or any other items is prohibited, with the exception of outside storage in areas designated and approved in advance and in writing by Landlord. Tenant may be required to provide screening for such outside storage, at the discretion of Landlord. Tenant shall not use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause or maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer the commission of any waste in, on or about the Premises. Tenant shall not allow any sale by auction upon the Premises, or place any loads upon the floors, walls or ceilings that endanger the structure, or place any harmful liquids in the drainage system of the

Building. No waste, materials, or refuse shall be dumped upon or permitted to remain outside the Building except in trash containers placed inside exterior enclosures designated for that purpose by Landlord. Landlord shall not be responsible to Tenant for the non-compliance by any other tenant or occupant of the Building with any of the above-referenced rules or any other terms or provisions of such tenant's or occupant's lease or other contract. Landlord agrees not to materially discriminate in the enforcement of any of the above-referenced rules against Tenant only and not against other tenants or occupants of the Building.

C. Compliance with Regulations. By entering the Premises, Tenant accepts the Premises in the condition existing as of the date of such entry, subject to all existing or future applicable municipal, state and federal and other governmental statutes, regulations, laws and ordinances, including zoning ordinances and regulations governing and relating to the use, occupancy and possession of the Premises and the use, storage, generation and disposal of Hazardous Materials (hereinafter defined) in, on and under the Premises (collectively "Regulations"). Tenant shall, at Tenant's sole expense, strictly comply with all Regulations now in force or which may hereafter be in force relating to the Premises and the use of the Premises and/or the use, storage, generation of Hazardous Materials in, on and under the Premises. Tenant shall at its sole cost and expense obtain any and all licenses or permits necessary for Tenant's use of the Premises. Tenant shall promptly comply with the requirements of any board of fire underwriters or other similar body now or hereafter constituted. Tenant shall not do or permit anything to be done in, on, or about the Premises or bring or keep anything which will in any way increase the rate of any insurance paid for by Landlord upon the Premises or the Building, or upon any contents therein or cause a cancellation of said insurance or otherwise affect said insurance in any manner without the written consent of Landlord, which consent shall not be unreasonably withheld, if reasonably related to the conduct of Tenant's business within the Premises. In the event of such written consent by Landlord, Tenant shall pay for any increase in the rate of any insurance paid for by Landlord as set forth above. Tenant shall indemnify, defend, protect and hold Landlord harmless from and against any loss, cost, expense, damage, attorneys' fees or liability arising out of the failure of Tenant to comply with any Regulation or comply with the requirements as set forth herein.

D. Hazardous Materials. Tenant shall not cause, or allow any of Tenant's Parties to cause, any Hazardous Materials to be generated, stored, used, treated, removed, transported, handled and disposed of on or about the Premises or the Building without Landlord's prior written approval, provided that, Tenant shall be permitted to use the Disclosed Hazardous Materials in the ordinary course of its business subject to the conditions and requirements of this Lease, Landlord's conditional authorization of the Disclosed Hazardous Materials shall be strictly limited to the types and quantities described in Exhibit F, and shall not be construed as an authorization for Tenant to generate, store, use, treat, remove, transport, handle or dispose of any additional quantities of Disclosed Hazardous Materials or any other Hazardous Materials in, on, about or under the Premises or Building. Tenant acknowledges that any change in the types or quantities or Disclosed Hazardous Materials described in Exhibit F, or any change in the means and methods of generating, storing, treating, removing, transporting, handling or disposing of such Disclosed Hazardous Materials, shall require the prior written approval of Landlord in each instance. Tenant represents and warrants to Landlord that (a) prior to its use of Hazardous Materials on the Premises, it will have received or obtained issuance of, and will maintain in effect, all permits, approvals, licenses, or other authorizations necessary for Tenant's activities with respect to the Disclosed Hazardous Materials, and (b) Tenant has not been cited, fined, or otherwise found to be in violation of any governmental requirement or fire, safety and insurance requirements or regulations applicable to any Disclosed Hazardous Materials or any other Hazardous Materials in any other leased premises.. At least once during each twelve (12) month of the Lease Term, Tenant shall provide Landlord with an

inventory list describing the minimum and maximum quantities of each of the Disclosed Hazardous Materials generated, stored, used, treated, removed, transported, handled and disposed of on or about the Premises or the Building the succeeding twelve (12) months, and a copy of its Hazardous Materials Management Plan ("HMMP") in the form submitted by Tenant to the fire department. Tenant agrees to notify Landlord immediately if Tenant receives notification or otherwise becomes aware of: (a) any threatened or actual release, spill or discharge of any Disclosed Hazardous Materials in, on, about or under the Premises or the Building, or (b) any threatened or actual lien, action, or proceeding or notice that any Disclosed Hazardous Materials or any other Hazardous Materials is not being generated, stored, used, treated, removed, transported, placed, manufactured, handled, or disposed of in strict compliance with any and all governmental requirements and regulations or applicable fire, safety or insurance requirements and regulations. If Tenant or any of Tenant's Parties is partially or wholly responsible or potentially responsible for such condition, situation, lien, action or notice, Tenant's notice to Landlord shall include a statement as to the actions Tenant proposes to take in response to such condition, situation, lien, action or notice. As used in this Lease, "Hazardous Materials" shall include, but not be limited to, hazardous, toxic and radioactive materials and those substances defined as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or other similar designations in any federal, state, or local law, regulation, or ordinance. Landlord shall have the right at all reasonable times to inspect the Premises and to conduct tests and investigations to determine whether Tenant is in compliance with the foregoing provisions. The costs of all such inspections, tests and investigations shall be borne by Tenant provided that so long as Tenant is not in Default hereunder Tenant shall not be responsible for the cost of more than one (1) inspection per calendar year and Tenant's liability for the cost of each such inspection shall not exceed $1,500 per inspection. Tenant shall Indemnify, defend (by counsel selected by Landlord and approved by Tenant, which approval shall not be unreasonably withheld), protect and hold Landlord harmless from and against all liabilities, losses, actually incurred costs and expenses, demands, causes of action, claims or judgments directly or indirectly arising out of the use, generation, storage or disposal of Hazardous Materials by Tenant or any of Tenant's Parties, which indemnity shall include, without limitation, reasonable attorneys' and consultants' fees, the cost of any required or necessary repair, cleanup or detoxification, and the preparation of any closure or other required plans, whether such action is required or necessary prior to or following the termination of this Lease. Neither the written consent by Landlord to the use, generation, storage or disposal of Hazardous Materials nor the strict compliance by Tenant with all laws pertaining to Hazardous Materials shall excuse Tenant from Tenant's obligation of indemnification pursuant to this Paragraph 4.D. Tenant's obligations pursuant to the foregoing indemnity shall survive the termination of this Lease.

RULES AND REGULATIONS

5.: Tenant shall faithfully observe and comply with any rules and regulations not in conflict with this Lease Landlord may from time to time prescribe in writing for the purpose of maintaining the proper care, cleanliness, safety, traffic flow and general order of the Premises or the Building. Tenant shall cause Tenant's Parties to comply with all such rules and regulations. Landlord shall not be responsible to Tenant for the non-compliance by any other tenant or occupant of the Building with any of the rules and regulations.

RENT

6.: A. Base Rent. Base rent for the Premises shall be calculated on the basis of the rentable square feet of the Premises (approximately 50,210 square feet) at the rate specified in the Basic Lease Information. Rentable square feet shall include a load factor for common areas of

the Building (approximately 1,350 square feet), including but not limited to the Trash Room, Main Electrical Room and common access walkway, as determined by Landlord's architect. Tenant's obligation to pay Base Rent for the Premises shall commence on the Term Commencement Date. Upon completion of Landlord's Work, Landlord's architect shall certify to Landlord the rentable square feet of the Premises, measured from the outside of exterior walls of the building, but including areas below the "dripline" in the exterior entrances, to the midpoint of any interior demising walls plus Tenant's proportionate share of Building Common areas which include utility rooms (trash and electrical rooms), common access walkway etc. Landlord's architect's certification of rentable square feet for the Premises shall be binding upon both Landlord and Tenant for all purposes under this Lease. Landlord and Tenant currently estimate that the rentable square feet of the Premises and the Base Rent for the Premises will be as stated in the Basic Lease Information. Upon receipt of the architect's certification of rentable square feet, the actual Base Rent shall be determined and, if requested by Landlord or Tenant, Landlord and Tenant shall enter into an amendment of this Lease which states the actual Base Rent as so determined. Upon determination of the actual Base Rent for the Premises, Landlord and Tenant shall adjust, if necessary, the Base Rent deposited by Tenant for the first full month of the Term as provided in Paragraph 6.B. below, and Tenant's share of Operating Costs, as defined in Paragraph 7A. theretofore paid.

B. Payments. Tenant shall pay to Landlord, without demand throughout the Term, Base Rent as specified in the Basic Lease Information and finally determined as provided in Paragraph 6.A., payable in monthly installments in advance on or before the first day of each calendar month, in lawful money of the United States, without deduction or offset whatsoever, at the address specified in the Basic Lease Information or to such other place as Landlord may from time to time designate in writing. Base Rent and Estimated Basic Operating Costs as defined in Paragraph 7.A. for the first full month of the Term (based upon the estimated rentable area as hereinabove provided) shall be paid by Tenant upon Tenant's execution of this Lease. If the obligation for payment of Base Rent commences on other than the first day of a month, then Base Rent (calculated at the rate applicable to the second full month of the Term) for the partial month shall be prorated on the basis of the actual number of days in the month.

C. Additional Rent. All monies other than Base Rent required to be paid by Tenant hereunder, including, but not limited to, the interest and late charges described in Paragraph 26.D., any monies spent by Landlord pursuant to Paragraph 29., and Tenant's Proportionate Share of Basic Operating Costs, as specified in Paragraph 7 of this Lease, shall be considered additional rent ("Additional Rent"). "Rent" shall mean Base Rent and Additional Rent.

BASIC OPERATING COST

7.: A. Basic Operating Cost. In addition to the Base Rent required to be paid hereunder, Tenant shall pay as Additional Rent, Basic Operating Costs in the manner set forth below and shown on Exhibit G. The Operating Costs shall be calculated on the basis of Landlord's architect's certification of the rentable square feet of the Premises and useable square feet of the Building. The certification by Landlord's architect of the rentable square feet of the Premises and the useable square feet of the Building shall be conclusive and binding upon both Landlord and Tenant for all purposes of this Lease. Tenant's obligation to pay Basic Operating Costs with respect to the Premises and the Building shall commence on the Early Possession Date. Landlord shall account for each item of Basic Operating Costs attributable to the Premises and the Building as determined by Landlord in Landlord's sole discretion, and unless provided to the contrary in this Lease, Tenant shall pay the Basic Operating Costs, as set forth

in the Basic Lease Information. "Basic Operating Costs" shall mean all expenses and costs of every kind and nature which Landlord shall pay or become obligated to pay because of or in connection with the management, maintenance, preservation and operation of the Premises and the Building (determined in accordance with generally accepted accounting principles, consistently applied) including but not limited to the following:

(1) Taxes. All real property taxes, including those resulting from any increase in the value of the Building and/or the real property upon which the Building is located, possessory interest taxes, business or license taxes or fees, service payments in lieu of such taxes or fees, annual or periodic license or use fees, excises, transit charges, housing fund assessments, open space charges, assessments, levies, fees or charges general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind (including fees "in-lieu" of any such tax or assessment) which are assessed, levied, charged, confirmed, or imposed by any public authority upon the real property upon which the Building is located, the Building, its operations or the Rent (or any portion or component thereof) (all of the foregoing being hereinafter collectively referred to as "real property taxes"), or any tax imposed in substitution, partially or totally, of any tax previously included within the definition of real property taxes, or any additional tax the nature of which was previously included within the definition of real property taxes, except (a) inheritance or estate taxes imposed upon or assessed against the Premises, or any part thereof or interest therein, (b) taxes computed upon the basis of net income of Landlord or the owner of any interest therein, except as otherwise provided in the following sentence. Basic Operating Costs shall also include any taxes, assessments, or any other fees imposed by any public authority upon or measured by the monthly rental or other charges payable hereunder, including, without limitation, any gross income tax or excise tax levied by the local governmental authority in which the Building is located, the federal government, or any other governmental body with respect to receipt of such rental, or upon, with respect to or by reason of the development, possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof, or upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. In the event that it shall not be lawful for Tenant to reimburse Landlord for all or any part of such taxes, the Base Rent payable to Landlord under this Lease shall be revised to net to Landlord the same net rental after imposition of any such taxes on Landlord as would have been payable to Landlord prior to the payment of any such taxes. If Landlord at any time during the Term of this Lease or within two (2) years after termination of this Lease shall receive a refund of real property taxes applicable to a period within the Term of this Lease for which Tenant has paid real property taxes hereunder, Landlord shall refund to Tenant Tenant's proportionate share of said refund if Tenant is not then in Default or was not in Default at the termination of the Lease, as the case may be. If Tenant timely pays real property taxes to Landlord, Landlord alone shall be responsible for any fines, penalties, interest and other charges that result from any late payment of taxes by Landlord.

(2) Insurance. All insurance premiums and costs, including but not limited to, any deductible amounts, premiums and costs of insurance incurred by Landlord, as more fully set forth in Paragraph 8.A. herein.

