Prepared by MERRILL CORPORATION

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JOgvyrddYNZ8dVXkqnFWWFGVI5++CpeeXV2qKvgezxQg3b8uZM0umuWVJ7m242bI eLEgm7CZqZHU2Z+Fw7kmeQ== 0000912057-02-004514.txt : 20020414 0000912057-02-004514.hdr.sgml : 20020414 ACCESSION NUMBER: 0000912057-02-004514 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 20020207 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: 02530308 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 February 7, 2002

Registration No. 333-70438

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

AMENDMENT NO. 6
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 FEBRUARY 7, 2002

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

5,400,000 Shares

Common Stock

$ per share

We are selling 5,400,000 shares of our common stock. We have granted the underwriters an option to purchase up to 810,000 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 $12.00 and $14.00 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 8.

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 , 2002.

Salomon Smith Barney

Bear, Stearns & Co. Inc.

William Blair & Company

SunTrust Robinson Humphrey

Friedman Billings Ramsey

, 2002

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		8
Publicity Regarding Us		21
Special Note Regarding Forward-Looking Statements		21
Use of Proceeds		22
Dividend Policy		22
Capitalization		23
Dilution		24
Selected Consolidated Financial Data		25
Management's Discussion and Analysis of Financial Condition and Results of Operations		27
Business		49
Management		71
Certain Relationships and Related Party Transactions		82
Principal Stockholders		88
Description of Capital Stock		91
Shares Eligible for Future Sale		94
Underwriting		96
Legal Matters		98
Experts		98
Where You Can Find More Information		99
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 nine months ended September 30, 2001, the dollar value of payments made through PayPal to business accounts, which we refer to as Gross Merchant Sales or GMS, totaled $2.0 billion, or 87.5% of our total payment volume of $2.3 billion for the same period. Our GMS consists mainly of payments to small businesses. Currently, the majority of these payments relate to sales of goods and services through online auctions. As of September 30, 2001, we had 10.6 million total accounts, including 2.1 million business accounts and 8.5 million personal accounts. For the nine months ended September 30, 2001, 5.3 million of these accounts sent or received a payment that resulted in a fee.

Our customers choose either PayPal business accounts or PayPal personal accounts. Business accounts pay us transaction fees on all payments they receive and enjoy a variety of additional features. These features include the ability to receive credit card-funded payments, the opportunity to apply for the PayPal ATM/debit card, listing in our PayPal Shops directory and use of our Web Accept feature to accept payments directly from their websites. Personal accounts may receive free payments funded from bank account transfers or existing PayPal balances and may send payments without any cost to them. Personal accounts can upgrade to business accounts at any time. During the nine months ended September 30, 2001, 622,000 customers upgraded from personal to business accounts.

We earn revenues primarily from transaction fees on GMS, as well as from international funding and withdrawal fees and from fees on our ATM/debit card. For the three months ended September 30, 2001:

•: We generated revenues of $30.2 million. Of this amount, GMS fees comprised 82.8%, and we derived 15.1% of our revenues from non-U.S. customers;
•: Our transaction and other fees equaled $29.2 million, or 3.2% of our total payment volume of $924.6 million, compared to our transaction processing expenses of $12.4 million, or 1.3% of total payment volume; and
•: Our net loss totaled $32.4 million. Our net loss amounted to $1.2 million, excluding non-cash expenses of $31.2 million related to amortization of intangibles and stock-based compensation.

For the nine months ended September 30, 2001:

•: We generated revenues of $64.4 million. Of this amount, GMS fees comprised 82.4%, and we derived 13.5% of our revenues from non-U.S. customers;
•: Our transaction and other fees equaled $61.4 million, or 2.7% of our total payment volume of $2.3 billion, compared to our transaction processing expenses of $31.9 million, or 1.4% of total payment volume; and

•: Our net loss totaled $89.3 million. Our net loss amounted to $19.1 million, excluding non-cash expenses of $70.2 million related to amortization of intangibles and stock-based compensation.

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 growth through a combination of the "push" nature of email payments to non-registered recipients and the "pull" nature of Web Accept. During the nine months ended September 30, 2001, our total number of accounts grew by 5.1 million, an average of 18,500 per day, at an average total marketing expense, including promotional bonuses, of $1.05 per new account.

During the nine months ended September 30, 2001, we processed an average of 171,000 payments per day totaling $8.5 million in daily volume. For this period, the average payment amount sent equaled $50.

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, including non-cash stock-based compensation expenses and amortization of intangibles, of $264.7 million from our inception, March 8, 1999, through September 30, 2001. The non-cash expenses related to amortization of goodwill and other intangibles and amortization of non-cash stock-based compensation amounted to $125.8 million for the same period.
•: 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 businesses.
•: We depend on online auction transactions for a significant percentage of our payment volume and we generate a significant portion of our business on eBay, with which we have no contractual relationship and which owns a majority stake in a competing payment service. If our ability to process payments for purchases made on online auction websites, particularly eBay, became impaired, our business would suffer.

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. By the end of the first quarter of 2002, 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. In this prospectus, 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		5,400,000 shares
Common stock outstanding after this offering		59,832,452 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 54,432,452 shares outstanding as of December 31, 2001, including 3,683,562 shares of restricted common stock outstanding but subject to repurchase by us and excluding:

•: 2,336,478 shares of common stock issuable upon exercise of options outstanding as of December 31, 2001 at a weighted average exercise price of $1.80 per share;
•: 4,195,597 shares of common stock issuable upon exercise of options granted in January 2002 at a weighted average exercise price of $11.89 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
•: 4,466,903 shares of common stock reserved for future grant under our stock option plans as of January 31, 2002; in addition, 625,000 shares are reserved 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 was effected in December 2001;
•: 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 43,355,136 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 $13.00 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 5,400,000 shares of common stock offered by us at an assumed initial offering price of $13.00 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 and other fees		$	—		$	35		$	1,016		$	7,425		$	13,156		$	18,992		$	29,229
Interest on funds held for others			—			240			727			1,079			1,143			920			955
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
Customer service and operations(1)			523			3,726			5,848			5,657			7,064			7,216			7,682
Product development(1)			512			923			1,625			1,359			2,018			2,125			2,191
Selling, general and administrative(1)			3,127			13,615			10,614			7,592			5,443			5,736			5,603
Stock-based compensation			519			281			3,907			1,118			2,157			4,026			14,776
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	)

Basic and diluted net loss per share		$	(34.94	)	$	(13.48	)	$	(14.10	)	$	(8.95	)	$	(5.39	)	$	(4.47	)	$	(4.69	)

Shares used in calculating basic and diluted net loss per share			653			3,546			4,041			4,682			5,426			6,187			7,182
Pro forma basic and diluted net loss per share		$	(1.94	)	$	(1.44	)	$	(1.45	)	$	(1.00	)	$	(0.63	)	$	(0.58	)	$	(0.69	)

Shares used in calculating pro forma basic and diluted net loss per share			11,736			33,257			39,170			41,891			46,511			48,074			48,828
(1) Amounts exclude stock-based compensation as follows:
Customer service and operations		$	24		$	48		$	57		$	84		$	157		$	462		$	867
Product development			48			64			180			623			383			392			5,440
Selling, general and administrative			447			169			3,670			411			1,617			3,172			8,469

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

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
Average payment amount		$	45		$	46		$	45		$	44		$	48		$	50		$	51
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	$	85,661
Short-term investments			4,998			4,998		4,998
Long-term investments			20,826			20,826		20,826
Restricted cash			6,548			6,548		6,548

	Total	$	54,747		$	54,747	$	118,033

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

	Total	$	132,604		$	132,604	$	132,604

Funds receivable		$	26,674		$	26,674	$	26,674
Total assets			265,901			265,901		329,187
Due to customers			139,993			139,993		139,993
Funds payable			16,584			16,584		16,584
Reserve for transaction losses			5,332			5,332		5,332
Mandatorily redeemable convertible preferred stock			279,224			—		—
Total stockholders' equity (deficit)			(186,648	)		92,576		155,808

Recent Developments

We set forth below our unaudited selected financial information for the three months ended December 31, 2000 and 2001. The information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements contained 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 completion of the offering.

	Three Months Ended Dec. 31,
	2000			2001
	(in thousands, except per share data) (unaudited)
Selected Results of Operations:
Total revenues	$	8,841		$	40,436
Transaction processing expenses		9,098			15,735
Provision for transaction losses		3,307			5,057
Customer service and operations		5,657			8,674
Product development		1,359			2,485
Selling, general and administrative		7,592			5,691
Stock-based compensation		1,118			5,318
Amortization of goodwill and other intangibles		16,415			16,415
Net loss		(41,904	)		(18,541	)
Basic and diluted net loss per share	$	(8.95	)	$	(2.36	)

Pro forma basic and diluted net loss per share	$	(1.00	)	$	(0.36	)

For the three months ended December 31, 2001, our net loss totaled $18.5 million. Excluding non-cash expenses of $21.7 million related to amortization of intangibles and stock-based compensation, we earned net income of $3.2 million.

During the three months ended December 31, 2001, our total accounts grew by an average of 24,400 per day, to 12.8 million accounts at December 31, 2001. Of these accounts, 1.0 million were international accounts, an increase of 0.9 million accounts from December 31, 2000, and 2.6 million were business accounts, an increase of 1.8 million from December 31, 2000.

Revenue for the three months ended December 31, 2001 totaled $40.4 million, an increase of 357.4% over the comparable period in 2000. We attribute this increase primarily to the following:

•: A 219.0% increase in GMS from $335.7 million for the three months ended December 31, 2000 to $1,070.8 million for the three months ended December 31, 2001;
•: An increase in the average price charged on GMS payments to 3.2% for the three months ended December 31, 2001 from 2.1% for the three months ended December 31, 2000. Fees on GMS increased to $33.9 million from $7.1 million;
•: Our introduction of international access in November 2000. Revenue from fees assessed on international funding and withdrawals increased from $0.3 million for the three months ended December 31, 2000 to $3.3 million for the three months ended December 31, 2001. For the three months ended December 31, 2001, international funding and withdrawal fees plus GMS fees and other fees collected from senders or recipients that reside outside the U.S. accounted for 14.0% of our total revenues; and
•: The launch of the PayPal ATM/debit card in January 2001. Debit card fees, net of cash-back bonuses, amounted to $1.5 million for the three months ended December 31, 2001. This represents a weighted average fee, net of cash-back bonuses, of 0.9% on total debit card volume for the same period.

Transaction processing expenses for the three months ended December 31, 2001 increased by $6.6 million over the comparable period in 2000, or 73.0%. We attribute this increase primarily to the growth of our aggregate dollar payment volume by 121.8%, from $543.6 million for the three months ended December 31, 2000 to $1,205.8 million for the three months ended December 31, 2001. As a percentage of aggregate dollar payment volume, total transaction processing expenses decreased from 1.7% to 1.3%. We attribute this decrease mainly to the decrease in the percentage of aggregate dollar payment volume funded by credit cards from 56.9% for the three months ended December 31, 2000 to 52.3% for the three months ended December 31, 2001.

Provision for transaction losses increased by $1.8 million, or 52.9%, for the three months ended December 31, 2001 over the comparable period in 2000. We attribute this increase to the growth of our total payment volume for these periods. As a percentage of aggregate dollar payment volume, provision for transaction losses decreased to 0.42% for the three months ended December 31, 2001 from 0.61% for the three months ended December 31, 2000. This decrease resulted from of our continued efforts to control transaction-related losses.

Our net loss for the three months ended December 31, 2001 decreased by $23.4 million from our net loss for the three months ended December 31, 2000, or a 55.8% improvement. We attribute this improvement to:

•: Increased dollar payment volume;
•: The decrease in credit card funded payments and transaction processing expenses as a percentage of aggregate dollar payment volume, as described above;
•: Elimination of service agreement costs and termination expenses of $7.2 million for the three months ended December 31, 2000, as a result of our termination of the Internet banking services agreement in December 2000; and
•: A decrease in other operating expenses, such as selling, general and administrative, product development and customer service and operations, to 1.4% as a percentage of total payment volume for the three months ended December 31, 2001, from 2.7% for the three months ended December 31, 2000. We attribute this decrease to improved efficiency in our operations and reduced promotional bonus expenses.

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 would limit our growth and cause 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. This would impact revenues adversely, and cause our business to suffer.

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 financial results and growth prospects would be affected significantly and negatively.

For the nine months ended September 30, 2001, our customers identified to us approximately 68.3% 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 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 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 would 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 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 have. 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. These competitors have offered, and may continue to offer, their services for free in order to gain market share and we may be forced to lower our prices in response. 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 result in our losing market share, which would 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 of $264.7 million from our inception, March 8, 1999, through September 30, 2001, and net losses 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 losses from fraud would increase, and 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 ability to compete could be impaired and 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, except for certain money transmitter licenses mentioned below. One or more states may conclude that, under its or their statutes, we are engaged in an unauthorized banking business. We have received written communications from regulatory authorities in California, New York, Idaho and Louisiana expressing the view that our service, as it was then structured, constituted or might constitute an unauthorized banking business. We have taken steps to address these states' concerns, but cannot provide assurances that these steps will be effective in any of these states. If we are found to be engaged in an unauthorized banking business, 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 Financial Anti-Terrorism 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, few 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 credit cards in 36 countries outside the U.S. In eleven countries outside the U.S.—Canada, the United Kingdom, Germany, the Netherlands, France, Australia, New Zealand, Hong Kong, Japan, Spain and Singapore—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 has been extended until November 1, 2003. After that date, 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 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 competitive position would be damaged seriously.

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, but we have not received confirmation from MasterCard that these concerns are fully resolved. In 2001, Visa also indicated that some of our practices violated its operating rules, and we implemented changes in response. On January 25, 2002, we received correspondence through our credit card processor that three issues remain unresolved, and in connection with this, Visa assessed a fine of $30,000. These issues relate to our charging and immediately rebating international membership fees, charging fees for foreign credit card funded payments, and not seeking on a transaction by transaction basis affirmative authorization for charging a Visa account when a user's ACH transfer fails. Visa has not threatened to suspend, terminate or otherwise limit or restrict our ability to accept Visa, except to the extent that we may be required to change our current practices to resolve these three outstanding issues. However, Visa, MasterCard, American Express and Discover could take positions in the future that jeopardize our ability to accept credit cards or limit the countries in which we can 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, MasterCard, American Express and Discover increase the interchange fees that they charge for each transaction using their cards. 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 pledge cash as collateral with respect to our acceptance of Visa, MasterCard, American Express and Discover.

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 December 31, 2000 to 418 as of December 31, 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 two third parties for co-location of our data servers and rely upon these third parties for the physical security of our servers. Our servers currently reside in facilities in San Jose and 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 secondary Internet hosting provider, Exodus, recently filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Subject to court approval, Britain's Cable and Wireless plc has agreed to purchase Exodus's data center assets. 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.

Our revenues have grown 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 December 31, 2001, upon completion of this offering we will have 59,832,452 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, 2,479,081 shares reserved for issuance pursuant to outstanding options and warrants and 9,287,500 shares available for grant under our existing stock plans as of December 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."

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 $10.92 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.

PUBLICITY REGARDING US

On February 4, 2002, Gartner, Inc., which is a provider of research and consulting services relating to information technology, published a research report relating to online payment systems. The report contained the results of a survey conducted by Gartner of online consumers' attitudes towards electronic payment systems. PayPal was one of four online payment providers discussed in the report. On February 5, 2002, Gartner issued a press release announcing these survey results and containing additional discussion of the matters addressed in the research report. One of our employees was contacted by the author of the report and verified factual statements contained in the report. In response to the author's questions, our employee (i) informed the author of the report that we currently have more than 13 million users and (ii) provided additional information that is contained elsewhere in this prospectus concerning the number of new users added in the fourth quarter of 2001 and the fact that we have no contractual relationship with eBay. We did not authorize the contacts between our employee and the author of the report. Other than these contacts, we were not involved with the Gartner report or the press release. We were not responsible for any statement, survey result, opinion, or prediction contained in the Gartner report or press release.

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 5,400,000 shares of common stock in this offering will total $63.3 million, or $73.1 million if the underwriters exercise their over-allotment option in full, based on an assumed offering price of $13.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses, which are payable by us. The principal purposes of this offering are to establish a public market for our common stock, increase our visibility in the marketplace and facilitate our future access to public capital markets. 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. We meet these collateral requirements by pledging cash to provide collateral to 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 capitalization as of September 30, 2001:

•: on an historical basis, retroactively giving effect to the one-for-four reverse split of common stock effected in December 2001;
•: on a pro forma basis to reflect the conversion of all of the outstanding shares of our convertible preferred stock into 43,355,144 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 5,400,000 shares of common stock in this offering, assuming an initial public offering price of $13.00 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)
Long-term liabilities				$	1,883		$	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: 173,420,806 shares actual, no shares pro forma and no shares pro forma as adjusted					279,224			—			—
Stockholders' equity (deficit):
	Common stock, par value $0.001 per share:
		authorized: 300,000,000 shares actual, 150,000,000 shares pro forma and pro forma as adjusted; issued and outstanding: 10,459,112 shares actual, 53,814,256 shares pro forma and 59,214,256 shares pro forma as adjusted			10			54			59
	Additional paid in capital				101,176			380,356			443,583
	Stock-based compensation				(21,145	)		(21,145	)		(21,145	)
	Stockholders' notes				(1,953	)		(1,953	)		(1,953	)
	Accumulated deficit				(264,736	)		(264,736	)		(264,736	)

			Total stockholders' equity (deficit)		(186,648	)		92,576			155,808

			Total capitalization	$	94,459		$	94,459		$	157,691

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 5,400,000 shares of common stock offered by us in this offering at an assumed initial public offering price of $13.00 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 $2.08 per share of common stock. This represents an immediate increase in net tangible book value of $0.97 per share to our existing stockholders and an immediate dilution in net tangible book value of $10.92 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				$	13.00
	Pro forma net tangible book value per share as of September 30, 2001	$	1.11
	Increase per share attributable to this offering		0.97

Pro forma net tangible book value per share after this offering					2.08

Dilution in pro forma net tangible book value per share to new investors				$	10.92

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		53,814,256	90.9	%	$	204,140,000	74.4	%	$	3.79
New investors		5,400,000	9.1			70,200,000	25.6		$	13.00

	Total	59,214,256	100.0	%	$	274,340,000	100.0	%

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 and other fees		$	—		$	8,476		$	1,051		$	61,377
Interest on funds held for others			—			2,046			967			3,018
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
Customer service and operations(1)			230			15,754			10,097			21,962
Product development(1)			483			4,419			3,060			6,334
Selling, general and administrative(1)			3,691			34,950			27,357			16,782
Stock-based compensation			354			5,825			4,707			20,959
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	)

Basic and diluted net loss per share		$	(12.09	)	$	(52.47	)	$	(46.46	)	$	(14.46	)

Shares used in calculating basic and diluted net loss per share			382			3,230			2,747			6,265
Pro forma basic and diluted net loss per share (unaudited)		$	(0.60	)	$	(5.38	)	$	(4.55	)	$	(1.90	)

Shares used in calculating pro forma basic and diluted net loss per share (unaudited)			7,714			31,513			28,054			47,804
(1) Amounts exclude stock-based compensation as follows:
Customer service and operations		$	66		$	213		$	129		$	1,486
Product development			138			915			292			6,215
Selling, general and administrative			150			4,697			4,286			13,258

	Total	$	354		$	5,825		$	4,707		$	20,959

	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		$	48,199
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			231,797			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			279,224
Total stockholders' deficit		(4,039	)		(113,453	)		(186,648	)

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 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, which include both personal and business accounts, sent or received a payment that resulted in a fee. For the nine months ended September 30, 2001:

•: 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 $2.0 billion;
•: our transaction and other fees equaled $61.4 million, or 2.7% of total payment volume, compared to our transaction processing expenses of $31.9 million, or 1.4% of total payment volume; and
•: our total accounts grew by an average of 18,500 per day at an average total marketing expense of $1.05 per new account, which includes an average promotional bonus cost of $0.13 per new account.

We earn revenues from two sources: transaction and other fees, and interest on funds held for others. Transaction and other fees—which include fees on GMS, international funding and withdrawal fees, and debit card fees—comprised 95.3% of our revenues for the nine months ended September 30, 2001.

For the three months ended September 30, 2001, our net loss totaled $32.4 million. Excluding non-cash expenses of $31.2 million related to amortization of intangibles and stock-based compensation, our net loss amounted to $1.2 million. For the nine months ended September 30, 2001, our net loss totaled $89.3 million. Excluding non-cash expenses of $70.2 million related to amortization of intangibles and stock-based compensation, our net loss amounted to $19.1 million. From our inception, March 8, 1999, through September 30, 2001, our net loss totaled $264.7 million. Excluding non-cash expenses of $125.8 million related to amortization of intangibles and stock-based compensation, our net loss amounted to $138.9 million.

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., a development stage company, 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. As of the date of the merger, Confinity had accumulated net losses since inception of $18.3 million: $15.6 million for the period ended March 30, 2000 and $2.7 million for the year ended December 31, 1999. Under the terms of the agreement, as part of the purchase price paid, we 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, mandatorily redeemable preferred stock, in exchange for all of the outstanding common and mandatorily redeemable preferred stock of Confinity. Each share of mandatorily redeemable convertible preferred stock is convertible at any time into 0.25 shares of common stock, has voting rights equal to the shares of common stock into which it converts, and is entitled to receive when, and if, declared by our board of directors, dividends at the rate of $0.0049 per share of Series AA, $0.0093 per share of Series BB, $0.0297 per share of Series CC, respectively, per year, payable in preference to any payment of any dividend on common stock. The dividends are non-cumulative. All the shares of mandatorily redeemable convertible preferred stock will automatically convert into shares of common stock in connection with this offering. In accordance with APB 16, we determined the fair value of each of the securities issued in the acquisition. The fair values were determined using a valuation model which valued each security by assessing its characteristics with reference to the most recent financing with a third party. The valuation methodology determines the relative value of each class of stock as a function of the fair value of the total assets (as opposed to the book value) of the enterprise available for distribution to the holders of the various classes of equity. For this purpose, we used the Series C preferred stock financing which was issued in an arms-length transaction ($2.75 per share; total proceeds of $100.0 million), which also closed in March 2000, on the day following the acquisition. As such, the difference in the liquidation values of each series of preferred stock was the primary factor for the differences in the value of the various series of preferred stock. The fair value of the securities issued in connection with the acquisition totalled $129.7 million based on the following per share values: common stock at $1.51, Series AA at $1.53, Series BB at $1.54, and Series CC at $1.63. The value of warrants and options issued in connection with the acquisition totalled $15.6 million. X.com was deemed to be the surviving entity as it had the majority of the outstanding voting interest and the fully diluted interest immediately following the merger. The former stockholders of Confinity owned approximately 46.5% of our total outstanding voting interest immediately following the merger. Peter Thiel, our Chief Executive Officer, President and Chairman, was Chief Executive Officer and Chairman of Confinity at the time of the merger, but left shortly thereafter. Mr. Thiel rejoined the company as Chief Executive Officer in September 2000. Max Levchin, our Chief Technology Officer and a member of our board of directors, was Chief Technology Officer and a member of the board of directors of Confinity at the time of the merger.

We formally changed our name to PayPal, Inc. in February 2001. We accounted for the merger under the purchase accounting method. In accordance with APB 16, the cost to acquire Confinity was allocated among the identifiable tangible and intangible assets acquired and liabilities assumed based on the fair market value of those assets at the date of acquisition. The excess of the purchase price and assumed liabilities over the fair value of the net assets acquired is included in goodwill and other intangible assets and we amortize using the straight-line method over a two-year period. We based the fair value of the stock consideration paid upon an arms-length third party equity round that closed concurrently with the acquisition.

The following table shows the allocation of the purchase price of $129.7 million:

Net liabilities assumed	$	(1.6	)
Goodwill		123.6
Purchased technology		0.6
Customer base		6.3
Assembled workforce		0.8

Total	$	129.7

See "Unaudited Pro Forma Combined Financial Statements."

By October 2000 we decided to focus our efforts on the PayPal product and to discontinue our Internet banking operations. 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. We are currently evaluating under SFAS No. 142 the amortization treatment of the intangible assets other than goodwill acquired as part of the merger. Prior to the effective date of SFAS No. 142, we expect to amortize an additional $16.4 million of intangibles relating to the merger.

Termination of Internet Banking Service Agreement

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

Sources of Revenue

We currently earn revenues from two sources: transaction and other fees, and interest on funds held for others. 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. 31, 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			2,044
Debit card cash-back			—		—		—		—		—		(316	)		(1,014	)
Other transaction fees			—		—		—		22		359		549			759

Transaction and other fees			—		35		1,016		7,425		13,156		18,992			29,229
Interest on funds held for others			—		240		727		1,079		1,143		920			955
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. 31, 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		6.8
Debit card cash-back		—		—		—		—		—		(1.6	)%	(3.4	)%
Other transaction fees		—		—		—		0.2		2.5		2.8		2.5

Transaction and other fees		—		1.6		44.7		84.0		92.0		95.4		96.8
Interest on funds held for others		—		11.1		32.0		12.2		8.0		4.6		3.2
Service agreement revenues		100		87.3		23.3		3.8		—		—		—

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

Transaction and Other Fees

We recognize revenue from transaction and other 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 14, 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 nine months ended September 30, 2001, we charged a weighted average fee of 2.6% of GMS. As a result of our fee increase on July 13, 2001, the weighted average fee for the three months ended September 30, 2001 increased to 3.1% of GMS. 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 during that period. 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 currently 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.

The following tables set forth quarterly data regarding the percentage of transactions falling within certain ranges and the percentage of total dollar volume attributable to those transactions. Due to rounding, totals may not sum to exactly 100.0%.

		Three Months Ended
Dollar Volume of Payments in Dollar Range		Mar. 31, 2000		June 30, 2000		Sept. 30, 2000		Dec. 31, 2000		Mar. 31, 2001		June 30, 2001		Sept. 30, 2001
$0.01-$10.00		3.2	%	3.5	%	3.7	%	3.5	%	3.1	%	3.0	%	2.9	%
$10.01-$25.00		12.2		12.2		12.5		12.7		12.1		11.8		11.3
$25.01-$50.00		13.4		13.2		13.2		13.9		13.6		13.1		12.6
$50.01-$100.00		15.8		14.7		14.4		14.8		14.8		14.4		14.0
$100.01-$250.00		25.3		21.9		21.2		21.0		21.5		20.9		20.5
$250.01-$500.00		11.6		16.3		16.1		14.2		13.4		13.4		13.9
$500.01-$1,000.00		7.6		9.4		10.6		10.0		9.6		10.2		11.1
$1,000.01+		10.9		8.6		8.3		9.9		12.0		13.2		13.7

	Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Number of Payments in Dollar Range		Mar. 31, 2000		June 30, 2000		Sept. 30, 2000		Dec. 31, 2000		Mar. 31, 2001		June 30, 2001		Sept. 30, 2001
$0.01-$10.00		27.0	%	28.4	%	29.1	%	29.0	%	25.9	%	24.5	%	24.2	%
$10.01-$25.00		35.3		34.7		35.0		34.9		35.5		36.3		36.0
$25.01-$50.00		17.4		17.4		17.1		17.7		18.6		18.8		18.8
$50.01-$100.00		10.4		9.8		9.4		9.5		10.3		10.5		10.6
$100.01-$250.00		7.4		6.6		6.3		6.1		6.8		6.9		7.1
$250.01-$500.00		1.5		2.2		2.1		1.9		1.9		2.0		2.1
$500.01-$1,000.00		0.6		0.7		0.8		0.7		0.7		0.8		0.9
$1,000.01+		0.3		0.3		0.2		0.2		0.3		0.3		0.4

	Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Dollar Volume of GMS Payments in Dollar Range		Mar. 31, 2000	June 30, 2000		Sept. 30, 2000		Dec. 31, 2000		Mar. 31, 2001		June 30, 2001		Sept. 30, 2001
$0.01-$10.00		—	6.2	%	3.5	%	3.1	%	2.8	%	2.8	%	2.7	%
$10.01-$25.00		—	15.3		11.8		12.8		12.0		11.8		11.3
$25.01-$50.00		—	14.1		12.4		14.3		13.7		13.2		12.8
$50.01-$100.00		—	13.3		13.2		15.0		14.9		14.5		14.2
$100.01-$250.00		—	18.5		20.6		21.3		22.5		21.5		21.2
$250.01-$500.00		—	18.2		17.0		13.8		13.6		13.6		14.1
$500.01-$1,000.00		—	9.0		10.4		10.0		9.4		10.0		11.0
$1,000.01+		—	5.5		11.0		9.8		11.2		12.4		12.7

	Total	—	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Number of GMS Payments in Dollar Range		Mar. 31, 2000	June 30, 2000		Sept. 30, 2000		Dec. 31, 2000		Mar. 31, 2001		June 30, 2001		Sept. 30, 2001
$0.01-$10.00		—	41.3	%	28.2	%	23.1	%	21.8	%	22.5	%	22.3	%
$10.01-$25.00		—	32.0		35.4		37.3		37.0		37.0		36.6
$25.01-$50.00		—	13.6		17.2		19.6		19.8		19.4		19.3
$50.01-$100.00		—	6.5		9.2		10.4		10.9		10.8		10.9
$100.01-$250.00		—	4.0		6.5		6.7		7.5		7.2		7.4
$250.01-$500.00		—	1.8		2.4		2.0		2.0		2.1		2.2
$500.01-$1,000.00		—	0.5		0.8		0.7		0.7		0.8		0.9
$1,000.01+		—	0.1		0.3		0.3		0.3		0.3		0.4

	Total	—	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

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. For the same period, 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 business 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

Our U.S. 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. We earn investment management fees on funds customers have chosen to invest in the Fund. The Fund is managed by PayPal Asset Management, a wholly owned subsidiary of PayPal, Inc. and an SEC registered investment advisor. An independent broker-dealer distributes the Fund's shares. The Fund's 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. Prior to December 19, 2001, we earned a net annual management fee of 1.4% on the average net assets held in the Fund and waived expenses of 0.4%. As of December 19, 2001, we have increased the expense waiver to 1.8%. As a result, we currently earn no management fee on the assets held in the Fund. We can terminate or reduce the expense waiver in the future if we provide reasonable advance notice to shareholders. The Fund imposes a charge of 0.1% on the average net assets held in the Fund which is passed on to Barclays Global Fund Advisors. 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.

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. By the end of the first quarter of 2002, 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.

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. 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 $0.20. 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, typically within 90 days of the relevant transaction. 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.

Customer Service and Operations

Customer service and operations expenses consist primarily of salaries 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.

Product Development

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

Selling, General and Administrative

Selling, general and administrative, or SG&A, expenses consist primarily of salaries for our executive, marketing, business development, administrative, legal, finance and human resources personnel, cost of facilities, computer and communications equipment, support services, professional services fees and promotional expenditures, which include new user sign-up and referral bonuses.

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. Currently, we offer a $5 promotional bonus to new U.S. customers who verify with us their bank account, add $250 to their

PayPal account via ACH, and sign up for our money market feature. We also offer a $5 bonus to new international customers who confirm a credit card with us and make a PayPal payment of at least $100. Our $5 referral bonus is available to any PayPal account holder who refers a new customer who earns the $5 new account bonus by completing the above requirements. We deposit these amounts into customer accounts and expense them as incurred. We will evaluate the effectiveness of the promotional program and revise the offering from time to time.

Non-cash Stock-based Compensation

In connection with some employee stock option grants, we recorded non-cash 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 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 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 stock-based compensation expense. The table below includes these amounts.

Non-cash stock-based compensation expenses in our statement of operations are allocable 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)
Customer service and operations		$	24	$	48	$	57	$	84	$	157	$	462	$	867
Product development			48		64		180		623		383		392		5,440
Selling, general and administrative			447		169		3,670		411		1,617		3,172		8,469

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

We expect to amortize the $26.7 million of non-cash stock-based compensation remaining at December 31, 2001 as follows (in thousands):

Year ending December 31, 2002	$	11,355
Year ending December 31, 2003	$	7,879
Year ending December 31, 2004	$	5,578
Year ending December 31, 2005	$	1,864

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 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 stock-based compensation accrued during the vesting period were adjusted in subsequent periods, until the loans were repaid, for changes in the fair value of the shares but not below zero. We will amortize the non-cash 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 389,881 shares of our common stock and 150,000 shares of our preferred stock. As of September 30, 2001, one loan associated with this program was outstanding and the remaining loans were paid in full. We adjusted non-cash stock-based compensation associated with the one remaining participant's pledged equity awards in the fourth quarter of 2001. This loan was paid in full as of November 30, 2001. We will amortize the remaining non-cash 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.

In January 2002, we granted options to purchase 75,000 shares at an exercise price of $6.00 and 4,120,597 shares at an exercise price of $12.00. We expect to record non-cash deferred stock-based compensation of $4.6 million in respect of these grants, which will be amortized over the vesting periods of the respective grants. Also in January 2002, we agreed to accelerate the vesting of option grants for an employee as part of a separation agreement. An amount of $466,000 will be recorded as non-cash stock-based compensation expense in respect of this acceleration.

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 months of October and November 2001, payment volume increased to a daily average of $12.6 million.

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

Revenues

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

	Nine Months Ended
	Sept. 30, 2000		Sept. 30, 2001
	(in thousands)
Transaction and other fees	$	1,051	$	61,377
Gross Merchant Sales (GMS)		57,494		2,024,876
Total payment volume		717,822		2,314,226

Transaction and other fees increased to $61.4 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% of the payment amount for the nine months ended September 30, 2001 from 1.8% of the

payment amount for the nine months ended September 30, 2000. We began charging fees in June 2000 and have implemented a number of fee adjustments since that date, most recently in July 2001.

•: Our introduction of international access. We launched international capability in November 2000. Revenues from fees assessed on international funding and withdrawals amounted to $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 January 2001. 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.

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 our continued efforts to control transaction losses.

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
		Nine Months Ended						Percentage Increase (Decrease)
		Sept. 30, 2000			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			1,865			8,053		331.8	%
Customer service operations:
	Expense	$	10,097		$	21,962		117.5	%
	As a percentage of revenues		179.7	%		34.1	%	—
	Per payment		$0.63			$0.47		(25.4	)%
	Per account per month		$0.60			$0.30		(49.6	)%

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 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.

Product Development. Product development expenses increased by $3.2 million, or 103.2%, to $6.3 million for the nine months ended September 30, 2001 from $3.1 million for the nine months ended September 30, 2000. As a percentage of revenues, product development expenses totaled 9.8% and 54.5% 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. 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 depreciation and amortization of fixed assets of $1.1 million and $165,000 for the nine months ended September 30, 2001 and 2000, respectively. See "Business--Our Strategy."

Selling, General and Administrative. SG&A expenses decreased by $10.6 million, or 38.7%, to $16.8 million for the nine months ended September 30, 2001 from $27.4 million for the nine months ended September 30, 2000. As a percentage of revenues, SG&A expenses equaled 26.1% and 486.9% for the nine months ended September 30, 2001 and 2000, respectively. We experienced some increase in expenses from additional staffing levels and related costs required to manage and support our rapidly growing operations. However, this increase was more than offset by the decrease in our promotional bonus expenses due to the tightening of our requirements to receive sign-up and referral bonuses between the two periods. For each new account opened, 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. We attribute the decrease in SG&A 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 while SG&A expenses decreased as we enjoyed economies of scale in our corporate infrastructure and reduced promotional bonus expenses.

Non-cash Stock-based Compensation. Non-cash stock-based compensation increased by $16.3 million, or 345.3%, to $21.0 million for the nine months ended September 30, 2001 from $4.7 million for the nine months ended September 30, 2000. We attribute the increase primarily to amortization of non-cash stock-based compensation recognized relating to the liquidity program adopted in July 2001 and the private placement of Class A stock to or for the benefit of our CEO. See

"Operating expenses—Non-cash stock-based compensation." The allocation of non-cash stock-based compensation to each of the functional areas follows.

		Nine months ended
		Sept. 30, 2000		Sept. 30, 2001
		(in thousands)
Customer service and operations		$	129	$	1,486
Product development			292		6,215
Selling, general and administrative			4,286		13,258

	Total	$	4,707	$	20,959

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 25.2%, 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. Our net loss decreased by $38.3 million, or 30.0%, to $89.3 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 in part by an increase in non-cash stock-based compensation of $16.3 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 and other 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.

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.

Customer Service and Operations. Customer service and operations expenses increased to $15.8 million for the year ended December 31, 2000 from $0.2 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.

Product Development. Product development expenses increased to $4.4 million for the year ended December 31, 2000 from $0.5 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 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.

Selling, General and Administrative. SG&A expenses increased to $35.0 million for the year ended December 31, 2000 from $3.7 million for the period from inception to December 31, 1999. We attribute this increase primarily to promotional bonus expenses, greater professional fees, outside service fees and other corporate expenses. SG&A expenses for the year ended December 31, 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.

Non-cash Stock-based Compensation. Non-cash stock-based compensation increased to $5.8 million for the year ended December 31, 2000 from $0.4 million for the period from inception to December 31, 1999. We attribute this increase to option grants made to personnel hired during the year ended December 31, 2000 to support our growth.

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 and other fees		$	—		$	35		$	1,016		$	7,425		$	13,156		$	18,992		$	29,229
Interest on funds held for others			—			240			727			1,079			1,143			920			955
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
Customer service and operations(1)			523			3,726			5,848			5,657			7,064			7,216			7,682
Product development(1)			512			923			1,625			1,359			2,018			2,125			2,191
Selling, general and administrative(1)			3,127			13,615			10,614			7,592			5,443			5,736			5,603
Stock-based compensation			519			281			3,907			1,118			2,157			4,026			14,776
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	)

(1) Amounts exclude stock-based compensation as follows:
Customer service and operations		$	24		$	48		$	57		$	84		$	157		$	462		$	867
Product development			48			64			180			623			383			392			5,440
Selling, general and administrative			447			169			3,670			411			1,617			3,172			8,469

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

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
Average payment amount		$	45		$	46		$	45		$	44		$	48		$	50		$	51
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
		Stock-based compensation				519			281			3,907			1,118			2,157			4,026			14,776
		Changes in operating assets and liabilities				10,691			26,855			31,277			4,662			11,312			7,874			19,976

				Net cash provided by (used in) operating activities		(11,166	)		(1,356	)		499			(15,481	)		4,982			4,359			24,357

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 provided by (used in) investing activities			(5,711	)		(1,822	)		(63,953	)		49,881			(20,793	)		(10,094	)		(8,177	)

Cash flows from financing activities
	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 (used in) financing activities			95,961			13,489			26,918			12,579			37,526			(649	)		(1,177	)

			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; changes in non-cash stock-based compensation; 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 $202.7 million net of issuance costs from the sale of equity securities.

Net cash used by operating activities totaled $4.1 million for the year ended December 31, 1999, and $27.5 million for the year ended December 31, 2000. Net cash provided by operating activities totaled $33.7 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, and increases in amounts due to customers.

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, $148.9 million for the year ended December 31, 2000 and $35.7 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.

In connection with our plan to deposit all customer funds not transferred into the PayPal Money Market Reserve Fund into FDIC-insured bank accounts by the end of the first quarter of 2002, 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, we pledged $6.5 million in cash to provide collateral for 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
•: 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

	Total minimum lease commitments	$	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 nine months ended September 30, 2001, our payment volume to business accounts, which we refer to as Gross Merchant Sales or GMS, totaled $2.0 billion. GMS equaled 87.5% of our total payment volume of $2.3 billion 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 nine months ended September 30, 2001, the percentage of our payment volume related to online auctions, particularly eBay auctions, equaled 68.3%. As of September 30, 2001, we had 10.6 million accounts, including 2.1 million business accounts and 8.5 million personal accounts.

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 nine months ended September 30, 2001, our total number of accounts grew by 5.1 million, an average of 18,500 per day, at an average total marketing expense, including promotional bonuses, of $1.05 per new account.

During the nine months ended September 30, 2001, we processed an average of 171,000 payments per day totaling $8.5 million in daily volume. The average payment amount sent equaled $50.

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 user base had grown to 2.2 million accounts, and as of September 30, 2001, we had 10.6 million accounts.

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 nine months ended September 30, 2001, customers funded 22.2% of payment volume through their existing PayPal balances, 26.7% via bank account transfers and 51.1% 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 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 nine 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.

Timing of Payments and Withdrawals

The time it takes for a sender to complete a transaction using PayPal and for a recipient to have use of the transferred funds depends on the sender's funding source for the payment and the recipient's choice regarding use of the funds he or she receives. The sender can fund a payment from one of three sources: an existing PayPal balance, a credit card or, for U.S. customers, a bank account. If the sender funds the payment in full using a pre-existing PayPal balance, PayPal instantly debits the amount specified by the sender from the sender's balance and simultaneously credits that amount, less any applicable fees, to the recipient's PayPal balance. If the sender instead funds the payment in part or in full using a credit card, PayPal credits the amount of the payment, less any fees, to the recipient's account as soon as PayPal receives information from the applicable credit card network that the sender's payment is authorized, which usually takes a few seconds. Similarly, if the sender has registered both a primary bank account and an alternate funding source with PayPal and qualifies for PayPal's "Instant Transfer" feature, PayPal will credit the recipient's account instantly. PayPal will concurrently initiate a debit to the sender's primary bank account through the ACH network. The only type of payment in which PayPal does not credit funds instantly to the recipient occurs if the sender chooses to use bank account funding but does not qualify for, or elects not to use, Instant Transfer. In these "eCheck" payments, PayPal will initiate a debit to the sender's bank account through the ACH network, and will notify the recipient immediately that the sender has initiated payment, but will credit funds to the recipient's account only after the debit has been completed, which usually takes three to four business days.

Once the funds have been credited to the recipient's account, the recipient can leave the funds in the PayPal system or can at any time initiate a withdrawal. The customer can withdraw funds either by ACH transfer to his or her bank account, if the customer is in the U.S. or one of 11 other countries, or by check for U.S. customers. Recipients who are U.S. customers can also immediately spend up to $150 per day from their PayPal balance at online sellers that accept MasterCard, using PayPal's Shop Anywhere feature. U.S. recipients who have a business account may also be eligible for the PayPal ATM/debit card, which can be used to spend PayPal balances at online sellers and physical retail locations that accept MasterCard and withdraw cash at ATMs.

If the recipient initiates a withdrawal by ACH transfer, he or she will typically receive the funds in his or her bank account within four business days, or five business days in the 11 countries outside the U.S. where PayPal offers withdrawals to local bank accounts. If the recipient initiates a withdrawal by check, PayPal will send a request on the following business day to its processing bank to issue and send the check through the U.S. mail, but the time needed for the recipient to receive the check will depend on the speed of mail delivery and the recipient's geographic location. The full process from initiation of a check withdrawal request to receipt of the check by the customer can take up to two weeks. Even after the customer has received the check, he or she will need either to cash the check or deposit it in his or her bank. If he or she deposits the check in the bank, depending on the customer's location, the bank may take up to five additional days to credit the customer's account with the funds.

Users may also add funds to their PayPal accounts without making a payment. This is not possible by credit card, but only by ACH transfer from a bank account, which generally takes three to four business days to complete.

The following tables summarize the timing of payments and withdrawals.

Making Payments and Funding:

	Source
		Bank Account
	Credit Card	Instant Transfer	eCheck/ACH	Existing PayPal Balance
Domestic payment	Instant	Instant	3-4 business days	Instant
International payment	Instant	n/a	n/a	Instant
Add funds	n/a	n/a	3-4 business days	n/a

Withdrawals:

	Method
	Bank Account	Check	ATM/Debit Card
Domestic withdrawal	3-4 business days	Up to 2 weeks	Instant
International withdrawal	5 business days	n/a	n/a

Account Types

Business Accounts. Our customers choose either PayPal business accounts or PayPal personal 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 14, 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, other than credit card-funded payments. Personal accounts can upgrade to business accounts at any time and thereby avail themselves of all the benefits of a business account, including the ability to receive credit card-funded payments. During the nine months ended September 30, 2001, 622,000 customers upgraded from personal to business accounts.

International Accounts. We currently allow residents of 36 foreign countries to open 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 eleven 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 international users to hold balances in 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 1.08% for the nine months ended September 30, 2000 to 0.42% for the nine 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 nine months ended September 30, 2001, 8.7% 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 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 nine months ended September 30, 2001, we spent $0.6 million on promotional bonuses and acquired 5.1 million accounts, for an average cost of $0.13 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

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 The Gartner Report, dated July 28, 2000, the 90.0% of online retailers responding to the Gartner survey reported average Internet charge-back rates of 2.64%. In contrast, PayPal's transaction loss rate as a percentage of payment volume in the nine months ended September 30, 2001 equaled 0.42% compared to 1.08% for the nine 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 Equinix data center in San Jose, California, and at our operations and customer support facility in Omaha, Nebraska. We have a second data center with Exodus in Santa Clara, California.

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

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

Customer Service and Operations

Our primary customer service team in Omaha, Nebraska provides email and telephone customer support. As of December 31, 2001, this team consisted of 318 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 December 31, 2001, this team consisted of 100 dedicated representatives, for a total of over 418 persons dedicated to customer support.

We strive to maintain industry-leading standards for customer service. On average, we respond to phone calls from business and premier customers in nine seconds, with only a 2.1% call abandonment rate for the nine months 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

Electronic Payment Exchange

We process all of our customers' credit card transactions through Electronic Payment Exchange, Inc., or EPX. EPX provides the systems and services that allow us to direct transaction information to the merchant bank that provides transaction processing services to us and sponsors our acceptance of Visa cards. For Visa transactions, First Union National Bank acts as our merchant bank, and for MasterCard, Discover and American Express transactions, TheBancorp.com Bank acts as our merchant bank. Our agreements with EPX, First Union National Bank, Certegy Card Services, Inc., which provides processing services for First Union, and TheBancorp.com Bank make us responsible for all charge-backs unless we obtain a physical signature from the cardholder, and require us to comply with the rules and guidelines of the card associations.

In turn, EPX and the applicable bank have agreed to process properly-presented card transactions and to transfer the funds from such transactions to us on a daily basis. EPX is also required to meet specified service levels regarding the availability, response times and security of their processing services, their settlement of funds due us, and their charge-back processing. The contract limits the liability of EPX and the applicable bank for any breaches of the agreement to the amount of fees we have paid during the six-month period immediately prior to the event giving rise to our damages.

We pay EPX and the applicable bank a fee for each credit card authorization, as well as a fee for each completed credit card transaction. The banks also pass through to us standard industry fees that they are charged by the card associations for issuer interchange on completed transactions, which consist of a percentage of the transaction amount. We also are subject to additional fees if we submit less than 50.0% of our customers' credit card transactions through EPX during the first year of the contract. If the dollar amount of credit card transactions that our customers charge back exceed 1.0% of our credit card transaction volume, EPX and the applicable bank can require us to establish a reserve account at the bank equal to the total amount of charge-backs over the last 30 to 120 days, depending on the extent to which our charge-back ratio exceeds 1.0%. At our current charge-back rates, we do not need to provide any funds to this reserve account.

Until December 1, 2001, our processor for substantially all credit card transactions was Chase Merchant Services. Chase Merchant Services remains responsible to Visa and MasterCard for any charge-backs on our customers' credit card transactions that occurred prior to December 1, 2001. To protect itself against the risk of such charge-backs, Chase Merchant Services has retained approximately $12.0 million in settlement funds due to us, and has notified us of its intention to hold these funds as long as necessary to cover its liability for charge-backs. We also have pledged previously a $3.0 million certificate of deposit to Chase Merchant Services to protect it against the risk of loss from transactions that are subsequently charged back. We believe these amounts of security are excessive compared to Chase Merchant Services' risk of loss from transactions occurring prior to December 1, 2001, and therefore are not permitted under the surviving provisions of our former contract with Chase Merchant Services. We are negotiating with Chase Merchant Services for a reduction in the amount of the reserve.

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. We are required to keep a minimum of $10.0 million on account with Wells Fargo in order to obtain Wells Fargo's ACH processing services. Until December 2001, this requirement was met by holding sufficient customer funds as agent in a pooled account at Wells Fargo. The requirement is now met by pledging securities owned by PayPal and held in a brokerage account at Wells Fargo. These securities, as of December 15, 2001, have a fair market value of $10.7 million and will be accounted for as restricted investments. 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.

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 as collateral to cover its settlement risk with the sponsoring bank. We have pledged a certificate of deposit as security for the letter of credit. If our debit card transaction volume increases, First Data may require us to increase the letter of credit to the average amount of PayPal debit card transactions in recent 4-day periods. If First Data were to exercise this right up to the maximum amount based on debit card volumes as of December 1, 2001, we would be required to increase the size of the letter of credit, which is currently $2.0 million, by approximately $5.3 million. We would also need to increase the size of the certificate of deposit, which is classified as restricted cash, by the same amount. 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.

Visa and MasterCard

We do not have any direct contractual relationship with Visa or MasterCard other than an agreement relating to our participation in MasterCard's Remote Payment and Presentment Service for online bill payment. As a merchant that accepts Visa and MasterCard credit cards, however, we are subject to, and must comply with, the operating rules of the Visa and MasterCard credit card associations. Under these operating rules, in cases of fraud or disputes between senders and recipients in transactions involving Visa or MasterCard cards, we face charge-backs when cardholders dispute items for which they have been billed. Because we are not a bank, we are not eligible to belong to the credit card associations. As a result, we must rely on banks that are members of these associations or their independent service organizations to process our transactions, to challenge charge-backs on our behalf where appropriate, to inform us of changes to Visa and MasterCard operating rules, and to communicate with the Visa and MasterCard associations on our behalf.

In late 2000, MasterCard indicated it would terminate PayPal's ability to accept MasterCard cards for payment if we did not change some of our practices and procedures immediately. We and our credit card processor had a series of meetings with MasterCard to discuss how to bring our practices and procedures into compliance. As a result of those meetings, we made changes to our system that we believe resolved MasterCard's concerns, but MasterCard has not communicated to us that its concerns have been fully resolved. In 2001, Visa informed our credit card processor that some of our practices violated its operating rules, and we made certain changes to our practices in response. In a letter dated January 25, 2002, Visa informed our credit card processor that three issues remain unresolved and, as a result, we were being fined $30,000. Specifically, Visa objected to our charging and immediately rebating international membership fees, and to our charging fees to international customers for payments that are funded using credit cards, but not for payments that are funded from balances in the PayPal system. Visa also objected to our practice of obtaining a card holder's single up-front authorization, rather than authorization on a transaction by transaction basis, to charge that card holder's Visa account in the event that the card holder requests an ACH transfer and that transfer fails. We are continuing our efforts to resolve Visa's concerns. Visa has not threatened to suspend, terminate or otherwise limit or restrict our ability to accept Visa, except to the extent that we may be required to change our current practices to resolve these three outstanding issues. As is the case with any merchant that Visa believes is violating its operating rules, however, Visa could terminate our ability to accept Visa cards for payment or levy additional fines against us if we do not resolve Visa's concerns.

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. We are currently in discussions with Providian regarding a proposed amendment to the terms of our commercial relationship.

Competition

The market for our product is emerging, intensely competitive and characterized by rapid technological change. We compete with a number of companies, both directly in the email-based online payments market, and indirectly with traditional payment methods such as credit cards, checks, money orders and ACH transactions. In order to retain existing customers and attract new customers, we must offer an attractive combination of the following factors:

•: 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. In addition, our patent-pending account verification method allows us to authenticate users with a high degree of reliability, without the delay and inconvenience to customers of mailing or faxing documents. Some of our direct and indirect competitors, however, may have an advantage in encouraging buyers to use their product by allowing new customers to make payments without opening an account.
•: Size of the Network. Our network continues to grow relative to most of our direct competitors, and our size encourages usage by new customers. We believe that we have a significantly larger network of both senders and recipients than any of our direct online payment competitors. Some of our indirect competitors, including credit card products offered under the Visa and MasterCard brands, enjoy significantly wider adoption than we do.
•: Price. Subject to the other factors listed, users generally will use the lowest cost payment system. Our product is free for users to send payments, and we have set the fees we charge to business accounts to receive payments at rates that we believe are lower than most new or small businesses could obtain if they sought to accept credit cards directly. Some of our direct competitors in the online payment market charge lower fees than we do, including Citibank's c2it, which currently makes its product available for free to senders and recipients within the U.S.
•: 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. In particular, for a buyer deciding whether to pay an unfamiliar seller through PayPal or directly by credit card, PayPal offers the advantage of keeping the buyer's credit card information secret from the merchant. Our direct competitors, however, provide the same feature.
•: Brand Recognition. While we enjoy strong brand recognition in our market, many current and potential competitors have established long-standing relationships with their users. Many of our competitors, including credit card products under the Visa and MasterCard brands, enjoy significantly greater brand recognition than do we. Also, our direct competitor Billpoint recently changed the marketing name for its products to eBay Payments.
•: Customer Service. We have strengthened our customer support network by establishing a large customer call center. We believe that our commitment to customer service helps us attract and retain customers. Although we have devoted substantial resources to customer service, some of our competitors, including c2it, enjoy the backing of large financial institutions with the ability to devote significantly more resources to customer service than could we.
•: Timing of Payments. When buyers and sellers are in different locations, the PayPal product offers buyers a fast method of completing payment, and offers sellers the ability to know that the buyer has sent the payment more quickly than waiting for cash, a check or a money order to arrive in the mail. This knowledge often allows sellers, in particular those who do not accept credit cards,

to deliver their goods or services more quickly, which in turn encourages customer use of PayPal. Most PayPal payments are credited instantly to the recipient's PayPal account, and the recipient may then use those funds to pay others or may choose to withdraw them. PayPal's direct competitors offer equivalent advantages in processing speed compared to cash, checks or money orders by mail, and also allow customers to transfer funds to their bank accounts as fast or, in some cases, faster than do we. However, our Shop Anywhere feature and the large number of individuals and businesses that accept PayPal allow recipients to use funds immediately upon receipt to make online purchases, and provide us a competitive advantage over our direct competitors in this respect. Our debit card also allows select merchants to use the funds they receive through PayPal at ATMs and at merchants that accept MasterCard, without waiting for funds to be transferred to their bank account.

We anticipate continued challenges from current competitors, who may enjoy greater resources, as well as by new entrants into the industry. Our direct competitors include:

•: eBay Payments, which is owned jointly by eBay and Wells Fargo, and which 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; and
•: Citibank's c2it, which has received significant marketing support in the form of distribution agreements with AOL and Microsoft.

MasterCard recently announced a new online payment service in conjunction with CertaPay, and Visa has also expressed interest in developing an online email-based payment product for use by its members. 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, and with merchant processors, such as First Data and VeriSign, which assist online merchants in accepting credit cards. We also compete indirectly with online wallets such as Microsoft's Passport.

Many of our 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 have. 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.

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 became 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 websites or online auctions, and our process for obtaining an alternate payment method from the customer if the customer's primary payment method fails. We cannot predict whether the U.S. Patent and Trademark Office, or 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. These claims and any resultant litigation could subject us to significant liability for damages. 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, patents, 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.

Tumbleweed Communications Corp.

On January 22, 2002, we received a letter from Tumbleweed Communications Corp. The letter states that Tumbleweed is the owner of two U.S. patents: U.S. Patent Number 5,790,790, entitled "Electronic Document Delivery System in Which Notification of Said Electronic Document is Sent to a Recipient Thereof," and U.S. Patent Number 6,192,407, entitled "Private, Trackable URLs For Directed Document Delivery." The letter also states that "[Tumbleweed's] understanding of [PayPal's] online payment product leads [Tumbleweed] to believe that [we] require a license under the '790 and '407 patents."

We believe that Tumbleweed's assertions are without merit. We believe that our service does not infringe the patents and that we therefore do not require a license.

Despite our belief that our service does not infringe either patent, we cannot assure you that we would prevail if Tumbleweed were to sue us for infringement of either patent. If any portions of our service were found to be infringing either patent, and if we were unwilling or unable to obtain a license on terms acceptable to Tumbleweed, then we would likely be unable to continue to offer those portions of our service found to be infringing. We could also then be required to pay damages for past infringing use, possibly Tumbleweed's attorneys' fees, and possibly treble damages. This could have a material adverse effect on our business prospects, financial condition, and results of operations.

CertCo, Inc.

On February 5, 2002, we learned that CertCo, Inc. filed a lawsuit on February 4, 2002 for patent infringement against us in the United States District Court for the District of Delaware (CertCo, Inc. v. PayPal, Inc., Case Number 02-CV-094).

The complaint alleges that we are "directly infringing, contributing to the infringement of, or inducing others to infringe" CertCo's U.S. Patent Number 6,029,150 ("the '150 patent," entitled

"Payment and Transactions in Electronic Commerce System"), "by making, using, offering to sell, selling or inducing others to use [our] electronic payment and transaction system … in the United States…." The complaint additionally alleges that our alleged infringement "has been and continues to be deliberate and willful, … entitling CertCo to enhanced damages and reasonable attorneys' fees." The complaint further alleges that CertCo will suffer "irreparable injury" unless our "infringing conduct is preliminarily and permanently enjoined." The complaint includes a demand for a jury trial.

The complaint requests the following relief from the Court: (a) a permanent injunction against our alleged infringement; (b) an award of damages for alleged past infringement, including pre- and post-judgment interest; (c) a judgment that we willfully infringed the patent, warranting a trebling of any awarded damages; (d) a judgment that this is an exceptional case, warranting an award to CertCo of its reasonable attorneys' fees; and (e) an award of CertCo's costs.

Prior to CertCo's filing of this lawsuit, on February 2, 2002, our General Counsel received a letter from counsel for CertCo. The letter states that CertCo is the owner of the '150 patent. The letter further states that CertCo's counsel has analyzed PayPal's service and determined that it infringes one or more claims (including claims 18, 27, 30 and 32) of the '150 patent. Beyond that assertion, the only additional discussion in the letter of any specific claims is with respect to claim 30, as follows:

For instance, claim 30 of the '150 patent recites an electronic payment system such as the one offered by PayPal. In that claim, PayPal would correspond to the agent mechanism. PayPal's customers access their respective account information and authorize payments using a secret password which they share with PayPal ("each customer mechanism sharing a respective secret with the agent mechanism"). PayPal users request payment by making a request to the agent (PayPal). The payment request identifies the customer (PayPal uses the customer's e-mail as a customer identifier) and requests payment of a specific amount from the customer to another entity (which may or may not be a PayPal customer). PayPal (the agent) cannot determine whether the payment request was made based on any customer/payee interaction (so the PayPal payment request is "indistinguishable from a communication which was generated solely by the customer without any customer/merchant interaction"). PayPal then issues a payment message based on the payment request from the PayPal user, the user's password and other information (such as the user's account balance) which the agent knows.

The letter also alleges that we are inducing infringement by providing our service on auction sites such as eBay. CertCo's counsel demands in the letter that we cease and desist from alleged further infringement and account to CertCo for damages resulting from our offering of allegedly infringing services.

A patent's claims define the scope of the invention covered by the patent. In order to assert its patent against us, CertCo must prove that our service infringes at least one claim of its patent. In order to prove direct infringement of any single claim, CertCo must prove that all of the elements of the claim, or their equivalent, are performed by our service. If any element of a claim is not performed, literally or equivalently, by our service, our service cannot infringe the claim.

In analyzing CertCo's patent, we have noted that all of the patent's claims have as an element that a system send an "authenticated" or "verifiable" "payment advice message." But our service does not send either "authenticated" or "verifiable" "payment advice messages." For this reason, among other reasons that may exist, we believe that we do not infringe CertCo's patent, and that CertCo's assertions are without merit.

Despite our belief that our service does not infringe CertCo's patent, we cannot assure you that we will prevail against CertCo in its lawsuit alleging infringement of its '150 patent. Even if we prevail, the litigation could be time consuming and expensive to defend and could affect our business materially and adversely. If any portions of our service were found to be infringing the patent, and if we were

unwilling or unable to obtain a license on terms acceptable to CertCo, then we would likely be unable to continue to offer those portions of our service found to be infringing. We could also then be required to pay damages for past infringing use, possibly CertCo's attorneys' fees, and possibly treble damages. This could have a material adverse effect on our business prospects, financial condition, and results of operations.

Additionally, CertCo could ask the court to issue a preliminary injunction against some or all of our services at any time before trial. If the court issued a preliminary injunction, we would be unable to continue to offer those portions of our service enjoined by the court. This also could have a material adverse effect on our business prospects, financial condition and results of operations.

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 most 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 many 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 and courts will agree with our interpretations. We initially contacted regulatory authorities in the 31 states, including the District of Columbia, 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. Eight 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 transmitter of money abroad. After discussions with the California Department of Financial Institutions, we filed a new application in November 2001. While our application is pending, we have agreed to suspend money transfer payments, but not payments for goods or services, from U.S. accounts to international accounts in the eleven countries where international customers can make electronic funds transfer withdrawals to their local bank accounts. In the nine months ended September 30, 2001, such payments constituted less than 0.5% of our total payment dollar volume.

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 Financial Anti-Terrorism 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 have made new or further inquiries or are preparing to file applications for money transmitter licenses in Arizona, Colorado, Connecticut, Idaho, Louisiana,

Massachusetts, Minnesota, North Carolina, Texas and Vermont. On February 6, 2002, Louisiana regulatory authorities said that they will not grant a money transmitter license to us, however, until they have determined the separate issue of whether our service constitutes an unauthorized banking business under Louisiana law.

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 PayPal. 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 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 have established relationships with four banks under which PayPal places customer funds outside of the Money Market Reserve Fund into bank accounts, and thus we do not have discretion in the management of customer funds.

In response to our contacts with state regulatory authorities in the summer of 2000 regarding the applicability of money transmitter laws, and our application in California in July 2000 for a money transmitter license, regulatory authorities in New York and Louisiana stated their view that the ability of our customers to leave amounts on account with us for future transfer represented the conduct of a banking business, and authorities in California and Idaho questioned whether we were engaged in a banking business. We received written communications to this effect from these authorities in the summer of 2000 and, in the case of Idaho, in January 2001. Because we are not licensed as a bank, we are not permitted to engage in a banking business. In an effort to address these states' concerns, we have taken three principal steps:

•: as described above, we changed our user agreement and the management of our customer's funds so that we act as the agent for the customer in placing their money in bank accounts, rather than acting as the holder of our customers' funds;
•: we are seeking an advisory opinion from the FDIC to the effect that we are not taking deposits; and
•: we have added the PayPal Money Market Reserve Fund option for users who choose to carry balances.

We have written reply letters with supporting legal analysis to these states. We have not received any written communications from these states on banking issues since their original written communication other than requests for copies of materials mentioned in our letters. We have been in recent contact with the staffs of each of these regulatory authorities. Other than in their initial correspondence, none of these authorities have taken or threatened regulatory action against us for engaging in an unauthorized banking business. However, California, New York and Louisiana have indicated that they are continuing to review our analysis and are also awaiting action by the FDIC on

our opinion request. We cannot provide any assurance that the steps we have taken will be sufficient to address these states' concerns.

If we were found to be subject to and in violation of any banking laws or regulations, we could be subject to liability, which in some states may include high fines for each day of non compliance, 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.

International

We offer our product to customers with a 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 criminal activities or funds intended for use in 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 documented, 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 activities. 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.

The FinCEN regulations 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. We have filed for registration with the Treasury Department and have commenced filing suspicious activity reports. During the three months ended September 30, 2001, 0.1% of our transactions and 6.5% of the volume of payments we processed 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 confirm 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 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 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, although we are currently waiving the fee. The 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 registered broker-dealer that is named on our website to formally offer 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 registered 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 registered broker-dealer, notwithstanding our use of an independent registered broker-dealer, we might not be able to offer our customers the PayPal Money Market Reserve Fund and we could be subject to criminal and civil penalties and adverse publicity. Regulatory authorities in Idaho believe that we are subject to registration in Idaho as a broker-dealer because we offer our customers the opportunity to invest in shares of the PayPal Money Market Reserve Fund through our website. As a result, we may not be able to offer this option to our customers residing in Idaho and may be subject to penalties.

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 December 31, 2001, we had 618 full-time employees: 198 at our Palo Alto, California corporate headquarters, 418 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 second 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 December 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	43	Senior Vice President, International
John D. Muller	40	General Counsel
John C. Dean(1)	54	Director
Timothy M. Hurd(1)	32	Director
John A. Malloy(1)	42	Director
Shailesh J. Mehta(2)	52	Director
Michael J. Moritz(2)	47	Director
Elon R. Musk(2)	30	Director

(1): Member of the compensation committee.
(2): Member of the audit 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. Ms. Imbach has announced her intention to leave the company in April 2002.

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

John C. Dean has served as a director since December 2001. Mr. Dean currently serves as chairman of the boards of directors of Silicon Valley Bancshares and Silicon Valley Bank. Mr. Dean served as chief executive officer of Silicon Valley Bank from 1993 until April 2001. Prior to joining Silicon Valley Bank, Mr. Dean was chief executive officer of Pacific First Bank, First Interstate Bank of Washington, First Interstate Bank of Oklahoma, and First Interstate System Inc. Mr. Dean is an advisor to or director of several U.S. and foreign venture capital firms and technology companies. Mr. Dean received a B.A. in Economics from the College of The Holy Cross in 1969 and an M.B.A. from The Wharton School of the University of Pennsylvania in 1974.

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 served as the CEO of Providian Financial Corporation from 1989 until November 2001 and served as the chairman of the board of directors of Providian Financial Corporation from May 1988 to October 2001. 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.

Several of our non-employee directors were initially appointed to the board of directors in connection with investments in PayPal by the entities they serve. Michael J. Moritz's appointment to the board of directors in August 1999 was a condition to the obligation of entities affiliated with Sequoia Capital to complete their investment in our Series A Preferred Stock; John A. Malloy's appointment to our board of directors in March 2000 was a condition to the obligation of Confinity, Inc. to complete their merger with us; Timothy M. Hurd's appointment to the board of directors in March 2000 was a condition to the obligation of various investors, including Madison Dearborn Partners, to complete their investment in our Series C Preferred Stock; and we agreed to appoint Shailesh J. Mehta to our board of directors in February 2001 as an inducement for Providian Bancorp Services to complete their investment in our Series D Preferred Stock and enter into the credit card alliance agreement with us. We have completed our obligations under these agreements by appointing these individuals to our board of directors. As a result, when each of Messrs. Moritz's, Malloy's, Hurd's and Mehta's term of office expires, or in the event of their resignation or removal, we are not obligated to nominate or re-elect these individuals or any other representatives of their affiliated investors to our board of directors.

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 2003;
•: Class II, whose term will expire at the annual meeting of stockholders to be held in 2004; and
•: Class III, whose term will expire at the annual meeting of stockholders to be held in 2005.

Upon the closing of this offering, Class I shall consist of Timothy M. Hurd and Shailesh J. Mehta; Class II shall consist of John C. Dean, John A. Malloy and Michael J. Moritz; and Class III shall consist of Peter A. Thiel, Max R. Levchin and Elon R. Musk. 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. Dean, Hurd and Malloy.

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. In December 2001, we granted options to purchase 50,000 shares at $6.00 per share to both Messrs. Mehta and Dean. In January 2002, we granted options to purchase 50,000 shares at $12.00 per share to each of Messrs. Hurd, Malloy, Moritz and Musk. These option grants vest monthly over three years.

Executive Compensation

The following table sets forth all compensation paid by us during the fiscal years ended December 31, 2000 and 2001 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 years ended December 31, 2000 and 2001. 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

						Long-Term Compensation
		Annual Compensation				Long-Term Compensation
Name and Principal Position		Annual Compensation				Restricted Stock Awards(7)(8)		Securities Underlying Options	All Other Compensation
Name and Principal Position	Year	Salary		Bonus		Restricted Stock Awards(7)(8)		Securities Underlying Options	All Other Compensation
Peter A. Thiel, Chief Executive Officer and President(1)	2000 2001	$ $	147,084 208,333		— —	$	— 0	— —		— —
Max R. Levchin, Chief Technology Officer	2000 2001	$ $	153,125 178,167		— —		— —	— 450,000		— —
David O. Sacks Executive Vice President, Product	2001	$	160,000	$	10,000		—	—		—
Reid G. Hoffman, Executive Vice President, Business Development(2)	2000 2001	$ $	147,694 159,000	$	— 10,000		— —	353,614 300,000		— —
Roelof F. Botha Chief Financial Officer	2001	$	162,612		—		—	25,000		—
Todd R. Pearson, Senior Vice President, Financial Services(3)	2000 2001	$ $	110,493 147,001	$	35,000 —		— —	75,000 25,000		— —
Bill H. Harris, former Chief Executive Officer(4)	2000	$	78,125		—		—	—		—
Elon R. Musk, former Chief Executive Officer(5)	2000	$	163,825		—		—	—		—
H. David Johnson, former Chief Financial Officer(6)	2000 2001	$ $	153,594 100,818		— —		— —	— —	$	— 75,000

(1): Mr. Thiel has served as our Chief Executive Officer and President since September 2000.
(2): Mr. Hoffman's options granted in 2001 were cancelled in connection with his participation in the liquidity program described in "Certain Relationships and Related Party Transactions—Other Transactions."
(3): Mr. Pearson received a hiring bonus of $35,000 in 2000 and receives an annual medical allowance of $6,000.
(4): Mr. Harris served as our Chief Executive Officer from December 1999 to May 2000.
(5): Mr. Musk served as our Chief Executive Officer from May 2000 through September 2000.
(6): 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, and received a payment of $75,000 in connection with his termination of employment.
(7): We issued 1,125,000 shares of restricted stock to Mr. Thiel in 2001. Mr. Thiel's shares will be released from our repurchase option in equal amounts over the 48 month period beginning January 1, 2001. We have the right to repurchase Mr. Thiel's unvested shares in the event of termination of Mr. Thiel's employment.
(8): The total number of restricted shares, including shares held as a result of early exercise of options, held by each named executive officer and subject to our repurchase option as of the end of the 2001 fiscal year, and the aggregate value of those shares at such time less any consideration paid for them, was as follows: Mr. Thiel, 1,221,076 shares valued at $6,324,609; Mr. Levchin, 822,138 shares valued at $4,392,084; Mr. Sacks, 222,619 shares valued at $1,149,962; Mr. Hoffman, 14,733 shares valued at $84,025; Mr. Botha, 36,984 shares valued at $177,524; and Mr. Pearson, 67,189 shares valued at $322,508.