(3) Repairs and Improvements. The cost of all repairs, replacements and general maintenance for the Premises and the Building (except for those repairs expressly made the financial responsibility of Landlord pursuant to the terms of this Lease, repairs to the extent paid for by proceeds of insurance or by Tenant or other third parties, and alterations attributable solely to tenants of the Building other than Tenant) Tenant shall

not be responsible for the cost of repairs to tenant-occupied spaces which are part of the Building other than the Premises. Such repairs, replacements, and general maintenance shall include the cost of any capital improvements made to or capital assets acquired for the Building or the Premises after the Term Commencement Date that are intended by Landlord to reduce any other Basic Operating Cost, are reasonably necessary for the health and safety of the occupants of the Building, or are made to the Building by Landlord after the date of this Lease and are required under any governmental law or regulation, such costs or allocable portions thereof to be amortized over the useful life of the improvement, as determined by the Landlord, together with interest on the unamortized balance at the "prime rate" charged at the time such improvements or capital assets are constructed or acquired by Wells Fargo Bank, N.A. (San Francisco) plus two (2) percentage points, but in no event more than the maximum rate permitted by law.

(4) Services. To the extent such expenses are not the obligation of Tenant under other provisions of this Lease, all expenses relating to maintenance, janitorial and service agreements and services, and costs of supplies and equipment used in operating and maintaining the Premises and the Building and the equipment therein and the adjacent sidewalks, driveways, parking and service areas, including, without limitation, alarm service, window cleaning, elevator maintenance, the Building exterior maintenance and landscaping.

(5) Utilities. To the extent such expenses are not the obligation of Tenant under other provisions of this Lease, the cost of all utilities which benefit all or a portion of the Premises or the Building,

(6) Management Fee. A management and accounting cost recovery fee equal to three (3%) percent of the sum of Base Rent.

(7) Legal and Accounting. Legal and accounting expenses relating to the Building other than legal expenses related to negotiating leases with tenants and/or prospective tenants in the Building, and any costs or expenses otherwise reimbursable to Landlord, including, without limitation, any costs or expenses reimbursed by policies of insurance carried by Landlord or required to be carried by Landlord under this Lease, and any cost or expenses reimbursable by any tenant within the Building pursuant to Such tenant's lease in the Building, Accounting expenses shall be limited to preparation of annual reconciliation of estimated and actual Operating Costs.

In the event that the Building is not fully occupied during any fiscal year of the Term as determined by Landlord, an adjustment shall be made in computing the Basic Operating Costs for such year so that Tenant pays an equitable portion of all variable items of Basic Operating Costs, as reasonably determined by Landlord; provided, however, that in no event shall Landlord be entitled to collect in excess of one hundred (100%) percent of the total Basic Operating Costs from all of the tenants in the Building including Tenant.

Basic Operating Costs shall not include specific costs incurred for the account of, separately billed to and paid by specific tenants. Notwithstanding anything herein to the contrary, in any instance wherein Landlord, in Landlord's sole discretion, deems Tenant to be responsible for any amounts greater than Tenant's Proportionate Share, Landlord shall have the right to allocate costs in any manner Landlord reasonably deems appropriate.

B. Payment of Estimated Basic Operating Cost. "Estimated Basic Operating Costs" for any particular year shall mean Landlord's estimate of the Basic Operating Cost for such fiscal year made prior to commencement of such fiscal year as hereinafter provided. Landlord shall have

the right from time to time to revise its fiscal year and interim accounting periods so long as the periods as so revised are reconciled with prior periods in accordance with generally accepted accounting principles applied in a consistent manner. Within thirty (30) days of the Effective Date of this Lease, and during the last month of each fiscal year during the Term, or as soon thereafter as practicable, Landlord shall give Tenant written notice of the Estimated Basic Operating Costs for the ensuing fiscal year. During the Early Possession period, Tenant shall pay Tenant's Proportionate Share of the Estimated Basic Operating Cost for the fiscal year to which the Estimated Basic Operating Cost applies in monthly installments on the first day of each calendar month prior to the Lease Commencement Date, in advance. Following the Lease Commencement Date, Tenant shall pay Tenant's Proportionate Share of the Estimated Basic Operating Cost with the Base Rent for the fiscal year to which the Estimated Basic Operating Cost applies in monthly installments on the first day of each calendar month during such year, in advance. If at any time during the course of the fiscal year, Landlord determines that Basic Operating Cost is projected to vary from the then Estimated Basic Operating Cost by more than Ten percent (10%), Landlord may, by written notice to Tenant, revise the Estimated Basic Operating Cost for the balance of such fiscal year, and Tenant's monthly installments for the remainder of such year shall be adjusted so that by the end of such fiscal year Tenant has paid to Landlord Tenant's Proportionate Share of the revised Estimated Basic Operating Cost for such year. Upon execution of this Lease, Tenant shall pay to Landlord the Estimated Basic Operating Cost for the Premises (calculated on the estimated rentable square feet) for the first full month of the Term. Upon final determination of the rentable square feet of the Premises and useable square feet of the Building, Landlord and Tenant shall adjust such estimated payment.

C. Computation of Basic Operating Cost Adjustment. "Basic Operating Cost Adjustment" shall mean the difference between Estimated Basic Operating Cost and Basic Operation Cost for any fiscal year determined as hereinafter provided. Within One Hundred Twenty (120) days after the end of each fiscal year, as determined by Landlord, or as soon thereafter as practicable, Landlord shall deliver to Tenant a statement of Basic Operating Cost for the fiscal year just ended, accompanied by a computation of Basic Operating Cost Adjustment. If such statement shows that Tenant's payment based upon Estimated Basic Operating Cost is less than Tenant's Proportionate Share of Basic Operating Cost, then Tenant shall pay to Landlord the difference within twenty (20) days after receipt of such statement. If such statement shows that Tenant's payments of Estimated Basic Operating Cost exceed Tenant's Proportionate Share of Basic Operating Cost, then (provided that Tenant is not in Default under this Lease) Landlord shall credit the difference against the Estimated Basic Operating Cost payment next due. If this Lease has been terminated or the Term hereof has expired prior to the date of such statement, then the Basic Operating Cost Adjustment shall be paid by the appropriate party within twenty (20) days after the date of delivery of the statement and this obligation shall survive termination of the Lease. Should this Lease commence or terminate at any time other than the first day of the fiscal year, Tenant's Proportionate Share of the Basic Operating Cost adjustment shall be prorated by reference to the exact number of calendar days during such fiscal year that this Lease is in effect.

D. Net Lease. This shall be a net Lease and Base Rent shall be paid to Landlord absolutely net of all costs and expenses, except as specifically provided to the contrary in this Lease. The provisions for payment of Basic Operating Cost and the Basic Operating Cost Adjustment are intended to pass on to Tenant and reimburse Landlord for all costs and expenses of the nature described in Paragraph 7.A. incurred in connection with the management, maintenance, preservation and operation of the Building and such additional facilities now and in subsequent years as may be determined by Landlord to be necessary to the Building.

E. Tenant Audit. In the event that Tenant shall dispute the amount set forth in any statement provided by Landlord under Paragraph 7.B or 7.C above, Tenant shall have the right, not later than sixty (60) days following the receipt of such statement and upon the condition that Tenant shall have paid Landlord the full amount that has been invoiced, to cause Landlord's books and records with respect to Basic Operating Cost for such fiscal year to be audited by certified public accountants selected by Tenant and subject to Landlord's reasonable right of approval. The Basic Operating Cost Adjustment shall be appropriately adjusted on the basis of such audit and the appropriate party shall pay to the other all amounts found by such audit to be owing within thirty (30) days. If such audit discloses a liability for a refund in excess of five percent (5%) of Tenant's Proportionate Share of the Basic Operating Cost Adjustment previously reported, the cost of such audit shall be borne by Landlord; otherwise the cost of such audit shall be paid by Tenant. If Tenant shall not request an audit in accordance with the provisions of this Paragraph 7.E within sixty (60) days after receipt of Landlord's statement provided pursuant to Paragraph 7.B or 7.C, such statement shall be final and binding for all purposes hereof.

INSURANCE AND INDEMNIFICATION

8.: A. Landlord's Insurance. Landlord agrees to maintain insurance insuring the Building against fire, lightning, flooding, earthquake, vandalism and malicious mischief (including, if Landlord elects, "All Risk" coverage), in an amount of not less than one hundred percent (100%) of the current replacement cost thereof, except where commercially unreasonable, with deductibles and the form and endorsements of such coverage as selected by Landlord. Such insurance may also include, at Landlord's option, insurance against loss of Base Rent and Additional Rent, in an amount equal to the amount of Base Rent and Additional Rent payable by Tenant for a period of at least twelve (12) months commencing on the date of loss. Such insurance shall be for the sole benefit of Landlord and under Landlord's sole control. Landlord shall not be obligated to insure any furniture, equipment, machinery, goods or supplies which Tenant may keep or maintain in the Premises, or any leasehold improvements, additions or alterations within the Premises. Landlord may also carry such other insurance as Landlord may deem prudent or advisable, including, without limitation, liability insurance in such amounts and on such terms as Landlord shall determine and flood insurance.

B. Tenant's Insurance.

(1) Property Insurance. Tenant shall procure at Tenant's sole cost and expense and keep in effect from the date of this Lease and at all times until the end of the Term, insurance on all personal property, Fixtures and all improvements made by or for Tenant to the Premises, insuring such property for the full replacement value of such property, exclusive of reasonable deductibles.

(2) Liability Insurance. Tenant shall procure at Tenant's sole cost and expense and keep in effect from the date of this Lease and at all times until the end of the Term either Comprehensive General Liability insurance or Commercial General Liability insurance applying to the use and occupancy of the Premises and the Building, and any part of

either, and any areas adjacent thereto, and the business operated by Tenant, or by any other occupant on the Premises, Such insurance shall include Broad Form Contractual Liability insurance coverage insuring all of Tenant's indemnity obligations under this Lease. Such coverage shall have a minimum combined single limit of liability of at least Two Million and no/100^th Dollars ($2,000,000.00), and a general aggregate limit of Five Million and no/100^th Dollars ($5,000,000.00). All such policies shall be written to apply to all bodily injury, property damage or loss, personal injury and other covered loss, however occasioned, occurring during the policy term, shall be endorsed to add Landlord and Landlord's members, agents and employees, and any party of which Tenant has been notified holding an interest to which this Lease may be subordinated as an additional insured, and shall provide that such coverage shall be primary as it pertains to the Premises and that any insurance maintained by Landlord pertaining to the Premises shall be excess insurance only. Such coverage shall also contain endorsements: (i) deleting any employee exclusion on personal injury coverage; (ii) including employees as additional insureds; (iii) deleting any liquor liability exclusion; and (iv) providing for coverage of employer's automobile non-ownership liability. All such insurance shall provide for severability of interests; shall provide that an act or omission of one of the named insureds shall not reduce or avoid coverage to the other named insureds; and shall afford coverage for all claims based on acts, omissions, injury and damage, which claims occurred or arose (or the onset of which occurred or arose) in whole or in part during the policy period. Said coverage shall be written on an "occurrence" basis, if available. If an "occurrence" basis form is not available, Tenant must purchase "tail" coverage for the most number of years available, and tenant must also purchase "tail" coverage if the retroactive date of an "occurrence" basis form is changed so as to leave a gap in coverage for occurrences that might have occurred in prior years. If a "claims made" policy is ever used, the policy must be endorsed so that Landlord is given the right to purchase "tail" coverage should Tenant for any reason not do so or if the policy is to be canceled for nonpayment of premium.

(3) General Insurance Requirements. All coverages described in this Paragraph 8.B shall be endorsed to provide Landlord with thirty (30) days' notice of cancellation or change in terms. If at any time during the Term the amount or coverage of insurance which Tenant is required to carry under this Paragraph 8.B is, in Landlord's reasonable judgment, materially less than the amount or type of insurance coverage typically carried by owners or tenants of properties located in the general area in which the Premises are located which are similar to and operated for similar purposes as the Premises, Landlord shall have the right to require Tenant to increase the amount or change the types of insurance coverage required under this Paragraph 8.B. All insurance policies required to be carried under this Lease shall be written by companies rated A or better in "Best's Insurance Guide" and authorized to do business in California. Any deductible amounts under any insurance policies required hereunder shall be subject to Landlord's prior written approval. In any event deductible amounts shall not exceed Five Thousand and no/100^th Dollars ($5,000.00). Tenant shall deliver to Landlord on or before the earlier of (i) the Early Possession Date or (ii) the Term Commencement Date, and thereafter at least thirty (30) days before the expiration dates of the expiring policies, certified copies of Tenant's insurance policies, or a certificate evidencing the same issued by the insurer thereunder, showing that all premiums have been paid for the full policy period; and, in the event Tenant shall fail to procure such insurance, or to deliver such policies or certificates, Landlord may, at Landlord's option and in addition to Landlord's other remedies in the event of a Default by Tenant hereunder, procure the same for the account of Tenant, and the cost thereof shall be paid to Landlord as Additional Rent.