Option Grants in Last Fiscal Year

The following table sets forth information regarding stock options we granted during the fiscal year ended December 31, 2001 to the named executive officers. We granted options to purchase common stock equal to a total of 3,066,926 shares during 2001. Potential realizable values are net of exercise price before taxes, and are based on the assumption that our common stock appreciates at the annual rate shown, compounded annually, from the date of grant until the expiration of the ten-year term. These numbers are calculated based on SEC requirements and do not reflect our projection or estimate of future stock price growth.

	Individual Grants
		Percent of Total Options Granted to Employees During the Fiscal Year Ended December 31, 2001					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	450,000	14.67	%	$	1.20	10/16/2011	$	339,603	$	860,621
David O. Sacks	—	—			—	—		—
Reid G. Hoffman	300,000	9.78	%	$	1.20	2/13/2011	$	226,402	$	573,747
Roelof F. Botha	25,000	.82	%	$	1.20	2/13/2011	$	18,867	$	47,812
Todd R. Pearson	25,000	.82	%	$	1.20	2/13/2011	$	18,867	$	47,812
Bill H. Harris	—	—			—	—		—		—
Elon R. Musk	—	—			—	—		—		—
H. David Johnson	—	—			—	—		—		—

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, 2001 and on unexercised options to purchase our common stock granted to the named executive officers and held by them as of December 31, 2001.

				Number of Securities Underlying Unexercised Options at December 31, 2001		Value of Unexercised In-The-Money Options at December 31, 2001(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	450,000	$	0	—	—	—		—
David O. Sacks	225,000	$	0	—	—	—		—
Reid G. Hoffman	—		—	—	—	—		—
Roelof F. Botha	84,893	$	0	—	36,457	—	$	192,513
Todd R. Pearson	100,000	$	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, 2001. 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, 2001 of $6.00 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 Relationships and Related Party 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 Relationships and Related Party 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, which was approved by our stockholders in December 2001. 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

In October 2001, we adopted a 2001 Employee Stock Purchase Plan, which was approved by our stockholders in December 2001. 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.

Board Committees

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

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 at a per share price of $3.00 for an aggregate purchase price of $10,000,000. These shares will convert into 833,333 shares of our common stock upon the consummation of this offering. Shailesh J. Mehta, the former chief executive officer 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. We extended 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 were pledged as collateral for the repayment of the loan. The loan has a term of four years, with interest compounding annually, and is not 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 5,051,627, 24,247,842 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 Partners(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. These shares will convert into 606,196 shares of our common stock upon the consummation of this offering.
(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. beneficially owns 8.9% of our outstanding capital stock prior to this offering. These shares will convert into 4,462,279 shares of our common stock upon the consummation of 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 beneficially own 6.4% of our outstanding capital stock prior to this offering. These shares will convert into 2,100,639 shares of our common stock upon the consummation of 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)	36,300,000	—	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 300,000 shares purchased by members of Mr. Musk's family. Mr. Musk beneficially owns 13.2% of our outstanding stock prior to this offering. Mr. Musk has sold some of these shares and the remaining shares will convert into 5,314,393 shares of our common stock upon the consummation of this offering. See "—Other Transactions."
(2): These shares will convert into 1,590,909 shares of our common stock upon the consummation of this offering. 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. Entities affiliated with Sequoia Capital beneficially own 9.9% of our outstanding stock prior to this offering.
(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 May 2000. We have repurchased some of these shares from Mr. Harris and the remaining shares will convert into 546,875 shares of our common stock upon the consummation of this offering. See "—Other Transactions."
(4): These shares will convert into 2,727,273 shares of our common stock upon the consummation of this offering. 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., and 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. Entitles affiliated with Madison Dearborn Partners beneficially own 5.1% of our outstanding stock prior to this offering.
(5): These shares will convert into 90,909 shares of our common stock upon the consummation of this offering. 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. beneficially owns 8.9% of our outstanding capital stock prior to this offering.
(6): These shares will convert into 45,455 shares of our common stock upon the consummation of this offering. 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 beneficially own 6.4% of our outstanding capital stock prior to this offering.

(7): Mr. Mehta, a director of PayPal, is the former chief executive officer of Providian Financial Corporation, the parent company of Providian Bancorp Services. These shares will convert into 833,333 shares of our common stock upon the consummation of this offering.

In August 1999, various entities affiliated with Sequoia Capital purchased 15,000,000 shares of Series A Preferred Stock at a per share price of $0.33 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. These shares will convert into 3,750,000 shares of our common stock upon the consummation of this offering.

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, these shares of Class A Stock will automatically convert into 1,125,000 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 share, 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. These shares will convert into 254,303 and 1,271,515 shares of our common stock, respectively, upon the consummation of this offering.

Other Transactions

In the nine months ended September 30, 2001, our officers, directors and affiliates engaged in a total of 479 payment transactions using PayPal, with a total payment dollar volume of $241,739, representing less than .01% of our total number of transactions and less than .02% of the total payment volume processed by PayPal in that period. When conducting PayPal transactions, officers, directors and affiliates are subject to the same terms as other customers and do not receive any discount on fees or other preferential treatment.

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 $0.13 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 $0.13 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, at an interest rate of 5.02% per annum, 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 389,881 common shares and 150,000 preferred 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 in the following amounts and had shares purchased by us on the terms described above: David O. Sacks ($450,000), Reid G. Hoffman ($500,000), Roelof F. Botha ($112,500), Jack R. Selby ($240,000), James E. Templeton ($240,000), Sarah B. Imbach ($108,372), Todd R. Pearson ($120,000), and Sandeep Lal ($120,000). In addition, H. David Johnson, our former Chief Financial Officer, participated in the program with a $240,000 loan and subsequent repurchase.

In April 2000, we assumed a loan of $70,000 at an interest rate of 9% per annum 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. These shares will convert into 252,582 shares of our common stock upon the consummation of this offering.

In June 1999, we issued and sold to Kimbal Musk 300,000 shares of our Series A Preferred Stock at a per share price of $0.33 for aggregate consideration of $100,000. These shares will convert into 75,000 shares of our common stock upon the consummation of this offering. 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. The "Executive Compensation" and "Principal Stockholders" tables reflect options granted as of December 31, 2001. On January 4, 2002, we granted options to purchase 75,000 shares of our common stock to Reid G. Hoffman at an exercise price of $6.00 per share, vesting monthly over one year. On January 18, 2002, we granted options to Mr. Hoffman to purchase an additional 75,000 shares of our common stock at an exercise price of $12.00 per share, vesting monthly over one year. We granted the following number of options to purchase shares of our common stock to the following executive officers, each at an exercise price of $12.00 per share: Peter A. Thiel—625,000, Max R. Levchin—625,000, David O. Sacks—200,118, Roelof F. Botha—54,159, Jack R. Selby—67,337, James E. Templeton—74,303, Todd R. Pearson—38,058, and John D. Muller—42,679. These options vest on a delayed basis, primarily in 2004 and 2005, subject to the officer's continued employment, with the exception of the options granted to Messrs. Thiel and Levchin, which vest monthly from January 1, 2003 to June 30, 2004. We also granted the following additional number of options to the following executive officers on the Company's standard vesting schedule, 1/4 after one year, and 1/48 per month thereafter: David O. Sacks—125,000, Roelof F. Botha—125,000, and John D. Muller—25,000.

Also on January 18, 2002, we granted options to purchase shares of our common stock to the following non-employee directors at an exercise price of $12.00 per share, vesting monthly over three years: Timothy M. Hurd—50,000, John A. Malloy—50,000, Michael J. Moritz—50,000 and Elon R. Musk—50,000.

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 December 31, 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 54,432,452 shares of common stock outstanding as of December 31, 2001 and 59,832,452 shares of common stock outstanding after the completion of this offering which, in each case, includes 3,683,562 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 December 31, 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	5.1	%	4.6	%
Max R. Levchin(2)	1,738,167	3.2	%	2.9	%
David O. Sacks(3)	376,549	*		*
Reid G. Hoffman(4)	307,403	*		*
Roelof F. Botha(5)	115,625	*		*
Todd R. Pearson(6)	90,000	*		*
Bill H. Harris	703,125	1.3	%	1.2	%
H. David Johnson	169,844	*		*
Entities Affiliated with Sequoia Capital(7) 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025	5,340,908	9.8	%	8.9	%
Nokia Ventures, L.P. 545 Middlefield Road, Suite 210 Menlo Park, CA 94025	4,807,491	8.8	%	8.0	%

Entities Affiliated with Clearstone Venture Partners(8) 2500 Sand Hill Road, Suite 205 Menlo Park, CA 94025	3,417,606	6.3	%	5.7	%
Entities Affiliated with Madison Dearborn Partners(9) Three First National Plaza, Suite 3800 Chicago, IL 60602	2,727,271	5.1	%	4.6	%
Elon R. Musk(10)	7,101,656	13.0	%	11.9	%
Michael J. Moritz(11)	5,340,908	9.8	%	8.9	%
John A. Malloy(12)	4,807,491	8.8	%	8.0	%
Timothy M. Hurd(13)	2,727,271	5.0	%	4.6	%
Shailesh J. Mehta(14)	883,333	1.6	%	1.5	%
John C. Dean	50,000	*		*
All directors, officers and key employees as a group (19 persons)	27,863,646	50.7	%	46.2	%

*: Less than 1%.
(1): Includes 1,059,697 shares of restricted stock subject to repurchase as of March 1, 2002. 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. Mr. Thiel expects to transfer 1,468,125 of his shares to PT PPI LLC. Mr. Thiel would remain the beneficial owner of the shares transferred to this entity. On January 18, 2002, subsequent to the date of the table, we granted Mr. Thiel an option to purchase 625,000 shares of our common stock.
(2): Includes 633,134 shares of restricted stock subject to repurchase as of March 1, 2002, in addition to a stock option grant for 450,000 shares vesting over 4 years. On January 18, 2002, subsequent to the date of the table, we granted Mr. Levchin an option to purchase 625,000 shares of our common stock.
(3): Includes 206,928 shares of restricted stock subject to repurchase as of March 1, 2002. On January 18, 2002, subsequent to the date of the table, we granted Mr. Sacks an option to purchase 325,118 shares of our common stock. In January 2002, Mr. Sacks transferred his shares to DS PPI LLC. Mr. Sacks remains the beneficial owner of the shares transferred to this entity.
(4): On January 14, 2002 and January 18, 2002, subsequent to the date of the table, we granted Mr. Hoffman options to purchase an aggregate of 150,000 shares of our common stock.
(5): Includes 28,644 shares of restricted stock subject to repurchase as of March 1, 2002. Includes 40,107 outstanding options exercisable within 60 days of December 31, 2001. On January 18, 2002, subsequent to the date of the table, we granted Mr. Botha an option to purchase 179,159 shares of our common stock.
(6): Includes 57,814 shares of restricted stock subject to repurchase as of March 1, 2002. On January 18, 2002, subsequent to the date of the table, we granted Mr. Pearson an option to purchase 38,058 shares of our common stock.
(7): 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.

(8): 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.
(9): 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.
(10): On January 18, 2002, subsequent to the date of the table, we granted Mr. Musk an option to purchase 50,000 shares of our common stock.
(11): Consists of the shares listed in footnote 7 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. On January 18, 2002, subsequent to the date of the table, we granted Mr. Moritz an option to purchase 50,000 shares of our common stock.
(12): 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. On January 18, 2002, subsequent to the date of the table, we granted Mr. Malloy an option to purchase 50,000 shares of our common stock.
(13): Consists of the shares listed in footnote 9 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. On January 18, 2002, subsequent to the date of the table, we granted Mr. Hurd an option to purchase 50,000 shares of our common stock.
(14): Includes 833,333 shares of common stock held of record by Providian Bancorp Services. Mr. Mehta is the former chief executive officer 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 10,000,000 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 December 31, 2001, and assuming the conversion of all outstanding preferred stock into common stock upon the closing of this offering, there were 54,432,452 shares of common stock outstanding held by 534 stockholders and options outstanding to purchase 2,336,478 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 10,000,000 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 41,545,487 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 59,832,452 shares of common stock, including the issuance of 5,400,000 shares of common stock offered by us and no exercise of options outstanding after December 31, 2001. The shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, without giving effect to lock-up agreements signed by certain purchasers of shares sold in the directed shares program.

All of the remaining 54,432,452 shares of common stock were issued and sold by us in reliance on exemptions from the registration requirements of the Securities Act. Generally, these shares will be subject to lock-up agreements or other restrictions, described below, on the date of this prospectus. As a result of the contractual restrictions described below and the provisions of Rules 144, 144(k) and 701, the restricted shares will be available for sale in the public market as follows:

Relevant Dates	Approximate Number of Shares Eligible for Future Sale	Comment
On the date of this prospectus	5,090,448	Freely tradeable shares sold in this offering and shares saleable under Rule 144(k)
180 days after the date of this prospectus	53,474,401	All shares subject to 180 day lock-up agreements or other restrictions released; shares saleable under Rules 144, 144(k) and 701
Thereafter	1,267,603	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 598,000 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, "144(k) shares" may be sold immediately upon the completion of this offering, subject to the provisions of the lock-up agreements described below. 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 41,545,487 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 December 31, 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 December 31, 2001, there were a total of 2,336,478 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

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. Additionally, some of our stockholders are otherwise contractually obligated to refrain from disposing of or hedging any shares of our common stock or any securities convertible into or exchangeable for our common stock.

UNDERWRITING

Salomon Smith Barney Inc., Bear, Stearns & Co. Inc., William Blair & Company, L.L.C., SunTrust Capital Markets, Inc. and Friedman Billings Ramsey & Co., Inc. 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.
William Blair & Company, L.L.C.
SunTrust Capital Markets, Inc.
Friedman Billings Ramsey & Co., Inc.


	Total	5,400,000

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 810,000 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. Approximately one-third of these shares, or 5% of the shares in this offering, will be subject to a 90 day 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, 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-3
	Consolidated balance sheets at December 31, 1999 and 2000, at September 30, 2001 and pro forma at September 30, 2001 (unaudited)	F-4
	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-5
	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-6
	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-8
	Notes to consolidated financial statements	F-10
	Unaudited pro forma combined financial statements for the year ended December 31, 2000	F-39
Confinity, Inc. (a development stage company)
	Report of PricewaterhouseCoopers LLP, independent accountants	F-41
	Balance sheets at December 31, 1998 and 1999, and at March 30, 2000 (unaudited)	F-42
	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-43
	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-44
	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-45
	Notes to financial statements	F-46

F-1

(This page intentionally left blank)

F-2

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of mandatorily redeemable convertible preferred stock and stockholders' 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.

/s/ PricewaterhouseCoopers LLP

San Francisco, California
November 5, 2001, except as to
the third paragraph of note 1,
which is as of December 14, 2001

F-3

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
Long-term 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, 173,421 shares issued and outstanding at December 31, 1999 and 2000 and September 30, 2001, respectively.				15,791			241,641			279,224		$	—
Commitments and contingencies (Note 17)
Stockholders' equity (deficit):
Common stock, par value $0.001: 300,000 shares authorized; 4,396, 9,328 and 10,459 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			54
Additional paid in capital				3,754			69,825			101,176			380,356
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	)		(186,648	)		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-4

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 and other fees		$	—		$	8,476		$	1,051		$	61,377
Interest on funds held for others			—			2,046			967			3,018
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
Customer service and operations(1)			230			15,754			10,097			21,962
Product development(1)			483			4,419			3,060			6,334
Selling, general and administrative(1)			3,691			34,950			27,357			16,782
Stock-based compensation			354			5,825			4,707			20,959
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	)

Basic and diluted net loss per share		$	(12.09	)	$	(52.47	)	$	(46.46	)	$	(14.46	)

Shares used in calculating basic and diluted net loss per share			382			3,230			2,747			6,265

Pro forma basic and diluted net loss per share (unaudited)		$	(0.60	)	$	(5.38	)	$	(4.55	)	$	(1.90	)

Shares used in calculating pro forma basic and diluted net loss per share (unaudited)			7,714			31,513			28,054			47,804

(1) Amounts exclude stock-based compensation as follows:
Customer service and operations		$	66		$	213		$	129		$	1,486
Product development			138			915			292			6,215
Selling, general and administrative			150			4,697			4,286			13,258

	Total	$	354		$	5,825		$	4,707		$	20,959

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)

		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		—			—		6,006			6			3,032			(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	)		(3	)		(67	)		—			—			—			(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		—			—		1,009			1			138			—			(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		—			—		(1,615	)		(1	)		(3,088	)		1,920			—			—			(1,169	)
Exercise of stock options		—			—		175			—			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-6

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	(150	)		(450	)	(390	)		—			(4,686	)		—			5,272			—			586
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	173,421		$	279,224		10,459		$	10		$	101,176		$	(21,145	)	$	(1,953	)	$	(264,736	)	$	(186,648	)

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

F-7

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
		Non-cash 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	)
			Due to customers		—			82,786			67,523			57,207
			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 provided by (used in) operating activities		(4,137	)		(27,504	)		(12,023	)		33,698

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
	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			148,947			136,368			35,700

			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.

F-8

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.

F-9

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 $3.02, $13.12, $11.62 and $3.62 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 cash (outflows)/inflows from operations of $(4.1) million, $(27.5) million and $33.7 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. The Company faces a rolling window of uncertainty in their loss reserving which is inherently narrow in its range. Customers typically have up to 90 days to file transaction disputes (e.g., charge-backs or Regulation E disputes). Consequently, the time between loss reserving and realization

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is short. 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 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.

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Cash and cash equivalents

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

Investment securities

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

Funds receivable and funds payable

Funds receivable and payable arise due to the time taken to clear transactions through external payment networks. When a customer funds their account using their bank account or credit card, or withdraws money to their bank account or through a debit card transaction, there is a clearing period before the cash is received or sent by PayPal, usually two or three days. Hence, these funds are treated as a receivable or payable until the cash is settled.

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.

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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 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.

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Due to customers

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

Stock-based compensation

The Company accounts for non-cash 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 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 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 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 period from March 8, 1999 to December 31, 1999, 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 March 8, 1999

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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 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.

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Customer acquisition costs

At times, the Company has paid an acquisition cost ranging from $5 to $10 to each customer opening a new PayPal account and an additional $5 to $10 to those customers who refer another new account holder to the Company. The amounts paid are not dependent on whether the customer generates revenue for the Company. These amounts are deposited into the customer's account after certain requirements are met. During the years ended December 31, 1999 and 2000 and the 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

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

Recent accounting pronouncements

Business Combinations

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

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

Goodwill and Other Intangibles

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

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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.

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. 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, X.com merged with Confinity, Inc., (a development stage company) which developed the PayPal product. Under the terms of the agreement, as part of the purchase price paid, X.com 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, as part of this consideration, X.com assumed Confinity's options and warrants outstanding into options and warrants to purchase X.com's common and Series CC preferred stock. X.com was the surviving entity in the merger as it had the majority of the outstanding voting interest and the fully diluted interest in the Company immediately following the merger. The former stockholders of Confinity owned approximately 46.5% of the total outstanding voting interest of the Company immediately following the merger. X.com formally changed its name to PayPal, Inc. in February 2001.

The merger has been accounted for under the purchase accounting method. In accordance with APB 16, the cost to acquire Confinity was allocated among the identifiable tangible and intangible assets acquired and liabilities assumed based on the fair market value at the date of acquisition. The fair value of the stock consideration paid, was based upon an arms-length third party equity round that closed concurrently with the acquisition. In accordance with APB 16, the Company determined the fair value of each series of securities issued in the acquisition. The fair values were determined using a valuation model which valued each series by assessing its characteristics, such as liquidation values, with reference to the most recent financing with a third party. For this purpose, the Company used as a reference its Series C preferred stock financing, which closed in March 2000 with total proceeds of $100.0 million at a price of $2.75 per share.

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The following table shows the allocation of the purchase price of $129.7 million:

Net liabilities assumed	$	(1.6	)
Goodwill		123.6
Purchased technology		0.6
Customer base		6.3
Assembled workforce		0.8

Total	$	129.7

The excess of the purchase price over the fair value of net assets acquired totaled $123.6 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	$	(10.80	)	$	(41.79	)

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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

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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.

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

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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.

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

F-23

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 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
Non-cash 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

F-24

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	4,902		485		7,280
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	173,421	$	236,999	$	279,224

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-25

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-26

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 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-27

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 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 1,009,000 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.

F-28

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.

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, 389,881 common shares and 150,000 of Series AA Preferred 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. The Company 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.

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

F-29

grant. Such options are exercisable at prices established at the date of grant, and have a term not to exceed ten years. Options granted under the Plan are exercisable according to the terms of each option; however, in the event of a change in control or merger as defined in the Plan, 12 months of options shall immediately become vested and exercisable in full. Options granted generally vest at a rate of 25% of the option shares upon the optionee's completion of one year of service measured from the vesting commencement date. The balance will vest in equal successive monthly installments of ¹/48 of the total grant upon the optionee's completion of each of the next 36 months of service. If an option holder ceases to be employed by the Company, exercisable and vested options held at the date of termination may be exercised within the earlier of three months and termination of the option. Options 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 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 stock-based compensation expense.

F-30

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-31

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	$	(12.09	)	$	(52.47	)	$	(14.46	)

	Pro forma	$	(12.15	)	$	(52.55	)	$	(14.51	)

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 40,413 shares of preferred stock at an exercise price of $0.60 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-32

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-33

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

See Note 22 "Subsequent Events."

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.

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

F-34

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 (Note 10)		—			—			—			(1,350	)

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

Denominator
	Weighted average common shares		2,808			7,867			7,467			9,747
	Weighted average unvested common shares subject to repurchase		(2,426	)		(4,637	)		(4,720	)		(3,482	)

Denominator for basic and diluted calculation			382			3,230			2,747			6,265

Basic and diluted net loss per share		$	(12.09	)	$	(52.47	)	$	(46.46	)	$	(14.46	)

F-35

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		11,239	39,172	38,152	43,355
	Stock options to purchase common stock		430	3,203	2,521	2,061
	Warrrants to purchase mandatorily redeemable convertible preferred stock and common stock		135	135	135	143
	Unvested common shares subject to repurchase agreements		3,649	4,045	4,714	2,863

		Total	15,453	46,555	45,522	48,422

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-36

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 October 2001, the Company granted options to employees to purchase 587,000 shares of common stock at an exercise price of $1.20 per share. The Company has recorded non-cash deferred stock-based compensation of $6.5 million representing 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.

As of November 30, 2001, the Company terminated the agreement with Chase Merchant Services, the Company's credit card transaction processor. In November 2001, Chase Merchant Services notified the Company that it intends to hold an additional $12 million in reserve for an indefinite period of time, which it deems necessary to cover its liability for charge-backs. Accordingly, in December 2001, the Company's restricted cash has been increased by $12 million.

The Company is required to keep a minimum of $10.0 million on account with Wells Fargo in order to obtain Wells Fargo's ACH processing services. Until December 2001, this requirement was met by holding sufficient customer funds as agent in a pooled account at Wells Fargo. The requirement is now met by pledging securities owned by PayPal and held in a brokerage account at Wells Fargo. These securities will be accounted for as restricted long-term securities.

22. SUBSEQUENT EVENTS (UNAUDITED)

In December 2001, the Company granted options to purchase 370,000 shares of common stock at an exercise price of $6.00 per share. In January 2002 the Company granted options to purchase 75,000 and 4,120,597 shares of common stock at exercise prices of $6.00 and $12.00, respectively. The Company will record non-cash deferred stock-based compensation of $7.2 million, representing 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 periods of the respective grants.

F-37

Legal Matters

Tumbleweed Communications Corp.

On January 22, 2002, the Company received a letter from Tumbleweed Communications Corp. The letter states that Tumbleweed is the owner of two U.S. patents: U.S. Patent Number 5,790,790, entitled "Electronic Document Delivery System in Which Notification of Said Electronic Document is Sent to a Recipient Thereof," and U.S. Patent Number 6,192,407, entitled "Private, Trackable URLs For Directed Document Delivery." The letter also states that "[Tumbleweed's] understanding of [PayPal's] online payment product leads [Tumbleweed] to believe that [we] require a license under the '790 and '407 patents."

The Company believes that Tumbleweed's assertions are without merit. The Company also believes that its service does not infringe the patents and that it therefore does not require a license.

Despite the Company belief that its service does not infringe either patent, the Company cannot provide assurance that it would prevail if Tumbleweed were to sue the Company for infringement of either patent. If any portions of the PayPal service were found to be infringing either patent, and if the Company was unwilling or unable to obtain a license on terms acceptable to Tumbleweed, then the Company would likely be unable to continue to offer those portions of the service found to be infringing. The Company could also then be required to pay damages for past infringing use, possibly Tumbleweed's attorneys' fees, and possibly treble damages. This could have a material adverse effect on the Company's business prospects, financial condition, and results of operations.

CertCo, Inc.

On February 5, 2002, the Company learned that CertCo, Inc. filed a lawsuit on February 4, 2002 for patent infringement against us in the United States District Court for the District of Delaware.

The complaint alleges that the Company is "directly infringing, contributing to the infringement of, or inducing others to infringe" CertCo's U.S. Patent Number 6,029,150 ("the '150 patent," entitled "Payment and Transactions in Electronic Commerce System"), "by making, using, offering to sell, selling or inducing others to use [our] electronic payment and transaction system...in the United States...." The complaint additionally alleges that the Company's alleged infringement "has been and continues to be deliberate and willful,...entitling CertCo to enhanced damages and reasonable attorneys' fees." The complaint further alleges that CertCo will suffer "irreparable injury" unless the Company's "infringing conduct is preliminarily and permanently enjoined." The complaint includes a demand for a jury trial.

The complaint requests the following relief from the Court: (a) a permanent injunction against the Company's alleged infringement; (b) an award of damages for alleged past infringement, including pre- and post-judgment interest; (c) a judgment that the Company willfully infringed the patent, warranting a trebling of any awarded damages; (d) a judgment that this is an exceptional case, warranting an award to CertCo of its reasonable attorneys' fees; and (e) an award of CertCo's costs.

Prior to CertCo's filing of this lawsuit, on February 2, 2002, the Company received a letter from counsel for CertCo. The letter states that CertCo is the owner of the '150 patent. The letter further states that CertCo's counsel has analyzed PayPal's service and determined that it infringes one or more claims (including claims 18, 27, 30 and 32) of the '150 patent.

F-38

The letter also alleges that the Company is inducing infringement by providing its service on auction sites such as eBay. CertCo's counsel demands in the letter that the Company cease and desist from alleged further infringement and account to CertCo for damages resulting from the offering of allegedly infringing services.

The Company believes that CertCo's assertions are without merit. Based on the Company's review of the claims but without independent confirmation of the merits of its position by counsel, the Company believes that its service does not infringe the patent because, among other reasons, PayPal's service does not send an "authenticated" or "verifiable" "payment advice message" to either the customer or the merchant, as required by the patent's claims.

Despite the Company's belief that its service does not infringe CertCo's patent, the Company cannot provide assurance that it will prevail against CertCo in its lawsuit alleging infringement of its '150 patent. If any portions of the PayPal service were found to be infringing the patent, and if the Company was unwilling or unable to obtain a license on terms acceptable to CertCo, then the Company would likely be unable to continue to offer those portions of the service found to be infringing. The Company could also then be required to pay damages for past infringing use, possibly CertCo's attorneys' fees, and possibly treble damages. This could have a material adverse effect on the Company's business prospects, financial condition, and results of operations.

F-39

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, X.com merged with Confinity, Inc, a development stage company, which developed the PayPal product. Under the terms of the merger agreement, as part of the purchase price paid, X.com 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, as part of this consideration, X.com 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 X.com's common and Series CC preferred stock, respectively. X.com was the surviving entity as it had the majority of the outstanding voting interest and the fully diluted interest immediately following the merger. The former stockholders of Confinity own 46.5% of the total outstanding voting interest of the Company following the merger. X.com formally changed its name to PayPal, Inc. in February 2001. The purchase price of $129.7 million was allocated among the identifiable tangible and intangible assets acquired and liabilities assumed based on the fair market value of those assets as the date of acquisition. The intangible assets are being amortized using the straight-line method over a two-year period.

The following table shows the allocation of the purchase price of $129.7 million:

Net liabilities assumed	$	(1.6	)
Goodwill		123.6
Purchased technology		0.6
Customer base		6.3
Assembled workforce		0.8

Total	$	129.7

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-40

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
		Customer service and operations(1)			15,754,338			406,513			—			16,160,851
		Product development(1)			4,419,162			619,598			—			5,038,760
		Selling, general and administrative(1)			34,949,756			12,166,986			—			47,116,742
		Stock-based compensation			5,824,592			373,338			—			6,197,930
		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	)

Net loss per share
	Basic and diluted			$	(52.47	)							$	(41.79	)

Shares used in calculating Basic and diluted loss per share					3,230,433									4,823,516	(B)

Proforma net loss per share Basic and diluted (unaudited)				$	(5.38	)							$	(6.09	)

Shares used in calculating proforma basic and diluted net loss per share (unaudited)					31,513,524									33,106,607	(B)

(1) Amounts exclude stock-based compensation as follows:
Customer service and operations				$	213,171		$	91,594		$	—		$	304,765
Product development					915,030			139,606			—			1,054,636
Selling, general and administrative					4,696,799			142,138			—			4,838,937

	Total			$	5,825,000		$	373,338		$	—		$	6,198,338

(A): Reflects pro forma amortization of the $131,323,614 in intangible assets acquired in the merger for the period from January 1, 2000 through March 29, 2000.
(B): Assumes that the shares issued as consideration for the merger were issued on January 1, 2000.

F-41

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-42

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-43

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
Customer service and operations(1)			—		181,408			406,513			587,921
Product development(1)			—		550,700			619,598			1,170,298
Selling, general and administrative(1)			—		1,824,237			12,166,986			13,991,223
Stock-based compensation			—		174,717			373,338			548,055
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				$	(0.42	)	$	(2.08	)

Shares used in calculating basic and diluted net loss per share					6,291,280			7,533,600

(1) Amounts exclude stock-based compensation as follows:
Customer service and operations		$	—	$	26,964		$	91,594		$	118,558
Product development			—		81,856			139,606			221,462
Selling, general and administrative			—		65,897			142,138			208,035

	Total	$	—	$	174,717		$	373,338		$	548,055

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

F-44

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-45

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
		Non-cash 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	)
		Due to customers			—		253,933			11,190,545			11,444,478
		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 (used in) operating activities		7		(2,198,091	)		(12,645,931	)		(14,844,015	)

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
	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		5,420,376			11,090,711			16,611,086
			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			—

Cash and cash equivalents at end of period				$	100,007	$	2,362,257		$	—		$	—

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.

F-46

CONFINITY, INC.

(a development stage company)

NOTES TO THE FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Confinity, Inc. (the "Company") was incorporated in California on December 3, 1998 under the name FieldLink, Inc. On March 23, 1999, the Company's name was changed to Confinity, Inc.

Through the Company's PayPal product users can send money to anyone with an email address. PayPal is available through devices capable of sending email including computers, Palm organizers and other wireless devices.

As the company activities have consisted primarily of providing free of charge, a product for sending money securely through email and no significant revenue have been generated, the Company is classified as a development stage entity as of March 30, 2000.

On March 1, 2000 the Company agreed to merge with X.com Corporation. Under the terms of the agreement Confinity shareholders received approximately 2.02 shares of X.com stock for each share of Confinity stock. Immediately following the transaction the shareholders of Confinity owned approximately 50% of the combined company. The transaction was completed on March 30, 2000.

Interim financial information

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

Use of estimates in the preparation of financial statements

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

Fair value of financial instruments

The carrying amount of the Company's financial instruments, which include cash equivalents, investment securities and receivables, approximated fair value at December 31, 1998 and 1999.

Comprehensive income

The Company classifies items of other comprehensive income by their nature in the financial statements and displays the accumulated other comprehensive income separately from retained earnings in the equity section of the balance sheet. As of December 31, 1999, the Company had no such items.

F-47

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

Non-cash deferred stock-based compensation

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

2. STOCKHOLDER NOTES RECEIVABLE

In 1999 the Company accepted a full recourse note from an officer in connection with the issuance of common stock. Under the terms of the note, interest of 8.0% is compounded semiannually and added to the principal balance. The notes and accrued interest are due 3 years from the issuance of the

F-49

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.

F-50

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
Non-cash 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-51

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-52

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 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-53

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-54

$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.

F-55

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.

13. NET LOSS PER SHARE

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

F-56

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

		December 3, 1998 (inception) to December 31, 1998		Year ended December 31, 1999			Three months ended March 30, 2000
Numerator
	Net loss	$	7	$	(2,663,335	)	$	(15,633,447	)

Denominator
	Weighted average common shares		—		17,129,092			19,885,244
Weighted average unvested common shares subject to repurchase			—		(10,837,812	)		(12,351,644	)

Denominator for basic and diluted calculation			—		6,291,280			7,533,600

Basic and diluted net loss per share			—	$	(0.42	)	$	(2.08	)

			December 3, 1998 (inception) to December 31, 1998	Year ended December 31, 1999	Three months ended March 30, 2000
Effect of common equivalent shares:
	Mandatorily redeemable convertible preferred stock upon conversion to common stock		—	14,500,000	23,666,664
	Stock options to purchase common stock		—
	Warrants to purchase mandatorily redeemable convertible preferred stock and common stock			20,000	5,019,999
	Unvested common shares subject to repurchase agreements		—	12,690,184	15,402,407

		Total	—	27,210,184	44,089,070

F-57

5,400,000 Shares

PayPal, Inc.

Common Stock

P R O S P E C T U S

, 2002

Salomon Smith Barney

Bear, Stearns & Co. Inc.

William Blair & Company

SunTrust Robinson Humphrey

Friedman Billings Ramsey

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		$	21,665
NASD filing fee			9,194
Nasdaq National Market application fee			95,000
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			111,641

	Total	$	2,000,000

Item 14. Indemnification of Directors and Officers.

Section 102 of the Delaware General Corporation 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. In all cases except (5) and (13) below, the share numbers and dollar amounts shown do not reflect the reverse stock split effected in December 2001.

(1) In February 1999, Confinity, Inc. issued and sold an aggregate of 2,500,000 shares of its Series A Preferred Stock to Thiel Capital International and other institutional and accredited 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 Elon R. Musk, Kimbal Musk, other institutional and accredited investors and service providers 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 Nokia Ventures L.P., other institutional and accredited investors and certain existing stockholders of Confinity, Inc. 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 entities affiliated with Sequoia Capital, Bill H. Harris and other accredited 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.

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(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 entities affiliated with Clearstone Venture Partners, Nokia Ventures L.P. and other institutional and accredited investors, including certain existing stockholders of Confinity, Inc., at a per share price of $1.20 and granted to certain of the investors warrants to purchase 5,000,001 shares of its Series C Preferred Stock at an exercise price of $2.40 per share, for an aggregate consideration of $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 entities affiliated with Madison Dearborn Capital Partners, Elon R. Musk, entities affiliated with Sequoia Capital, Nokia Ventures L.P., entities affiliated with Clearstone Venture Partners and other institutional and accredited 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 Elon R. Musk, Providian Bancorp Services and other institutional and accredited 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 through January 31, 2002, 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 and from our 2001 Stock Plan at exercise prices from $1.20 to $12.00. Of the options granted, 6,492,331 remain outstanding, 3,357,001 shares of common stock have been purchased pursuant to exercises of stock options and 27,784 shares have been cancelled and returned to the 1999 Stock Plan and 2001 Stock Plan option pools as of January 31, 2002. In January 2002, we granted options to purchase 75,000 shares of our common stock at an exercise price of $6.00 per share and 4,120,597 shares of our common stock at an exercise price of $12.00 per share. 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

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such transactions. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.

There were no underwriters employed in connection with any of the transactions set forth in this Item 15.

Item 16. Exhibits and Financial Statement Schedules.

(a): Exhibits.

Exhibit Number		Description of Document
1.1	**	Form of Underwriting Agreement
2.1	**	Agreement and Plan of Merger dated as of March 1, 2000 by and between the registrant, Confinity, Inc. and Confinity Acquisition Corp.
3.1	**	Form of Amended and Restated Certificate of Incorporation of the registrant to be in effect upon closing of this offering
3.2	**	Bylaws of the registrant to be in effect upon closing of this offering
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		Reserved

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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
10.23	†	Merchant Agreement, dated November 14, 2001, between the registrant, Electronic Payment Exchange, Inc., and The Bancorp.com Bank
10.24	†	Merchant Agreement, dated November 14, 2001, between the registrant, Electronic Payment Exchange, Inc., Certegy Card Services, Inc., and First Union National Bank
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

**: 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 February 7, 2002.

		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)	February 7, 2002
* Roelof F. Botha	Chief Financial Officer (Principal Financial and Accounting Officer)	February 7, 2002
* Max R. Levchin	Director	February 7, 2002
* John C. Dean	Director	February 7, 2002
* Timothy M. Hurd	Director	February 7, 2002
* John A. Malloy	Director	February 7, 2002
* Shailesh J. Mehta	Director	February 7, 2002
* Michael J. Moritz	Director	February 7, 2002
* Elon R. Musk	Director	February 7, 2002


*By:		/s/ JOHN D. MULLER John D. Muller 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 to be in effect upon closing of this offering
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		Reserved
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
10.23	†	Merchant Agreement, dated November 14, 2001, between the registrant, Electronic Payment Exchange, Inc., and The Bancorp.com Bank
10.24	†	Merchant Agreement, dated November 14, 2001, between the registrant, Electronic Payment Exchange, Inc., Certegy Card Services, Inc., and First Union National Bank
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

**: Previously filed.
†: Confidential treatment requested.

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TABLE OF CONTENTS
PROSPECTUS SUMMARY
PayPal, Inc.
Summary Risks
Company Information
The Offering
Summary Consolidated Financial Information
Recent Developments
RISK FACTORS
Risks Related To Our Business
Risks Related to This Offering
PUBLICITY REGARDING US
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-5.1 3 a2068352zex-5_1.htm EXHIBIT 5.1 Prepared by MERRILL CORPORATION
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EXHIBIT 5.1

BOSTON CHICAGO FRANKFURT HAMBURG				Latham & Watkins ATTORNEYS AT LAW www.lw.com				NEW YORK NORTHERN VIRGINIA ORANGE COUNTY PARIS
HONG KONG LONDON LOS ANGELES MOSCOW NEW JERSEY								SAN DIEGO SAN FRANCISCO SILICON VALLEY SINGAPORE TOKYO WASHINGTON, D.C.

January 31, 2002

PayPal, Inc.
1840 Embarcadero Road
Palo Alto, CA 94303

Re:

Registration Statement No. 333-70438; up to 6,210,000 shares of common stock, par value $0.001 per share

Ladies and Gentlemen:

In connection with the registration of up to 6,210,000 shares (including up to 810,000 shares subject to the underwriters' over-allotment option) of common stock of PayPal, Inc., a Delaware corporation (the "Company"), par value $0.001 per share (the "Shares"), under the Securities Act of 1933, as amended (the "Act"), by the Company on Form S-1 filed with the Securities and Exchange Commission (the "Commission") on September 28, 2001 (File No. 333-70438), as amended by Amendment No. 1 filed with the Commission on November 7, 2001, Amendment No. 2 filed with the Commission on December 14, 2001, Amendment No. 3 filed with the Commission on December 28, 2001, Amendment No. 4 filed with the Commission on January 18, 2002 and Amendment No. 5 filed with the Commission on January 31, 2002 (collectively, the "Registration Statement"), you have requested our opinion with respect to the matters set forth below.

In our capacity as your special counsel in connection with such registration, we are familiar with the proceedings taken and proposed to be taken by the Company in connection with the authorization, issuance and sale of the Shares, and for the purposes of this opinion, have assumed such proceedings will be timely completed in the manner presently proposed. In addition, we have made such legal and factual examinations and inquiries, including an examination of originals or copies certified or otherwise identified to our satisfaction of such documents, corporate records and instruments, as we have deemed necessary or appropriate for purposes of this opinion.

In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to authentic original documents of all documents submitted to us as copies.

We are opining herein as to the effect on the subject transaction only of the General Corporation Law of the State of Delaware, and we express no opinion with respect to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction or, in the case of Delaware, any other laws, or as to any matters of municipal law or the laws of any local agencies within any state.

Subject to the foregoing, it is our opinion that the Shares have been duly authorized, and, upon issuance, delivery and payment therefor in the manner contemplated by the Registration Statement, will be validly issued, fully paid and nonassessable.

We consent to your filing this opinion as an exhibit to the Registration Statement and to the reference to our firm contained under the heading "Legal Matters."

		Very truly yours,
		/s/ Latham & Watkins

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EXHIBIT 5.1

EX-10.17 4 a2069647zex-10_17.htm EXHIBIT 10.17 Prepared by MERRILL CORPORATION
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EXHIBIT 10.17

Credit Card Alliance Agreement

This Agreement, effective as of February 1, 2001, is between Providian Bancorp Services, a California corporation, with principal offices located in San Francisco, California (together with all its affiliates "Providian"), and X.com Corporation., a Delaware corporation with principal offices located in Palo Alto, California ("PayPal").

Recitals

A. Providian Bancorp Services is an affiliate of Providian National Bank and Providian Bank, each a Card Association member issuing general-purpose credit cards. Providian provides marketing, credit, technology, operations, compliance, audit and other card-related services and support to its card-issuing affiliates and enters into this Agreement for and on their behalf in connection with the Program.;

B. PayPal operates the world's largest Internet-based payment network, providing a secure online payment service to its over six million customers. PayPal operates a World Wide Web site at http://www.paypal.com (the "PayPal Web Site"), that allows users to sign up for or use the PayPal products and services involving its online payment services (collectively, the "PayPal Services");

C. The parties desire to enter into this Agreement so that a PayPal co-branded Card (bearing a PayPal Mark and a Providian Mark) issued by Providian will be the preferred credit card promoted through the PayPal Services, and as such will be afforded by PayPal the "preferred alliance partner" opportunities set forth in this Agreement; and

D. Simultaneously with the execution of this Agreement, Providian has made a $10 million equity investment in PayPal by purchasing Series D preferred stock, and PayPal has agreed that Providian may designate a representative to serve on the PayPal board of directors.

NOW, THEREFORE, in consideration of the mutual obligations, promises and undertakings of the parties contained in this Agreement, the parties agree as follows:

1. DEFINITIONS

When used in this Agreement, unless the context clearly indicates otherwise:

	1.1		"Account" means a revolving, open-end credit account provided by Providian for PayPal Members and Non-Member Consumers and established pursuant to this Agreement, the features and terms of which are further described in this Agreement.
	1.2		"Account Agreement" means a credit agreement between Providian and a Cardholder with terms and conditions that apply to the Cardholder's Account.
	1.3		"Agreement" means this Credit Card Alliance Agreement, including all attached Exhibits, which are incorporated by this reference, and any amendments, modifications, or supplements to this Agreement.
	1.4		"Applicable Law" means applicable federal, state and local statutes, regulations, regulatory guidelines and judicial or administrative interpretations as well as any rules or requirements established by the applicable Card Association.

[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED.

	1.5		"Applicant" means a consumer who submits an Application or other request for an Account.
	1.6		"Application" means the action or document by which a Member requests and applies to Providian for an Account.
	1.7		"Banner Ad" means any image displayed in the banner space of the PayPal Web Site that is intended to serve as an advertisement for a product or service.
	1.8		"Business Day" means any day other than Saturday, Sunday and any day in which banks in the State of California are authorized or obligated by law to close.
	1.9		"Card" means a credit card issued for an Account pursuant to this Agreement that bears both a Providian Mark and a PayPal Mark.
	1.10		"Card Association" means either or both of MasterCard and Visa, as applicable.
	1.11		"Cardholder" means an individual, residing in the U.S., at or over the age of 18, who applies for, receives and activates an Account with Providian under the Program, including payment of any fee required by Providian in order to open an Account.
	1.12		"Cardholder Data" means all information, whether personally identifiable or in aggregate, that is submitted and/or obtained by Providian about an Account or an Application (whether or not completed), including without limitation, credit information, financial standing and demographic data, and Transaction Data.
	1.13		"Charge-back" means a transaction using the Account that is subsequently reversed pursuant to Card Association rules.
	1.14		"Competing Card Product" means a credit card or charge card, card alliance program or co-branded card program including, without limitation, business cards, marketed, offered or issued by any entity other than Providian or its affiliates to consumers in the United States, but does not include debit cards or lines of credit not tied to credit cards.
	1.15		"Confidential Information" means Providian Confidential Information or PayPal Confidential Information, except that it will not include: (1) information that, at the time of disclosure, is already in the recipient's rightful possession or available to it or its employees from any source having no obligation not to disclose it; (2) information that is or becomes available to the public; (3) information that the recipient receives from another source having no obligation not to disclose it; and (4) information which is independently developed by the recipient without the use of any "Confidential Information" of the other party.
	1.16		"Customer List" means the Members who have entered into a credit agreement with Providian for issuance of a credit card and all associated data, which will be owned by Providian and deemed confidential.
	1.17		"Implementation Date" means the first date on which Members are able to apply for an Account through a hyperlink from the PayPal Web Site to the Providian Web Site.
	1.18		"Interchange Income" means net interchange fees actually received by Providian from Card Associations with respect to charges made by Cardholders using a Card transacted on the PayPal system where PayPal is the Merchant.
	1.19		"Marketing Plan" means the written marketing plan agreed between the parties as provided in Section 2.2 of this Agreement.
	1.20		"MasterCard" means the payment card association MasterCard International Incorporated.

	1.21		"Member" means any individual resident or domiciled within the United States or its territories and possessions that is or becomes registered to utilize the PayPal Services, whether through a private label network or otherwise.
	1.22		"Member List" means the list of all Members who have not affirmatively opted out, indicating their election to be excluded from any product announcements of this type, together with their e-mail addresses, phone numbers, postal addresses, and all associated data held by PayPal, to be provided by PayPal to Providian under Section 4.1 of this Agreement, which shall be owned by PayPal and deemed confidential, but is licensed to Providian for the purposes set forth in this Agreement.
	1.23		"Merchant" means a merchant that accepts credit card payments pursuant to an account with a Card Association merchant acquirer that processes payment card authorizations and payments.
	1.24		"New Payment Products" means debit cards, stored value cards, online person-to-person payment products, online person-to-merchant payment products, digital cash products and other new payment technologies that may become available during the term of this Agreement.
	1.25		"Non-Member Consumer" means an individual that receives an advertisement for the Program on the PayPal Web Site and follows a hyperlink presented on that site to receive more information about the Program, but does not complete the process to become a Member.
	1.26		"PayPal Confidential Information" means all confidential information and documents about PayPal or any of its affiliates, including without limitation, its financial information, products, marketing plans, strategies, customers, processes and procedures, subject to the exceptions set forth in the definition of "Confidential Information."
	1.27		"PayPal Mark" means any design, image, visual representation, logo, service mark, trade dress, trade name, or trademark owned, used or acquired by PayPal now or during the term of this Agreement.
	1.28		"Program" means the program under which Providian and PayPal will solicit Applications for Accounts pursuant to this Agreement.
	1.29		"Providian Confidential Information" means all confidential information and documents about Providian or any of its affiliates, including without limitation, its financial information, products, performance of its products, strategies, marketing plans, performance of its marketing campaigns, customer lists, and Cardholder processes and procedures, subject to the exceptions set forth in the definition of "Confidential Information."
	1.30		"Providian Mark" means any design, image, visual representation, logo, service mark, trade dress, trade name, or trademark owned, used or acquired by Providian now or during the term of this Agreement.
	1.31		"Providian's Marketing Area" means throughout the United States, its territories, and possessions, other than in the State of Wisconsin, as changed from time to time by Providian..
	1.32		"Term" means the term of this Agreement as specified in Section 6 of this Agreement.
	1.33		"Trademark" means any Providian Mark or PayPal Mark.
	1.34		"Visa" means the payment card association Visa U.S.A. Inc.

1.35

"Web" means the World Wide Web.

2. THE PROGRAM

2.1: Offer of Accounts. Providian will offer to Members and to Non-Member Consumers one or more types of Accounts. Providian will have sole and complete responsibility and discretion to add, delete, or amend any of the terms and conditions applicable to Accounts, including but not limited to pricing terms, the right to establish new premium categories and other categories of Cards, and the right to make other changes; provided, however, that Providian shall provide 15 days' advance notice in writing to PayPal of any substantial changes. Any such changes to terms and conditions will be subject to Applicable Law.
2.2: Marketing of the Program. PayPal and Providian will work jointly to develop and market the Program and to solicit Applications from consumers residing in Providian's Marketing Area to enable Providian to establish Accounts and issue Cards. PayPal and Providian will mutually develop and approve all content for the PayPal Web Site to promote the Program, provided however that PayPal will have the right of prior approval of all marketing, advertising or solicitation material to be used in the marketing of the Program; such approval by PayPal will not be unreasonably withheld or delayed beyond a 10 business day review period. PayPal will incorporate all content identified by Providian as required for compliance with Applicable Law or compliance with Providian card marketing standards. Within 30 days of the execution of this Agreement (unless the parties mutually agree on a different timetable), the parties will agree on a written marketing plan specifically describing responsibilities and a timetable for the parties' implementation and marketing efforts under this Agreement (the "Marketing Plan").
2.3: Card Design. Within 30 days of the date of execution of this Agreement, or as otherwise designated in the Marketing Plan, the parties will create mutually acceptable designs for the front and back of the Card, which will include one or more of the PayPal Marks on the front of the Card and one or more of the Providian Marks on the back of the Card and will be subject to Applicable Law. Subject to the foregoing, the PayPal Marks will be in a primary position and the Providian Marks will be in a secondary position on the back of the Card.
2.4: Providian as Sole Owner and Creditor of Accounts. Providian will be the sole and complete owner and creditor of, and PayPal will have no right, title or interest in, the Accounts, the Cards or Cardholder Data. Such ownership will in no way be affected by expiration or termination of the Program. As the creditor, Providian will have sole discretion over the criteria that must be met to qualify for an Account, for a credit line increase or for repricing or other incentives Providian may wish to offer to qualified Cardholders. Without limiting the general nature of the foregoing, Providian will have the right to decline an Application or Card request from any person who already has one or more credit cards or open-end revolving lines of credit with Providian or its affiliates. An Application for an Account can only be approved by Providian, and neither PayPal nor any of its employees may legally bind or otherwise commit Providian to any agreement or arrangement of any kind. Providian will have the exclusive right to collect amounts owed by a Cardholder on an Account and to receive payments from Cardholders. Providian will also have the exclusive right to terminate, block or suspend credit or charge privileges in an Account. Providian will be solely liable for any charge-offs or other credit losses resulting from an uncollectible Account. In compliance with Applicable Law and subject to obtaining the Cardholder's consent if required, Providian will have the right to market to Cardholders other banking products of Providian or its affiliates, and third-party membership programs selected by Providian, and Providian may use e-mail, direct mail (including but not limited to inserts with Cardholders' credit card statements), telemarketing and online advertising on the Providian Web Site and related Web

sites for such marketing efforts as long as Providian provides its customers an opt-out option from these marketing efforts. Providian will be solely responsible for compliance with all Applicable Laws governing such marketing and advertising efforts.

2.5: Providian Non-Exclusivity. Providian and its affiliates will be free to offer credit card alliances, co-branded credit cards or other affiliate programs to other companies, including other Internet-based payment services.

3. ISSUANCE, ADMINISTRATION AND SERVICING OF ACCOUNTS

3.1: Card Offers and Application Evaluation. In accordance with this Agreement, Providian will perform for each type of Account all functions of the issuing bank, including without limitation designing the Application forms, receiving, reviewing and processing Applications for Accounts, providing customer service and otherwise administering and operating the Program and the relationships with Cardholders, evaluating the creditworthiness of each Applicant, establishing credit limits for each Account and issuing Cards to qualified Applicants who accept Providian's offer and pay the applicable fee, if any.
3.2: Account and Card Issuance. Providian will evaluate each Application or request for an Account and will open an Account and issue a Card to each Applicant who is creditworthy according to Providian's credit criteria and standards, who accepts the terms of Providian's offer and who pays the applicable fees, if any, to open an Account. As to each Application or request Providian approves, Providian will establish the credit line it deems appropriate. Providian will have no obligation or liability to PayPal in connection with any credit procedure or decision with respect to an Application, and Providian will have no obligation to advise PayPal of its credit criteria or Providian's decision as to any Application or request for a Card. Providian will use its best efforts, subject to maintaining high customer response rates and in accordance with Providian's privacy policies and applicable law, to provide PayPal with information, both aggregate and specific, regarding Members that opened Accounts. PayPal will not communicate with Applicants about their Application; provided however, that if a Member or Non-Member Consumer who is not a Cardholder contacts PayPal via standard PayPal customer service channels with a question about the Program or how to apply for an Account, then PayPal may communicate with those Members or Non-Member Consumers according to PayPal's standard customer relations policies and will refer them to Providian, in a manner to be mutually determined by the parties, including but not limited to prior review and approval by Providian of any script provided by PayPal to its customer service representatives regarding contacts with Applicants, Members and Non-Member Consumers about the Program.
3.3: Account Agreements. Providian will be solely responsible for, have complete control and discretion over, and bear the cost of production and printing of any Account Agreement. The contractual relationship with respect to each Account will be between Providian and the respective Cardholder.
3.4: Production of Cards. In accordance with Section 2.3, Providian will produce, store, maintain, and emboss plastic stock for each Card.
3.5: Account Administration and Servicing. Providian will be responsible for all Cardholder customer-service and record-retention requirements relating to the processing of Cards and Accounts, including but not limited to Cardholder-initiated calls, Account statements (both on paper and electronic) and online customer service. Providian will bear all costs of administering Accounts, except as otherwise provided under this Agreement. PayPal will not accept payments on Accounts nor accept billing-error notices under the Fair Credit Billing Act (Regulation Z) from Cardholders and instead will promptly forward them to Providian via

first-class mail or, at Providian's request, via overnight courier. If any Cardholder incorrectly makes a check, money order, draft, or other form of payment for an Account payable to the order of PayPal rather than to the order of Providian or its agents, PayPal hereby expressly authorizes Providian to endorse the item on PayPal's behalf and to credit the payment to the appropriate Account. Providian will substantially adhere to the customer performance standards as set forth on Exhibit A. Providian conducts reviews of its corporate wide customer service performance standards and will share these reviews with PayPal on a regular basis. Providian and PayPal will cooperate to develop procedures and a service level agreement ("Service Level Agreement") regarding the referral of Cardholders who contact a party concerning a claim, complaint, dispute or request for information regarding the other party. PayPal will refer to Providian customer service in accordance with such procedures any Cardholders who contact PayPal concerning a claim, complaint, dispute or request for information regarding Providian, Accounts or Cards.

3.6: Cardholder Inquiries Regarding PayPal. Providian will refer to PayPal customer service in accordance with the referral procedures described in Section 3.5 any Cardholders who contact Providian concerning a claim, complaint, dispute or request for information concerning PayPal. PayPal will be responsible for all Cardholder inquiries relating to PayPal as well as all complaints or disputes regarding PayPal; provided that Providian may take any action needed to comply with its obligations to a Cardholder under Regulation Z and other Applicable Laws. In addition, PayPal will provide Providian with any information or documents in its possession reasonably requested by Providian with respect to a Cardholder's dispute concerning Providian, as long as PayPal can release such information or documents in compliance with Applicable Law.
3.7: Credit Risk. As between Providian and PayPal, Providian will bear all risk of credit loss on the Accounts and PayPal will have no responsibility for any such loss.
3.8: Limited License to PayPal Marks. PayPal hereby grants to Providian, subject to compliance with the terms of this Agreement, a limited, royalty-free, exclusive, non-transferable (except as set forth in Section 15.7 below), non-sublicensable right to use, display and reproduce the PayPal Marks in connection with its marketing, promotion and operation of the Program as set forth in this Agreement. Providian will submit to PayPal, for its prior written approval, such approval not to be unreasonably withheld or delayed, samples of each of Providian's uses of the PayPal Marks. Providian will use the PayPal Marks in a manner approved by PayPal. Except as otherwise provided by this Agreement, upon termination of this Agreement, Providian will promptly cease use of the PayPal Marks.
3.9: Legal Compliance. Providian will be responsible for compliance with Applicable Laws with regard to its participation in the Program, its issuance of Cards and its extension of consumer credit, including those Applicable Laws governing billings, consumer credit disclosures, billing error resolution, collections, and any related charges, such as late fees and overlimit fees imposed on Cardholders and Accounts.

4. PAYPAL MARKETING

4.1: PayPal Members List. Within 30 days of the execution of this Agreement or as otherwise specified in the Marketing Plan, PayPal will license to Providian on a non-exclusive basis a list of its Members who in signing up for the PayPal services have not opted out, electing to be excluded from the relevant type of product announcements, together with their e-mail addresses, phone numbers, postal addresses, and all other information that PayPal may legally share with Providian that may be relevant to permit Providian to solicit the PayPal members for the Program on a recurring basis throughout the Term of this Agreement. On a regular

basis, but no less often than once in every 90-day period during the Term of this Agreement, PayPal will provide supplementary information to Providian regarding new Members and changed information regarding existing Members. Providian may not use this list, except for offering Cards through the channels provided by Section 4.2.

4.2

Providian Marketing to PayPal Members. Providian will design all advertising, solicitation and promotional materials with regard to the Program, which shall be subject to PayPal's approval, unless otherwise agreed, which approval may not be unreasonably withheld or delayed beyond a ten-day business day review period. Providian will generally bear all costs of solicitation and fulfillment associated with the Program, except for costs of modification of the PayPal Web Site and direct e-mail solicitations by PayPal associated with the Program, which costs will be borne by PayPal, all unless otherwise agreed. PayPal will be solely authorized to distribute all e-mail solicitations and solely authorized to disseminate web solicitations, in accordance with its Member communication policies, unless the parties mutually agree otherwise. Unless PayPal agrees to exceptions in writing, Providian will only use PayPal's channels for e-mail and web solicitations. Providian will have the right of prior approval of all marketing, advertising or solicitation material for the Program to be used or developed by PayPal (e.g., direct e-mail conducted by PayPal or Banner Site Ads or other materials on the PayPal Web Site associated with the Program), with such approval not to be unreasonably withheld or delayed beyond a 10 business day review period. PayPal will conduct the e-mail direct marketing campaign to its Members of the Program. In connection with PayPal's solicitation by e-mail of its Members, Providian may provide PayPal with such information relevant to credit-worthiness of the Member-solicitees that may be relevant to restricting the solicitation to a subset of Members, and Providian and PayPal agree to cooperate in coordinating such solicitation efforts, in accordance with the Marketing Plan. PayPal agrees to keep all information provided by Providian in accordance with the prior sentence confidential. Also, Providian agrees to keep all information provided by PayPal private, sharing it only as necessary to carry out this Agreement and only to parties bound by confidentiality arrangements at least as strong as this Agreement.

4.3

PayPal Web Site. Within 120 days of the execution of this Agreement, or as otherwise provided in the Marketing Plan, Providian and PayPal will provide a description of the Card on the PayPal Web Site, subject to Providian's reasonable approval, with a hyperlink from the PayPal Web Site that will allow Members to apply to Providian for a Card under the Program, and Providian will provide an application page to permit Applications for Cards and online decisions on the Applications, with such online decisions being provided at a service level at least equivalent to the service level available to Providian's other online credit card acquisition websites.

4.4

Exclusivity.

(a): Providian as Preferred Credit Card. During the Term of this Agreement, including any Renewal Term, Providian will be the exclusive United States credit card or charge card promoted by PayPal in the PayPal registration process on the PayPal Web Site.
(b): Restrictions on Competing Card Products. PayPal will not, without Providian's written consent, (1) sponsor, develop or participate in a Competing Card Product; (2) license or allow others to license PayPal Marks to promote a Competing Card Product; (3) negotiate, discuss or solicit any offer to market or promote a Competing Card Product; or (4) sell, rent or otherwise make available to the issuer of a Competing Card Product any list of Cardholders or any usage and demographic data on individual Cardholders, provided that PayPal will not be restricted from selling, renting or making available lists of its Members, or usage and demographic data on its Members, in a manner that does not identify which Members are Cardholders. Notwithstanding the

provisions set forth in this Section 4.4, PayPal may accept American Express and Discover on the PayPal system and may inform Members accordingly.

(c): Other Web Sites. With respect to Web sites other than the PayPal Web Site that PayPal may acquire, operate or control during the Term or any Renewal Term, where such Web sites do not already have exclusive relations with an organization other than Providian to offer a Competing Card Product, PayPal will provide Providian with a right of first offer prior to negotiating with, or soliciting proposals from, any party other than Providian to promote, advertise or solicit a Competing Card Product on such Web sites. In the event that the parties are unable to complete an agreement on a credit card alliance or co-branding program for such other Web site within 45 days after PayPal notifies Providian that the first offer period has begun, then PayPal will be free to negotiate to promote Competing Card Products through such other Web site.
(d): Co-brand Sites: PayPal will use its best efforts to include Providian as the preferred credit card under the terms of this Agreementin any co-branded website that PayPal develops in partnership. A co-branded site is one that has third-party branding above the fold, and a URL that indicates the joint offering of the PayPal service with the third party. As required by the specific partnership, PayPal may be required either not to offer Card (or other) Products at all, or to support on the co-branded site the partner's choice of credit card.
(e): New Payment Products. Consistent with the parties' strategic banking relationships, with respect to U.S. domestic New Payment Products other than online person-to-person payment products, if PayPal intends to work with a U.S. domestic banking partner to develop or provide such New Payment Products, it will notify Providian of such intent and negotiate in good faith to use Providian as its banking partner for such New Payment Products. If the parties are unable to reach agreement within 30 days of such notice, PayPal will be free to negotiate with other banking partners. With respect to all New Payment Products (including online person-to-person payment products) that PayPal offers to its Members during the Term, PayPal will use its best efforts to ensure that the Card is the system-default and preferred credit card used to purchase or transfer funds into such New Payment Products. PayPal will ensure that promotional materials for the Program are at least equivalent to the promotional materials for any New Payment Products. This provision (e) does not apply to any vendor relationships that PayPal has, or may establish in the future, with banking partners, for use in such services as, and without limitation to, ACH or merchant processing. The provisions of this Section 4.4(e) will apply exclusively to New Payment Products and will not relieve PayPal of any of its other obligations under this Agreement.
(f): Future Line of Credit Product. Providian understands that PayPal has interest in offering to a selected population of Program customers a line of credit product. As and when Providian has developed an improved understanding of the Program customer base, its credit quality and other relevant attributes, Providian will use its best efforts to conduct consumer tests which validate the market for such Line of Credit product and the attendant increased credit risks, if any. Providian agrees to complete this analysis within nine (9) months of the date of the signing of this Agreement, and within that time agrees to provide to PayPal a written determination of whether Providian will make a line of credit product available to the Members as part of this Program. If Providian elects to provide the line of credit, then Providian agrees to begin offering the line of credit within twelve (12) months after the date of the execution of this Agreement. If Providian states in writing to PayPal that Providian will not offer the line of credit product to Members or fails to commence offering it within the time limit set forth in this Section 4.4(f), then

PayPal may work with another issuer to permit that issuer to provide a line of credit product that it may offer to Members, provided that PayPal may actively promote such line of credit only to Members who have been turned down by Providian for a Card under the Program or Members who have been solicited via direct solicitation for a Card at least 4 times and have not pursued such solicitations or have not accepted the Card offers. For purposes of this paragraph, "actively promote" means promotions or marketing where such other line of credit appears alone or more prominently than the other featured financial products. Except as set forth in this Section PayPal will not sponsor, develop, solicit or discuss any line of credit program for Members with any other issuers during the term of this Agreement.

(g): Private Label Service. As and when appropriate, the parties agree to negotiate in good faith over the terms and conditions of a license by PayPal to Providian, on a private label basis, of the PayPal peer-to-peer payment technology on mutually agreed terms. Without Providian's written consent, PayPal will not provide its technology on a private-label basis to any U.S. domestic third party (except pursuant to its current Intuit/Quick Books arrangement and to Microsoft, or to Visa or MasterCard for re-licensing to their members) during the Term without first offering it to Providian under terms at least as favorable. PayPal retains all rights to international versions of its payment service, including private-label offerings, without the right of first offer to Providian. "Private Label" means the use of the PayPal Services under solely a third party brand.

4.5: Limited License to Providian Marks. Providian hereby grants to PayPal a limited, royalty-free, exclusive, non-transferable (except as set forth in Section 15.7 below), non-sublicensable right to use, display and reproduce Providian Marks in connection with PayPal's marketing, promotion and operation of the Program as set forth in this Agreement. PayPal will submit to Providian for its prior written approval, such approval not to be unreasonably withheld or delayed, samples of each of PayPal's uses of Providian Marks, and PayPal will use Providian Marks in a manner approved by Providian. Except as otherwise expressly provided by this Agreement, upon termination of this Agreement, Providian will promptly cease use of Providian Marks.
4.6: Legal Compliance. PayPal will comply with all Applicable Laws regarding its participation in the Program, including those governing advertising, incentive offers and on-line privacy issues and will comply with all Applicable Laws governing the PayPal Services.

5. COMPENSATION

5.1: Interchange Fee. Providian will compensate PayPal for [*] of the Interchange Income it earns for those Cards which transact on the PayPal system (where PayPal is the Merchant). Notwithstanding the foregoing, in circumstances where a PayPal user is also an already existing Providian credit cardholder holding a credit card other than a Card issued under this Program, Providian will not be obligated to reimburse interchange in the amount described in this Section 5.1. Where an existing Providian cardholder uses the PayPal system, Providian will make its best efforts to offer that credit cardholder a second Card under which PayPal would be entitled to the interchange reimbursement formula described in the first sentence of this Section 5.1, so long as the cardholder (i) meets Providian's then-applied policies and standards regarding creditworthiness and eligibility, and (ii) has completed during the previous 180 days at least one payment in a transaction using the PayPal system. Providian will solicit Cards under this provision at least twice yearly, subject to PayPal's approval of the content of any solicitations or marketing materials. All second Cards under this Program offered to existing Providian credit cardholders will be offered on terms and conditions equal to or better than such cardholder's pre-existing credit card.
5.2: Basis Point Fee. Providian will reimburse to PayPal [*] basis points of the net amount of purchase transactions where PayPal is not acting as the Merchant by Cardholders using Cards, when such transactions are posted to an Account that remained in good standing at the end of the previous calendar month and are not, prior to the time of Providian's compensation payment to PayPal: (1) rescinded, (2) the subject of a Charge-back request, (3) reversed through a credit adjustment, or (4) otherwise disputed. Purchase transactions will not include balance transfers, cash advance transactions, the imposition of fees (including annual membership fees and fees for membership products) or transactions categorized as "quasi-cash" transactions under Card Association rules.
5.3: Sunset. Except as provided in Section 6.8 of this Agreement, upon the expiration of this Agreement, or if during the term of this Agreement either party exercises its termination rights pursuant to Section 6 of this Agreement, Providian will cease to pay compensation to PayPal as of the effective date of such expiration or termination; provided that Providian will be responsible for all payments that have accrued up to the date of such expiration or termination.
5.4: Payment Timing. Providian will pay all amounts due to PayPal arising from money received by Providian in a given month within 45 days of the end of that calendar month.

6. TERM; TERMINATION

6.1: Term. Subject to the provisions of this Section 6, the Term will be five (5) years from the date this Agreement is signed.
6.2: Exclusive Negotiation Period. The parties agree to an exclusive negotiation period of 90 days, to commence 90 days before the date the Term terminates, for purposes of discussing the terms and conditions of a renewal or extension of this Agreement.
6.3: Termination for Breach. If either party materially breaches a material term of this Agreement, the non-breaching party may terminate this Agreement by giving notice, as provided in Section 15.5, to the breaching party. This notice will: (a) describe the material breach; and (b) state the party's intention to terminate this Agreement. If the breaching party does not cure or substantially cure its material breach within 30 days after receipt of notice as described in this Section (the "Cure Period"), then the non-breaching party may immediately terminate this Agreement by giving notice at any time following the end of such Cure Period. Neither

party will be held in breach for failure to perform under this Agreement if such failure is due to compliance with Applicable Law.