(c) Indemnification. Landlord shall not be liable to Tenant for any loss or damage to person or property caused by theft, fire, acts of God, acts of a public enemy, riot, strike, insurrection, war, court order, requisition or order of governmental body or authority or for any damage or inconvenience which may arise through repair or alteration of any part of the Building or failure to make any such repair, except as expressly otherwise provided in Paragraph 10. Tenant shall indemnify, defend by counsel reasonably acceptable to Landlord, protect and hold Landlord and Landlord's members harmless from and against any and all liabilities, losses, costs, damages, injuries or expenses, including reasonable attorneys' fees and court costs, arising out of or related to: (1) claims of injury to or death of persons or damage to property occurring or resulting directly or indirectly from the use or occupancy of the Premises, or from activities of Tenant or Tenant's Parties (2) claims for work or labor performed, or for materials or supplies furnished to or at the request of Tenant in connection with performance of any work done for the account of Tenant within the Premises; and (3) claims arising from any breach or Default on the part of Tenant in the performance of any covenant contained in this Lease. The foregoing indemnity shall not be applicable to claims arising from the gross negligence or willful misconduct of Landlord and Landlord shall indemnify Tenant for any loss incurred by Tenant as a direct consequence of any such gross negligence or willful misconduct of Landlord. The provisions of this Paragraph shall survive the expiration or termination of this Lease with respect to any claims or liability occurring prior to such expiration or termination.

WAIVER OF SUBROGATION

9.: To the extent permitted by law and without affecting the coverage provided by insurance to be maintained hereunder, Landlord and Tenant each waive any right to recover against the other for: (a) damages for injury to or death of persons; (b) damages to property; (c) damages to the Premises or any part thereof, and (d) claims arising by reason of the foregoing due to hazards covered by insurance to the extent of proceeds recovered therefrom. This provision is intended to waive fully, and for the benefit of each party, any rights and/or claims which might give rise to a right of subrogation in favor of any insurance carrier. The coverage obtained by each party pursuant to this Lease shall include, without limitation, a waiver of subrogation by the carrier which conforms to the provisions of this Paragraph.

LANDLORD'S REPAIRS

10.: Landlord shall at Landlord's expense maintain the structural soundness of the structural beams of the roof, the foundations and exterior walls of the Building in good repair, reasonable wear and tear excepted; provided that, Landlord shall not be responsible for the cost of any repairs resulting from damage, destruction or deterioration which is caused by Tenant or Tenant's Parties. The term "exterior walls" as used herein shall not include windows, glass or plate glass, doors, special store fronts or office entries. Landlord shall perform on behalf of Tenant and other tenants of the Building, as an item of Basic Operating Cost, the exterior maintenance of the Building, and public and common areas of the Building, including the elevators, and the real property upon which the Building is located, including but not limited to the roof, pest extermination, the landscaped areas, parking areas, driveways, the truck staging areas, fire sprinkler systems, sanitary and storm sewer lines, utility services, servicing the Building, exterior lighting, and anything which affects the operation and exterior appearance of the Building, which determination shall be at Landlord's sole discretion. Except for the expenses directly involving the items specifically described in the first sentence of this Paragraph 10, Tenant shall reimburse Landlord for all such costs in accordance with Paragraph 7. Any damage caused by or repairs necessitated by any act of Tenant or Tenant's

Parties may be repaired by Landlord at Landlord's option and at Tenant's expense. Tenant shall immediately give Landlord written notice of any defect or need of repairs after which Landlord shall have a reasonable opportunity to repair same. Landlord's liability with respect to any defects, repairs, or maintenance for which Landlord is responsible under any of the provisions of this Lease shall be limited to the cost of such repairs or maintenance. Except in case of emergency, Landlord shall provide Tenant with reasonable notice before entering the Premises to conduct repairs.

TENANT'S REPAIRS

11.: Tenant shall at Tenant's expense throughout the Term of this Lease maintain all parts of the Premises in a good, clean and secure condition and promptly make all necessary repairs and replacements, including but not limited to all windows, glass, doors, walls and wall finishes, floor covering, heating, ventilating and air conditioning systems, plumbing work and Fixtures, roof (exclusive of structural beams), downspouts, electrical and lighting systems, and fire sprinklers. Tenant shall at Tenant's expense also perform regular removal of trash and debris. Tenant shall, at Tenant's own expense, enter into a regularly scheduled preventive maintenance/service contract with a maintenance contractor for servicing hot water, heating and air conditioning systems and equipment within or serving the Premises. Landlord must approve the maintenance contractor and the contract. The service contract must include all services suggested by the equipment manufacturer within the operation/maintenance manual and must become effective and a copy thereof delivered to Landlord within thirty (30) days after the Term Commencement Date. Tenant shall not damage any demising wall or disturb the integrity and support provided by any demising wall and shall, at its sole expense, immediately repair any damage to any demising wall caused by Tenant or Tenant's Parties. To the extent permitted by applicable contracts or law, Landlord shall make available to Tenant the benefits of any contractor warranties applicable to items for which Tenant has repair, maintenance or replacement responsibility hereunder, provided, however, that Landlord shall not be obligated to incur any cost or liability in so doing.

ALTERATIONS

12.: Tenant shall not make, or allow to be made, any Alterations or physical additions in, about or to the Premises without obtaining the prior written consent of Landlord, except as stated below, which consent shall not be unreasonably withheld with respect to proposed alterations and additions which: (a) comply with all applicable laws, ordinances, rules and regulations; (b) are in Landlord's opinion, compatible with the Building and its mechanical, plumbing, electrical, heating/ventilation/air conditioning systems, (c) will not interfere with the use and occupancy of any other portion of the Building by any other tenant or its invitees; (d) are performed promptly and in a workman like manner; (e) the Building remains lien free as a result of the construction; and (f) are constructed using all new materials. The term "Alteration" as used herein is defined as alterations, additions, substitutions, installations, changes and improvements, but excludes minor decorations. So long as Tenant is not in Default under this Lease, Tenant shall have the right to make up to Fifteen Thousand and no 100^th Dollars ($15,000.00) worth of Alterations to the Premises per year, which would otherwise be permissible under the Lease and which do not involve demolition or effect the structural parts or exterior of the Building, without obtaining the prior written consent of Landlord. Prior to commencing any construction, Tenant shall nevertheless submit to Landlord copies of its plans and specification, and Tenant's work shall be performed pursuant to the other requirements of this section. Specifically, but without limiting the generality of the foregoing, Landlord shall have the right of written consent for all plans and specifications for the proposed Alterations or additions, construction means and methods, all appropriate

permits and licenses, any contractor of subcontractor to be employed on the work of Alteration or additions, and the time for performance of such work. Tenant shall also supply to Landlord any documents and information reasonably requested by Landlord in connection with Landlord's consideration of a request for approval hereunder. Tenant shall reimburse Landlord for all costs which Landlord may incur in connection with granting approval to Tenant for any such Alterations and additions, including any costs or expenses which Landlord may incur in electing to have outside architects, engineers, and attorneys review of said plans and specifications, All such Alterations, physical additions or improvements shall remain the property of Tenant until termination of this Lease, at which time they shall be and become the property of Landlord if Landlord so elects. Landlord shall promptly notify Tenant at time of approval whether said improvements will need to be removed at Lease Termination. If improvements are to be removed then Tenant, at Tenant's expense, shall remove any or all Alterations, additions, improvements and partitions made by Tenant and restore the Premises by the termination of this Lease, whether by lapse of time, or otherwise, to their condition existing prior to the construction of any such alterations, additions, partitions or leasehold improvements, except for initial Tenant Improvements made pursuant to Exhibit B-2. All such removals and restoration shall be accomplished in a good and workmanlike manner so as not to cause any damage to the Premises or the Building whatsoever. If Tenant fails to so remove such alterations, additions, improvements and partitions or Tenant's Trade Fixtures or furniture, Landlord may keep and use them or remove any of them and cause them to be stored or sold in accordance with applicable law, at Tenant's sole expense. In addition to and wholly apart from Tenant's obligation to pay Tenant's Proportionate Share of Basic Operating Cost, Tenant shall be responsible for and shall pay prior to delinquency any taxes or governmental service fees, possessory interest taxes, fees or charges in lieu of any such taxes, capital levies, or other charges imposed upon, levied with respect to or assessed against its personal property, on the value of the alterations, additions or improvements within the Premises, and on Tenant's interest pursuant to this Lease. To the extent that any such taxes are not separately assessed or billed to Tenant, Tenant shall pay the amount thereof as invoiced to Tenant by Landlord.

SIGNS

13.: Subject to the provisions of this Section and all applicable Regulations, Tenant may, at Tenant's cost, erect signs identifying Tenant within the Building in those locations to be identified by Landlord. All signs, notices, graphics and advertising balloons of every kind or character, visible in or from public view or corridors, the common areas or the exterior of the Premises, shall be subject to Landlord's prior written approval. Tenant shall not place or maintain any banners whatsoever or any window decor in or on any exterior window or window fronting upon any common areas or service area or upon any truck doors or man doors without Landlord's prior written approval. Any installation of signs or graphics on or about the Premises and/or the Building shall be subject to any applicable Regulations, including, CC&Rs, ordinances, and any other reasonable requirements imposed by Landlord. Tenant shall remove all such signs and graphics prior to the termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury or defacement of the Premises or the Building and any other improvements contained therein, and Tenant shall repair any injury or defacement, including without limitation, discoloration caused by such installation or removal.

INSPECTION/POSTING NOTICES

14.: After reasonable notice, except in emergencies where no such notice shall be required, Landlord, and Landlord's agents and representatives, shall have the right to enter the

Premises to inspect the same, to clean, to perform such work as may be permitted or required hereunder, to make repairs or alterations to the Premises or to other tenant spaces therein, to deal with emergencies, to post such notices as may be permitted or required by law to prevent the perfection of liens against Landlord's interest in the Building or to exhibit the Premises to prospective tenants, purchasers, encumbrances or others, or for any other purpose as Landlord may deem necessary or desirable; provided, however, that Landlord shall use reasonable efforts not to unreasonably interfere with Tenant's business operations. Provided that Tenant is not in Default hereunder, Landlord shall not advertise or show the Premises to prospective successor tenants except during the last twelve (12) months of the Lease term. Tenant shall not be entitled to any abatement of Rent by reason of the exercise of any such right of entry. At any time within twelve (12) months prior to the end of the Term, Landlord shall have the right to erect on the Premises a suitable sign indicating that the Premises are available for lease. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Premises and shall meet with Landlord for a joint inspection of the Premises at the time of vacating. In the event of Tenant's failure to give such notice or participate in such joint inspection, Landlord's inspection at or after Tenant's vacating the Premises shall conclusively be deemed correct for purposes of determining Tenant's responsibility for repairs and restoration.

UTILITIES

15.: Tenant shall pay directly for all water, gas, heat, air conditioning, light, power, telephone, sewer, sprinkler charges and other utilities and services used on or from the Premises, together with any taxes, penalties, surcharges or the like pertaining thereto, and maintenance charges for utilities and shall furnish all electric light bulbs, ballasts and tubes. If any such services are not separately metered to Tenant, Tenant shall pay a reasonable proportion, as determined by Landlord, of all charges jointly serving other premises. Landlord shall not be liable for any damages directly or indirectly resulting from nor shall the Rent or any monies owed Landlord under this Lease herein reserved be abated by reason of: (a) the installation, use or interruption of use of any equipment used in connection with the furnishing of any such utilities or services; (b) the failure to furnish or delay in furnishing any such utilities or services when such failure or delay is caused by acts of God or the elements, labor disturbances of any character, or any other accidents or other conditions beyond the reasonable control of Landlord; or (c) the limitation, curtailment, rationing or restriction on use of water, electricity, gas or any other form of energy or any other service or utility whatsoever serving the Premises, Landlord shall be entitled to cooperate voluntarily and in a reasonable manner with the efforts of national, state or local governmental agencies or utility suppliers in reducing energy or other resource consumption. The obligation to make services available hereunder shall be subject to the limitations of any such voluntary, reasonable program.

SUBORDINATION

16.: Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, this Lease shall be subject and subordinate at all times to: (a) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Premises and/or the land upon which the Building is situated, or both; and (b) any mortgage or deed of trust which may now exist or be placed upon such Building, land, ground leases or underlying leases, or Landlord's interest or estate in any of said items which is specified as security. At the request of Tenant, Landlord will endeavor to obtain from the secured party under any mortgage or deed of trust which is senior to this Lease, a nondisturbance agreement upon such lender's customary form therefor. Notwithstanding the foregoing,

Landlord shall have the right to subordinate or cause to be subordinated any such ground leases or underlying leases or any such liens to this Lease. In the event that any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, attorn to and become the Tenant of the successor in interest to Landlord at the option of such successor in interest. Within ten (10) days after request by Landlord, Tenant shall execute and deliver any additional documents evidencing Tenant's attornment or the subordination of this Lease with respect to any such ground leases or underlying leases or any such mortgage or deed of trust, in the form requested by Landlord or by any ground landlord, mortgagee, or beneficiary under a deed of trust.

FINANCIAL STATEMENTS

17.: At the request of Landlord, Tenant shall provide to Landlord Tenant's current financial statement or other information disclosing financial worth of Tenant within ten (10) business days after the date of Landlord's request, which Landlord shall use solely for purposes of this Lease and in connection with the ownership, management and disposition of the Building.

ESTOPPEL CERTIFICATE

18.: Tenant agrees from time to time, within ten (10) business days after request of Landlord, to deliver to Landlord, or Landlord's designee, an estoppel certificate per Exhibit D, or in an alternate form that the requesting party may require, stating that this Lease is in full force and effect, the date to which Rent has been paid, the unexpired portion of this Lease, and such other matters pertaining to this Lease as may be reasonably requested by Landlord. Landlord and Tenant intend that any statement delivered pursuant to this Paragraph may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of the Project or any interest therein, The parties agree that Tenant's obligation to furnish such estoppel certificates in a timely fashion is a material inducement for Landlord's execution of the Lease, and shall be an Event of Default if Tenant fails to fully comply. Tenant acknowledges that failure to provide the Estoppel Certificate to Landlord or Landlord's designee within the time provided above may cause Landlord to incur substantial damages. Tenant hereby agrees to indemnify Landlord for any liabilities, losses, costs, damages (including, without limitation, compensatory, incidental and consequential damages), injuries or expenses arising from the failure of Tenant to deliver the Estoppel certificate in the manner provided in this Paragraph within twenty (20) business days after requested by Landlord. In addition to any other remedies Landlord may have at law and equity, Landlord shall be entitled to specific performance of this Paragraph. The provisions of this Paragraph shall survive the expiration or termination of this Lease with respect to any claims or liability occurring prior to such expiration or termination.

SECURITY DEPOSIT

19.: Upon execution of this Lease, as collateral for the full and faithful performance by Tenant of all of its obligations under this Lease and for all losses and damages Landlord may suffer as a result of any default by Tenant under this Lease, Tenant shall deliver to Landlord an unconditional irrevocable negotiable Letter of Credit in the amount of One Million Two Hundred Eighty Thousand Three Hundred Fifty-five and no/100th Dollars ($1,280,355.00) meeting the requirements of this paragraph (the "Letter of Credit"). The Letter of Credit shall (a) designate Landlord or its assignees as beneficiary, (b) be issued by a financial institution approved by Landlord, and (c) be in form satisfactory to Landlord. The Letter of Credit may be for an initial term of fifteen (15) months so long as it provides that Landlord may immediately draw the full amount of the Letter of Credit if the issuer does not give Landlord written notice of renewal for additional successive periods of twelve (12) months at least sixty (60) days prior to the expiration date. Landlord is authorized to draw on the Letter of Credit from time to time in the event that (i) Landlord advises the issuer of the Letter of Credit that there is an Event of Default by Tenant under this Lease, or (ii) the issuer gives Landlord notice that the Letter of Credit will be terminated or will expire prior to the initial term of fifteen (15) months, or (iii) the issuer does not give Landlord a written notice of renewal of the term of the Letter of Credit as required by the preceding sentence. In the event Landlord shall draw on the Letter of Credit in the circumstances described in clause (i) of this paragraph, Landlord shall be permitted to draw an amount necessary in Landlord's good faith estimation to fully cure any such Event of Default, including any damage, injury, expense or liability caused or projected to be caused by such Event of Default, and Tenant shall, on demand from Landlord, increase the Letter of Credit up to its full original amount. In the event Landlord shall draw on the Letter of Credit in the circumstances described in clause (ii) or (iii) of this paragraph, Landlord shall be permitted to draw the entire amount of the Letter of Credit. Landlord may draw on the Letter of Credit regardless of whether or not Tenant disputes that an Event of Default has occurred and regardless of any other disputes or claims between the parties. Landlord shall not be required to deliver any certifications or documentation of any kind to the issuer in order to make a draw, other than Landlord's written demand certifying that an Event of Default has occurred. The issuer shall not be required to conduct any inquiry or investigation before paying Landlord the requested amount of the draw. Landlord may assign, transfer or pledge the Letter of Credit to any lender or purchaser in connection with any financing or sale of the Premises.

TENANT'S REMEDIES

20.: The liability of Landlord to Tenant for any default by Landlord under the terms of this Lease are not personal obligations of the Landlord or other trustees, advisors, partners, directors, officers and shareholders of Landlord, and Tenant agrees to look solely to Landlord's interest in the Building (including net revenues generated by the Building) together with proceeds of sale, insurance proceeds, and any award or settlement in eminent domain for the recovery of any amount from Landlord, and shall not look to other assets of Landlord nor seek recourse against the assets of the Landlord or other trustees, advisors, partners, directors, officers and members of Landlord.

ASSIGNMENT AND SUBLETTING

21.: A. General. Tenant shall not assign this Lease or sublet the Premises or any part thereof without Landlord's prior written approval. If Tenant desires to assign this Lease, it must demonstrate that the potential assignee has adequate credit, demonstrate to the Landlord's satisfaction that the potential assignee's proposed use of the Premises is compatible with the

Building and complies with all applicable Regulations. If Tenant desires to assign this Lease or sublet any or all of the Premises, Tenant shall give Landlord written notice at least fifteen (15) days but not more than ninety (90) days prior to the date Tenant desires the assignment or sublease to be effective. At that time, Tenant shall submit in writing to Landlord (i) the name of the proposed subtenant or assignee; (ii) the nature of the proposed subtenant's or assignee's business to be carried on in the Premises together with a detailed description of the proposed subtenant's or assignee's business experience and duration of the current enterprise; (iii) the terms and provisions of the proposed sublease or assignments and the proposed effective date thereof; and (iv) such financial information as Landlord may request concerning the proposed subtenant or assignee. The submission pursuant to clause (v) shall include a copy of any agreement, escrow instructions or other document which contains or memorializes the terms and provisions of the transaction for which Landlord's consent is required. Landlord's consent to a proposed assignment or sublet shall not be unreasonably withheld. Without limiting the other instances in which it may be reasonable for Landlord to withhold Landlord's consent to an assignment or subletting, Landlord and Tenant acknowledge that it shall be reasonable for Landlord to withhold landlord's consent in the following instances: (i) the use of the Premises by such proposed assignee or subtenant would not be a permitted use; (ii) the proposed assignee or subtenant is not of sound financial condition, as reasonably determined by Landlord after receipt of the proposed assignee's financial statements in form satisfactory to Landlord; (iii) the proposed assignee or subtenant is a governmental agency; (iv) the proposed assignee or subtenant does not have a good reputation as a tenant of property; (v) the proposed assignee or subtenant is a person with whom Landlord is negotiating to lease space in the Building; (vi) the assignment or subletting would entail any alterations which would lessen the value of the leasehold improvements in the Premises; or (vii) if Tenant is in Default of any obligation of Tenant under this Lease, or Tenant has defaulted under this Lease on three (3) or more occasions during any twelve (12) months preceding the date that Tenant shall request consent. Failure by Landlord to approve a proposed assignee or subtenant shall not cause a termination of this Lease. Notwithstanding anything to the contrary in this Paragraph 21, Tenant shall have the right to assign the Premises to any entity without first obtaining consent of Landlord resulting from a merger or consolidation with Tenant, a public offering and sale of some or all of Tenant's stock, a transfer of shares of Tenant's stock on the public stock exchange, or a transfer of the Lease in connection with the sale of all or substantially all of Tenant's assets; provided that: (a) Tenant shall not be in Default of any of its obligations under this Lease and shall not have previously defaulted under this Lease on three (3) or more occasions during any twelve (12) month period preceding the date of such transaction, (b) Tenant shall give Landlord at least thirty (30) days prior written notice of any such proposed transaction, and (c) the entity which results from the merger, consolidation or other transaction of Tenant shall have a net equity of at least Ten Million and no/100^th Dollars ($10,000,000.00) which has been demonstrated in appropriate documentation delivered to Landlord prior to the occurrence of such transaction. Tenant shall reimburse Landlord, on demand, for all reasonable costs and expenses incurred by Landlord in connection with any proposed assignment or subleasing by Tenant, including reasonable attorney's fees, as established by Landlord from time to time, in connection with Landlord's review and consideration of any such request for Landlord's consent.

B. Termination. At any time within fifteen (15) days after Landlord's receipt of the last information specified in subsection 21A, above, Landlord may by written notice to Tenant elect (i) to disapprove of such assignment or sublease; (ii) to approve such sublease or assignment; or (iii) to terminate this lease as to the portion (including all) of the Premises so proposed to be subleased or assigned. Should Landlord so elect to terminate this Lease, all of the obligations of the of the parties thereunder shall terminate on the later of sixty (60) days

following Landlord's notice to Tenant of its election hereunder or the effective date of the proposed assignment or subletting sought by the Tenant but in no event later than one hundred twenty (120) days following the date of Landlord's election hereunder. At the time of termination all obligations of both parties hereunder shall terminate as to obligations thereafter accruing except as otherwise expressly provided in this Lease. Landlord shall have the option to recapture the Premises only if the sublease or assignment, together with any previous subleases or assignments, covers 40% or more of the Premises or is for a period of three (3) or more years.

C. Bonus Rent. Any Rent or other consideration realized by Tenant under any approved sublease or assignment in excess of the Rent payable hereunder, after deducting on an amortized basis Tenant's actual payment of a reasonable brokerage commission, reasonable attorneys' fees related to the subletting, and reasonable costs of Tenant's improvements to the subleased or assigned premises for the subtenant's use, shall be divided and paid, fifty percent (50%) to Tenant, and fifty percent (50%) to Landlord.

D. Corporation. If Tenant is a corporation, a transfer of corporate shares by sale, assignment, bequest, inheritance, operation of law or other disposition (including such a transfer to or by a receiver or trustee in federal or state bankruptcy, insolvency or other proceedings), so as to result in a change in the present control of such corporation or any of its parent corporations by the person or persons owning a majority of said corporate shares, shall constitute an assignment for purposes of this Lease.

E. Partnership. If Tenant is a partnership, joint venture or other incorporated business form, a transfer of the interest of persons, firms or entities responsible for managerial control of Tenant by sale, assignment, bequest, inheritance, operation of law or other disposition, so as to result in a change in the present control of said entity and/or a change in the identity of the persons responsible for the general credit obligations of said entity shall constitute an assignment for all purposes of this Lease.

F. Liability. No assignment or subletting by Tenant shall relieve Tenant of any obligation under this Lease. Any assignment or subletting which conflicts with the provisions hereof shall be void.

G. Options. Tenant must be in possession of the entire Premises in order to exercise its options to expand, and/or expend under this Lease.

AUTHORITY OF PARTIES

22.: Landlord represents and warrants that it has full right and authority to enter into this Lease and to perform all of Landlord's obligations hereunder. Tenant represents and warrants that it has full right and authority to enter into this Lease and to perform all of Tenant's obligations hereunder.

CONDEMNATION

23.: A. Condemnation Resulting in Termination. If the whole or any substantial part of the Premises and/or the Building should be taken or condemned for any public use under governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, and the taking would prevent or materially interfere with the Permitted Use of the Premises, this Lease shall terminate and the Rent shall be abated during the unexpired portion of this Lease, effective when the physical taking of said Premises shall have occurred.

B. Condemnation Not Resulting in Termination. If a portion of the Premises are to be taken or condemned for any public use under any governmental law, ordinance, or regulation, or by right of eminent domain, or by private purchase in lieu thereof, and this Lease is not terminated as provided in Paragraph 23.A above, this Lease shall not terminate, but the Rent payable hereunder during the unexpired portion of the Lease shall be reduced, beginning on the date when the physical taking shall have occurred, to such amount as may be fair and reasonable under all of the circumstances.

C. Award. Landlord shall be entitled to any and all payment, income, rent, award, or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance and Tenant shall have no claim against Landlord or otherwise for the value of any unexpired portion of this Lease. Notwithstanding the foregoing, any compensation specifically awarded Tenant for loss of business, Tenant's personal property, moving costs or loss of goodwill, shall be and remain the property of Tenant and Tenant shall have the right to make any claim for the value of its interest in the Property, including, without limitation, the unamortized value of Tenant Improvements paid for by Tenant, as set forth in Exhibit B-2, including those items set forth in Exhibit B-3.

CASUALTY DAMAGE

24.: A. General. If the Premises or the Building should be damaged or destroyed by fire, tornado, earthquake or other casualty, Tenant shall give immediate written notice thereof to Landlord. Within thirty (30) days after Landlord's receipt of such notice, Landlord shall notify Tenant whether in Landlord's reasonable opinion such repairs can reasonably be made either: (1) within (90) days; (2) in more than (90) days but in less than one hundred eighty (180) days; or (3) in more than one hundred eighty (180) days from the date of such notice. Landlord's determination shall be binding on Tenant.

B. Less than 90 Days. If the Premises or the Building should be damaged by fire, tornado, earthquake or other casualty but only to such extent that rebuilding or repairs can in Landlord's estimation be reasonably completed within ninety (90) days after the date of such damage, this Lease shall not terminate, and provided that insurance proceeds are available to fully repair the damage, Landlord shall proceed to rebuild and repair the Premises in the manner determined by Landlord, except that Landlord shall not be required to rebuild, repair or replace any part of the partitions, Fixtures, additions and other leasehold improvements which may have been placed in, on or about the Premises. If the Premises are untenantable in whole or in part following such damage, the Rent payable hereunder during the period in which they are untenantable shall be abated proportionately, but only to the extent the Premises are unfit for occupancy.