6.4

Termination for Material Change in Applicable Law. Either party may terminate this Agreement on the effective date of any change in the legal or regulatory requirements applicable to the Program, or in the MasterCard or Visa rules applicable to the Program, that: (a) has a substantial negative impact on the financial burdens or rewards of the terminating party with respect to the Program, which the non-terminating party is unwilling or unable to accommodate; or (b) would render performance of a material obligation of the terminating party hereunder a violation of the Card Association rules, illegal or otherwise subject to legal challenge, unless performance of such material obligation is waived by the non-terminating party. The terminating party will notify the other party of such change within two (2) Business Days of becoming aware of such change.

6.5

Termination for Insolvency. If either Providian or PayPal becomes insolvent in that its liabilities exceed its assets, or is adjudicated insolvent, or takes advantage of or is subject to any insolvency proceeding, or makes an assignment for the benefit of creditors or is subject to bankruptcy receivership, conservatorship or liquidation, then the other party may immediately terminate this Agreement.

6.6

Termination for Improper Activities. Either party may terminate this Agreement upon 15 Business Days' advance written notice to the other party of such intent to terminate if, at any time during the term of this Agreement, the other party is conducting activities that the terminating party determines are materially harmful to relationships with its federal or state supervisory or law enforcement agencies, provided that the terminating party promptly notifies the other party of such activity, provides evidence of such activity, and the other party does not cure such activity to the terminating party's sole and complete satisfaction within 15 Business Days of notification to the terminating party.

6.7

Termination for Failure to Generate Minimum Card Purchase Volume. If, by the dates set forth in Exhibit C, the Program has not resulted in at least the stated percentages for purchase transactions using the Cards set forth in Exhibit C (as calculated in Section 5.1 above, but including transactions where PayPal is the Merchant), then either party may terminate this Agreement by sending thirty (30) days written notice to the other, without giving rise to any damage claim for termination:

6.8

Termination Due to Merger or Sale or Acquisition By Competitor or for Change in PayPal Business Model.

(a): If either party enters into any merger, acquisition or agreement providing for the transfer of control or the sale of all or substantially all of its assets to, then the non-merging party will have the right to terminate this Agreement by providing the merging party with 30 days' advance written notice of such termination. In addition, if PayPal enters into any merger, acquisition or agreement providing for the transfer of control or the sale of all or substantially all of its assets to, or any transaction with, a competitor of Providian identified on Exhibit B or any of its affiliates (a "Competitor") and Providian exercises its right to terminate this Agreement as set forth above then PayPal shall pay Providian damages in the amount of $2 million. If PayPal exercises its right to terminate this Agreement as set forth above then PayPal shall pay Providian damages in the amount based on the duration of the term prior to the termination, as follows: within six months after the Effective Date, PayPal will pay Providian upon termination $5 million; if at least 6 months but less than 12 months after the Effective Date, PayPal will pay Providian upon termination $4 million; if at least 12 months but less than 18 months after the Effective Date, PayPal will pay Providian upon termination $3 million; if at least

18 months, but less than 30 months after the Effective Date, PayPal will pay Providian upon termination $2 million; if at least 30 months, but less than 42 months after the Effective Date, PayPal will pay Providian upon termination $1 million.

(b): A material feature of the Program is the on-going branding of the PayPal Web Site and the implicit endorsement of the PayPal Co-Branded Program Card. Should the PayPal business model be materially altered with the PayPal branding (e.g., through name change due to acquisition or sale, etc.), which subsequently or through time, in Providian's discretion, materially alters the ability to originate accounts within the Program, then Providian may terminate this Agreement on thirty (30) day's notice unless the terms and conditions of all future compensation and or reimbursement arrangements are revised to Providian's satisfaction. If Providian terminates the agreement for this reason, there will be no compensation payment.

6.9

Effects of Expiration or Termination.

(a): Upon termination of this Agreement, Providian will have the right to use the PayPal Marks on Cards issued prior to such termination, on periodic statements and on records of, or (subject to PayPal's prior written approval) on correspondence to, any Cardholder until expiration of the Cards (provided that, if the Agreement terminates for a reason other than (1) breach of this Agreement by PayPal, (2) sale or merger of PayPal, or (3) Section 6.5, Providian will continue to pay PayPal as provided in Section 5 for a period of 1 year from the effective date of expiration or termination of this Agreement), and thereafter Providian will cease to use the PayPal Marks except for identification purposes when necessary on Cardholder service or collection letters. Except as otherwise provided in this Agreement, Providian will not claim any right, title, or interest in or to the PayPal Marks or to any mailing lists provided pursuant to this Agreement. However, Providian may use the PayPal Marks to complete any solicitation that Providian is required by law to complete. PayPal will not cause or attempt to cause the removal of PayPal's identification or PayPal Marks from any Cardholder's Cards, checks or records already existing on the effective date of expiration or termination of this Agreement. Neither party will make or distribute any disparaging or defamatory remarks regarding the other party, its products or services or its performance under this Agreement.
(b): In the event of a termination (including expiration) of this Agreement, the parties will cooperate to develop a joint notice to Cardholders regarding the termination of the Program within 30 days of termination. In the event the termination results from a material breach by either party, the breaching party will bear the cost of developing and distributing such notice to Cardholders and to Members. In the event of a termination for other cause, both parties will bear one- half of the cost of developing and distributing such notice to Cardholders and to Members. If the parties are unable to reach a consensus on the language and format of the notice of termination within 30 days of the expiration or termination of this Agreement, then either party or both parties may communicate the fact of the termination of the Program to Cardholders (but not to Members who are not Cardholders) without stating the reasons for termination, and may describe to Cardholders a replacement credit card program for the Program without stating the reasons for the termination. Notwithstanding the foregoing; (1) if this Agreement is terminated by Providian due to a breach by PayPal, PayPal shall have no right to solicit Cardholders for replacement cards for 24 months (other than through a general solicitation to all Members without targeting the Cardholders) and (2) PayPal will not target-solicit Cardholders to cancel their Accounts and accept another card.
(c): In the event of a termination of this Agreement under Section 6.5, then Providian will have all rights to use any information contained within the Members List for purposes of

credit card solicitation. Providian may keep the Accounts, but must destroy the Members Lists in all other circumstances.

(d): The parties agree that the Member List provided by PayPal to Providian (or to be provided by PayPal to Providian) under this Agreement, constitutes "intellectual property" as that term is defined and used in the Bankruptcy Code, 11 U.S.C. § 101(35A), § 365(n), and that in the event of any bankruptcy of PayPal, Providian would be entitled to use the Member List for the remaining Term notwithstanding any intervening bankruptcy by PayPal or attempt by PayPal to terminate or reject this Agreement under bankruptcy law. Notwithstanding any PayPal bankruptcy, PayPal agrees to continue to provide the Member List information and to provide copies of the Member List information to Providian on a timely basis during the bankruptcy proceeding, and in any event at least every thirty days.

6.10

Survival of Terms of the Agreement. The provisions of Sections 1, 3.5, 3.6, 6.9, 8.1-8.3, 8.6, 9-12, 14 and 15 will survive any termination of this Agreement.

7. COMMUNICATIONS

7.1: Initial Public Announcement. On or before February 9, 2001, the parties agree that they will both approve the wording of a mutually-acceptable press release announcing on or before that date the terms of this Agreement.
7.2: Future Cooperation on Publicity. From and after the date of this Agreement, Providian will work with PayPal as its strategic partner to enhance PayPal's relationships with the Card Associations, specifically Visa. Press releases describing the parties' strategic relationships and the Program will not be made without the mutual written consent of each party, which will not unreasonably be withheld or delayed. Without the written permission of Providian, PayPal will not discuss any specifics of this Agreement or the Program with issuers of other cards, except to disclose to those issuers that exclusivity provisions in this Agreement prohibit its discussion of or entering into agreements for offerings of Competing Card Products. Without prior written approval from Providian, PayPal will not generally communicate with PayPal customers, potential customers, or outside parties (other than PayPal's attorneys, auditors, financial advisors and other agents or contractors with a reason to know within a confidential relationship or confidentiality agreement) about the Program or Providian's investment in PayPal. Providian will not unreasonably withhold consent or delay consent beyond a ten business-day period.
7.3: Foreign Jurisdictions. PayPal acknowledges and agrees that Providian has a presence in the United Kingdom and Argentina and may in the future, through international banking relationships or otherwise, obtain a banking license in other foreign jurisdictions. The parties agree to confer, negotiate, and cooperate in good faith to explore other opportunities to work together to exploit joint opportunities in those jurisdictions.
7.4: E-Mail Policy. PayPal has an interest in avoiding overly aggressive e-mail solicitation of its Members. If PayPal substantially changes its policy of e-mail solicitations approximately three times per quarter, it shall inform Providian in advance. This provision does not constitute an obligation for PayPal either to expand its policy, nor expands nor changes the provisions in Section 4.2 on type or frequency of marketing that Providian may conduct to Members.

8. COLLECTION AND USE OF CARDHOLDER DATA

8.1: Providian Ownership of Data. Providian will collect, maintain, and be the sole owner of all Cardholder Data. Providian may use the Cardholder Data in a manner consistent with this Agreement for any legitimate business purpose and in compliance with Applicable Law,

provided that no personally identifiable Cardholder Data will be disclosed or transferred by Providian to any third party (other than credit reporting agencies or as otherwise necessary or appropriate for administration, servicing and funding of the Accounts) without the Cardholder's prior express consent.

8.2: PayPal Ownership of Data. Notwithstanding Section 8.1, PayPal will be the sole and complete owner of all Member Lists and all proprietary information pertaining to Members provided by PayPal to Providian pursuant to this Agreement and of all information provided to PayPal by a Member in PayPal's registration process. Providian may only use the data provided by PayPal to make the Card offering and other products mutually agreed upon. Providian may not use the data for any marketing, other than provided by the channels in this agreement. Furthermore, Providian may not sell, lease, or otherwise disclose this data to any third party. Finally, Providian may not sell or market directly to Members who have been declined for a Card, or sell, lease or otherwise disclose their information to any third party. However, Providian may maintain and use information obtained by Providian as a result of an Account relationship by a Member or a Non-Member Consumer, and may use other Member list information as provided in Section 6.8(c) above. The provisions of this Section 8.2 will not prohibit Providian from using information relating to Members which Providian acquires by other means.
8.3: Privacy Policies. Providian and PayPal will maintain and publish on their Web sites in a prominent manner privacy policies in compliance with Applicable Law. Each party will provide the other with notice of any changes to their privacy policy promptly after the effective date of such changes.

9. CONFIDENTIALITY

9.1: Duty to Keep Proprietary Information Confidential. Providian Confidential Information is a confidential and valuable proprietary asset of Providian. PayPal Confidential Information is a confidential and valuable proprietary asset of PayPal. Each party, the Card Associations and each party's respective employees, agents, third-party subcontractors and independent contractors ("Representatives") will treat as strictly confidential all Confidential Information and proprietary third-party products that the other party provides in connection with the Program. They will not disclose or duplicate Confidential Information or third-party products to anyone not having a need to know in connection with the performance of this Agreement and will not use them except in connection with the performance of this Agreement. Each party will take all steps needed to ensure that its Representatives preserve this confidentiality.
9.2: Duty To Keep This Agreement Confidential; Press Release. PayPal and Providian will maintain the confidentiality of this Agreement and its terms and will not disclose this Agreement or its terms to any third party; provided, however, that either party may disclose this Agreement or its terms: (a) as required by Applicable Law, (b) to its subsidiaries, affiliates and parent companies, (c) to its accountants, legal advisors and financial advisors, and (d) either party may issue a press release about the Program upon execution of this Agreement if the press release has the written approval of the other party, which will not be unreasonably withheld. Providian and PayPal will consult with each other prior to any conference with the press or other news media relating to the Program or this Agreement, including consultation with regard to responses to inquiries from the press or other media about the Program or this Agreement.
9.3: Duty to Notify Other Party of Any Mandated Disclosure. Each party will notify the other immediately if it receives a subpoena or other legal process referring to Confidential Information or documents containing Confidential Information and will cooperate in any

effort the owner of such Confidential Information has to comply with or to contest the legal process.

10. INDEMNIFICATION AND LIMITATION OF LIABILITY

	10.1		By PayPal. PayPal will defend, indemnify and hold harmless Providian against each claim, action, damage (including reasonable attorney fees and costs) or liability resulting from or relating to PayPal's breach of its obligations or of any terms (including, but not limited to, any representation or warranty) under this Agreement; and any acts or omissions of PayPal, its directors, officers, agents or employees in connection with PayPal's participation in the Program.
	10.2		By Providian. Providian will defend, indemnify and hold harmless PayPal against each claim, action, damage (including reasonable attorney fees and costs) or liability resulting from or relating to Providian's breach of its obligations or of any term (including, but not limited to, any representation or warranty) under this Agreement; and any acts or omissions of Providian, its directors, officers, agents or employees in connection with Providian's participation in the Program.
	10.3		Liability Limitation. Notwithstanding any other terms in this Agreement, neither party will be entitled to recover special, incidental, punitive, or consequential damages, whether based on breach of contract, tort (including negligence), or otherwise, and whether or not that party has been advised of the possibility of such damage, except that this limitation will not apply to damages resulting from either party's breach of its confidentiality obligations under Section 9, its representation and warranty under Section 14.1(f), or (h), or 14.2(f) or (g), or its obligations under Section 15.1.

11. ARBITRATION

Any controversy or claim between the parties arising from or relating to this Agreement, or the breach of this Agreement, will be settled by arbitration to take place in San Francisco, California or another mutually agreed upon site, in accordance with the Commercial Arbitration Rules of the American Arbitration Association by a panel of three arbitrators selected in accordance with those rules. Judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction and will be deemed Confidential Information.

12. FORCE MAJEURE

Neither party will be responsible, nor incur any liability to the other for any failure to comply with the terms of this Agreement due to causes beyond its control, including, without limitation, fire, storm, flood, acts of war, accident, insurrection, sabotage, labor disputes, computer system malfunction, acts of God, acts of third parties, acts of federal, state or local government or judicial action ("force majeure"), provided that such actions that do not substantially hinder or prohibit performance will not excuse performance. If an event of force majeure is caused by a labor dispute, computer system malfunction, or government or judicial action arising from the business operations of a party and continues for 60 days or more, the other party may terminate this Agreement in accordance with Section 6.

13. CONDITIONS PRECEDENT

Before either party will be obligated to implement the Program, all required approvals of any organization must be obtained including, without limitation, a Card Association.

14. REPRESENTATIONS AND WARRANTIES

In addition to any representation or warranties made by the parties in other Sections of this Agreement, the parties make the following representations and warranties:

	14.1		By PayPal. PayPal represents, warrants and covenants to Providian that: (a) it is duly incorporated, validly existing and in good standing under the laws of Delaware; (b) it is duly authorized to enter into this Agreement and to perform its obligations hereunder; (c) the making of this Agreement does not knowingly violate any law or regulation to which PayPal is subject or any agreement or contract to which it is a party or by which it is bound; (d) it will comply with all Applicable Laws (including but not limited to Card Association rules and regulations which pertain to Card Association non-members who are affinity partners of a Card Association member) in performing its obligations under this Agreement; (e) to the extent required by law, it has applied for licenses and, following receipt of such licenses, will continue to be duly qualified and licensed and has made and will continue to make all registrations to do business necessary to carry out its obligations under this Agreement under the law of each state in which the Program will be offered; (f) it owns and is authorized to use the PayPal Marks, and the use of the PayPal Marks does not violate the intellectual property rights of any third party; (g) its entering into and performing this Agreement does not violate any other Agreements by which it is bound.
	14.2		By Providian. Providian represents and warrants to PayPal that: (a) it is a duly organized national banking association, validly existing under the laws of the United States of America; (b) at the time of the execution of this Agreement, it is duly authorized to enter into this Agreement and to perform its obligations hereunder, (c) the making of this Agreement does not knowingly violate any law or regulation to which Providian is subject or any agreement or contract to which it is a party or by which it is bound; (d) it will comply with all Applicable Laws in performing its obligations under this Agreement; (e) to the extent required by law, it is and will continue to be duly qualified and licensed and has made and will continue to make all registrations to do business and to carry out its obligations under this Agreement under the law of each state in which the Program will be offered; (f) it is authorized to use Providian Marks, and the use of Providian Marks does not violate the intellectual property rights of any third party; and (g) its entering into and performing this Agreement does not violate any other Agreements by which it is bound.

15. GENERAL PROVISIONS

	15.1		Parties are Independent Contractors. PayPal and Providian are independent contractors, and neither is the partner, employee or agent of the other. Neither PayPal nor Providian will have the power or authority to pledge, bind or obligate the other with respect to any third party.
	15.2		Amendments. Except as otherwise provided in this Agreement, any amendment or modification to this Agreement or its Appendices must be in writing signed by both parties.
	15.3		Headings. The Section headings in this Agreement are for convenience only and are in no way to be construed as enlarging or limiting the scope of the particular terms to which they refer.
	15.4		Waiver. The waiver or failure of either party to exercise any right provided for in this Agreement will not be deemed a waiver of any further or future right under this Agreement.

15.5

Notices. All notices and other communications between the parties will be written and will be deemed given if delivered personally or by overnight courier service, or facsimile transmission or 2 days after mailing by registered or certified mail, return receipt requested, to a party at its address set forth below, or to such other address as a party may designate at a later time, as follows:

		Providian:		Bill Buchanan Providian Financial Corporation 123 Mission Street, 8^th Floor San Francisco, CA 94105 FAX: (415) 644-2148
		With a copy to:		Susan Lau Senior Vice President and Associate General Counsel Providian Financial Corporation 201 Mission Street, 28th Floor San Francisco, CA 94105 FAX: (415) 278-6064
		PayPal:		X.Com / PayPal 1840 Embarcadero Road Palo Alto, CA 94303
				Todd Pearson
				FAX: (650) 251-1101
		With a copy to:		John Muller
				Vice President, General Counsel X.Com / PayPal 1840 Embarcadero Road Palo Alto, CA 94303

	15.6		"Writing" to Include Electronic Mail. References to "writing" or "written" in this Agreement will be deemed to include an electronic mail message that is sent using standard Internet protocols and whose receipt is confirmed by the recipient to the sender.
	15.7		Assignment. This Agreement will be binding upon and will inure to the benefit of each party and its successors and assigns; provided that, neither party will assign or transfer its rights under this Agreement by operation of law or otherwise, without the other party's prior written consent which will not be unreasonably withheld, except that either party may assign its rights and obligations to its parent, subsidiary or affiliate, or in the event of reincorporation or reorganization, as long as the assignment does not result in a substantial change to the Program or otherwise cause a breach of this Agreement. Nothing in this Agreement will prohibit Providian from securitizing or participating the Accounts or related receivables in accordance with general banking practices.
	15.8		Third-Party Beneficiaries. It is expressly intended and agreed that there are no third-party beneficiaries to this Agreement.
	15.9		Governing Law. This Agreement will be governed by and interpreted in accordance with California law, without regard to its principles of conflicts of laws.

	15.10		Audit and Inspection. Each party will keep and maintain, in accordance with generally accepted accounting principles consistently applied, accurate books and records related to the Program including all charges, disbursements and expenses made or incurred by each party in the performance of its obligations hereunder. Each party will have the right, upon reasonable notice, to audit, at any time prior to the expiration of 1 year following termination of the Program, the other party's books and records relating to the Program or this Agreement. Such audit will be at the expense of the auditing party. If any such audit indicates a discrepancy, the audited party will promptly make the appropriate adjustments and/or payments, or, in the alternative and at the auditing party's option, the auditing party will deduct or offset such discrepancy. If the discrepancy exceeds 5% of the payments for any given period, the party that benefited from the discrepancy will pay the costs of such audit.
	15.11		Entire Agreement. This Agreement is the final, full and exclusive statement of the agreement between PayPal and Providian with respect to the subject matter set forth here. It supersedes all prior agreements and inducements relating to the subject of this Agreement. No promise or agreement made at or after the execution of this Agreement is binding unless it is written and signed by both parties.
	15.12		Counterparts; Facsimile Signatures. This Agreement may be executed in counterparts and, when fully executed, will be deemed effective on the date first written above without regard to the dates or times on when actually signed. The signed copies of this Agreement may be delivered by telefacsimile, and such facsimile exchange has the same legal effect as delivery of a signed original.

IN WITNESS WHEREOF, the parties, by their duly authorized representatives, have executed this Agreement as of the date first shown above.

		X.COM CORPORATION
		By:	/s/ Todd Pearson
		Name:	Todd Pearson
		Title:	Executive Vice President
		Date:	February 2, 2001
		PROVIDIAN BANCORP SERVICES
		By:	/s/ William Buchanan
		Name:	William Buchanan
		Title:	SVP
		Date:	2/2/01

EXHIBIT A

CUSTOMER PERFORMANCE STANDARDS

Customer Service & Servicing Goals

Providian will be responsible for all on-line and off-line servicing for the Accounts. Whether through Internet services, call center, or customer compliant center, Providian is committed to 100% customer satisfaction when helping customers build, protect and responsibly use credit.

Websites:

•: 95% availability in any 1 week period and 98% availability in any 1 calendar month period.
•: 8 seconds or less average response time for 95% of transactions on a weekly and monthly basis.

Call Center:

•: 90% of calls answered within 60 seconds

(Performance metrics will be sourced from Keynote, external measurement provider)

PayPal would provide Providian with written communication when these goals are not met and Providian will have the indicated time to cure, or substantially cure the standard in question.

Exh. A-1

EXHIBIT B

COMPETITORS PURSUANT TO SECTION 6.7

Providian Competitors

American Express Company

Bank of America Corporation

Bank One Corporation

Barclays Bank plc

Capital One Financial Corp.

Citigroup Inc.

Fleet Boston Corporation

Household International, Inc. (Household Bank LLC)

J.P. Morgan Chase/Chase Manhattan Corp.

MBNA Bank

Morgan Stanley Dean & Witter/Morgan Stanley (Discover and Novus Cards)

Standard Chartered Bank

Wells Fargo & Co.

Exh. B-1

EXHIBIT C

PROGRAM PERFORMANCE HURDLES

Each party may exercise its right to terminate this Agreement according to Section 6.7 if the following performance hurdles, as applicable, are not met.

Year*	If Number of Members Is At Least:	MINIMUM CARD VOLUME Must Be At Least:
1	16.5 million	3%
2	27.3 million	6%
3	38 million	8%
4	49 million	8%

Year*	If Number of Members Is Less Than:	MINIMUM CARD VOLUME Must Be At Least:
1	16.5 million	2%
2	27.3 million	5%
3	38 million	6%
4	49 million	6%

* For purposes of this Exhibit C, Year 1 will commence on the date that the Program website is first available for use by the general public, and each successive Year will commence on the anniversary date of Year 1.

"Minimum Card Volume" means net Card purchase volume generating Interchange Income as described in Section 5.1 of this Agreement, divided by total net credit card purchase volume from all Member transactions in which PayPal is the Merchant.

Minimum Card Volume and Number of Members will be determined as of either: (1) the end of the last month of the Year or (2) the average of the last 3 months, whichever is greater.

Exh. C-1

QuickLinks

EXHIBIT 10.17

Recitals
EXHIBIT A CUSTOMER PERFORMANCE STANDARDS
EXHIBIT B COMPETITORS PURSUANT TO SECTION 6.7 Providian Competitors
EXHIBIT C PROGRAM PERFORMANCE HURDLES
EX-10.18 5 a2069647zex-10_18.htm EXHIBIT 10.18 Prepared by MERRILL CORPORATION
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EXHIBIT 10.18

SERVICE AGREEMENT

dated September 25, 2000

between

FIRST DATA RESOURCES INC.

and

X.COM CORPORATION

TABLE OF CONTENTS

		Page
Article 1	Definitions and Interpretation	1
Article 2	Services	1
Article 3	Exclusivity, Acquired Portfolios and Merger or Change of Control	3
Article 4	Payment for Services	5
Article 5	Dispute Resolution and Indemnification	7
Article 6	Limitation of Liability	8
Article 7	Disclaimer of Warranties	8
Article 8	Term of Agreement	8
Article 9	Termination	8
Article 10	Confidential Nature of Data	12
Article 11	Representations and Covenants	13
Article 12	Miscellaneous	15

EXHIBITS

Exhibit A		Services/Pricing
Exhibit B		Affiliate Agreement
Exhibit C		Definitions
Exhibit D		Arbitration
Exhibit E		Indemnification
Exhibit F		Interchange Settlement
Exhibit G		Offline Debit Card Performance Criteria
Exhibit H		MasterCard Requirements

SERVICE AGREEMENT

This Service Agreement dated as of September 25, 2000 (the "Effective Date"), is between First Data Resources Inc. ("FDR") and X.com Corporation ("Customer"). References to "Customer" throughout shall include Customer's Affiliates which are receiving the Services.

Recitals

WHEREAS, FDR and Customer wish to enter into this Agreement in order for FDR to provide and for Customer to receive data processing and related services in connection with Customer's Accounts;

NOW THEREFORE, FDR and Customer agree as follows:

Article 1
Definitions and Interpretation

Section 1.1. Definitions. Unless the context otherwise requires, capitalized terms used herein shall have the meanings specified in Exhibit C.

Section 1.2. Interpretation. Each definition in this Agreement includes the singular and the plural and the word "including" means "including but not limited to". References to any statute or regulation means such statute or regulation as amended at the time and includes any successor statute or regulation. The section headings in this Agreement are solely for convenience and shall not be considered in its interpretation. The Exhibits referred to throughout this Agreement are attached hereto and are incorporated herein.

Article 2
Services

Section 2.1. Services. FDR shall make available to and perform for Customer those services described in Exhibit A (the "Services"). Exhibit A and any document or service referred to in Exhibit A shall be subject to periodic revision by FDR to reflect changes (i) to the FDR System or the services provided by FDR and offered generally to FDR customers and (ii) in the specific Services provided to Customer. The Services shall be made available to Customer in the United States to permit processing of Transaction Cards used by Customer's Clients worldwide through the clearing and settlement networks of the Networks, VISA and MasterCard. The offline debit card processing Services shall be performed substantially in accordance with the performance criteria set forth in Exhibit "G".

Section 2.2. Enhancements.

(a) Customer may periodically request customizations, enhancements, additions or modifications (each an "Enhancement") to the FDR System. FDR shall evaluate all such requests and, if terms and conditions can be agreed to (which shall include payment by Customer of FDR's development charges), FDR shall develop and implement each such Enhancement on terms and conditions agreed to by the parties. Timing of any Enhancement is subject to scheduling and prioritization by FDR of FDR's available resources, provided that FDR shall use commercially reasonable efforts to timely respond to Customer's requests and resource requirements. FDR may withhold its consent to an Enhancement which, in FDR's sole discretion, would materially and adversely affect FDR's operations. Any Enhancement shall remain solely the property of FDR and Customer shall acquire no right, claim or interest in the FDR System. Subject to the foregoing, after the expiration or termination of this Agreement, FDR agrees not to exercise any of its intellectual property rights in any Enhancement paid for exclusively by Customer to prevent Customer from directly or indirectly replicating and redeveloping such Enhancement or using the results of such replication and redevelopment efforts, provided that no code, documentation, or specifications to the Enhancement or any other aspect or component of the FDR System is hereby granted or licensed to Customer, by implication or otherwise, and FDR shall be the sole owner of all property rights and intellectual property rights in connection therewith during and after the Term of this Agreement.

(b) Customer understands that it is FDR's practice to provide any Enhancements developed by FDR, whether requested and paid for by its customers or based upon FDR's development and its expense, to its entire customer base. In the event that FDR develops an Enhancement at the request of Customer and the development costs and expenses are paid solely by Customer and FDR's customer base commences to use such after its implementation for Customer, then FDR shall reimburse Customer for the development costs and expenses paid by Customer to FDR as provided for in this Section 2.2(b). In order for Customer to be eligible for reimbursement pursuant to this Section 2.2(b), the Enhancement must (i) require at least one hundred (100) programming hours, and (ii) generate gross revenues from other FDR customers in excess of $1,000,000 within four (4) years of initial implementation. If any such Enhancement meets the reimbursement criteria, at the conclusion of each of Processing Years 1 through 4, FDR will reimburse Customer's development expense, but not to exceed the lesser of Customer's total expenditures or fifty percent (50%) of the gross revenues received from other FDR customers during each such Processing Year for the use of such qualified Enhancement. Additionally, in the event that FDR develops an Enhancement at the request of Customer and the development costs and expenses are paid solely by Customer and give Customer a demonstrable competitive advantage in the debit card issuing marketplace, FDR agrees not to make such Enhancement available to FDR's customer base for six (6) months after such Enhancement is made available to Customer.

Section 2.3. Start-Up.

(a) FDR shall provide, subject to the applicable approvals of MasterCard (including but not limited to the approvals in Exhibit H) and the Networks, for completion of the initial Start-Up within sixty (60) days of execution of this Agreement or at a later date as may be mutually agreed upon by FDR and Customer (the "Scheduled Start-Up Date"). To the extent that FDR and Customer mutually agree, the Scheduled Start-Up Date may be modified from time to time prior to Start-Up.

(b) Customer will (i) use all reasonable resources, including the assignment of adequate personnel to assure timely performance of those functions required of Customer under the Start-Up, and (ii) comply with any reasonable directions of FDR so as to enable Start-Up to be completed on or before the Scheduled Start-Up Date.

(c) FDR will use all reasonable resources, including the assignment of adequate personnel to assure timely performance of those functions required of FDR under the Start-Up so as to enable Start-Up to be completed on or by the Scheduled Start-Up Date.

(d) Provided that FDR has performed its obligations pursuant to this Section 2.3, Customer agrees to pay the initial Start-Up Fee as provided for in Exhibit "A", Section V, Paragraph (e). In addition, each party shall be responsible for and pay all costs and expenses incurred by it in connection with the Start-Up.

Section 2.4. Compliance With Law.

(a) FDR and Customer acknowledge that Customer is subject to a variety of federal, state and local laws, regulations and judicial and administrative decisions and interpretations applicable to its Transaction Card business, including without limitation those pertaining to equal credit opportunity, truth in lending, fair credit billing, fair credit reporting, fair debt collection practices and general consumer protection (the "Legal Requirements"). The parties shall cooperate with each other in resolving issues relating to compliance with the Legal Requirements in accordance with the provisions of this Section 2.4.

(b) Customer is solely responsible for (i) monitoring and interpreting the Legal Requirements, (ii) determining the particular actions, disclosures, formulas, calculations and procedures required for

compliance with the Legal Requirements (whether to be performed by FDR or by Customer) and (iii) maintaining an ongoing program for compliance with the Legal Requirements. In addition, Customer is solely responsible for reviewing and selecting the parameter settings and programming features and options within the FDR System that will apply to Customer's Transaction Card programs, and for determining that its selection of such settings, features and options is consistent with the Legal Requirements and with the terms and conditions of Customer's accounts and disclosures to such Cardholders. In making such determinations, Customer may rely on the written description of such settings, features and options in the User Manuals, customer bulletins and other system documentation provided by FDR to Customer.

(c) FDR is solely responsible for compliance with all laws, regulations and judicial and administrative decisions applicable to FDR as a third party provider of data processing services. FDR will not be responsible for any violation by Customer of a Legal Requirement to the extent such violation occurs as a result of performance by FDR of the Services in accordance with the FDR System documentation, instructions of Customer or written procedures provided by or approved by Customer.

(d) Subject to the terms of Article 10, FDR and Customer shall cooperate with each other in providing information or records in connection with examinations, requests or proceedings of each other's and Sponsor Bank's regulatory authorities.

Section 2.5. Execution by Affiliates. Each of Customer's Affiliates which receives any of the Services shall be required to execute an Affiliate Agreement substantially in the form of Exhibit B hereto. In no event shall FDR be required to perform any of the Services for any such Affiliate prior to the execution of an Affiliate Agreement by such Affiliate. All representations, warranties and covenants set forth in this Agreement shall be deemed given and made by Customer's Affiliate upon execution of an Affiliate Agreement.

Section 2.6. Sponsorship with VISA and/or MasterCard. During the Term of this Agreement, Customer shall conduct its business and make all undertakings reasonable or necessary in order that Customer's Accounts may be eligible for sponsorship by a Sponsor Bank member of the Networks, VISA and/or MasterCard. Customer acknowledges that neither FDR nor the Sponsor Bank shall be required to provide any Service under this Agreement or sponsor the Customer's Accounts to the extent the Service or sponsorship requires or may require actions or undertakings which in the reasonable discretion of FDR or the Sponsor Bank are not permitted by the Networks, VISA and/or MasterCard. During the Term hereof, Customer and FDR shall reasonably cooperate with the other in connection with the Sponsor Bank and any successor Sponsor Bank and other aspects of Customer's Accounts with its Clients, including but not limited to disclosures to Customer's Clients.

Article 3
Exclusivity, Acquired Portfolios and Merger or Change of Control

Section 3.1. Sole and Exclusive Provider. During the Term, FDR shall be the sole and exclusive provider to Customer and its Affiliates of all signature and PIN based Transaction Card processing services for credit card and debit card issuing, and transaction processing, clearing and settlement through the Networks and VISA and MasterCard, and each of Customer and its Affiliates shall neither perform or provide any service similar to such services for itself nor engage any third party to perform or provide any such services. Anything in this Section 3.1 to the contrary notwithstanding, FDR understands that at the time of the execution of this Agreement Customer has issued and is receiving processing services from a third party in connection with certain debit accounts issued pursuant to VISA "BIN" 443105 (the "Excluded BIN"). Nothing in this Section 3.1 shall prevent Customer from maintaining and adding debit card accounts to the Excluded BIN during the Term of this Agreement.

Section 3.2. Acquired FDR Portfolios. If Customer or any of its Affiliates ("Purchaser") Acquires any accounts for which FDR is then providing services similar to the Services (an "FDR Portfolio"),

FDR shall continue to perform the services pursuant to the pre-existing service agreement (the "Existing FDR Agreement") which shall remain in effect through the expiration of its then-current term. On the expiration of the Existing FDR Agreement and transfer of the FDR Portfolio to Customer on the FDR System, the FDR Portfolio shall be processed in accordance with the terms of this Agreement. FDR shall not include the volumes from the FDR Portfolio in any volume based price schedules set forth in Exhibit A until such time as the Existing FDR Agreement expires and there is a transfer of the FDR Portfolio to Customer on the FDR System. Such transfer of the FDR Portfolio shall occur on a mutually agreed upon date. In connection with such transfer, Customer shall bear the costs and expenses of such transfer, at the then-standard hourly rates of FDR plus related material charges.

Section 3.3. Acquired Non-FDR Portfolios.