C. Greater than 90 Days. If the Premises or the Building should be damaged by fire, tornado, earthquake or other casualty but only to such extent that rebuilding or repairs can in Landlord's estimation be reasonably completed in more than ninety (90) days but in less than one hundred eighty (180) days, then Landlord shall have the option of either: (1) terminating the Lease effective upon the date of the occurrence of such damage, in which event the Rent shall be abated during the unexpired portion of the Lease; or (2) electing to rebuild or repair the Premises to substantially the condition in which they existed prior to such damage, provided that insurance proceeds are available, to fully repair the damage, except that Landlord shall not be required to rebuild, repair or replace any part of the partitions, Fixtures, additions and other improvements which may have been placed in, on or about the Premises. If the Premises are untenantable in whole or in part following such damage, the Rent payable hereunder during the period in which they are untenantable shall be abated proportionately, but only to the extent the Premises are unfit for occupancy. In the event that

Landlord should fail to complete such repairs and rebuilding within one hundred eighty days (180) days after the date upon which Landlord is notified by Tenant of such damage, such period of time to be extended for delays caused by the fault or neglect of Tenant or because of acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, or delays of the contractors or subcontractors or any other causes or contingencies beyond the reasonable control of Landlord, Tenant may at Tenant's option within ten (10) days after the expiration of such one hundred eighty (180) day period (as such may be extended), terminate this Lease by delivering written notice of termination to Landlord as Tenant's exclusive remedy, whereupon all rights hereunder shall cease and terminate thirty (30) days after Landlord's receipt of such termination notice.

D. Greater than 180 Days. If the Premises or the Building should be so damaged by fire, tornado, earthquake or other casualty that rebuilding or repairs cannot in Landlord's reasonable estimation be completed within one hundred eighty (180) days after such damage, this Lease shall terminate and the Rent shall be abated during the unexpired portion of this Lease, effective upon the date of the occurrence of such damage.

E. Tenant's Fault. If the Premises or any other portion of the Building is damaged by fire or other casualty resulting from the fault, negligence, or breach of this Lease by Tenant or any of Tenant's Parties, Base Rent and Additional Rent shall not be diminished during the repair of such damage and Tenant shall be liable to Landlord for the cost and expense of the repair and restoration of the Building caused thereby to the extent such cost and expense is not covered by insurance proceeds.

F. Uninsured Casualty. Notwithstanding anything herein to the contrary, in the event that the Premises or the Building is damaged or destroyed and are not fully covered by the insurance proceeds received by Landlord or in the event that the holder of any indebtedness secured by a mortgage or deed of trust covering the Premises requires that the insurance proceeds be applied to such indebtedness, then in either case Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within thirty (30) days after the date of notice to Landlord that said damage or destruction is not fully covered by insurance or such requirement is made by any such holder, as the case may be, whereupon all rights and obligations hereunder shall cease and terminate.

G. Waiver. Except as otherwise provided in this Paragraph 24, Tenant hereby waives the provisions of Sections 1932(a), 1933(4), 1941 and 1942 of the Civil Code of California.

HOLDING OVER

25.: If Tenant shall retain possession of the Premises or any portion thereof without Landlord's consent following the expiration of the Lease or sooner termination for any reason, then Tenant shall pay to Landlord for each day of such retention one hundred and fifty percent (150%) of the amount of the daily rental as of the last month prior to the date of expiration or termination. Tenant shall also indemnify, defend, protect and hold Landlord harmless from any loss, liability or cost, including reasonable attorneys' fees, resulting from delay by Tenant in surrendering the Premises, including, without limitation, any claims made by any succeeding tenant founded on such delay. Acceptance of Rent by Landlord following expiration or termination shall not constitute a renewal of this Lease, and nothing contained in this Paragraph 25 shall waive Landlord's right of reentry or any other right, Unless Landlord consents in writing to Tenant's holding over, Tenant shall be only a Tenant at sufferance, whether or not Landlord accepts any Rent from Tenant while Tenant is holding over without Landlord's written consent. Additionally, in the event that upon termination of the Lease,

Tenant has not fulfilled its obligation with respect to repairs and cleanup of the Premises or any other Tenant obligations as set forth in this Lease, then Landlord shall have the right to perform any such obligations as it deems necessary at Tenant's sole cost and expense, and any time required by Landlord to complete such obligations shall be considered a period of holding over and the terms of this Paragraph 25 shall apply.

DEFAULT

26.: A. Events of Default. The occurrence of any of the following shall constitute an event of default ("Event of Default" or "Default") on the part of Tenant:

(1) Abandonment. Abandonment of the Premises for a continuous period in excess of thirty (30) business days will not be an Event of Default so long as Tenant timely performs all other monetary and non-monetary obligations under this Lease and keeps the Premises locked and secured. Tenant waives any right to notice Tenant may have under Section 1951.3 of the Civil Code of the State of California, the terms of this Paragraph 26.A being deemed such notice to Tenant as required by said Section 1951.3.

(2) Nonpayment of Rent. Failure to pay any installment of Rent or any other amount due and payable hereunder within five (5) days following the date when said payment is due.

(3) Other Obligations. Failure to perform any obligation, agreement or covenant under this Lease other than those matters specified in subparagraphs (1) and (2) of this Paragraph 26.A, such failure continuing for fifteen (15) days after written notice of such failure. In the event Tenant has commenced to cure the failure of performance within the fifteen (15) day period, but has not completed the cure despite diligent attempts to do so, Tenant shall have an additional period not to exceed thirty (30) additional days after such fifteen (15) day period to complete such cure so long as Tenant continues to diligently pursue the cure to completion during such additional thirty (30) day period.

(4) General Assignment. A general assignment by Tenant for the benefit of creditors.

(5) Bankruptcy. The filing of any voluntary petition in bankruptcy by Tenant, or the filing of an involuntary petition by Tenant's creditors, which involuntary petition remains undischarged for a period of sixty (60) days. In the event that under applicable law the trustee in bankruptcy or Tenant has the right to affirm this Lease and continue to perform the obligations of Tenant hereunder, such trustee or Tenant shall, in such time period as may be permitted by the bankruptcy court having jurisdiction, cure all Defaults of Tenant hereunder outstanding as of the date of the affirmance of this Lease and provide to Landlord such adequate assurances as may be necessary to ensure Landlord of the continued performance of Tenant's obligations under this Lease.

(6) Receivership. The employment of a receiver to take possession of substantially all of Tenant's assets or the Premises, if such appointment remains undismissed or undischarged for a period of sixty (60) days after the order therefor.

(7) Attachment. The attachment, execution or other judicial seizure of all or substantially all of Tenant's assets or the Premises, if such attachment or other seizure remains undismissed or undischarged for a period of sixty (60) days after the levy thereof.

(8) Delays. Any delay in the construction of Landlord's Work caused by Tenant or Tenant's Work as provided in Exhibit B.

B. Remedies Upon Default.

(1) Termination. In the event of the occurrence of any Event of Default, Landlord shall have the right to give a written termination notice to Tenant, and on the date specified in such notice, Tenant's right to possession shall terminate, and this Lease shall terminate unless on or before such date all arrears of rental and all other sums payable by Tenant under this Lease and all reasonable costs and expenses incurred by or on behalf of Landlord hereunder shall have been paid by Tenant and all other Events of Default of this Lease by Tenant at the time existing shall have been fully remedied to the satisfaction of Landlord. At any time after such termination, Landlord may recover possession of the Premises or any part thereof and expel and remove therefrom Tenant and any other person occupying the same, by any lawful means, and again repossess and enjoy the Premises without prejudice to any of the remedies that Landlord may have under this Lease, or at law or equity by reason of Tenant's Default or of such termination.

(2) Continuation After Default. Even though an Event of Default may have occurred, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession under Paragraph 26.B(1) hereof, and Landlord may enforce all of Landlord's rights and remedies under this Lease, including without limitation, the right to recover Rent as it becomes due, and Landlord, without terminating this Lease, may exercise all of the rights and remedies of a landlord under Section 1951.4 of the Civil Code of the State of California or any successor code section. Acts of maintenance, preservation or efforts to lease the Premises or the appointment of a receiver upon application of Landlord to protect Landlord's interest under this Lease shall not constitute an election to terminate Tenant's right to possession.

C. Damages After Default. Should Landlord terminate this Lease pursuant to the provisions of Paragraph 26.B(l) hereof, Landlord shall have the rights and remedies of a Landlord provided by Section 1951.2 of the Civil Code of the State of California, or successor code sections. Upon such termination, in addition to any other rights and remedies to which Landlord may be entitled under applicable law, Landlord shall be entitled to recover from Tenant: (1) the worth at the time of award of the unpaid Rent and other amounts which had been earned at the time of termination, (2) the worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided; (3) the worth at the time of award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of such Rent loss that the Tenant proves could be reasonably avoided; and (4) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease or which, in the ordinary course of things, would be likely to result therefrom. The "worth at the time of award" of the amounts referred to in (1) and (2), above shall be computed at the lesser of the "prime rate," as announced from time to time by Wells Fargo, N.A. (San Francisco) plus five (5) percentage points, or the maximum interest rate allowed by law ("Applicable Interest Rate"). The "worth at the time of award" of the amount referred to in (3) above shall be computed by discounting such amount at the Federal Discount Rate of the Federal Reserve Bank of San Francisco at the time of the award plus one percent (1%). If this Lease provides for any periods during the Term during which Tenant is not required to pay Base Rent or if Tenant otherwise receives a Rent concession, then upon the occurrence of an Event of Default, Tenant shall owe to Landlord the full amount of such Base Rent or value of such Rent concession, plus interest at the Applicable Interest Rate, calculated from the date that such Base Rent or Rent concession would have been payable.

D. Late Charge. If any installment of Rent is not received by the Landlord from the Tenant by the Fifth (5^th) day of each calendar month, such amount shall bear interest at the Applicable Interest Rate from the date on which said payment shall be due until the date on which Landlord shall receive said payment. In addition, Tenant shall pay Landlord a late charge equal to six percent (6%) of the delinquency, to compensate Landlord for the loss of the use of the amount not paid and the administrative costs caused by the delinquency, the parties agreeing that Landlord's damage by virtue of such delinquencies would be difficult to compute and the amount stated herein represents a reasonable estimate thereof. This provision shall not relieve Tenant of Tenant's obligation to pay Rent at the time and in the manner herein specified.

E. Remedies Cumulative. All rights, privileges and elections or remedies of the parties are cumulative and not alternative, to the extent permitted by law and except as otherwise provided herein.

LIENS

27.: Tenant shall keep the Premises free from liens arising out of or related to work performed, materials or supplies furnished or obligations incurred by Tenant or in connection with work made, suffered or done by or on behalf of Tenant in or on the Premises or the Building. In the event that Tenant shall not, within ten (10) business days following the imposition of any such lien, cause the same to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but not the obligation, to cause the same to be released by such means as Landlord shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord on behalf of Tenant and all expenses incurred by Landlord in connection therefor shall be payable to Landlord by Tenant on demand with interest at the Applicable Interest Rate. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law, or which Landlord shall deem proper, for the protection of Landlord, the Premises, the Building and any other party having an interest therein, from mechanics' and materialmen's liens, and Tenant shall give Landlord not less than five (5) business days prior written notice of the commencement of any work in the Premises or the Building which could lawfully give rise to a claim for mechanics' or materialmen's liens.

TRANSFERS BY LANDLORD

28.: In the event of a sale or conveyance by Landlord of the Building or a foreclosure by any creditor of Landlord, the same shall operate to release Landlord from any liability upon any of the covenants or conditions, express or implied, herein contained in favor of Tenant; to the extent required to be performed after the passing of title to Landlord's successor-in-interest. In such event, Tenant agrees to look solely to the responsibility of the successor-in-interest of Landlord under this Lease with respect to the performance of the covenants and duties of "Landlord" to be performed after the passing of title to Landlord's successor-in-interest, This Lease shall not be affected by any such sale and Tenant agrees to attorn to the purchaser or assignee. Landlord's successor(s)-in-interest shall not have liability to Tenant with respect to the failure to perform all of the obligations of "Landlord", to the extent required to be performed prior to the date such successor(s)-in-interest became the owner of the Building.

RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS

29.: All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of Rent. If Tenant shall fail to pay any sum of money, other than Base Rent and Basic Operating

Cost, required to be paid by Tenant hereunder or shall fail to per-form any other act on Tenant's part to be performed hereunder, and such failure shall continue for five (5) days after notice thereof by Landlord, Landlord may, but shall not be obligated to do so, and without waiving or releasing Tenant from any obligations of Tenant, make any such payment or perform any such act on Tenant's part to be made or performed. All sums, so paid by Landlord and all necessary incidental costs together with interest thereon at the Applicable Interest Rate from the date of such payment by Landlord shall be payable to Landlord on demand, and Tenant covenants to pay such sums, and Landlord shall have, in addition to any other right or remedy of Landlord, the same right and remedies in the event of the non-payment thereof by Tenant as in the case of Default by Tenant in the payment of Base Rent and Basic Operating Cost.

WAIVER

30.: If either Landlord or Tenant waives the performance of any term, covenant or condition contained in this Lease, such waiver shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition contained herein. The acceptance of Rent by Landlord shall not constitute a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, regardless of Landlord's knowledge of such preceding breach at the time Landlord accepted such Rent. Failure by Landlord to enforce any of the terms, covenants or conditions of this Lease for any length of time shall not be deemed to waive or to decrease the right of Landlord to insist thereafter upon strict performance by Tenant. Waiver by Landlord of any term, covenant or condition contained in this Lease may only be made by a written document signed by Landlord.

NOTICE

31.: Each provision of this Lease or of any applicable governmental laws,; ordinances, regulations and other requirements with reference to sending, mailing or delivery of any notice or the making of any payment by Landlord or Tenant to the other shall be deemed to be complied with when and if the following steps are taken:

A. Rent. All Rent and other payments required to be made by Tenant to Landlord hereunder shall be payable to Landlord at the address set forth in the Basic Lease Information, or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith. Tenant's obligation to pay Rent and any other amounts to Landlord under the terms of this Lease shall not be deemed satisfied until such Rent and other amounts have been actually received by Landlord.

B. Other. All notices, demands, consents and approvals which may or are required to be given by either party to the other hereunder shall be in writing and either personally delivered, sent by commercial overnight courier, sent by facsimile, or mailed, certified or registered, postage prepaid, and addressed to the party to be notified at the address for such party as specified in the Basic Lease Information and, in the case of Tenant, at the Premises or to such other place as the party to be notified may from time to time designate by at least fifteen (15) days notice to the notifying party. Notices shall be deemed served upon receipt or refusal to accept delivery. Tenant appoints as its agent to receive the service of all default notices and notice of commencement of unlawful detainer proceedings the person in charge of or apparently in charge of occupying the Premises at the time.

ATTORNEYS' FEES

32.: In the event that Landlord places the enforcement of this Lease, or any part thereof, or the collection of any Rent due, or to become due hereunder, or recovery of possession of the Premises in the hands of an attorney, Tenant shall pay to Landlord, upon demand, Landlord's reasonable attorneys' fees and court costs. In any action which Landlord or Tenant brings to enforce its respective rights hereunder, the unsuccessful party shall pay all costs incurred by the prevailing party including reasonable attorneys' fees, to be fixed by the court, and said costs and attorneys' fees shall be a part of the judgment in said action.

SUCCESSORS AND ASSIGNS

33.: This Lease shall be binding upon and inure to the benefit of Landlord, its successors and assigns, and shall be binding upon and inure to the benefit of Tenant, its successors, and to the extent assignment is approved by Landlord hereunder, Tenant's assigns.

FORCE MAJEURE

34.: In the event that Landlord shall be delayed, hindered in or prevented from the performance of any act or obligation required under this Lease by reason of acts of God, strikes, lockouts, labor troubles or disputes, inability to procure or shortage of materials or labor, failure of power or utilities, delay in transportation, fire, vandalism, accident, flood, severe weather, other casualty, governmental requirements (including mandated changes in the plans and specifications of Landlord's Work resulting from changes in pertinent governmental requirements or interpretations thereof), riot, insurrection, civil commotion, sabotage, explosion, war, natural or local emergency acts or omissions of others, including Tenant, or other reasons of a similar or dissimilar nature not solely the fault of, or under the exclusive control of, Landlord (individually and collectively, "Force Majeure"), then performance of such act or obligation shall be excused for the period of the delay and the period for the performance of any such act or obligations shall be extended for the period equivalent to the period of such delay

BROKERAGE COMMISSION

35.: Landlord shall pay a brokerage commission to Broker in accordance with a separate agreement between Landlord and Broker. Tenant warrants to Landlord that Tenant's sole contact with Landlord or with the Premises in connection with this transaction has been directly with Landlord and Broker, and that no other broker or finder can properly claim a right to a commission or a finder's fee based upon contacts between the claimant and Tenant with respect to Landlord or the Premises. Tenant shall indemnify, defend by counsel acceptable to Landlord, protect and hold Landlord harmless from and against any loss, cost or expense, including, but not limited to, attorneys' fees and costs, resulting from any claim for a fee or commission by any broker or finder in connection with the Premises and this Lease other than Broker.

MISCELLANEOUS

36.: A. General. The terms "Tenant and/or Landlord" or any pronoun used in place thereof shall indicate and include the masculine or feminine, the singular or plural number, individuals, firms or corporations, and their respective successors, executors, administrators and permitted assigns, according to the context hereof.

B. Time. Time is of the essence regarding this Lease and all of its provisions.

C. Choice of Law. This Lease shall in all respects be governed by the laws of the State of California.

D. Entire Agreement. This Lease, together with its exhibits, contains all the agreements of the parties hereto and supersedes any previous negotiations. There have been no representations made by the Landlord or understandings made between the parties other than those set forth in this Lease and its exhibits.

E. Modification. This Lease may not be modified except by a written instrument signed by the parties hereto.

F. Severability. If, for any reason whatsoever, any of the provisions hereof shall be unenforceable or ineffective, all of the other provisions shall be and remain in full force and effect.

G. Recordation. Tenant shall not record this Lease or a short form memorandum hereof.

H. Examination of Lease. Submission of this Lease to Tenant does not constitute an option or offer to lease and this Lease is not effective otherwise until execution and delivery by both Landlord and Tenant.

I. Accord and Satisfaction. No payment by Tenant of a lesser amount than the Rent nor any endorsement on any check or letter accompanying any check or payment of Rent shall be deemed an accord and satisfaction of full payment of Rent, and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of such Rent or to pursue other remedies.

J. Easements. Landlord may grant easements on the real property upon which the Building is located and dedicate for public use portions of said real property without Tenant's consent; provided that no such grant or dedication shall substantially interfere with Tenant's use of the Premises. Upon Landlord's demand, Tenant shall execute, acknowledge and deliver to Landlord documents, instruments, maps and plats necessary to effectuate Tenant's covenants hereunder.

K. Drafting and Determination Presumption. The parties acknowledge that this Lease has been agreed to by both the parties, that both Landlord and Tenant have consulted with attorneys with respect to the terms of this Lease and that no presumption shall be created against Landlord because Landlord drafted this Lease. Except as otherwise specifically set forth in this Lease, with respect to any consent, determination or estimation of Landlord required in this Lease or requested of Landlord, Landlord's consent, determination or estimation shall be made in Landlord's good faith opinion, whether objectively reasonable or unreasonable.

L. Exhibits. Exhibits A through G attached hereto are hereby incorporated herein by this reference.

M. No Light, Air or View Easement. Any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to or in the vicinity of the Building shall in no way affect this Lease or impose any liability on Landlord.

N. No Third Party Benefit. This Lease is a contract between Landlord and Tenant and nothing herein is intended to create any third party benefit.

O. Waiver of Jury Trial. IF ANY ACTION OR PROCEEDING BETWEEN LANDLORD AND TENANT TO ENFORCE THE PROVISIONS OF THIS LEASE (INCLUDING AN ACTION OR PROCEEDING BETWEEN LANDLORD AND THE TRUSTEE OR DEBTOR IN POSSESSION WHILE TENANT IS A DEBTOR IN A PROCEEDING UNDER ANY BANKRUPTCY LAW) PROCEEDS TO TRIAL, LANDLORD AND TENANT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY IN SUCH TRIAL. Landlord and Tenant agree that this Paragraph constitutes a written consent to waiver of trial by jury within the meaning of California Code of Civil Procedure Section 631(a)(2), and Tenant does hereby authorize and empower Landlord to file this Paragraph and or this Lease, as required, with the clerk or judge of any court of competent jurisdiction as a written consent to waiver of jury trial.

P. Covenant of Quiet Enjoyment. So long as Tenant is not in Default under this Lease, Tenant has the right to occupy and enjoy the Premises during the Term of this Lease in peace and without disturbance from Landlord or any other party subject to Landlord's supervision or control.

ADDITIONAL PROVISIONS

37.: A. Anti-Discrimination. There shall be no discrimination against or segregation of any person or group of persons, on account of race, color, creed, religion, sex, marital status, national origin, or ancestry, in the leasing, subleasing, transferring, use, occupancy, tenure or enjoyment of the Premises, nor shall the Landlord or Tenant or any person claiming under or through the Landlord or Tenant, establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy of tenants, sublessees, subtenants, or venders in the Premises.

B. Additional Space. Provided that Tenant is not in Default and there is no act or omission of Tenant that would become a Default with the passage of time or the giving of notice, Tenant shall be required to lease any portion of the Building (excepting retail space) not currently occupied by Tenant which becomes available for rent on the same terms and conditions as specified for other lease space provided herein. Landlord shall provide Tenant with a five (5) day written notice when Landlord determines at Landlord's sole discretion that any portion of the Building (excepting retail space) not occupied by Tenant will become available for lease. Landlord agrees to furnish Tenant with an Interior Improvement allowance of Twenty-Five dollars and no/100 ($ 25.00) per square foot for improvement of the additional rental space as part of the Building Improvements. This allowance shall be considered the Landlord's total monetary contribution with respect to the Interior Improvements, which allowance shall be used for the payment of the direct cost of constructing the Interior Improvements described in Paragraph 37B. Tenant shall diligently pursue improvement of space and rent shall commence the earlier of Tenant occupancy or 60 days after Landlord makes space available for Tenant use.

C. Notice to Lender of Default. In the event that a notice of default ("Notice of Default") is served on Landlord, Tenant shall provide a copy of such Notice of Default to all lenders of whom Tenant has been notified for whose benefit a Deed of Trust then encumbers the Project (a "Beneficiary").

D. Lender's Time to Cure. In the event that Landlord is served with a Notice of Default and Landlord fails to cure such default within the time provided in this Lease, Beneficiary shall have an additional thirty (30) days within which to cure the default, commencing with its receipt of the Notice of Default, or if such default cannot be cured within that time, then such additional time as may be necessary to effect such cure if within such thirty (30) days the Beneficiary has commenced and is diligently pursuing the remedies necessary to cure such default (including, but not limited to, commencement of foreclosure proceedings, if necessary to effect such cure).

E. Sublease or Assignment of Tenant's Existing Rental Premises. Tenant shall immediately market the existing PayPal Rental Premises ("Rental Premises") located at 1840 Embarcadero Road, Palo Alto, California for sublease or assignment. The Rental Premises shall be marketed for highest rent and best use of the Premises. In the event a sublease or assignment is entered into between Tenant and a third party, and the rent for said premises is in excess of $3.00 NNN per square foot (the "Sublease or Assignment Base Rent"), Landlord shall be entitled to fifty percent (50%) of all rent in excess of the Sublease Base Rent (the "Landlord Share"), up to a maximum amount totaling twenty-five cents $.25 per rentable square foot at 303 Bryant Street for the entire term of the sublease or assignment after first deducting on an amortized basis Tenant's actual payment of a reasonable brokerage commission, reasonable attorney fee related to the subletting, and reasonable costs of Tenant's improvements for the subleased or assigned premises for the subtenant's use. By way of example: if the Rental Premises are leased for $4.00 NNN per square foot (net of subleasing or assignment costs) the Landlord shall be entitled to payment for the square foot area of the of sublease or assignment multiplied by fifty cents ($ .50) per square (fifty percent of the one dollar $1.00 amount in excess of the Sublease or Assignment Base Rent). The maximum amount of money "Landlord Share" shall not exceed $12,553.00 per month ($.25 multiplied by 50,210 square feet) if the rentable space at 303 Bryant Street is 50,210 square feet, Tenant shall deliver the Landlord's Share to Landlord within three days after receipt of payment by subtenant or Assignee during the term of the sublease or assignment. Landlord will only receive payment after the Subtenant or Assignee has paid rent.

F. ECO Pass Program. Tenant shall comply (pay for and participate in) with City of Mountain ECO Pass Program. Each employee shall be offered a VTA Bus, CalTrans and Lightrail pass to encourage mass transit participation. Landlord will monitor program participation and keep records for City of Mountain of View.

IN WITNESS WHEREOF, the parties hereto have executed this Lease the day and year first above written.

		"Landlord"
		BRYANT STREET ASSOCIATES, LLC, a California limited liability company
		By:		/s/ WILLIAM NEWELL
		Its:		Co-managing Partner
		By:		/s/ DON CUNNINGHAM
		Its:		Co-managing Partner
		"Tenant"
		PayPal, INC., a Delaware corporation
		By:		/s/ PETER THIEL
		Its:		Chairman/CEO
		By:		/s/ SALVATORE T. GIAMBACO
		Its:		Vice President, Administration

EXHIBIT A-1

LEGAL DESCRIPTION OF PROPERTY

Real property in the City of Mountain View, County of Santa Clara, State of California:

Parcel 1, as shown on that certain Parcel Map which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California, on April 16, 1979 in Book 439 of Maps at page(s) 29.

EXHIBIT A-2

PREMISES

The Premises shall include all work as generally described below:

Shell Improvements: The term "Shell Improvements" shall include Core Improvements and shall mean the following which are to be constructed by Landlord's Contractor, Vance Brown, Inc. in accordance with the plans and specifications and as generally described hereto (i) the shell of a three story office building containing approximately 56,000 square feet (approximately 50,000 square feet are for the use of tenant), consisting of the building and garage foundation; the exterior walls (including the architectural skin of the building); floor slab for the first, second and third story; load bearing walls; roof system including mansard roof; the roof membrane; thermal insulation at the roof level and at exterior walls as required by code; standard width interior stairways; two electric 5 story elevators (including cab finishes); toilet cores on each floor level; exterior doors and exterior door hardware; 2,400 amp main building electrical service at 277/480 volts (approximately 1,300 amps 277/480v of main building electrical service for use by tenant); transformer; HVAC equipment and main trunk; Fire Sprinkler bulk main and branch line grid with up heads (and drop heads for all core improvements); Fire Sprinkler monitoring panel; and (ii) a 91 parking stall, two level below grade parking garage (for exclusive use by tenant); concrete paving and City sidewalks, curbs and gutters, irrigation system and landscaping; utility lines into building for storm sewer; sanitary sewer; fire sprinkler; water; electrical.