(a) If Purchaser Acquires any accounts that require services substantially similar to the services for which FDR is the sole and exclusive provider to Customer pursuant to Section 3.1, but for which FDR is not then providing such services (a "Non-FDR Portfolio"), Customer shall use its reasonable best efforts to start-up such Non-FDR Portfolio to the FDR System within six (6) months after the closing of the Acquisition or, if Customer is bound by the terms of an existing agreement to obtain processing services for such portfolio (an "Existing Non-FDR Agreement"), upon the expiration of the then-remaining term of the Existing Non-FDR Agreement, whichever is later. If Purchaser is bound by an Existing Non-FDR Agreement, then, unless otherwise agreed by the parties, the Non-FDR Portfolio shall continue to be processed pursuant to such Existing Non-FDR Agreement through its expiration date. In connection with any such start-up, FDR shall have a reasonable period of time to perform due diligence and propose a start-up plan. Unless the parties mutually agree otherwise, and subject to the terms and conditions set forth in the start-up plan as mutually agreed to by the parties, Customer shall pay all charges for start-up of each Non-FDR Portfolio including (A) FDR's standard start-up charges (at $150/hour for resources plus related materials charges), and (B) any charges (at $150/ hour for resources plus related materials charges) associated with any customization of the FDR System specified in the start-up plan applicable to each such Non-FDR Portfolio. Any such customization shall remain solely the property of FDR, and Customer shall acquire no right, claim, or interest in the FDR System or any customization thereof during or after the Term.

(b) If Purchaser and FDR agree that the remaining term of an Existing Non-FDR Agreement will not provide adequate time to prepare for an orderly start-up to the FDR System, Purchaser may extend the term of such Existing Non-FDR Agreement after it Acquires the Non-FDR Portfolio; provided, however, that no such extension may cause the term of such Existing Non-FDR Agreement to extend to a date which is more than six (6) months after Customer's Acquisition of the Non-FDR Portfolio. In addition, Customer shall deliver any written notice which is required to prevent an automatic extension or renewal of such Existing Non-FDR Agreement.

(c) Purchaser shall notify FDR, in writing, within thirty (30) days after the execution of any binding agreement to Acquire a Non-FDR Portfolio if Purchaser intends to obtain processing services pursuant to an Existing Non-FDR Agreement and shall use its best efforts to provide FDR with a copy of the provisions of such Existing Non-FDR Agreement dealing with the term, renewal and termination thereof upon the execution by FDR of any appropriate confidentiality agreement that may be required, unless prohibited by the terms of such Existing Non-FDR Agreement.

Section 3.4. Disposition of Portfolios. Upon the sale or other disposition by Customer of all or any portion of Customer's accounts (the "Former Accounts"), FDR will cooperate in the Deconversion of the Former Accounts from the FDR System, and upon Deconversion shall no longer be obligated to provide Services for the Former Accounts for Customer pursuant to this Agreement and Customer and FDR agree that there shall be no reduction in the Year 1 Minimum Processing Fee or the Minimum Processing Fees set forth in Section 4.4.

Section 3.5. Merger or Change of Control. If Customer is merged into an Entity that, prior to such merger, was not an Affiliate of Customer, and such Entity is the survivor of such merger (the "Surviving Entity"), then (i) the provisions of this Agreement shall continue to apply to all Customer Accounts which were subject to this Agreement prior to such merger, but shall not apply to any accounts of the Surviving Entity or any of its Affiliates which were not subject to this Agreement prior to such merger and (ii) the Surviving Entity, as Customer's successor-in-interest, shall continue to be bound by Customer's obligations hereunder. If there is a Change of Control of Customer, then the provisions of this Agreement shall continue to apply to all Customer Accounts of Customer and its Affiliates immediately prior to such Change of Control, but shall not apply to any accounts of the Entity that Acquires Control of Customer and its Affiliates which were not subject to this Agreement prior to such Change of Control.

Article 4
Payment for Services

Section 4.1. Processing Fees. Customer shall pay FDR the Processing Fees set forth in Exhibit A to this Agreement. For each Processing Year after Processing Year 1, FDR may increase each line item of Processing Fees set forth in Exhibit A to this Agreement which were in effect for the immediately preceding Processing Year by [*] increase in the Consumer Price Index ("CPI") as described below but only to the extent the CPI in any such Processing Year shall exceed [*]. For purposes hereof, the CPI shall be the index compiled by the United States Department of Labor's Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers ("CPI-U") having a base of 100 in 1982-84, using that portion of the index which appears under the caption "Other Goods and Services." The percentage increase in the CPI shall be calculated as of ninety (90) days in advance of the effective date of such increase, by comparing the CPI using a twelve (12) month period ending three (3) months prior to the effective date of such increase and expressing the increase in said CPI through the twelve (12) month period as a percentage.

Section 4.2. Special Fees. Customer shall pay to FDR the Special Fees for amounts paid to third-party providers, computed in accordance with Exhibit A to this Agreement. If, at any time while this Agreement is in effect, the charges are increased to FDR for items which are included in the Special Fees or FDR obtains communication or other services included in the Special Fees by another method, resulting in an increase in the charges to FDR for such items, then FDR shall increase by an equal amount the Special Fees Customer is then paying FDR for such items under this Agreement. Such price change by FDR shall be effective on the effective date of the increase to FDR.

Section 4.3. New Products. If FDR commences to offer any new services or products generally to its customers and Customer elects to use any such service or product, or if Customer elects to use services or products which Customer had not previously elected to use, then FDR shall provide such service or product at FDR's then-current fees and charges for such service or product or such other price as FDR and Customer may mutually agree.

Section 4.4. Minimum Fees.

(a) In Processing Year 1, Customer will require and shall pay FDR for Services sufficient to generate aggregate Processing Fees at least equal to [*] (the "Year 1 Minimum Processing Fee"). In each Processing Year after Processing Year 1, except as provided in subsection (b), Customer will require and shall pay FDR for Services sufficient to generate aggregate Processing Fees at least equal to [*] of the Processing Fees paid during the immediately preceding Processing Year, but in no event less than [*] in each such Processing Year (the "Minimum Processing Fees"). FDR shall calculate the total Processing Fees paid by Customer in respect of Services performed during each Processing Year (the "Total Annual Processing Fees") within ninety (90) days after the end of each Processing Year and will, after ten (10) days written notice to Customer, draw upon Customer's account pursuant to

Section 4.5 of this Agreement for the amount, if any, by which the Year 1 Minimum Processing Fees or the Minimum Processing Fees, as applicable, for the Processing Year exceed the Total Annual Processing Fees for the Processing Year. For the avoidance of doubt and based on economic assumptions material to each party underlying this transaction, Customer and FDR expressly agree that Customer shall pay FDR Processing Fees each Processing Year in an amount at least equal to the Year 1 Minimum Processing Fee or the Minimum Processing Fees, as applicable, until this Agreement is terminated by Customer pursuant to the provisions of Sections 9.2(a) or 9.2(b), or after Customer shall have paid FDR the Minimum Processing Fees for the year of termination as determined pursuant to this subsection (a) in the case of a termination pursuant to Sections 9.2(d) or 9.2(e) or pursuant to subsection (b) below in the case of a termination pursuant to Section 9.2(c), or until FDR terminates this Agreement and invokes compensatory payments pursuant to Section 9.4.

(b) If Customer shall elect to terminate this Agreement in accordance with Section 9.2(c), then in the Processing Year in which the Deconversion shall occur, the Minimum Processing Fees for such Processing Year shall be at least equal to [*] of the Processing Fees paid during the immediately preceding Processing Year, but prorated for the number of calendar months which will have expired as of the date the final Deconversion shall occur. The payment of the Minimum Processing Fees by Customer shall be prior to Deconversion.

Section 4.5. Method of Payment. To facilitate the payment of Processing Fees, Special Fees, compensatory payments pursuant to Section 9.4 of this Agreement and any other fee, tax, interest payment, charge or amount due or payable to FDR under this Agreement, Customer shall provide FDR with access to a bank account of Customer's funds not requiring signature including notifying FDR of the demand deposit account number and transit routing number for the account. FDR may draw upon the bank account to pay fees, taxes, interest payments, charges, or any other amount due or payable to FDR under the terms of this Agreement. The detailed records of the amounts drawn on the account of Customer will be provided by FDR to Customer on a monthly basis. FDR shall be under no obligation to effect any Start-Up until the account has been established as provided herein.

Section 4.6. Interest. If FDR is unable to obtain payment of Processing Fees, Special Fees, compensatory payments pursuant to Section 9.4 of this Agreement or any other fee, tax, interest payment, charge or amount due or payable to FDR under this Agreement at the time provided for payment under this Agreement, the unpaid amount of any Processing Fees, Special Fees, compensatory payments pursuant to Section 9.4 of this Agreement or other fee, tax, interest payment, charge or amount shall bear interest at the rate equal to the lesser of (a) [*], or (b) the maximum rate permitted by applicable law, from the date on which payment should have been available until the date on which FDR receives the payment. In the event Customer disputes any amount payable to FDR pursuant to Section 5.1, any amount which is paid by Customer and later determined not to have been payable shall bear interest from the date paid until refunded by FDR to Customer at the applicable rate set forth above.

Section 4.7. Taxes.

(a) Customer shall pay all taxes and similar charges, however designated, which are imposed by any governmental authority by reason of FDR's fulfillment of its obligations hereunder except for income taxes payable by FDR on amounts earned by FDR or property taxes payable by FDR on property owned by FDR. Without limiting the foregoing, Customer shall promptly pay FDR for any amounts actually paid or required to be collected or paid by FDR.

(b) Customer authorizes FDR to calculate the total amount of sales taxes due from Customer hereunder. Customer shall supply FDR with all information necessary for FDR to compute and remit the taxes (including any tax-exempt certificate, claim letter, or similar documentation). FDR shall remit the sales taxes to the appropriate taxing authority on behalf of Customer based on the information available to FDR. If FDR underpays or overpays such sales taxes, Customer shall be responsible for

promptly paying any shortfalls (including any penalties or interest) and for collecting any refunds from the appropriate taxing authority; provided, however, if such underpayment is solely the result of the negligence of FDR, FDR shall be responsible for any penalties associated with such underpayment.

Section 4.8. Deconversion. Upon the expiration or termination of this Agreement, FDR shall provide Deconversion assistance to Customer as Customer may reasonably request, provided however, that in no event shall FDR be obligated to Deconvert any of Customer's Accounts until a date which is mutually agreed upon and at least thirty (30) days but not greater than six (6) months after notice by Customer to FDR requesting such Deconversion, provided that if such notice is given and the six (6) month period ends during the FDR System "freeze period" which occurs annually between the third weekend in November and the third week in January, then the period in which to complete the Deconversion shall be extended until the February implementation date following the expiration of such "freeze period." Except in the event of Deconversion occurring as a result of termination of the Agreement by Customer pursuant to Sections 9.2(a) or 9.2(b), Customer shall pay FDR, the rate of $150/hour for resources for each activity completed by FDR in order to accomplish the Deconversion and for all costs, including postage or shipping, of complying with Section 10.1. FDR agrees that it will not interfere with efforts that Customer may undertake upon Deconversion to retain its Accounts' BINs or ICAs following Deconversion through a separate agreement with the Sponsor Bank; provided however, that nothing contained herein shall require FDR or Sponsor Bank to transfer the BINs or ICAs used in connection with Customer's Accounts to Customer or any third party.

Article 5
Dispute Resolution and Indemnification

Section 5.1. Informal Dispute Resolution. Any controversy or claim between FDR and Customer arising from or in connection with this Agreement whether based on contract, tort, common law, equity, statute, regulation, order or otherwise ("Dispute"), shall be resolved as follows:

(a) upon written request of either FDR or Customer, the parties shall each appoint a representative to meet and attempt to resolve such Dispute;

(b) the designated representatives shall meet as often as the parties reasonably deem necessary to discuss the problem in an effort to resolve the Dispute without the necessity of any formal proceeding; and

(i) the date that the designated representatives conclude in good faith that amicable resolution through continued negotiation of the matter does not appear likely; or

(ii) thirty (30) days after the date that either party requested negotiation of the Dispute pursuant to Section 5.1(a) of this Agreement.

(d) Notwithstanding the foregoing, this Section 5.1 shall not be construed to prevent a party from instituting formal proceedings at any time to avoid the expiration of any applicable limitations period, to preserve a superior position with respect to other creditors or to seek temporary or preliminary injunctive relief pursuant to Section 10.7.

Section 5.2. Arbitration. If Customer and FDR are unable to resolve any Dispute in the manner set forth in Section 5.1, such Dispute shall be submitted to arbitration in the manner set forth in Exhibit D.

Section 5.3. Indemnification. The indemnification rights and obligations of Customer and FDR under this Agreement are contained in Exhibit E.

Article 6
Limitation on Liability

Section 6.1. Limitation on Liability. FDR's cumulative liability for any loss or damage, direct or indirect, for any cause whatsoever (including, but not limited to those arising out of or related to this Agreement) with respect to claims (whether third party claims, indemnity claims or otherwise) relating to events in any one Processing Year shall not under any circumstances exceed the lesser of (a) the Minimum Processing Fees for such Processing Year and, in the case of Processing Year 1, the Year 1 Minimum Processing Fee or (b) the amount of the Processing Fees paid to FDR pursuant to this Agreement for Services performed in the immediately preceding Processing Year, and, in the case of Processing Year 1, the Year 1 Minimum Processing Fee.

Section 6.2. No Special Damages. IN NO EVENT SHALL EITHER PARTY BE LIABLE UNDER ANY THEORY FOR ANY LOST PROFITS, EXEMPLARY, PUNITIVE, SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES, IT BEING FURTHER UNDERSTOOD THAT THE CUSTOMER'S PAYMENT OBLIGATIONS UNDER THIS AGREEMENT SHALL NOT BE LIMITED OR EXCLUDED BY THIS SECTION 6.2.

Article 7
Disclaimer of Warranties

Section 7.1. Disclaimer. FDR SPECIFICALLY DISCLAIMS ALL WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY, ARISING OUT OF OR RELATED TO THIS AGREEMENT. THIS AGREEMENT IS A SERVICE AGREEMENT AND THE PROVISIONS OF THE UNIFORM COMMERCIAL CODE SHALL NOT APPLY TO IT.

Article 8
Term of Agreement

Section 8.1. Term. This Agreement is effective from the Effective Date and shall extend for five (5) Processing Years (the "Original Term"). Processing Year 1 of the Term shall commence on the earlier of: (i) the first day of the calendar month immediately subsequent to the completion of the initial Start Up provided for in Section 2.3 or (ii) six (6) calendar months after the Effective Date. For purposes of this Agreement, each subsequent "Processing Year" means each twelve (12) month period commencing on the expiration of the previous Processing Year in which Services are performed.

Article 9
Termination

Section 9.1. Termination by FDR. FDR may terminate this Agreement:

(a) if FDR fails to receive payment from Customer pursuant to the provisions of Section 4.5 of this Agreement and Customer, within forty-eight (48) hours after written notice, still has not made such payment to FDR, or immediately without notice if FDR has the right more than four times in any twelve month period to give notice under this paragraph whether or not the notice is given, provided however, that in the event Dispute resolution is initiated, FDR may terminate the Agreement pursuant to this subsection (a) only following the informal Dispute resolution (not including arbitration) pursuant to Section 5.1;

(b) if Customer fails to pay any Daily Amount when required as provided in Exhibit F to this Agreement and does not cure the failure within twenty-four (24) hours after written notice of the failure or immediately without notice if FDR has the right more than three times in any twelve month period to give notice under this paragraph whether or not the notice is given;

(c) if Customer does not cure within twenty-four (24) hours after notice by FDR if FDR has terminated Interchange Settlement of transactions on behalf of Customer as described under "Violation of Rules" in Exhibit F to this Agreement for more than ten (10) consecutive days or for more than twenty (20) days in any Processing Year;

(d) if any Insolvency Event occurs with respect to Customer;

(e) if Customer does not cure within twenty-four (24) hours after notice by FDR if FDR has the right to give notice to MasterCard and/or VISA as provided under "Failure to Transfer" in Exhibit F to this Agreement whether or not the notice is given;

(f) upon prior notice (i) if Customer, FDR or the Sponsor Bank receives a cease and desist or similar order regarding Customer's Transaction Card program from any Network, VISA or MasterCard, or (ii) upon a determination by FDR pursuant to Section 2.6 that the support of Customer's Transaction Card program must be discontinued pursuant to any Network, VISA or MasterCard standards, guidelines, rules, regulations or requirements, provided however, that in connection with each of clauses (i) and (ii), FDR shall not be permitted to terminate this Agreement pursuant to this subsection (f) if the event giving rise to the termination shall be as set forth in Sections 9.1(j) or 9.1(k);

(g) in the event Customer shall breach any of its representations, warranties or covenants contained in this Agreement, and fail to cure within seven (7) days after notice thereof by FDR, or such shorter period as may be required by a Legal Requirement or by any Network, VISA or MasterCard;

(h) in the event Customer's Accounts shall incur fraud losses in excess of 200 basis points in any two (2) consecutive calendar months;

(i) if, after receipt of written notice from FDR regarding an Updated Amount of the Letter of Credit pursuant to Section 11.3(b), Customer does not, within forty-eight (48) hours, increase the monetary amount of the Letter of Credit to be at least equal to the Updated Amount of the Letter of Credit as provided for in Section 11.3(b);

(j) upon prior notice if any new Network, VISA or MasterCard standard, guideline, rule, regulation or requirement or any change, amendment or new interpretation of an existing Network, VISA or MasterCard standard, guideline, rule, regulation or requirement which occurs after the date hereof (except for any of the foregoing which arise as a result of an order, decree, memorandum of understanding, agreement or similar basis which was initiated by or as a result of state or federal law or regulatory authorities, or which involve Customer's breach of its covenants in Section 11.3) results (i) in the issuance to Customer, FDR or Sponsor Bank of a cease and desist or similar order regarding Customer's Transaction Card program from a Network, VISA or MasterCard, or (ii) in a determination by FDR pursuant to Section 2.6 that the support of the Customer's Transaction Card program must be discontinued pursuant to such Network, VISA or MasterCard standard, guideline, rule, regulation or requirement; or

(k) upon prior notice if a Network, VISA or MasterCard determines that the continued operation by Customer of Customer's Transaction Card program (as facilitated through the FDR Services and the sponsorship by Sponsor Bank) is in direct competition with the Network, VISA or MasterCard in violation of any standard, guideline, rule, regulation or requirement in existence as of the date hereof (except if such determination arises as a result of an order, decree, memorandum of understanding, agreement or similar basis which was initiated by or as a result of state or federal law or regulatory authorities, or involves Customer's breach of its covenants in Section 11.3), and the Network, VISA or MasterCard issues Customer, FDR or Sponsor Bank a cease and desist or similar order regarding Customer's Transaction Card program.

The rights of FDR to terminate under this Section 9.1 are cumulative and the existence of the right under any provision or subsection is not exclusive of the right under any other provision or subsection.

Section 9.2. Termination by Customer. Customer may terminate this Agreement:

(a) if any Insolvency Event occurs with respect to FDR;

(b) as provided for in Exhibit G;

(c) at its sole option, at any time during the Original Term after the delivery of written notice to FDR at least six (6) months prior to the effective date of such termination; provided that the effective date of such termination is not prior to six (6) calendar months after the expiration date of Processing Year 1;

(d) upon prior notice, if any new Network, VISA or MasterCard standard, guideline, rule, regulation or requirement or any change, amendment or new interpretation of an existing Network, VISA or MasterCard standard, guideline, rule, regulation or requirement which occurs after the date hereof (except for any of the foregoing which arise as a result of an order, decree, memorandum of understanding, agreement or similar basis which was initiated by or as a result of state or federal law or regulatory authorities, or which involve Customer's breach of its covenants in Section 11.3) results in the issuance to Customer, FDR or Sponsor Bank of a cease and desist or similar order regarding Customer's Transaction Card program from a Network, VISA or MasterCard; or

(e) upon prior notice if a Network, VISA or MasterCard determines that the continued operation by Customer of Customer's Transaction Card program (as facilitated through the FDR Services and the sponsorship by Sponsor Bank) is in direct competition with the Network, VISA or MasterCard in violation of any standard, guideline, rule, regulation or requirement in existence as of the date hereof (except if such determination arises as a result of an order, decree, memorandum of understanding, agreement or similar basis which was initiated by or as a result of state or federal law or regulatory authorities, or involves Customer's breach of its covenants in Section 11.3), and the Network, VISA or MasterCard issues Customer, FDR or Sponsor Bank a cease and desist or similar order regarding Customer's Transaction Card program.

Section 9.3. Effect of Termination. Upon expiration or termination of this Agreement, FDR shall have no further obligation to provide the Services to Customer and all outstanding unpaid amounts due and owing to FDR shall become immediately due and payable. Expiration or termination of this Agreement shall not affect the following:

(a) the obligation of Customer to pay for Services rendered or any other obligation or liability owing or which becomes owing under this Agreement whether the obligations arise prior to or after the date of termination including the obligations to make the payments provided in Article 4 of this Agreement, Sections 9.4 and 9.5 of this Agreement and as described under "Trailing Activity" in Exhibit F to this Agreement;

(b) the obligations set forth in this Agreement in connection with any Network Agreement or any third party software pursuant to Exhibit A;

(d) the obligations in Section 11.3(b) which shall survive until the latest to occur of the following: (i) ninety (90) days after Deconversion, (ii) during any period while any Dispute shall be ongoing, or (iii) during any period while Customer has any remaining claim or obligation which is not fully satisfied under this Agreement, including indemnity obligations in accordance with Exhibit E or Trailing Activity in accordance with Exhibit F.

Section 9.4. Payments Upon Termination.

(a) If FDR terminates this Agreement pursuant to Section 9.1, other than pursuant to Section 9.1(j), or if Customer terminates this Agreement pursuant to Section 9.2(e), Customer and FDR agree that, based on economic assumptions material to each party, Customer shall make a compensatory payment to FDR. Such compensatory payment shall be made by Customer upon termination by FDR or Customer, and prior to Deconversion, and shall equal the sum of:

(i) the Year 1 Minimum Processing Fee or Minimum Processing Fees, as applicable, as set forth in Section 4.4(a) of this Agreement, for the Processing Year in which the termination occurs (after crediting Customer for any Processing Fees paid for Services provided in such Processing Year); and the amount set forth in subsections (ii) or (iii) below, as applicable

(ii) except as provided in subsection (iii) below, the sum of the present values of a payment in each full Processing Year (other than the year of termination) which remains during the Term of this Agreement in an amount equal to the applicable percentage set forth below for the Processing Year in which termination occurs multiplied by the Year 1 Minimum Processing Fees or the Minimum Processing Fees, as applicable, for the Processing Year in which termination occurs. The applicable percentage shall be as follows:

Processing Year in which termination occurs		Applicable Percentage
Processing Year 1		[*]
Processing Year 2		[*]
Processing Year 3		[*]
Processing Year 4		[*]

(iii) in the event the Agreement shall be terminated by FDR pursuant to Section 9.1(k) or by Customer pursuant to Section 9.2(e), the present value of a payment in the next full Processing Year (other than the year of termination) which remains during the Term of this Agreement in an amount equal to the applicable percentage set forth in subsection (ii) above, for the Processing Year in which termination occurs multiplied by the Year 1 Minimum Processing Fees or the Minimum Processing Fees, as applicable, for the Processing Year in which termination occurs.

(b) In determining the present value of the amount set forth in subsection (a)(ii) or (a)(iii) above, an interest rate equal to [*], as quoted by The Wall Street Journal for the date on which termination occurs, or if not available on the date of termination, as soon thereafter as the next edition of The Wall Street Journal is published, shall be assumed and the payments shall be assumed to be made on the first day of each Processing Year.

(c) FDR and Customer agree that the compensatory payments as set forth in Section 9.4(a) are a reasonable estimation, as of the date of this Agreement, of the actual damages which FDR would suffer if FDR were to fail to receive the processing business for the full Term. In making such determination, the parties have considered all relevant factors known to the parties as of the date hereof and have given special consideration to the particular circumstances which may attend each particular termination event including the allocation of risks associated therewith between the parties. If not but for the full consideration of all relevant factors known to the parties as of the date hereof, and the payments to be made pursuant to this Section 9.4, neither party would have been willing to enter into this Agreement.

(d) Despite the foregoing, nothing in this Section 9.4 shall limit FDR's right to recover from Customer any amounts for which Customer is otherwise liable under this Agreement, except that upon payment of amounts due under Section 9.4(a), Customer shall not be responsible for Minimum Processing Fee shortfalls after the year of termination.

Section 9.5. Payments Upon Termination Pursuant to Section 9.2(c). If Customer terminates this Agreement pursuant to Section 9.2(c), Customer shall not be required to make any payment to FDR pursuant to Section 9.4 but Customer shall be responsible for Minimum Processing Fee shortfalls, if any, pursuant to Section 4.4(b) for the Processing Year in which termination is effective but not for any subsequent Processing Years.

Article 10
Confidential Nature of Data

Section 10.1. Customer's Proprietary Information. Upon Customer's request, FDR shall return to Customer (upon the expiration or termination of all of FDR's obligations under this Agreement and payment by Customer of all amounts due to FDR hereunder) all or any requested portion of the proprietary and confidential data of Customer disclosed to FDR including the Cardholder Master Files and CIS Memo Files (collectively, "Customer's Proprietary Information"). Throughout the Term of this Agreement and thereafter, FDR shall not obtain any proprietary rights in Customer's Proprietary Information.

Section 10.2. FDR's Proprietary Information. Customer acknowledges that all products and systems provided or used by FDR, including any developments, Enhancements, improvements or modifications disclosed, provided or used by FDR, shall remain solely and exclusively the property of FDR. In addition, FDR shall retain sole and exclusive ownership in all works of authorship, ideas, concepts, know-how and inventions, whether or not patentable, created or conceived by FDR in the course of providing the services under this Agreement. Customer acknowledges that FDR, in its sole discretion, may provide to other customers, similar services to those outlined in this Agreement utilizing any of the FDR owned intellectual property referenced in this Section 10.2 or otherwise set forth or referred to in this Agreement. Customer shall not obtain any proprietary rights in any proprietary or confidential information which has been or is disclosed to Customer by FDR, including without limitation, any data or information that is a trade secret or competitively sensitive material, User Manuals; screen displays and formats; computer software, systems, products, system architecture and documentation related to each of the foregoing, in each case, whether owned, licensed or otherwise provided or used by FDR; software performance results; flow charts and other specifications (whether or not electronically stored), data and data formats (collectively, "FDR's Proprietary Information") whether any of the materials are developed or purchased specifically for performance of this Agreement or otherwise. Customer shall return to FDR all of FDR's Proprietary Information upon the expiration or termination of this Agreement.

Section 10.3. Confidentiality of Agreement. Except as required by law, Customer shall keep confidential and not disclose, and shall cause its Affiliates and their respective directors, officers, employees, representatives, agents and independent contractors to keep confidential and not disclose, any of the terms and conditions of this Agreement to any third party without the prior written consent of FDR. FDR shall be permitted to disclose Customer's Proprietary Information to Sponsor Bank as necessary to perform FDR's obligations under this Agreement.

Section 10.4. Confidentiality. FDR and Customer shall maintain Customer's Proprietary Information and FDR's Proprietary Information, respectively, in strict confidence. Without limiting the generality of the foregoing, FDR and Customer each agree:

(a) not to disclose or permit any other person or Entity access to Customer's Proprietary Information or FDR's Proprietary Information, as appropriate, except that the disclosure or access shall be permitted to an employee, officer, director, agent, representative, external or internal auditors or independent contractor of the party requiring access to the same in the course of his or her employment or services;

(b) to ensure that its employees, officers, directors, agents, representatives and independent contractors are advised of the confidential nature of Customer's Proprietary Information and FDR's Proprietary Information, as appropriate, and are precluded from taking any action prohibited under this Article 10, provided that in any event Customer and FDR shall each be liable for any breach of this Article 10 by their respective employees, officers, directors, agents, representatives and independent contractors, and FDR shall be liable to Customer for breach of this Article 10 by Sponsor Bank;

(c) not to alter or remove any identification, copyright or proprietary rights notice which indicates the ownership of any part of Customer's Proprietary Information or FDR's Proprietary Information, as appropriate; and

(d) to notify the other promptly and in writing of the circumstances surrounding any possession, use or knowledge of Customer's Proprietary Information or FDR's Proprietary Information, as appropriate, at any location or by any Entity other than those authorized by this Agreement.

Section 10.5. Release of Information. Despite the foregoing, FDR and Customer agree that Customer's Proprietary Information and FDR's Proprietary Information may be made available to VISA, MasterCard, Network or to supervisory or regulatory authorities of Customer and Sponsor Bank upon the written request of any of the foregoing.

Section 10.6. Exclusions. Nothing in this Article 10 shall restrict either party with respect to information or data identical or similar to that contained in Customer's Proprietary Information or FDR's Proprietary Information, as appropriate, but which: (a) the receiving party can demonstrate was rightfully possessed by it before it received the information from the disclosing party; (b) was in the public domain prior to the date of this Agreement or subsequently becomes publicly available through no fault of the receiving party or any person or Entity acting on its behalf; (c) was previously received by the receiving party from a third party or is subsequently furnished rightfully to the receiving party by a third party (no Affiliate of FDR or Customer shall be considered to be a third party) not known to be under restrictions on use or disclosure; (d) is independently developed by such party; (e) is required to be disclosed by law, regulation or court order, provided that the disclosing party will exercise reasonable efforts to notify the other party prior to disclosure in order that the other party may seek a protective order; or (f) is required to be disclosed to comply with or to enforce the terms of this Agreement, provided that the disclosing party will exercise reasonable efforts to notify the other party prior to disclosure in order that the other party may seek a protective order.

Section 10.7. Remedy. If either party breaches this Article 10, the non-breaching party will suffer irreparable harm and the total amount of monetary damages for any injury to such party will be impossible to calculate and therefore an inadequate remedy. Accordingly, the non-breaching party may (a) seek temporary and permanent injunctive relief against the breaching party or (b) exercise any other rights and seek any other remedies to which the non-breaching party may be entitled to at law, in equity and under this Agreement for any violation of this Article 10.

Article 11
Representations and Covenants

Section 11.1. FDR's Representation. FDR represents and warrants that the execution and delivery of this Agreement and the consummation of the transaction herein contemplated does not conflict in any material respect with or constitute a material breach or material default under the terms and conditions of any documents, agreements or other writings to which it is a party; and FDR has the corporate power and corporate authority to execute, deliver and perform this Agreement.

Section 11.2. Customer's Representation. Customer represents and warrants that the execution and delivery of this Agreement and the consummation of the transaction herein contemplated does not conflict in any material respect with or constitute a material breach or material default under the terms

and conditions of any documents, agreements or other writings to which it is a party; and Customer has the corporate power and corporate authority to execute, deliver and perform this Agreement.

Section 11.3. Customer's Covenants.

(a) Within fifteen (15) days after the end of each quarter during the Term of this Agreement, Customer shall provide to FDR a copy of the individual and consolidated quarterly and year to date financial statements (including where available, audited financial statements) of Customer and its affiliates to assist FDR in evaluating the risks associated with Interchange Settlement or other Customer obligations under this Agreement. Customer shall provide (or shall cause its Affiliates to provide) additional security or undertakings as FDR may reasonably require.

(b) Within thirty (30) days after the date hereof, Customer shall obtain and deliver to FDR, in form and substance reasonably acceptable to FDR, a 364-day revolving and irrevocable letter of credit in an amount equal to [*] (the "Initial Amount of the Letter of Credit"). Such letter of credit will be issued by a financial institution with a credit rating acceptable to FDR and will (i) secure all payment and settlement obligations of Customer under this Agreement that arise after the issuance of the letter of credit, including, but not limited to payment and settlement obligations for Processing Fees, Special Fees, Minimum Processing Fees, Interchange Settlement and other settlement obligations, taxes, interest or payments upon termination, and (ii) allow FDR to draw upon the Letter of Credit prior to expiration if the Letter of Credit is not renewed. The Initial Amount of the Letter of Credit was agreed to by the parties based on their best estimate, at the time of the execution of this Agreement, that [*] represents approximately the monetary amount of four (4) business days of the Daily Amount for which Customer may be responsible pursuant to Exhibit "F". If, after the execution of this Agreement, FDR, based on the then current monetary amount of the Daily Amount, determines that the monetary amount of approximately four (4) business days of the Daily Amount is more than [*] then FDR shall promptly notify Customer, in writing, of the updated monetary amount of four (4) business days of the Daily Amount (the "Updated Amount of the Letter of Credit"). Promptly upon receipt of the Updated Amount of the Letter of Credit Customer shall increase the monetary amount of the Letter of Credit to be at least equal to the Updated Amount of the Letter of Credit. The Customer's obligations in this Section 11.3(b) shall continue throughout the Term of this Agreement, and shall survive the expiration or termination of the Agreement in accordance with Section 9.3(d).

(c) As of the date hereof, and throughout the Term of this Agreement, Customer and Customer's Transaction Card program to be made available to Customer's Clients utilizing the FDR Services and the sponsorship by the Sponsor Bank:

(i) shall comply with all Network, VISA and MasterCard standards, guidelines, rules, regulations, guidelines or requirements and any interpretations thereof, including but not limited to the Virtual MasterCard standards and guidelines, as well as the MasterCard Rules as specified in Chapter 8 of the MasterCard Bylaws and Rules, and Customer has obtained and will obtain all required consents and approvals which may be required from the Networks, VISA or MasterCard (in each case regardless of whether Customer or Sponsor Bank is responsible for compliance or is obligated to obtain any such consent or approval under the applicable requirements), and that the intended operation and administration of Customer's Transaction Card program contemplated hereby, does not and will not violate any such approval, consent, standard, guideline, rule, regulation or requirement or any interpretation thereof, and, Customer will notify FDR immediately in the event this covenant is no longer true, accurate or complete, or if Customer receives any cease and desist or similar order from a Network, VISA or MasterCard;

(ii) shall comply with each of the obligations and requirements set forth in that certain letter dated September 13, 2000, from MasterCard to the Sponsor Bank, together with the

application and supporting materials submitted by Sponsor Bank in connection therewith, attached hereto and incorporated herein by reference as Exhibit H (in each case regardless of whether Customer or Sponsor Bank is responsible for compliance or is obligated to obtain any such consent or approval under the applicable requirements),it being understood that Customer will also provide information to FDR regarding such compliance as may be reasonably requested by FDR from time to time; and

(iii) shall properly disclose that the Sponsor Bank is the Issuer of the Transaction Cards to Customer's Clients and that Sponsor Bank, upon notice to Customer, may terminate Customer's Clients Transaction Card privileges at any time, and shall require Customer's Clients to agree that Sponsor Bank shall have no obligation or liability to any Customer Client regarding funds held, transferred, or invested by Customer or any of its Affiliates.

(d) Throughout the Term of this Agreement, Customer shall (or shall cause its Affiliates to) deposit, process, settle, and administer all financial transactions on behalf of and with its Clients in accordance with the PayPal process flow description set forth in Exhibit H hereto. In the event Customer wishes to modify such process flow, it shall notify FDR and obtain FDR's prior written consent. If such process flow is modified to reduce or eliminate settlement risk associated with Client transactions, Customer may request, and FDR will negotiate with Customer, the reduction of the number of business days of settlement funds to be secured by the Letter of Credit as provided in subsection (b) above.

Article 12
Miscellaneous

Section 12.1. Assignment. Except as otherwise provided herein, the rights and obligations of Customer are personal and not assignable, either voluntarily or by operation of law, without the prior written consent of FDR. Customer shall be permitted to assign this Agreement in the event (i) any person or Entity acquires all or substantially all of the assets or stock of Customer, or (ii) Customer merges or consolidates with another Entity, provided that for those events set forth in clauses (i) and (ii) hereof, FDR is given prior notice of such assignment and the successor has entered into an agreement reasonably acceptable to FDR to assume all of the obligations of Customer under this Agreement. Subject to the foregoing, all provisions contained in this Agreement shall extend to and be binding upon the parties hereto or their respective successors and permitted assigns.

Section 12.2. Business Continuity Plan. FDR has created a business continuity plan (the "Business Continuity Plan") and will provide Customer with a written summary of same upon written request. FDR reserves the right to change such Business Continuity Plan and, upon request, will explain all changes. No change shall degrade the quality of the Business Continuity Plan in a manner which has a material adverse impact on the Services. FDR will make certain revisions to its Business Continuity Plan which will meet or exceed regulatory agency contingency planning criteria. FDR's Business Continuity Plan includes a schedule for recovering critical business functions.

Section 12.3. State Law. Except as provided in Exhibit D, this Agreement shall be governed by the laws of the State of Nebraska as to all matters including validity, construction, effect, performance and remedies without giving effect to the principles of choice of law thereof. With respect to any claim arising out of this Agreement, Customer irrevocably waives any objection which it may have at any time to the venue of any suit, action or proceeding arising out of or relating to this Agreement brought in the courts of the State of Nebraska and the United States District Court located in the city of Omaha, Nebraska and Customer further waives any claim such suit, action or proceeding is brought in an inconvenient forum and further irrevocably waives the right to object, with respect to such suit, action or proceeding brought in any such court, that such court does not have jurisdiction over Customer. For purposes of any such suit, action or proceeding Customer agrees that any process to be served in

connection therewith shall, if delivered, sent or mailed in accordance with Section 12.4, constitute good, proper and sufficient service thereof.

Section 12.4. Notice. All notices which either party may be required or desire to give to the other party shall be in writing and shall be given by personal service, telecopy, registered mail or certified mail (or its equivalent), or overnight courier to the other party at its respective address or telecopy telephone number set forth below. Mailed notices and notices by overnight courier shall be deemed to be given upon actual receipt by the party to be notified. Notices delivered by telecopy shall be confirmed in writing by overnight courier and shall be deemed to be given upon actual receipt by the party to be notified.

If to FDR:		With a copy to:
First Data Resources Inc. 10825 Farnam Drive Omaha, Nebraska 68154 Attn: President Telecopy Number: 402-222-7334		First Data Resources Inc. 10825 Farnam Drive Omaha, Nebraska 68154 Attn: General Counsel Telecopy Number: 402-222-7700

If to Customer:

X.com Corporation
1840 Embarcadero Road
Palo Alto, CA 94303
Attn: Todd Pearson
Telecopy Number: 650-251-1101

A party may change its address or addresses set forth above by giving the other party notice of the change in accordance with the provisions of this section.

Section 12.5. Waiver. The failure of either party at any time to require performance by the other party of any provision of this Agreement shall not affect in any way the full right to require the performance at any subsequent time. The waiver by either party of a breach of any provision of this Agreement shall not be taken or held to be a waiver of the provision itself.

Section 12.6. Relationship of Parties. Nothing contained in this Agreement shall be deemed to create a partnership, joint venture or similar relationship between the parties. The parties' relationship shall be that of independent parties contracting for services. All personnel and other agents employed by either party in connection with this Agreement are such party's or its agent's employees and not employees or agents of the other party.

Section 12.7. Third Party Beneficiaries. This Agreement is entered into solely for the benefit of FDR and Customer and shall not confer any rights upon any Entity not a party to this Agreement except for Sponsor Bank which shall have no liability to Customer or Customer's Clients.

Section 12.8. Subcontractors. FDR may subcontract all or any part of the Services, but, notwithstanding any such subcontract, FDR shall remain responsible for performance of the Services.

Section 12.9. Force Majeure and Restricted Performance. If performance by FDR of any service or obligation under this Agreement, including Start-Up or Deconversion, is prevented, restricted, delayed or interfered with by reason of labor disputes, strikes, acts of God, floods, lightning, severe weather, shortages of materials, rationing, utility or communication failures, failure of MasterCard, VISA or a Network, failure or delay in receiving electronic data, earthquakes, war, revolution, civil commotion, acts of public enemies, blockade, embargo, or any law, order, proclamation, regulation, ordinance, demand or requirement having legal effect of any government or any judicial authority or representative of any such government, or any other act, omission or cause whatsoever, whether similar

or dissimilar to those referred to in this clause, which are beyond the reasonable control of FDR, then FDR shall be excused from the performance to the extent of the prevention, restriction, delay or interference. As a condition to continuing to perform embossing services for card issuing members of VISA, FDR was required to enter into VISA Card Personalization Agreements (the "VISA Agreements"). Under certain circumstances VISA is permitted, pursuant to the VISA Agreements, to temporarily or permanently prevent or restrict FDR's right to perform embossing services for card issuing members of VISA. Customer hereby agrees that if, as a result of VISA exercising its rights under the VISA Agreements, FDR is prevented or restricted by VISA from performing embossing services for Customer, then FDR shall be excused from the performance of such embossing services to the extent of such prevention or restriction by VISA.

Section 12.10. Severability. If any provision of this Agreement is held invalid or unenforceable for any reason, the invalidity shall not affect the validity of the remaining provisions of this Agreement, and the parties shall substitute for the invalid provisions a valid provision which most closely approximates the intent and economic effect of the invalid provision.

Section 12.11. Audit. From time to time during the Term of this Agreement, FDR will allow a third party, selected by FDR, to perform an audit of the electronic data processing environment maintained by FDR to provide the services contemplated under this Agreement. FDR shall provide Customer with a copy of the results of the audit if Customer requests a copy in writing.

Section 12.12. Risk of Loss. Customer shall be responsible for any and all risk of loss to any tangible item (a) provided by FDR for Customer (including without limitation letters and embossed cards) upon the delivery of such items to the U.S. Postal Service or such other courier as Customer may select, and (b) provided by Customer to FDR until actual receipt of such items by FDR. It is expressly understood that the U.S. Postal Service and any courier selected by Customer are the agents of Customer and not FDR.

Section 12.13. Equal Employment Opportunity. FDR will not discriminate against any employee or applicant for employment because of race, color, religion, sex, national origin, disability, age or veteran status as ordered by the Secretary of Labor pursuant to Section 202 of Executive Order 11246, Section 503 of the Rehabilitation Act of 1973, and Section 402 of the Vietnam Era Veterans Readjustment Assistance Act of 1974.

Section 12.14. Entire Agreement. This Agreement, including Exhibits, and the executed Affiliate Agreements, if any, set forth all of the promises, agreements, conditions and understandings between the parties respecting the subject matter hereof and supersedes all negotiations, conversations, discussions, correspondence, memorandums and agreements between the parties concerning the subject matter.

Section 12.15. Amendments. This Agreement may not be amended except by a writing signed by authorized representatives of both parties to this Agreement.

Section 12.16. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

Section 12.17. Interchange Settlement. FDR and Customer agree that they will handle and settle Interchange Settlement pursuant to the terms and conditions governing Interchange Settlement as set forth in Exhibit F.

IN WITNESS WHEREOF, the parties to this Agreement have caused it to be executed by their duly authorized officers as of the date first written above.

FIRST DATA RESOURCES INC.
By:		/s/ John Thielen
Name:		John Thielen
Title:		Executive Vice President

X.COM CORPORATION
By:		/s/ H. David Johnson
Name:		H. David Johnson
Title:		CFO

EXHIBIT A

SERVICES/PRICING

I. The following documents specifically describe the services referred to in Section II:

User Manuals:

Adjustments
Authorizations
Cardholder Account Maintenance
Cardholder Billing
Cardholder Communication
Cardholder New Accounts
Cardholder Non-Monetary Transactions
Cardholder Plastics
Cardholder System Features
Chargeback Message Codes
Chargebacks
Client-Defined Screens
Correspondence Management
Customer Inquiry Management System
Customer Inquiry System
Electronic Ticket Capture
Electronic Ticket Capture APLUS@
Enterprise Presentation
Falcon Fraud Detection System
Fraud Control Options
Issuer Marketing Products
Letter Fundamentals
Merchant Letters
Merchant New Accounts
Merchant Non-Monetary Entry
Merchant Processing
Monetary Entry
Off-Line Debit Card
Online product Control File Parameters
PIN Management
Plastics Related Formats
Point-of-Sale Products
Product Control File
Product Control File Utilities
Reference Manual
Reports Management System
Retrievals
Rewards
Security
Settlement
System Administration
System Overview

Customer bulletins issued by FDR

Exh. A-1

II. General Services

A. FDR will provide Customer with an on-line terminal facility (not the terminals themselves), on-line access to Transaction Card processing software, adequate computer time and other mechanical Transaction Card services as more specifically described in the documents referred to in Section I.

B. Reports will be made available to Customer in accordance with FDR's Reports Management System (RMS).

C. FDR periodically shall install, provide or cause to be installed or provided the means for communicating data from its facilities or equipment to the facilities or equipment of Customer, and third parties designated by Customer, as FDR determines is desirable to perform offline debit processing services under this Agreement. The method of transmission and the media employed will be determined by FDR taking into consideration relevant factors such as traffic type, inbound and outbound message sizes, traffic loading distribution, and the equipment or devices which are or may be used.

D. Specific Services are defined in Section IV.

III. Ancillary Services

A. FDR LinkUp Services. FDR agrees to provide to Customer and Customer's Transaction Card Affiliates (hereinafter collectively referred to as "Customer") electronic mail services consisting of a system whereby Customer may create, edit, transmit, store and retrieve data, in the form of textual messages and binary files, utilizing Customer's telephone communication lines to FDR and certain data storage facilities residing on Customer's computer equipment ("Mailboxes"). FDR shall assign to Customer a number of Mailboxes, which may be increased or decreased by Customer at any time following at least thirty (30) days written notice to FDR, provided that Customer shall be required to maintain at least one (1) Mailbox at all times. In order for Customer to obtain FDR LinkUp Services as described in this section, FDR shall distribute to Customer cc:Mail Software and related documentation (collectively, the "cc:Mail Software").

(1) Customer represents and warrants to FDR that it will permit the FDR LinkUp Services to be utilized or accessed in its internal business only by its own personnel. Each copy of the cc:Mail Software provided to Customer may be used by Customer on a single computer only, and in no event may Customer install any cc:Mail product given to Customer by FDR on a network server. Customer shall not copy the cc:Mail Software except that Customer may make archival copies of the cc:Mail Software for the sole purpose of having a backup copy. Customer agrees that it will not reverse assemble or reverse compile the cc:Mail Software program, nor transfer, sublicense, rent, lease or assign the cc:Mail Software. The cc:Mail Software is owned by cc:Mail, Inc., a division of Lotus Development Corporation ("Lotus") and is protected by United States copyright laws and international treaty provisions.

(2) Customer shall be responsible, at its expense, for all computer equipment at Customer's locations necessary to use the cc:Mail Software. All communication charges associated with accessing the FDR computers and equipment used to provide FDR LinkUp Services shall be paid by Customer.

(3) If FDR's right to distribute the cc:Mail Software is terminated because the software infringes upon the copyright, patent or other proprietary rights of any party or for any other reason, FDR shall have the right to terminate the provision of FDR LinkUp Services upon thirty (30) days notice to Customer, or such shorter period of notice as coincides with the termination of

Exh. A-2

FDR's right to distribute the software, and FDR shall have no further liability to Customer with respect to the terminated services.

(4) Within thirty (30) days after the termination of this Agreement, or the earlier termination of Customer's right to use the cc:Mail Software, Customer shall deliver to FDR all copies of the relevant software and associated documentation, together with all separate informational materials provided with respect to the services or the software, in their possession, custody or control or shall destroy the same, as directed by FDR. In addition, an officer of Customer shall certify in writing to FDR that use of the relevant software has been discontinued and all items have been returned or destroyed as required in this section.

(5) Customer agrees to indemnify and hold harmless Lotus, its subsidiaries, affiliates, officers, directors, employees and agents from and against any and all claims, demands, liability, loss, cost, damage or expense, including attorneys' fees and costs of settlement, resulting from or arising out of (i) the failure of Customer to observe any covenant or condition set forth in this Section, (ii) the violation by Customer of any applicable statute, law or regulation, or (iii) Customer's use of the FDR LinkUp Services.

(6) Customer acknowledges that the cc:Mail Software product is subject to restrictions and controls imposed under the U.S. Export Administration Act. Customer certifies that neither the cc:Mail Software nor any direct product thereof is being or will be acquired, shipped, transferred or reexported, directly or indirectly, into any country prohibited under the Act. RESTRICTED RIGHTS LEGEND. Use, duplication or disclosure by the U.S. Government is subject to restrictions as set forth in subparagraph (c)(1)(ii) of the Rights in Technical Data and Computer Software clause at DFARS 52.227-7013. cc:Mail, Inc., 2141 Landings Drive, Mountain View, CA 94043.

(7) NEITHER FDR NOR LOTUS MAKES ANY WARRANTIES, WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCTS OR SERVICES TO BE PROVIDED HEREUNDER, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. LOTUS DOES NOT WARRANT THAT THE FUNCTIONS CONTAINED IN THE CC:MAIL SOFTWARE WILL MEET CUSTOMER'S REQUIREMENTS OR THAT THE OPERATION OF THE SOFTWARE WILL BE ERROR FREE, OR THAT DEFECTS IN THE SOFTWARE WILL BE CORRECTED. IN NO EVENT WILL CUSTOMER HAVE ANY CAUSE OF ACTION AGAINST LOTUS, NOR WILL LOTUS BE LIABLE TO CUSTOMER FOR ANY LOSSES, DAMAGES OR ANY ECONOMIC CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS OR SAVINGS), INCIDENTAL DAMAGES OR PUNITIVE DAMAGES INCURRED OR SUFFERED BY CUSTOMER EVEN IF LOTUS IS INFORMED OF THEIR POSSIBILITY.

B. Fraud Management/Fraud Detection (Falcon) Services. FDR shall provide Customer and Customer's Transaction Card Affiliates (hereinafter collectively referred to as "Customer" with Fraud Management/Fraud Detection Services in conjunction with HNC, Inc., and its Falcon™ software (hereinafter referred to as the "HNC Software"), which services shall consist of those services set forth in this section.

(1) FDR shall provide Customer with Card Fraud Management/Fraud Detection Services by utilizing the output of the Falcon Neural Engine computational model (designed to detect card fraud) which encompasses or contains the Falcon neural network-based system, as such same software is licensed to FDR by HNC and is commonly known as the Falcon Card Fraud Detection Model (hereinafter referred to as the 'Card Output Access') solely for the purpose of assisting Customer in detecting possible fraudulent transaction account activity on the card accounts of Customer and for no other purpose. Except as expressly provided in this section, no right or

Exh. A-3

license under any patent copyright, trade secret, trademark or other intellectual property of FDR or other person is granted or is to be inferred from this section. Customer agrees that FDR's providing of Card Fraud Management/Fraud Detection Services does not confer upon Customer any license in or to the Card Computational Model.

(2) The parties acknowledge that the HNC Software, from which the Card Output Access is generated, is licensed to FDR pursuant to a license agreement (the "HNC License Agreement"). FDR shall use commercially reasonable efforts to extend or renew the initial or any renewal terms, as the case may be, of the HNC License Agreement and if the HNC License Agreement expires or is terminated, FDR shall promptly notify Customer of such termination or expiration. FDR shall use commercially reasonable efforts to substitute for HNC one or more software vendors from whom FDR shall license, on commercially reasonable terms, one or more software packages that will generate output access that provides, in all material respects, the utility and performance provided by the Card Output Access generated by the HNC Software.

(3) FDR and Customer shall mutually establish a fraud detection strategy designed to fulfill Customer's fraud detection requirements. Customer will provide a single point of contact, at least 60 days prior to beginning of service, to establish start-up requirements. Customer shall notify FDR in writing of the contact's identity. Customer's contact person will be authorized to build and approve the fraud detection strategy, to determine the fraud score criteria and to approve product control file changes. FDR shall assist Customer in the establishment of the processing parameters designed to effectively implement Customer's fraud detection strategy. Customer shall be solely responsible for approving the processing parameters and shall verify that such parameters effectively satisfy the requirements of Customer's fraud detection strategy. In no event, however, shall FDR be liable to any person for any damages caused by either the HNC Software or any deficiency in the construction of the processing parameters. Furthermore, Customer shall be responsible for the accuracy of all Customer data and fraud control data provided to FDR.

(4) FDR will provide Customer with the following Card Call Processing Services:

(a) FDR will utilize its Fraud Detection WorkCenter to monitor authorizations queued as a result of the fraud detection criteria and/or fraud score.

(b) FDR will initiate outbound telephone calls to the Cardholders of Customer who have had authorization activity on their account and appear in a Fraud Detection WorkCenter Queue Group. At Customer's option, FDR shall either (i) use a predictive dialer (herein defined as a mechanism by which outbound calls to the Cardholder Accounts to be worked hereunder are automatically dialed by the system based upon the telephone number indicated by the Cardholder master files of Customer resident at FDR) to place cans or (ii) manually review accounts for fraud activity (based upon Customer-defined criteria) in order to call only selected accounts.

(c) FDR will make up to four attempts to reach the Cardholder within a 48-hour period. All attempts will be made within the hours of 8:00 a.m. and 9:00 p.m.

(d) FDR will attempt all home and business telephone numbers as provided by Customer's Cardholder masterfile.

(e) If FDR is unable to contact the Cardholder, a message for the Cardholder to contact FDR at a to-be-provided 800 number will be delivered to the Cardholder's message machine and/or to responsible adults.

(f) When the FDR call results in contact with the Cardholder, and the Cardholder validates the authorization activity, FDR will record an on-line account memo (to the Customer Inquiry System) indicating the results of the call.

Exh. A-4

(g) When the FDR call results in contact with the Cardholder and the Cardholder is unable to validate the activity, FDR will initiate a Lost/Stolen Report and place a block on the account. (Standard fees apply for the Lost/Stolen Report.) FDR will record an on-line account memo (to the Customer Inquiry System) indicating the results of the call.

(h) If FDR encounters activity which appears uncharacteristic or unusual for a Cardholder Account and FDR is unable to contact successfully the Cardholder, then FDR may place a block on the Cardholder Account to prevent further authorization approvals until either the Cardholder or Customer successfully verifies the activity. On a daily basis, FDR will fax to Customer a list of accounts which have been blocked because of uncharacteristic or unusual account activity. The account will remain blocked until the Cardholder instructs FDR to remove such block or Customer removes such block.

(i) Upon the request of Customer, FDR may at its option, provide additional services, including the following: telephone number look ups, fraud control services, customized reporting, etc. These services would be provided at an additional cost to Customer.

(j) Upon request by Customer, HNC or FDR may, at its option, provide the following to Customer: custom system installation, additional training, and fraud user interface licensing. HNC shall provide the following to Customer upon request: fraud strategy consulting and custom fraud models. Customer will contract directly with HNC for these services, which will be provided at an additional cost to Customer.

(k) HNC has established a Fraud Control Consortium whereby users of Card Output Access contribute data for use by HNC to study fraud patterns, which enables HNC to improve fraud detection methods. If Customer chooses to join such Consortium, FDR will provide, on Customer's behalf, data to the Fraud Control Consortium as required and requested by HNC within 30 days after the Falcon Start Date and on a calendar quarterly basis thereafter. If Customer does not wish to join the Fraud Control Consortium, HNC, upon request of Customer shall construct a custom fraud model for Customer, as an additional service, at a cost agreed upon among FDR, Customer and HNC. Customer acknowledges that FDR will employ the HNC Software using the Fraud Control Consortium algorithms to produce Card Output Access for Customer only if Customer contributes data to the Fraud Control Consortium.

C. Online Debit. FDR agrees to provide Customer with online debit Services as described below:

(1) FDR shall operate a computer data processing facility to perform transaction processing, switching and settlement through the Networks and other services as further set forth in this section and in Section IV of this Exhibit A.

(2) Customer is solely responsible for the operation or maintenance of any hardware, software, equipment or systems that are not under FDR's direct control, including the terminals, Networks, third party authorizers and telecommunication lines.

(3) FDR will provide Customer with documentation describing FDR's services and the manner in which the online debit services will be used by Customer. FDR shall update and revise such documentation from time to time as necessary to reflect any modifications and enhancements and Customer will comply with such documentation.

(4) Customer agrees to enter into the agreements for access to the Network(s) as needed in order to obtain the services contemplated hereby.

D. Open Data Streams. FDR has developed a proprietary software product known as 'Open Data Streams'. Open Data Streams provides functionality to enable Customer to access and retrieve certain

Exh. A-5

of its Cardholder information from the FDR System. FDR shall provide access to and Customer may use Open Data Streams pursuant to the following terms and conditions:

(1) Implementation of Open Data Streams System.

(a) 'Open Data Streams System' means the Open Data Streams Software, the software licensed by either FDR or Customer from Sybase, Inc. ('Sybase') in connection with Open Data Streams services (collectively 'Sybase Software'), the related documentation to any of the foregoing, and the Customer Supplied Equipment.

(b) 'Customer Supplied Equipment' means the hardware and software that FDR designates and directs Customer to procure and such other hardware and software that FDR and Customer may determine is necessary for use of the Open Data Streams System. Customer, at Customer's expense, shall procure, provide, install and maintain the Customer Supplied Equipment as directed by FDR.

(c) Customer shall acquire development license(s) directly from Sybase and install on each Access Point one copy of the Sybase Software product 'Open Client' (acquired with purchase of development license(s)), and perform any required data conversion. 'Access Points' means the number of mini computers, automated recognition units, workstations servers, automatic processors, concentrators and other processors of any type at Customer's site that are operating such Sybase Software and processing transaction requests to the FDR System.

(d) Customer agrees to provide to appropriate Customer employees, at its expense, initial and ongoing training on applicable Sybase Software (from Sybase or other equivalent source) and on operation and usage of the Open Data Streams System.

(e) Customer shall designate an appropriately qualified individual to act as project manager and as the single point of contact with FDR with respect to the Open Data Streams System.

(2) Use of Open Data Streams Software.

(a) 'Open Data Streams Software' means (i) the object code version of certain software packages licensed to FDR from Sybase; (ii) the object code version of the FDR proprietary interface and method of access to the FDR System; and (iii) all additions, updates, revisions, corrections, enhancements and modifications to the foregoing delivered to Customer from time to time, except as provided herein. FDR reserves the right to modify, enhance, change, or substitute any of the components of the Open Data Streams Software.

(b) FDR grants to Customer a limited, nonexclusive, and nontransferable right and license, exercisable during the Term, to access and use the Open Data Streams Software from the Access Points solely for the purposes provided herein. Customer may use the Open Data Streams Software solely to access, transmit, modify and process its Cardholder information from the FDR System. The Open Data Streams Software and Open Data Streams System are and are composed of confidential and proprietary information of FDR and Sybase, as applicable, and shall be subject to all rights and obligations relating to confidential and proprietary information (including return of all confidential and proprietary information upon any termination of the Service Agreement, the Open Data Streams Services or the license to the Open Data Streams Software) contained in the Service Agreement. All right, title and interest in the Open Data Streams Software are and shall remain with FDR and Sybase, as applicable. FDR and Sybase reserve all rights not expressly granted to Customer herein.

(c) Except for backup and archival purposes, Customer shall not directly or indirectly copy the Open Data Streams Software. Customer shall reproduce on all such copies all copyright and proprietary notices and legends originally included in the Open Data Streams

Exh. A-6

Software. Customer shall not attempt to reverse engineer, decompile or disassemble (or otherwise attempt to derive a source code for) the Open Data Streams Software or any part thereof Customer shall not use the Open Data Streams Software for bulk data transfers or to populate a data warehouse. Except as may be permitted under a Sybase development license procured by Customer, Customer shall not: (i) use any third party application development tools or otherwise modify or enhance existing screens or forms that are delivered as part of the Open Data Streams System; (ii) directly access the Sybase Software command verbs; (iii) use the Sybase Software other than in connection with the Open Data Streams System or as a substitute for a general database product; or (iv) create new reports or modify existing reports with executables delivered as part of the Open Data Streams System. However, Customer may use the Open Data Streams Software to create or alter tables, columns or rows, or to add fields to existing tables as necessary to implement, operate and administer the Open Data Streams System. Customer shall not rent, sublicense, distribute, assign or otherwise transfer any or all of its rights in the Open Data Streams Software to any third party, whether by operation of law or otherwise.

(d) Customer will comply fully with the U.S. Export Administration Act and the relevant regulations of the United States Department of Commerce to assure that the Open Data Streams Software is not used or exported in violation of such Act or regulations or any other relevant law of the United States or of any country to which the Open Data Streams Software is exported.

(3) Liability. SYBASE IS A DIRECT AND INTENDED THIRD PARTY BENEFICIARY OF THIS SECTION OF EXHIBIT "A", TO THE EXTENT OF TERMS RELATED TO THE LICENSE OF OPEN DATA STREAMS SOFTWARE TO CUSTOMER, AND MAY ENFORCE SUCH RIGHTS DIRECTLY AGAINST CUSTOMER. NOTWITHSTANDING ANY OTHER PROVISIONS OF THIS AGREEMENT TO THE CONTRARY, IN NO EVENT SHALL SYBASE BE LIABLE TO CUSTOMER UNDER ANY THEORY OF TORT, CONTRACT, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY DAMAGES ARISING OUT OF OR RELATED TO THE OPEN DATA STREAMS SOFTWARE.

(4) Termination of Sybase License Agreement. The parties acknowledge that certain of the Open Data Streams Software is licensed to FDR pursuant to a license agreement between FDR and Sybase. In the event such license agreement expires or is terminated, FDR shall use commercially reasonable efforts to obtain or provide a substitute for such software. If FDR fails to provide a substitute for such software, FDR may terminate the Open Data Streams Services by giving Customer ninety days' notice.

(5) Development and Maintenance of Customer Developed Applications.

(a) Customer may, if in accordance with its Sybase license, use the software included in the development license it acquires from Sybase to develop applications to be used solely on the Access Points ("Customer Developed Applications'). Customer will develop Customer Developed Applications in substantial compliance with the reasonable recommendations of FDR.

(b) Customer shall promptly report to FDR any suspected error. At FDR's request, Customer shall provide FDR in writing a reasonably detailed description and documentation of the suspected error. Customer shall, at its expense, maintain all Customer Developed Applications and correct any Customer Developed Applications which are causing Operating Problems. FDR may deny access to the Open Data Streams System of any Customer Developed Application which is causing an Operating Problem. As used herein, the term "Operating Problem(s)' means any malfunction which (i) materially reduces the response time or performance of the FDR System, (ii) results in a substantially higher volume than

Exh. A-7

Customer's typical volume, or (iii) causes programs or other processes within the FDR System to terminate or otherwise cease operating properly.

(c) Customer shall, based on the reasonable direction of FDR, install and implement any replacement or upgrade of Sybase Software within ninety (90) days from the date that the upgrade is required for the Open Data Streams System and made available to Customer. At the conclusion of such ninety (90) day period, FDR's support services for the previous version of the Sybase Software will cease. Customer shall modify the Customer Supplied Equipment as necessary for use of any upgrades. Customer acknowledges and agrees that upgrades to the Sybase Software and upgrades or other modifications that FDR may make to the Open Data Streams System may result in failure of the Customer Developed Applications to operate properly. Customer shall make all corrections and revisions to the Customer Developed Applications as necessary for proper operation with any such upgrades and modifications. If Customer fails to make such corrections or revisions, FDR may deny access of such Customer Developed Applications to the Open Data Streams System.

(d) To resolve technical issues arising with respect to the Open Data Streams System, Customer shall implement and provide a telephone help desk staffed by trained personnel. The help desk shall be accessible to Customer employees during the same times that the FDR help desk is available (as provided in the Service Agreement). Customer shall instruct its employees to call Customer's help desk before calling the FDR help desk.

(6) Customer shall pay a minimum monthly fee for Open Data Stream services in the amount of [*] per month.

Exh. A-8

IV. Processing Fee Definitions/Prices (Debit/Credit Card Processing):

Item Number	Item	Definition	Price Per Item
n/a	Auth Plus Services	The debit card authorization support system services comprised of debit card authorization strategies, debit card specific authorization and advice options and debit card specific customer service functionality. This includes certain pc-based software used to establish and maintain strategies.
		The prices below for Auth Plus Services do not include and Customer shall pay FDR for any Cardholder Non-Monetary/On-Line Transactions created by tape or transmission in connection with the Auth Plus Services, and any other applicable fees and charges set forth in this Exhibit A in connection with such services (including but not limited to PIN Verification fees and tape related charges). Customer shall also reimburse FDR for any programming charges incurred by FDR in order to support Auth Plus Services on Customer's behalf.
3600	Auth Plus Cardholder on File	Each account of a debit card Cardholder of Customer that remains on Customer's debit card master file at FDR on the last processing day of the calendar month as defined in the CD-121 Ledger Activity Report or the equivalent report.	[*]
3601	Auth Plus-CPU Linked Authorization	Each authorization inquiry received by FDR that is routed to Customer for balance or authorization action.	[*]
3602	Auth Plus-Non-CPU Linked Authorization	Each authorization inquiry received by FDR which is not routed to Customer, but which accesses the debit card files of Customer at FDR.	[*]
3603	Auth Plus-CPU Linked Adjustment	Each CPU Linked monetary adjustment made by FDR to a debit card Cardholder Account of Customer.	[*]
3604	Auth Plus-Non-CPU Linked Adjustment	Each monetary adjustment, other than a CPU Linked monetary adjustment, made by FDR to a debit card Cardholder Account of Customer.	[*]
3605	Auth Plus-CPU Linked Address Verification	Each CPU Linked request received by FDR from a Merchant for a confirmation of the address of a debit card Cardholder Account of Customer.	[*]
3620	Debit Balance Update Transaction	Each transaction, entered into the FDR System via a file transmitted to FDR by Customer, which updates a Cardholder's debit card account balance.	[*]

Exh. A-9

7215	Cardholder Monetary Transaction	Each posting of a monetary transaction to Customer's Cardholder Accounts, including but not limited to sales, returns, cash advances, payments, reversals, adjustments and annual charges.	[*]
3515	Assistance Request (Voice)	Each miscellaneous customer assistance request from a Cardholder or Merchant of Customer that is received by FDR's voice authorization center.	[*]
7256	Debit Card Non-Monetary Transaction	Each entry of non-monetary information subsequently posted or unposted to a debit card Cardholder masterfile of Customer by the use of a terminal, through an ATM, or by tape.	[*]
7244	ODS Access Select	Transaction charge for ODS read-only, view select transactions Entered in conjunction with client developed applications. Fees are calculated an a per transaction level.	[*]
7289	ODS Access-update	Transaction charges for each ODS update Remote Procedure Call (RPC transaction entered by the Customer for applications developed by the Customer).	[*]
7270	ODS Access- DB2 Transactions	Transaction charges for ODS DB2 table transactions entered by the Customer in conjunction with applications developed by the Customer.	[*]
7204	Cardholder Account on File	Each account of a Cardholder of Customer (including but not limited to charged off, authorization only and debit accounts) that remains on Customer's master file at FDR on the last processing day of the calendar month as defined on the CD-121 Ledger Activity Report or the equivalent report	[*]
7217	Issuer Chargeback	Each return of a Ticket and receipt of the amount thereof from an Issuer to an Acquirer as provided for in the then-current MasterCard and VISA international rules and regulations, or applicable domestic regulations. Issuer Chargebacks subsequently reversed by the Acquirer will be forwarded by FDR to Customer for resolution via the On-Line Direct Sell Chargeback System.	[*]
7910	Potential Chargeback Queue	Each recording and display in an on-line work queue of transactions posting to a Cardholder Account of Customer that exceed a Merchant's floor-limit and cannot be matched to an authorization record.	[*]

Exh. A-10

7907	Automatic Chargeback	Each automatic initiation of a chargeback by the FDR System based upon predefined parameters for transactions, involving an expired account plastic, an account listed in the Combined Warning Bulletin, or an account which exceeds presentment parameters.	[*]
5708	Retrieval	Each request serviced by FDR in response to a request for a Merchant Ticket or copy of the same stored at FDR, on behalf of Customer, or available through MasterCom services. Retrieval services can include but are not limited to the manual fulfillment of the request by an FDR representative or the use of a MasterCom or VISA workstation, modem, scanner and proprietary system developed by MasterCard or VISA to enable the storage and transfer of documents as electronic images for retrieval purposes. With regard to the latter, FDR will (a) receive, via a MasterCom or VISA workstation located at FDR's premises, a copy of a Ticket image previously requested from an Acquirer by Customer or a notification from MasterCard or VISA that the Acquirer has failed to return a Ticket image within the time period permitted by MasterCard or VISA rules, (b) mail a copy of the Ticket image or notification to Customer and (c) transmit Customer's acceptance or rejection of each Ticket to MasterCard or VISA following receipt of Customers written instructions on acceptance or rejection of such Ticket. Following receipt by FDR of a request on the MasterCom or VISA system for a facsimile of a Ticket previously acquired by Customer and stored at FDR, FDR will retrieve the Ticket or a facsimile thereof and forward an image of such Ticket to the requesting party utilizing a MasterCom or VISA workstation located at FDR's premises. Following receipt by FDR of a request on the MasterCom or VISA system for a facsimile of a Ticket previously acquired by Customer and stored away from FDR's premises, FDR will (a) mail a request to the custodian of the Ticket and (b) utilizing a MasterCom or VISA workstation located at FDR's premises forward an image of such Ticket to the requesting party.	[*]
5727	Merchant 12B Letter	A letter sent directly to a Merchant of Customer requesting a Retrieval.	[*]