Interior Improvements: The term "Interior Improvements" shall mean all improvements to be constructed by Landlord's Contractor, Vance Brown, Inc., or an independent contractor hired by Tenant (pursuant to terms set forth herein) in compliance with all applicable codes and regulations. In the event the bid of the independent contractor is less that quote from the existing architect and Vance Brown, Inc., by ten percent (10%) or more, Tenant may use the independent contractor unless the existing architect and Vance Brown, Inc., agree to meet the bid of the independent contractor, and paid for by the tenant as hereinafter set forth, and/or not included in the Shell Improvements set forth in the Paragraph above e.g., by way of example interior improvements shall include, but not be limited to, the fire sprinkler system drop heads; interior drop ceilings; interior plumbing; distribution of HVAC extensions beyond main HVAC shaft; HVAC pneumatic or DDC controls; electrical distribution from the main electrical room; emergency generator and UPS system; carpeting; vinyl floor covering; interior painting; window coverings; interior walls and movable floor to ceiling partitioning; interior doors and door hardware; security systems; data and telephone distribution beyond main riser, acoustic insulation; signage of any type beyond code required; Contractor's fees; Architect's fees; Engineer's fees; Builder's Risk insurance premiums as related to the Interior Improvements; and any Building Permit fees.

EXHIBIT B-1

BUILDING CONSTRUCTION

1. LANDLORD'S WORK

1.1 Landlord's work ("Landlord's Work") shall be defined as the construction of the Building shell more particularly described in Exhibit C and Building Core Improvements as defined below, including soft costs associated with Landlord's Work. Such soft costs shall include, but are not limited to architecture, engineering, consultants, shell building permits and impact fees, utility fees, loan fees, construction interest, transaction fees, and development fees. The scope of the shell construction shall include: the Building shell, roof, all exterior windows and doors, fire sprinklers at the roof line, utilities and services to the Building's exterior, the parking lot, exterior common areas, and landscaping. The scope of the Building Core Improvements shall include: lobbies, restrooms, janitorial room, elevator, elevator equipment room, roof screen and stair assemblies.

1.2 Landlord's Work shall be completed through Landlord's general contractor, Vance Brown, Inc., in compliance with all applicable codes and regulations,

1.3 Landlord, at Landlord's sole cost and expense, shall pay for all costs involved in Landlord's Work described in Paragraph 1.1.

1.4 Changes requested by Tenant to the Building shell and/or Core Improvements shall be at Tenant's sole cost and expense.

2. INTERIOR IMPROVEMENTS

2.1 Landlord's contractor or an independent contractor (see 2.2 below) shall construct all Interior Improvements. Tenant shall be responsible for and pay one hundred per cent (100%) of the Interior Improvement Costs relating to the Interior Improvements in excess of those costs that are paid for with the Landlord's Interior Improvement allowance as set forth herein. The scope of Interior Improvements shall include, but not be limited to, the fire sprinkler system drop heads, interior drop ceilings, interior plumbing, distribution of HVAC extensions beyond the trunk line distribution, HVAC pneumatic controls, electrical distribution from the main electrical room, carpeting, vinyl floor covering, interior painting, window coverings, interior walls and movable floor to ceiling partitioning, interior doors and door hardware, security systems, data and telephone distribution beyond main riser, sound insulation, and signage of any type beyond code required. Interior Improvements shall also include, but not be limited to, architecture, engineering, consultants, interior building permits and impact fees and utility fees.

2.2 The Interior Improvements shall be completed through Landlord's general contractor, Vance Brown, Inc., or an independent contractor hired by Tenant (pursuant to terms set forth herein) in compliance with all applicable codes and regulations. In the event the bid of the independent contractor is less that quote from the existing architect and Vance Brown, Inc., by ten percent (10%) or more, Tenant may use the independent contractor unless the existing architect and Vance Brown, Inc., agree to meet the bid of the independent contractor.

2.3 The Interior Improvements shall be generally based on the Interior Improvement Specifications attached hereto as Exhibit B-2.

2.4 Unless the Lease has been terminated pursuant to Paragraph 26 of the Lease, upon the termination or expiration of the Lease, as such term may be extended, Tenant shall have the right to remove items listed in Exhibit B-3 which have been installed and paid for by Tenant, Tenant shall repair any damage to the Premises resulting from such removal, patch and repair the walls, floor and ceiling and return the Premises in clean condition.

3. COMPLETION DATES

3.1 Landlord shall notify Tenant in advance of the approximate date on which Landlord's Work and the Interior Improvements will be substantially completed and will notify Tenant when

Landlord's Work and the Interior Improvements are in fact substantially competed ("Substantial Completion"). If any dispute shall arise as to whether the Premises are substantially completed and ready for Tenant's occupancy, a certificate furnished by an independent architect mutually agreed to by Landlord and Tenant certifying the date of Substantial Completion shall be conclusive.

3.2 Except as otherwise provided in the Lease, failure of Landlord to deliver possession of the Premises within the time and in the condition provided for in the Lease will not give rise to any claim for damages by Tenant against Landlord or Landlord's general contractor. If Landlord fails to deliver the Premises in the condition as provided for under this Lease, Landlord shall promptly correct any such deficiencies, excluding any immaterial deficiencies, which do not prevent Tenant from using the Premises for their intended use. If Landlord fails to correct such deficiencies within a reasonable time, Tenant may pursue its legal remedies against Landlord.

EXHIBIT B-2

INTERIOR BUILDING STANDARDS


1.	Glass and Glazing
	a)	10'-0" tall exterior glass doors (medium style)
	b)	Sidelight width minimum 2'-0" × 10'-0"
2.	Painting
	a)	Three coat system; Class "A" finish
3.	Metal Studs and Gypsum Wallboard
	a)	3⁵/8" minimum width metal studs.
	b)	Stud spacing @ 16" on center.
	c)	All interior walls abutting exterior glass shall terminate at a window mullion.
	d)	All exposed gypsum wall or concrete shall have a level IV finish.
	e)	Lobby gypsum wallboard shall have a level V finish.
	f)	All walls shall be designed to be installed under the ceiling grid (10"-0" tall) whenever possible.
	g)	USG Ultrawall (Country Weave) with bone white aluminum trim is an acceptable alternative to gypsum wallboard.
	h)	All exposed columns shall be wrapped in drywall.
4.	Acoustic Ceilings
	a)	Ceilings shall be installed at + 10'-0" high above finish floor (minimum).
	b)	The ceiling grid shall be continuous throughout.
	c)	Ceiling grid shall be ¹⁵/16" wide exposed fire rated with 2' × 4' nd Look II ceiling tiles.
	d)	All wall angle shall be caulked with matching color caulking.
5.	Floor Coverings and Base
	a)	Carpet shall be 30 ounce cut pile (minimum) direct glue down with or without carpet pad or 28 oz loop (minimum) direct glue down with or without carpet pad.
	b)	VCT shall be ¹/8" gauge Armstrong Standard Exelon.
	c)	Sheetvinyl shall be Armstrong Corlon with welded seams and cove base.
	d)	All visible entries into stairwells and exit passageways shall have floor coverings.
6.	Lobby (Bryant Street)
	a)	Stone ³/4" thick, mortar set
7.	Doors, Frames and Door Hardware
	a)	All doors to be full height, solid core, 3'-0" × 10'-0", 1³/4" thick, 20-minute fire rated, and plastic laminate.
	b)	Door hardware to Schlage "D" series, brushed chrome.
	c)	Transom doors shall be used when transitioning from higher to lower ceiling heights.
	d)	Doors shall have 4, ball bearing, butts per door leaf.
	e)	Door frames be aluminum.
	f)	Hold-open doors shall be constructed into flush door pockets.
8.	Window Coverings
	a)	Horizontal mini blinds, 1" wide, aluminum, recess mounted.
9.	Casework
	a)	Class "A" millwork, European hinges; flush mounted doors; plastic laminate.
10.	Overhead Fire Sprinklers
	a)	Semi-recessed chrome or white down heads.
	b)	All piping is to be concealed.
	c)	All ceiling heads shall be aligned in straight rows.

	d)	All ceiling heads shall be located centerline of ceiling tiles in 2'-0" direction and 1'-0" in 4'-0" direction.
11.	Electrical
	a)	Finelite indirect lighting or equal throughout office spaces.
	b)	Electrical panels to be located out of public lobbies and corridors.
	c)	No surface mounted conduits except in utility rooms.
	d)	All electrical outlets are to be labeled with their circuit/panelboard location.
	e)	All furniture partitions shall be powered through tel/data flush mounted floor monuments (no power poles).
Miscellaneous
Fire Extinguisher Cabinets
	a)	Cabinets shall be semi-recessed, pre-fabricated units, paint to match.

EXHIBIT B-3

MOVEABLE EQUIPMENT AND TRADE FIXTURES

Moveable Equipment & Trade Fixtures includes:

EXHIBIT B-4.

PERFORMANCE SCHEDULE

	Due Date	Responsible Party	Comments
A	8/13/01	Landlord	Deliver Shell Construction Drawings to PayPal for review and comment.
B	8/22/01	Tenant	Deliver to Landlord (for incorporation into Shell Drawings) any Tenant Improvement work that may have impact on shell construction. TI work may have minimal impact on Shell construction so that Landlord (on behalf of Tenant) can move quickly into completion of TI drawings.
C	8/27/01	Landlord	Deliver to Tenant revised shell drawings showing incorporation of all Tenant related work having impact on shell construction.
D	8/29/01	Tenant	Approve Shell Definitive Plans (or notify Landlord of specific objections).
E	8/31/01	Landlord	Deliver to Tenant Final Shell Plans for one last review and comment.
F	9/4/01	Tenant	Deliver to Landlord approved Final Shell Plans.
G	9/5/01	Landlord	Submit Final Shell Plans with T.I. Revisions to the Building Department for Permit approval if necessary, otherwise incorporate all new work with T.I. Drawings.
Tenant Improvement Plans
H	9/13/01	Tenant	Complete the Preliminary Interior Improvement Plans for review and comment.
I	9/14/01	Landlord	Approve Preliminary Interior Improvement Plans.
J	9/27/01	Tenant	Deliver to Landlord Final Interior Improvement plans for review and comment.
K	9/28/01	Landlord	Approve Final Interior Improvement plans.
L	10/1/01	Tenant	Submit Interior Plans for Plan Check and Building Permit. Plan check could take in excess of 30 days. Landlord to commence TI as soon as is reasonably possible.
M	11/1/01	Tenant	Receive Tenant Improvement Permit.
N	1/1/02	Landlord	Substantial Completion of Improvements (8 weeks).

EXHIBIT C

LANDLORD'S SCOPE OF WORK

GENERAL DESCRIPTION—SHELL, CORE AND GARAGE

Construction of a five (5) level office/retail/parking structure to be constructed on .43 acre site at 303 Bryant Street, Mountain View, CA. The building will be comprised of a 91 stall two level parking garage and a three-story office/retail building. The office space is approximately 50,000 square feet. The retail space is 5,900 square feet. The building will be constructed of structural steel, precast concrete with a glass storefront and a slate mansard roof.

BUILDING and SITEWORK

•

Sitework: (1) Utility services from the street to the building; (2) City trees; (3) City sidewalks, curbs and gutters; (4) Paving at Wild Cherry Lane.

•

Two level below grade concrete parking garage that will include 91 parking stalls. The parking garage will be handicap accept acceptable for cars and vans on the first below grade level. Pedestrian access and exit from the parking garage will be from two stairwells as well as two electric elevators.

•

Three level above grade building consisting of office and retail space. The building structure will consist of a structural steel framework, metal deck and concrete floor slabs, steel pan and concrete stairways, precast sandblasted concrete and a glass storefront set in aluminum frames.

•

Thermal insulation—R30 fiberglass batt stick-pinned to the underside of the roof and R19 fiberglass batt stick-pinned or wired at exterior walls.

•

Roofing—flat roof will receive a 4-ply Class A built up membrane roofing (or equal); mansard roof will consist of a metal stud framed mansard roof with a slate tile roof.

•

Garage: Ceiling—exposed structure with fire proofing; drive aisle lighting; exit lighting; Walls—painted white; Floor—striped for parking stalls (handicap and standard stalls). Parking levels will be provided with built out elevator lobbies and stairwells including exterior wall painting to match the garage walls; concrete wrapped steel columns at parking stalls.

•

Building Interior:

•: Toilet Rooms: Floors—thin set tile; Ceilings—smooth finish painted gypsum wallboard; Walls smooth finish painted gypsum wallboard on interior, sanded and ready for paint on exterior; Lavatory Countertops—stone or Corian; Fixtures—underslung lavatories; flushomatic toilets and urinals; Toilet Partitions—ceiling mounted plastic laminate or painted metal; Toilet Accessories -satin stainless steel; Doors—1³/4" solid core full height doors set in aluminum frames, Schlage "D" series hardware.
•: Janitor's Rooms: Floors—vinyl tile; Ceilings -exposed to structure above; Walls—painted gypsum wallboard on interior including FRP at wet walls, sanded and ready for paint on exterior; Fixtures—floor mounted slop sink with goose neck faucet; Doors—11³/4" solid core full height door set in aluminum frame, Schlage "D" series hardware.
•: Interior Stairs: Floors—concrete pan filled; Ceilings—suspended acoustical 2x4 with lay-in light fixtures, sanded gypsum wallboard ready for paint at underside of stair landings; Walls—sanded gypsum wallboard ready for paint on interior, fire taped gypsum wallboard on exterior; Fixtures—Doors—1³/4" solid core (metal or wood to meet fire rating requirements) full height door set in aluminum frame, Schlage "D" series hardware; Handrails—round steel 1¹/2" prime painted only.
•: Elevator Cabs: Floor—material to match lobby floor finish; Walls—plastic laminate standoff panels; Ceiling—6 halogen downlights set in stainless steel #4 panels; Doors—stainless steel

# 4 finish; Handrails—1¹/2" round or rectangular stainless steel #4; Base and Reveals—stainless steel #4.

•: Elevator Equipment Room: Penthouse located on roof; exposed walls; concrete floor; weathertight.
•: Core area walls facing tenant improvement areas: Walls—taped and sanded smooth ready for paint (painting of walls is part of tenant improvement work).
•: Mechanical HVAC Shafts: Walls—taped and sanded smooth ready for paint (painting of walls is part of tenant improvement work).
•: Interior Face of Exterior Walls: Exposed walls, studs and finish of interior side of exterior walls by tenant.
•: Structural Steel Columns: Columns—exposed steel or fireproofing.
•: Building Lobby—all finishes by tenant. Note that a stone floor will be required at the main lobby entrance,

PLUMBING

•: Toilet cores including showers, sinks, floor drains, toilets and urinals.
•: Roof drains, underslab sanitary sewer line; main water service into building; backflow preventer; makeup water and gas line for rooftop mounted HVAC units.

ELECTRICAL

•: Underground telephone and main electrical feeder to switch gear; two (2) 1,200 amp 277/480 underground vaults; cable TV underground duct into main electrical room.
•: Building and arcade lighting; 2,400 amp main electrical switchboard (two (.2) 1,200 amp UGPS); 3 meter sections; 2 each 225 amp 277/480volt panels.
•: Core lighting and power including HVAC units; toilet cores; garage lighting and exhaust; elevators; stairwell lighting.

FIRE PROTECTION

•: Riser into building and bulk main, branch lines—Ordinary Hazard (.2 over the most remote 3000 sf) with up and down heads as required for core, shell and garage improvements; flow and tamper switches; floor control valves.

HVAC

•: Two (2) 75 ton VAV rooftop mounted AC units with variable speed drives (Trane SXHF075C); one (1) three ton wall mounted AC unit for elevator machine room; one (1) 1,500 MBH outdoor boiler and dual pumps with hot water riser; two (2) toilet room and electrical room exhaust fans; three (3) 20,000 cfm garage exhaust fans; two (2) 5,000 cfm transfer fans for garage ventilation; twelve (12) fire/smoke dampers; roof ducts and main riser inside HVAC main plenum shaft; EMS controller for equipment start/stop and hot water controls; time clock for garage fan control; start-up, hydronic testing and balancing.

SITEWORK

•: City sidewalks curbs and gutters; arcade walkway; utility services into the building; street trees; street lighting.

EXHIBIT D

TENANT ESTOPPEL CERTIFICATE

TO:

Bryant Street Associates, LLC
3197 Park Boulevard
Palo Alto, California 94306

THIS IS TO CERTIFY:

1. That the undersigned is the Tenant under that certain Lease dated , and, if applicable, amended on , by and between ("Landlord"), and the undersigned ("Tenant") covering those certain premises located as shown on the drawing made part of the Lease (the "Premises").

2. That said Lease is in full force and effect and, except as noted in Paragraph 1. above, has not been modified, changed, altered or amended in any respect, and is the only lease or agreement between the Tenant and the Landlord affecting the Premises.

3. To the best of Tenant's knowledge, the information set forth below is true and correct:

(a): Square footage of the Premises:
(b): Annual rent as of the Commencement of Lease: $
(c): Current annual rent (if different than at commencement): $
(d): Commencement date of Lease:
(e): Lease termination date:
(f): Rent paid to and including:
(g): Security deposit: $
(h): Prepaid rent for and in amount of: $
i): Free rent period: to
j): Amount of current monthly escrow payment obligations with respect to taxes, insurance, and Common Area Maintenance charges under the Lease:

Taxes: $
Insurance: $
Common Area Maintenance Charges: $

(k): Dates through which Tenant has paid monthly escrow payments and Common Area Maintenance charges:

Escrow Payment for Taxes:
Escrow Payment for Insurance:
Common Area Maintenance Charges:

4. Delete if Tenant has not occupied the Premises: Tenant now occupies the Premises, accepts the Premises in their current condition subject only to those punch list items listed in Exhibit A, if any, and is not aware of any defect in the Premises except as described in Exhibit A, if any.

5. Delete if Tenant has occupied the Premises: Tenant does not occupy the Premises. The status of the plans and specifications for and the construction of Tenant Improvements is described in Exhibit A. Tenant is familiar with the Tenant Improvement work done to date and is not aware of any defect in such work, except as described in Exhibit A.

6. No rent has been paid in the current month other than as disclosed in Paragraph 3. No free rent or other concessions, benefits, or inducements other than as specified in the Lease have been granted to Tenant or undertaken by the Landlord.

7. Tenant has not been granted any renewal, expansion, purchase options or any rights of first refusal, except as disclosed in writing in the Lease.

8. Neither Tenant nor to the best of Tenant's knowledge, Landlord is in breach of the Lease and there has not occurred any event, act, omission or condition which by notice or lapse of time or both or otherwise, will result in any breach by Tenant or to the best of Tenant's knowledge, by Landlord. As of the date hereof and except as set forth in the Lease, the undersigned is entitled to no credit, offset or deduction in rent. Tenant knows of no liabilities or obligations of Landlord which have accrued but are unsatisfied under the Lease as of the date of this Certificate.

9. To the best of Tenant's knowledge, there are no actions, whether voluntary of otherwise, pending against the undersigned under the bankruptcy laws or other laws for the relief of debtors of the United States or any state thereof.

10. With the exception of this Lease and except as otherwise disclosed in writing to Landlord, neither the Tenant nor any affiliate of the Tenant is a tenant under a lease or any other tenancy arrangement (i) with (a) ; (b) ; (c) ; or (ii) involving any property in which the entities named in clauses ( ),( ) or ( ) are known by the Tenant to have an ownership interest.

DATED this day of 20 .

		TENANT:
		PayPal, Inc., a Delaware corporation
		By:
		Name:
		Its:

(Tenant to attach Exhibit A to Tenant Estoppel Certificate, List of Defects, if necessary.)

EXHIBIT E

RULES AND REGULATIONS FOR TENANTS CONTRACTOR(S)

1.: Tenant's contractor will be responsible for making arrangements with Landlord as to time for the use of Building and equipment such as elevators and loading areas. The delivery of materials, equipment and supplies to the Building or Premises must be coordinated with Landlord at least two (2) business days prior to delivery. The Building debris box is not to be used for waste produced by Tenant's contractor.
2.: Tenant's contractor shall not interfere with the Landlord's contractor and sub-trades in any way and will cooperate fully with same.
3.: All Tenant's contractor's waste and debris must be removed from the Premises and Building regularly and promptly. All combustible waste and debris must be stored in a covered, fire-proof container prior to removal.
4.: Tenant's contractor and sub-trades shall take all precautions to ensure the security and the site condition of the Premises and Building in which the work is being performed, including their own tools, equipment and materials, and are responsible for any damage caused by employees and sub-trades to any part of the Building or Premises.
5.: Tenant's contractor shall remove and properly replace underfloor duct access covers as required for Tenant's trades and services. Any damage to underfloor duct access coverings shall be repaired or replaced by Tenant's contractor to the satisfaction of Landlord.
6.: Tenant's contractor must provide their own fire protection equipment, have same on premises at all times and conform to any requirements of Landlord or Landlord's contractor regarding fire protection.
7.: Tenant's contractor shall carry out all work in compliance with all Federal, State, County and City Building Codes and applicable Acts, Ordinances and Statutes.
8.: Tenant's contractor shall provide all their own protective devices and coverings, so as to protect the Building finishes provided by Landlord in the Building.
9.: No attachments to or use of window frames and mullions, ceiling systems, glass, ceiling frame or Building frame, will be permitted without the expressed written consent of Landlord.
10.: All Tenants' contractors, employees and trades must be confined to the area in which work is being performed.
11.: Tenant or Tenant's contractor shall carry builder's risk insurance with limits of not less than the amount requested by Landlord, insurance covering loss or damage to the work during the course of construction; worker's compensation/employer's liability insurance covering all employees of contractor and subcontractor. All such policies shall name Landlord and Tenant as additional insureds. A certificate of insurance must be provided to Landlord prior to commencement of work.
12.: Any construction, alteration, maintenance, repair, replacement, removal or decoration undertaken by Tenant's contractor shall be carried out in a good, workmanlike, and prompt manner, shall comply with applicable statutes, laws, ordinances, regulations, rules, orders and requirements of the authorities having jurisdiction thereof, and shall be subject to supervision by Landlord or its employees, agents, or contractors. All construction shall be performed in a timely manner without delays or interruptions.
13.: Tenant's contractors shall not use excessive quantities of electricity or water and shall not shut off any water, electricity, sprinkler systems or other services without first obtaining Landlord's express authorization.
14.: Where PayPal performs construction or has work performed by separate contractors on the project site premises, to the fullest extent permitted by law, PayPal shall indemnify and hold harmless

Vance Brown, Inc. and their agents or subcontractors from and against all claims, damages, losses and expenses, including but not limited to attorney's fees, arising out of or resulting from performance of such construction or Work; provided that such claim, damage, loss or expense is attributable to the bodily injury, sickness, disease or death, injury to or destruction of tangible property (other than to the Work itself, or defective workmanship and/or materials including loss of use therefrom, but only to the extent caused in whole or part by negligent acts or omissions of PayPal, its separate contractors or anyone for whose acts PayPal may be liable. The indemnification obligation under this paragraph shall not be limited by a limitation on amount or type of damages, compensation or benefits payable by or for PayPal or PayPal's contractors under works or workman's compensation acts, benefit disability acts or other employee benefit acts.

INSURANCE AGREEMENT

Where PayPal has work performed by separate contractors on the site premises, PayPal shall require all such vendors/subcontractors to carry and maintain with insurance companies having "A.M. Bests" rating "A- (VII)" or better, the insurance coverage indicated below as a minimum requirement:

Type of Coverage		Limits of Liability
Worker's Compensation*		Statutory per State of California
Employer's Liability		$2,000,000
Commercial General Liability**		$2,000,000
"Occurrence Form Broad Form Contractual Liability"
Automobile Liability		$2,000,000

*: PayPal and its contractors shall furnish an Endorsement waiving rights of subrogation against Vance Brown, Inc. and their insurers only with respect to such material work.
**: Building Owner and its contractors/vendors shall have their insurance agency furnish the above certificate with Vance Brown, Inc., their subsidiaries, officers, directors, and employees' entities affiliated with Vance Brown, Inc. named as additional insured.

EXHIBIT F

DISCLOSED HAZARDOUS MATERIALS LIST

EXHIBIT G

ESTIMATED FIRST YEAR BASIC OPERATING COST

August 15, 2001

303 Bryant Street
Mountain View, CA

Building Common Area Expenses		Annual Cost		PayPal 89.61%
Cost for:
	Softscape/Hardscape	$	2,500.00	$	2,240.25
	Building Janitorial		by tenant
	Building Common Area Maintenance Costs	$	1.500.00	$	1,344.15
	Building Fire Alarm Monitoring	$	2,000.00	$	1,792.20
	Annual FS Inspection/Elev	$	1,500.00	$	1,344.15
	Annual Elevator Maintenance	$	12,000,00	$	12,000.00
	HVAC Equipment Service	$	6,000,00	$	6,000.00

				$	24,720.75
Property Taxes
Awaiting Interpretation by Assessor			Building Tax		PayPal 89.61%
	a) Construction Cost
	b) Income w/cap rate
	c) Appraisal
	Allow $15,000,000 x.015	$	225,000.00	$	201,622.50
Management Fees at 3.0%			PayPal		Annual Mgmt Fee
	Gross Rental Income	$	2,560,710	$	76,821.30
			Building		PayPal 89.61%
Building Insurance		$	27,000.00	$	24,194.70
Flood and Earthquake Insurance		$	36,000.00	$	32,259.60

				$	56,454.30
			Total	$	359,618.85
			Cost per SF per 1	$	0.60

ECO Pass Program		Participate in City promoted/desired mass transit program
		Cost may be approximately $100/participating employee/year Program is under study

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TABLE OF CONTENTS
LEASE
EXHIBIT A-1 LEGAL DESCRIPTION OF PROPERTY
EXHIBIT A-2 PREMISES
EXHIBIT B-1 BUILDING CONSTRUCTION
EXHIBIT B-2 INTERIOR BUILDING STANDARDS
EXHIBIT B-3 MOVEABLE EQUIPMENT AND TRADE FIXTURES
EXHIBIT B-4. PERFORMANCE SCHEDULE
EXHIBIT C LANDLORD'S SCOPE OF WORK
EXHIBIT D TENANT ESTOPPEL CERTIFICATE
EXHIBIT E RULES AND REGULATIONS FOR TENANTS CONTRACTOR(S)
INSURANCE AGREEMENT
EXHIBIT F DISCLOSED HAZARDOUS MATERIALS LIST
EXHIBIT G ESTIMATED FIRST YEAR BASIC OPERATING COST
EX-23.1 8 a2060419zex-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
November 7, 2001

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CONSENT OF INDEPENDENT ACCOUNTANTS
EX-23.2 9 a2060419zex-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 November 5, 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
November 7, 2001

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CONSENT OF INDEPENDENT ACCOUNTANTS
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