Exh. A-11

n/a	CIS	FDR's Customer Inquiry System (CIS) is an on-line system for storing and accessing Statement, Detail or Memo information regarding a Cardholder Account.	n/a
7311	CIS Statement	Each set of statement information regarding Customer's Cardholder Accounts that is stored on the FDR system and accessible by Customer via Customer's CRT terminals. CIS Statement information includes the information set forth on a Cardholder Statement such as, but not limited to, the name, address, account number, statement date, payment date, cycle days, annual percentage rates, and monthly periodic rates.	[*]
7312	CIS Detail	Each item of information regarding transactions that have posted or will post to a Cardholder Statement such as charges, payments, credits and authorizations not aged off the Cardholder's file, Cardholder payment history, and real-time authorizations.	[*]
7219	CIS Memo	Each summary item, not individually exceeding 65 positions, that is stored with the Customer's Cardholder Account information and is accessible by Customer via Customer's CRT terminal.	[*]
7405	RMS Reports—On-Line View	Each FDR Reports Management System (RMS) report provided to Customer by FDR via the FDR on-line system.
		For purposes of the billing of RMS Reports: (i) if the standard (or default) setting for a particular report is "0", then all pages of RMS On-Line View and RMS RJE of such report provided by FDR to, Customer shall be billed to Customer at the prices above, or (ii) if the standard (or default) setting for a particular report is a value other than "0", then each page of the RMS On-Line View of such report provided by FDR to Customer shall be at no charge and each page of RMS RJE of such report shall be billed to Customer at the prices above.	[*]
7404	RMS Reports—RJE/NDM	Each FDR Reports Management System (RMS) report provided to Customer by FDR via remote job entry (RJE) or Network Data Mover (NDM).	[*]

Exh. A-12

		For purposes of the billing of RMS Reports: (i) if the standard (or default) setting for a particular report is "0", then all pages of RMS On-Line View and RMS RJE of such report provided by FDR to Customer shall be billed to Customer at the prices above, or (ii) if the standard (or default) setting for a particular report is a value other than "0", then each page of the RMS On-Line View of such report provided by FDR to Customer shall be at no charge and each page of RMS RJE of such report shall be billed to Customer at the prices above.
7900	Lost/Stolen Account Processing	Automatic actions, relating to the processing of a Cardholder's Account statused as lost or stolen, required to prompt Customer fraud/security representatives, record the representatives directive(s) and request that a Cardholder Account number be listed in the appropriate Combined Warning Bulletin; automatically report the cardholder's Account number to Visa and MasterCard's Authorization Exception System, if applicable; systematically, based upon Customers pre-defined parameters, initiate the set-up of a new Cardholder Account; reconcile transactions posted but not yet statemented at the time of the Cardholder's reporting, including but limited to the transfer of valid transactions to the Cardholder's replacement account and identification and recording of non-valid transactions as fraudulent; automatically request approved reissue of account plastic(s) and suspend reissue of account(s) not approved for review by Customer; and automatically update the Cardholder's phone number in the Cardholder masterfile from the lost/stolen report.	[*]
7901	Lost/Stolen Report—FDR Entered C	Each report of a lost or stolen Transaction Card from the ardholder of Customer which is processed by FDR's Fraud Management Voice Operations. Reports entered on-line immediately change the external status and block authorization requests on the Cardholder Account Service includes lost/stolen reports received via collect call, telegram and telex	[*]
7902	Cardholder Hot Call Referral	Each authorization requiring intervention because Customer has requested recovery of the account plastic or positive identification in order to complete the authorization transaction.	[*]

Exh. A-13

7904	Cardholder Hot Call Fraud Referral	Each authorization attempt on a Cardholder Account of Customer statused lost/stolen or Code 10 authorization transaction where FDR's Fraud Management Voice Operations conducts an identification process, instructs the Merchant on the authorization's disposition and attempts recovery of the Transaction Card if the Card is identified as Lost/Stolen. Additionally, FDR may instruct the Merchant to recover the Transaction Card and, at Customer's option based upon predefined criteria, FDR shall dispatch the police to the Merchant location.	[*]
7905	Emergency Card or Cash Replacement Services	The capture and processing of information by FDR's Fraud Management Voice Operations in the performance of emergency cash authorization services or for coordinating the creation and delivery of a replacement card(s) for Customer's Cardholder.	[*]
7906	Returned Account Plastics Immediately Delivered (RAPID)	For each undeliverable Transaction Card, FDR will research and attempt to reroute to the Cardholder's new address. FDR will also enter the address change on the Cardholder masterfile. Returned Transaction Cards of Cardholders for which no new address is available, and those which Customer elects not to reroute, shall be destroyed.	[*]
7931	Fraud Management/Fraud Detection (Falcon) Services—Monthly Gross Active Account	Each Cardholder Account processed through the Falcon system which Account had a balance or any monetary posting for the onth billed, as determined by FDR for Customer.	[*]
7980	Fraud Management/Fraud Detection (Falcon) Services—Call Processing—Predictive Dialer, Domestic)	Any account routed to the FDR Fraud Detection WorkCenter queue group and called using a predictive dialer which results in any ne or more of the following activities in a single 48-hour eriod: outgoing/incoming Cardholder phone calls with a maximum of 4 attempts within any single 48-hour period, CIS Memos, Letter generation or account statusing.	[*]
7207	Letter	Each letter prepared by FDR's computer, in accordance with Customer's Product Control File settings or CRT entry requests made by employees of Customer. Each such Letter shall have on-line composition and editorial features and options including signatures, logos, multiple type faces and additional page letter generation-Service includes any preparation required for delivery.	[*]

Exh. A-14

7208	Letter—Insert	Each inserting of advertising or other item of information not contained on a Letter, including but not limited to generic reply envelopes, into a windowed envelope containing a Letter.	[*]
7209	Letter—Additional Page	Each printed output on the reverse side of a Letter (duplex printing) or each side of each sheet of 8¹/2" by 11" 24 1b. bond stock accompanying a Letter.	[*]
7210	Letter—Priority Mailing	Each Letter, with or without Letter Insert, which is handled separately from Customer's first class mailings to provide next day delivery of said item.	[*]
7211	Letter—Certified Mail Handling	Each Letter, with or without Letter Insert, which is handled separately from Customer's first class mailings to provide certified delivery of said item. This does not include postage.	[*]
7213	Letter—Set-up, Revision or Deletion	Each addition, deletion or change, performed by FDR on behalf of Customer, of a Customer's Letter format or inputs including but not limited to digitized signatures and logos of Customer.	[*]
7601	PlastiCard Standard Embossing Services	Each plastic card for which FDR has mechanically raised personalized characters prepared at the request of Customer based upon Customer's Product Control File or a CRT entry request made by an employee of Customer, or in response to a receipt of a magnetic tape or transmission from Customer of embossing files in a format defined by FDR. Includes up to three lines of alpha-numeric font and one line of OCR font on a ".030" plastic, the recording and verifying of data on the Transaction Card's magnetic stripe (high or low coercivity), the tipping of the plastic through the placement of a contrasting color plastic film on the raised embossed characters, the printing of variable card carrier information on a Customer-specified card carrier form and the insertion of a card carrier containing a merged Cardholder plastic into an envelope, and the electronic matching of plastic to the related card carrier. An FDR generic card carrier and envelope are included at no charge, provided, however, that due to increased inventory cost, if Customer uses its own materials, Customer will not be entitled to receive a price discount.	[*]

Exh. A-15

		FDR will generate embossing information based upon Customer's Product Control File (or, at Customer's option, receive embossing information via tape from Customer), use such information to prepare the embossed plastic and mail the embossed plastic on behalf of Customer to its Cardholder at the Cardholder's then current address.
7600	PlastiCard Embossing Set-Up	Each instance in which a change is made to any or all of (i) Customer's prin level (if prin level billing for set-ups is required), (ii) the plastic stock number, (iii) card carrier, (iv) tipping foil, (v) card activation flag and sticker and/or (vi) ultragraphic color in connection with Customer's plastic cards.	[*]
7605	PlastiCard Vault Storage	The inventory and storage of plastics procured through a source other than FDR.	[*]
7615	PlastiCard Pull	Each removal of a card carrier and/or printed PIN/POST Mailer from the delivery/mail stream prior to delivery to Customer or Customer's Cardholder. This includes but is not limited to pull and destroys, pull and mail to different address and pull and mail overnight (3 day turnaround).	[*]
7616	PlastiCard Inserting	The inserting of each accompanying piece of materials into a #10 windowed envelope along with a pre-folded card carrier containing a merged Cardholder plastic. Excludes inserts required by state or Federal law. Customer supplies inserts.	[*]
7618	PlastiCard Job Processing	Each scheduled daily receipt of a Customer's Cardholder Account information, including logging onto the AS400 system and setting up control reports for each input	[*]
7624	PlastiCard CVV/CVC Verification Generation	The calculation and encoding and/or indent printing of the VISA Card Verification Value (CVV) or MasterCard Card Validation Code (CVC).	[*]
7663	PlastiCard DES PIN Generation	Each Data Encryption System (DES) Personal Identification Number (PIN) created by the FDR System in connection with a plastic card produced by FDR on behalf of Customer.	[*]
7622	PlastiCard Card Activation Labeling	Each affixation of a sticker to each embossed plastic in a Customer Cardholder embossing run; a generic sticker is included at no additional charge.	[*]
7625	PlastiCard Bulk Packaging—Basic Sort	The separation from the production run of accounts from individual systems, principals, agents or grouping of zip codes.	[*]

Exh. A-16

7680	PlastiCard Pull (1 or 2 Day Non-Holds)	Each removal of a card carrier and/or printed PIN/Post mailer form from the production process prior to delivery to Customer or Customers Cardholder. This includes but is not limited to pull and destroys, pull and mail to a different address and pull and mail overnight (1 and 2 day turnaround with holds).	[*]
7606	PlastiCard Mail Handling	Mail preparation and handling fees associated with non-first class mailings of Customer's Cardholder and Merchant plastics.	[*]
7609	PlastiCard Manual Rush Embossing	Rush servicing of a Customer request for an embossed Cardholder plastic received from hardcopy, faxed or mailed reports or requests where FDR mail or delivers the plastic to a courier during the same day as the Customer's request is received. Service includes manual embossing, carrier printing, hand inserting and other services required to prepare the plastic for delivery, and applies to my plastic piece handled separately from Customer's PlastiCard Standard Embossing Services.	[*]
7611	PlastiCard Automatic Rush Embossing	Each rush servicing of a Customer request for a Cardholder embossed plastic and/or PIN/Post Mailers through use of on-line rush program on the FDR System. Cards ordered day 1 will be mailed day 2.	[*]
7614	PlastiCard Ultragraphics	Each side of a Transaction Card of Customer on which a logo is placed through the use of a thermal image process.	[*]
7617	PlastiCardMail Integration	The mixture by FDR of a mail item containing an embossed plastic with several other types of mailing item prior to their delivery to the United States Postal Service for mailing. Anything in this Agreement to the contrary notwithstanding, Customer understands and agrees that, with respect to any embossed plastics for which FDR provides PlastiCard Mail Integration Services, the normal turnaround for the mailing of such embossed plastics shall, for purposes of this Agreement, be delayed by one (1) business day.	[*]
7627	PlastiCard Forms Purchased	Each item of paper material ordered by FDR on behalf of Customer including but not limited to card carriers, inserts and envelopes	[*]
7628	PlastiCard Plastics Purchased	Each item of plastic stock ordered by FDR an behalf of Customer.	[*]

Exh. A-17

7629	PlastiCard Incoming Material Shipping	The shipping charges associated with incoming PlastiCard materials purchased by FDR on behalf of Customer.	[*]
7636	PlastiCard Programming	The fee associated with each programmer hour of computer programming supplied by FDR = PlastiCard programming staff.	[*]
7637	Custom Forms Purchased	Any paper materials (including but not limited to inserts, forms and agreements) ordered and purchased by FDR on behalf of Customer in connection with the Cardholder Statement and Insert services set forth in this Agreement.	[*]
7639	PlastiCard Image Scanning	Each logo or other image stored by FDR as a digitized image on a data base for up to five (5) years.	[*]
7640	PlastiCard Expedited Turnaround	Accelerated mailing of all of Customer's daily issue plastics.	[*]
7645	PlastiCard Smart Card Personalization	Each Cardholder plastic of Customer for which FDR performs a process of loading a dollar value or Customer specific information onto, and initialization of, a smart card computer chip embedded within the plastic.	[*]
7678	PlastiCard Same Day Embossing™ (PSD)	Each embossed Cardholder plastic where FDR mails or delivers he plastic to a courier during the same day of Customer's request via an on-line screen. The service includes standard embossing, carrier printing, inserting and other services required to prepare tile plastic for delivery. Requests for PlastiCard Same Day Embossing™ must be received by 1400 hours Central Time Zone.	[*]
7689	PlastiCard Template Creation	Each half hour of labor required of FDR to create, paint or revise an overlay document used to print onto a page for a card carrier and/or mailer.	[*]

Exh. A-18

n/a	PlastiCard Photocard Services (1" × 1" or 2" × 2")	Process by which FDR creates an embossed plastic containing an image provided by the Cardholder. Customer and FDR hereby agree that all photographs sent to FDR by Customer for use by in the performance of the PlastiCard Photocard Services set forth in this Agreement shall, prior to delivery to FDR, be reviewed by Customer for content. Customer acknowledges and agrees that, with respect to the issuance of Photocards to its Cardholders, FDR has no responsibility and assumes no responsibility whatsoever for the content of any such photographs, and that Customer is solely responsible for interpreting applicable state and federal laws (including but not limited to laws governing obscenity, privacy, proprietary information ownership rights and copyright/trademark infringement), monitoring applicable legal developments, determining the requirements for compliance with all applicable state and federal laws, and maintaining an ongoing compliance program in connection with such services.	[*]
7664	PlastiCard Photocard Photo Transfer (1 × 1)	The affixation of a digitized photographic image (not larger than 1 × 1) to a plastic Transaction Card.	[*]
7642	PlastiCard Image Management (1 × 1)	The acceptance and management by FDR of each 1 × 1 electronic photo image scanned by a party other than FDR for use on the FDR PlastiCard Customer Services image database. Each such image shall be stored by FDR for use for up to five (5) years.	[*]
7665	PlastiCard Photocard Photo/Signature Scanning and Digitization (1 × 1)	The process by which FDR (i) scans a photograph or signature (not larger than 1 × 1), (ii) cleans/crops the photograph or signature and (iii) stores such photograph or signature as a digitized image on a data base for up to five (5) years.	[*]
7666	PlastiCard Photocard Photo Image Handling and Merge (1 × 1)	The handling and merging of images (not larger than 1 × 1) with corresponding data to create an output file.	[*]
7699	PlastiCard Photocard Photo Image Handling and Merge (2" × 2")	The handling and merging of images (2" × 2") with corresponding data to create an output file.	[*]
7667	PlastiCard Photocard Photo Transfer (2 × 2)	The affixation of a digitized photographic image (2 × 2) to a plastic Transaction Card.	[*]

Exh. A-19

7668	PlastiCard Photocard Photo Scanning and Digitization (2 × 2)	The process by which FDR (i) scans a photograph (2 × 2), (ii) cleans/crops the photograph and (iii) stores such photograph as a digitized image on a data base for up to five (5) years.	[*]
7700	PlastiCard Image Management (2 × 2)	The acceptance and management by FDR of each 2 × 2 on the FDR PlastiCard Customer Services image database. Each such image shall be stored by FDR for use for up to five (5) years.	[*]
4435	Postal Discount Processing Fee	The fee associated with providing any postage discount generating services for Customer's first class mailings.	[*]
7402	Non-Standard Job Run	Each scheduled daily, weekly or monthly production of a data set on behalf of Customer that is in addition to the standard data outputs produced by the FDR System.	[*]
7411	Interface Services—RJE/NDM	Each transmission to, or receipt by, FDR of Customer's data via a central processing unit to central processing unit transmission using Remote Job Entry or Network Data Mover (RJE or NDM.	[*]
7412	Interface Services—Tape to Tape	Each transmission to, or receipt by, FDR of Customer's data via a central processing unit to central processing unit transmission using a tape to tape interface.	[*]
7408	Interface Services—Magnetic Tape Handling	Each receipt of data by FDR from Customer or a third party designated by Customer or each forwarding of data to Customer or a third party designated by Customer from FDR via mailed or courier delivered magnetic media including, but not limited to, diskettes and magnetic tapes.	[*]
8200	Service Requests	Client requests for services which may include Retail Services start-up fees, Behavior Scoring installation fees, Reruns, DES PIN access charges, promotional letters programming, program requests, Online Reporting setup fees, PC terminal connect fees, etc.	[*]
8202	Network Control Requests	Programming and access specifications for client terminals.	[*]

Exh. A-20

Processing Fee Definitions/Prices (Online Processing):

Item Number	Item	Definition			Price Per Item
401	Base Monthly Fee	Base services which enables FDR to provide online connectivity and online debit processing services to Customer, including:			[*]
		•	One standard FDR Regional Network connection using a standard network transaction set. This includes the hardware, software, and processor fees necessary to route a network transaction performed by an eligible cardholder or acquired at an eligible ATM. Settlement, reporting, and network monitoring are included in this fee. The current regional networks available from FDR include:
			o	Star/Honor
			o	NYCE/Magic Line
			o	Cash Station
			o	Pulse
			o	CU24
			o	TYME
			o	MAC
			o	Quest EBT (via Star/Honor or Pulse)
			o	Oregon Trail EDT (via Star/Honor)
			o	Utah EBT (via Star/Honor)
			o	Louisiana EBT (via Pulse)
		•	All standard National Network connections using standard network transaction sets. This includes the hardware and software necessary to route a transaction performed by an eligible cardholder or acquired at an eligible ATM. Monitoring of the links and settlement of the transactions are included. Membership and sponsorship fees imposed by the national networks, or levied by the sponsoring institution, are not included in this fee. The current national networks include:
			o	Cirrus/MasterCard ATM
			o	Plus/Visa ATM
			o	American Express
			o	Discover
			o	Interlink
			o	Maestro

Exh. A-21

		•	One standard FDR ISO 8583 processor connection or standard FDR authorization service. This includes the cost of monitoring the availability of the host, as well as monitoring the communications link with the host. It does not include the cost of the telecommunications circuit and equipment between FDR and the host.
		•	One daily balance file update using FDR standard file format. This includes the daily receipt and application, via electronic transmission, by FDR from Customer, of a balance file update. This may be in the form of a full file replacement or a balance file refresh.
		•	One daily batch file for Customer cardholder file maintenance using FDR standard file formats. This includes the daily receipt and application, via electronic transmission, by FDR from Customer, of a cardholder file maintenance update.
		•	One daily posting file in FDR standard file format.
		•	PIN encryption/validation services, whereby FDR accommodates PIN encryption and validation using hardware encryption modules. Encryption keys can remain constant or change periodically. The method of security is defined separately for each physical link. Security safeguards are built in to ensure that keys can only be changed by authorized FDR personnel. Hardware encryption and key handling are provided on regional and national networks as required by appropriate network operating rules.	[*]
490	Transaction Processing	Transaction fees are charged for each transaction attempted at Customer's ATM and passed through the FDR switch for processing, as well as transactions processed for Customer's cardholders at regional or national network ATM or POS locations. This transaction fee applies to all accepted and rejected online (PIN-based) ATM and POS transactions, and excludes all off-line (signature-based) transactions (which are priced in Section IV above as item #3601 — Auth Plus-CPU Linked Authorization). The tiered pricing at right represents each transaction and is based on monthly volume.		[*]

Exh. A-22

425	Additional Concurrent Administrative Terminal ID's	This fee applies if Customer wishes for FDR to maintain additional concurrently available administrative terminal id's for Customer. NOTE: Two concurrent id's are included in item #XXXX-Base Monthly Fee.		[*]
460	Additional Daily ACH File Distribution	This fee applies if Customer wishes to receive additional ACH posting file transmissions each day. The fee applies to each additional file per day.		[*]
415	Additional Daily Positive Balance Files	This fee applies if Customer wishes to transmit to FDR more than one Positive Balance File update per day. The fee applies to each additional file per day.		[*]
424	Additional Mailbox Software	This fee applies if Customer requests additional copies of Mailbox, the PC-based report distribution software used to retrieve FDR's reports and files.		[*]
426	Additional Non-Concurrent Administrative Terminal ID's	This fee applies if Customer wishes for FDR to maintain additional non-concurrently available administrative terminal id's for Customer. NOTE: Two concurrent id's are included in item #XXXX-Base Monthly Fee.		[*]
423	Additional Outside View Software	This fee applies if Customer requests additional copies of Outside View, the PC-based terminal emulation software used to access FDR's administrative terminal system		[*]
427	Additional User Manuals	This fee applies if Customer requests additional user manuals from FDR.		[*]
413	Administrative Terminal Access and Report Distribution	This fee includes FDR's administrative terminal services specifically relating to online ATM and POS transactions. This also entails the distribution, storage and access to all reports associated specifically with online ATM and POS transaction processing. The service includes:
		•	Distribution of these reports via RJE, NJE, NDM or Mailbox PC-based software.
		•	Online microfiche retention of all reports for two years.
		•	Software support for one administrative terminal (Outside View PC software), giving access to online processing system (transaction research and database information) and card management system

Exh. A-23

		•	Two concurrent administrative terminal id's
		•	Report viewing access using Outside View PC software or direct IBM to IBM connectivity	[*]
422	Exception Item Handling	This fee applies to any exception item or adjustment handled on behalf of Customer by FDR. Any network fees associated with the exception item or adjustment is passed through to Customer.		[*]
420	National Network Sponsorship	This fee applies if Customer wishes for FDR to provide sponsorship to any national network. FDR will assist Customer to the best of its ability to secure membership in the standard national networks listed in item #XXXX-Base Monthly Fee. All membership fees, special bank fees are the responsibility of Customer. All network-originated fees are also pass-through to Customer.		[*]
421	Report Redistribution	This fee applies if Customer requests a re-distribution of any report that was previously transmitted to Customer.		[*]
428, 455- 458	Telecommunications Lines and Equipment	All telecommunications lines and equipment ordered, installed, and maintained by FDR for Customer is provided on a specific quote basis and approved by Customer prior to ordering.		[*]
438	Testing	This fee is for switch resources and includes all computer hardware, software, and personnel required to prepare the test, perform the test, dismantle the test, and perform normal test analysis as defined by FDR on behalf of Customer. A maximum of 30 minutes of test switch resource usage additional to actual or scheduled time may be charged for test preparation and dismantling. Minimum of one hour must be scheduled for any testing, and time is calculated in 30 minute increments. This fee does not include telecommunications costs.		[*]

Processing Fee Definitions/Prices (Additional Credit Card Processing Services):

7260

Account-Level Processing (ALP)—Cardholder Pricing Account on File

Each account of a Cardholder of Customer using Account-Level Processing that remains on Customer's masterfile on the last processing day of the calendar month as defined on the CD-121 Ledger Activity Report or the equivalent report. ALP Services-Cardholder Pricing allow Customer the ability to set, change and monitor pricing parameters (including but not limited to annual percentage rate, penalty fees, minimum payment calculations and annual charges) on a Cardholder Account automatically at the level of the individual Account based upon decision tables built by Customer.

[*]

Exh. A-24

8500	Adaptive Control System	The number of instances (transactions) in which a Cardholder Account on File (as defined herein) of Customer is processed through the Behavior Scoring System, which may or may not include any of the applicable adaptive control decision areas (specifically, credit line management, reissue management delinquent collections or overlimit collections), for the applicable calendar month, subject to certain agent-level bank exclusions. The Behavior Scoring System is an account control system which aids in the management of credit accounts. Components of the account control system include (i) behavior scorecards that rank account according to risk, (ii) software that implements various account management strategies by using the behavior scores of accounts to determine various actions to be taken on such accounts, (iii) software that reports the results of alternative strategies to provide input to measure the relative effectiveness of such alternative strategies; and (iv) human statistical analysis of reports resulting in feedback on the performance of alternative strategies and the development of new alternative strategies.	[*]
		Customer and FDR hereby agree that the Basic Behavior Scoring Service pricing is referenced herein only for convenience, and that such service shall only be available to Customer pursuant to a separate Behavior Scoring and Adaptive Control Service Agreement to be mutually agreed upon by Customer, FDR and Fair, Isaac and Company, Inc. prior to the commencement of such services.
8501	Adaptive Control System—Authorization Decision Area	The account management strategy which uses behavior scores of accounts to determine actions with respect to authorizations. The prices for this service are provided herein for reference only. Customer and FDR hereby agree that, prior to the commencement of any such services by FDR on behalf of Customer, Customer and FDR shall be required to execute a separate contract which shall include all terms and conditions for the provision of such services.	[*]
7220	Application Processing Services (EAPS)	An on-line system supporting the data entry, credit investigation, credit analysis, decisioning, documentation and booking of credit applications on the FDR System. Services include automated credit scoring and credit limit assignment.	[*]

Exh. A-25

3510	Cardholder Authorization Inquiry	Each instance in which the Cardholder records of Customer are accessed for an authorization, including but not limited to personal identification number (PIN) verification and Cardholder address verification services, or when the authorization request is switched to Customer's location to access the off-site Cardholder masterfile of Customer.	[*]
7215	Cardholder Monetary Transaction	Each posting of a monetary transaction to Customer's Cardholder Accounts, including but not limited to sales, returns, cash advances, payments, reversals, adjustments and annual charges.	[*]
7205	Cardholder Statement	Each periodic summarization of activity (whether printed or otherwise) associated with a Transaction Card issued by Customer, including but not limited to single statements, dual statements, and reprints of information from a CIS Statement currently stored on-line on the FDR System. Service includes statement messaging on original statements and preparation required for delivery.	[*]
*7240	Cardholder Statement First Class Mail	Bankcard statements are a printed monthly communication of itemized and summarized credit card transactions. Statements are comprised of two components: processing, and printing and mail preparation. This billing element is exclusive to the print and mail preparation process. Printing and mail preparation functionality is all the processes necessary to laser print and insert a statement and a remittance envelope into a carrier envelope. This billing element does not include the postage required to mail a statement.	[*]
7206	Cardholder Statement Insert	Each inserting of advertising or other item of information not contained on a Cardholder Statement into an envelope containing a Cardholder Statement: inserts required by state or federal law do not apply.	[*]

Exh. A-26

7222		On-Line Credit Bureau Report Request		The transmission or receipt of credit application or existing account information via video display terminals at Customer's location to any of the principal credit bureaus presently interfaced to FDR with which Customer has established a written relationship that is in effect at all times during the term of this Agreement in order to determine the credit worthiness of an applicant/account. Anything in this Agreement to the contrary notwithstanding, in the event that Customer's relationship(s) with all of the principal credit bureaus supported pursuant to this Agreement should be terminated at any time during the term of this Agreement, then FDR's obligation to provide Credit Bureau Report Requests shall automatically be terminated, without penalty or financial obligation of any type or kind to FDR, on the effective date of the termination of Customer's relationship(s) with such principal credit bureaus.		[*]
2836		Transaction Level Processing (TLP) Promotional Balance on File		The monthly charge for each promotional purchase balance, associated with a Cardholder Account of Customer (several promotional purchase balances may exist at the same time for the same Cardholder Account), which remains on the FDR System on the last processing day of the calendar month, as defined on the CD-121 Ledger Activity Report or the equivalent report (e.g. - the CD-621 Report).		[*]

V. Reimbursements and Assessments

a. The communications data circuit, including the reoccurring service charge, service termination fees and required modem(s) (data sets) at Customer's location(s) and FDR, terminal, devices, and any other directly associated expenses, shall be at Customer's expense. The data circuit cost will be no greater than that associated with a digital data circuit(s) based on the tariffs of FDR's primary carrier. One time costs related to the installation of the circuit as specified by such tariffs, will also be paid by Customer. The actual circuit speed and ensuing cost will be determined by Customer's communications requirements.

b. Customer shall be responsible for and may be billed directly for any MasterCard, VISA, Network or other Transaction Card dues, fees and assessments. Customer shall reimburse FDR for Base Access Fees incurred by FDR on behalf of Customer. (IN—3513)

c. Customer shall pay all courier expenses associated with the transportation of reports and documents from Customer to FDR and from FDR to Customer.

d. (i) FDR agrees to act as an agent on behalf of Customer and Customer shall reimburse FDR at cost (after applying any applicable rebates, refunds and discounts) for the purchase on Customer's behalf of the postage required to mail notices, letters and other materials mailed by FDR on behalf of Customer. While this Agreement is in effect, Customer shall pay FDR daily pursuant to this Agreement at the then current first class, single piece postage rate for all mailings mailed by FDR for Customer during that day. Within ten (10) days after the end of the month, FDR shall (i) calculate, for each discount category offered by the United States Postal Service (AUSPS@) which is used by Customer, the percentage of mailings with respect to all customers of FDR that qualified for such

Exh. A-27

discount and the number of first class mailings mailed by FDR for Customer during such month and (ii) include a credit on Customer's monthly invoice for the amount Customer is entitled to receive under this section. Such credit shall be calculated by applying such percentage for each USPS discount category against Customer's total mailings in such category to determine the appropriate USPS discount Customer is entitled to receive.

(ii) Notwithstanding anything in paragraph (i) above, FDR agrees to act as an agent on behalf of Customer and Customer shall reimburse FDR at cost (after applying any applicable pre-sorting rebates, refunds and discounts) for the purchase on Customer's behalf of the postage required to mail Cardholder plastics mailers on behalf of Customer. While this Agreement is in effect, Customer shall pay FDR daily pursuant to this Agreement at the then current first class, single piece postage rate for all Cardholder plastics mailers mailed by FDR for Customer during that day. Within ten (10) days after the end of the month, FDR shall (i) calculate, for the pre-sorting discount category offered by the United States Postal Service (AUSPS@), the percentage of mailings with respect to all customers of FDR that qualified for such discount and the number of Cardholder plastics mailers mailed by FDR for Customer during such month and (ii) include a credit on Customer's monthly invoice for the amount Customer is entitled to receive under this section. Such credit shall be calculated by applying such percentage for the USPS pre-sorting discount category against Customer's total Cardholder plastics mailings in such category to determine the appropriate USPS discount Customer is entitled to receive.

e. Customer shall not be required to pay FDR any fee for the services performed by FDR in connection with the initial Start Up provided for in Section 2.3. Except for the Start-up or conversion of the Customer's credit card portfolio which shall be provided in accordance with FDR's standard procedures at no charge to Customer, the costs for subsequent Start-Ups shall be as set forth in the Agreement or as mutually agreed and set forth in the Start-Up plan.

f. For each Reward processed by FDR, Customer shall reimburse FDR for the amount of the Reward payment to the Merchant, plus any additional fees or charges to which FDR is entitled under applicable MasterCard and VISA rules and regulations in connection with the processing of such Reward. A Reward shall mean each monetary payment made to a Merchant for the recovery of a statused Transaction Card of Customer, which payment is processed by FDR in accordance with the reward schedule established by MasterCard and VISA for card pick-up. (IN—7915)

g. Customer shall reimburse FDR for special service set-up/certification fees and charges, training fees and programming fees including but not limited to the set up/training charges associated with FDR's Customer Inquiry Management System (CIMS) Services, PIN Management System Services, Extended CIS Services, PC Remote Access Services, Online Access and Retrieval System (OARS) Services, ANI Card Activation Services, Promotional Letter Services, Fraud Management/Fraud Detection Services (Scoring and Strategy Start-Up and Call Processing), Auto PIN Change service and other services requiring special programming or training. Prices for such services shall be provided by FDR upon Customer's request.

h. Customer shall reimburse FDR for destroyed forms, product service selects, network control requests, equipment sales, supplies and documentation manuals.

i. If FDR is required by any Network or Network member to sign a "sponsorship", "processor", or similar type agreement (a "Network Agreement"), Customer shall pay or reimburse to FDR all fees, costs, liabilities or obligations arising out of such Network Agreement.

VI. Processing Fee Rebate

a. Within one hundred twenty (120) days following the conclusion of each Processing Year during the Term of this Agreement after Processing Year 1, FDR shall determine the Total Annual

Exh. A-28

Processing Fees paid to FDR by Customer during the just concluded Processing Year. If, during the Processing Year 2, Customer pays to FDR Total Annual Processing Fees in excess of [*] then Customer shall be entitled to a Processing Fee Rebate for Processing Year 2. If, during any Processing Year during the Term of this Agreement after Processing Year 2, Customer pays to FDR Total Annual Processing Fees in excess of [*] then Customer shall be entitled to a Processing Fee Rebate for such Processing Year. The Processing Fee Rebate shall be a rebate paid to Customer by FDR in the form of a credit against Processing Fees due FDR by Customer for the calendar month immediately following the completion of the applicable calculation, and shall be in an amount calculated based upon the schedule below:

FOR PROCESSING YEAR 2

Total Annual Processing Fees Paid		Rebate Percentage Applicable to the Corresponding Portion of the Total Annual Processing Fees Paid
[*]	[*]	[*]
[*]	[*]	[*]
[*]	[*]	[*]

FOR EACH PROCESSING YEAR AFTER PROCESSING YEAR 2

Total Annual Processing Fees Paid		Rebate Percentage Applicable to the Corresponding Portion of the Total Annual Processing Fees Paid
[*]	[*]	[*]
[*]	[*]	[*]
[*]	[*]	[*]

b. The Rebate Percentage for each corresponding level (tier) of Processing Fees comprising the Total Annual Processing Fees for the qualifying Processing Year shall be multiplied by its corresponding level (tier) of Processing Fees, and the sum of the products of each such calculation shall equal the Processing Fee Rebate for the qualifying Processing Year. [*]

c. The parties hereby agree that if this Agreement is terminated for any reason prior to the completion of a Processing Year then no Processing Fee Rebate shall be paid for such Processing Year or any subsequent Processing Years.

VII. Explanation of Pricing Terms

For purposes of this Exhibit A: (i) "quote" means this Agreement does not contemplate the use of this service or product, but FDR shall, on the request of the Customer, provide a price for such service or product, (ii) An/a@ means the applicable description is an overall description of the applicable service for reference only and does not describe a particular billing element, and (iii) "included" means the charge for the service or product is included in the price of other items in this Exhibit A.

VIII. Prices for Services Not Covered by This Agreement

For any services performed by FDR at Customer's direction which are neither set forth in this Exhibit nor covered by a separate agreement, Customer shall pay FDR for such services at FDR's then current standard rates.

Exh. A-29

EXHIBIT B

AFFILIATE AGREEMENT

The undersigned, as an Affiliate of X.com Corporation ("Customer"), hereby wishes to receive Services from First Data Resources Inc. ("FDR") pursuant to the Debit Card Service Agreement between Customer and FDR dated as of September , 2000, as the Debit Card Service Agreement may be amended from time to time (the "Agreement"). This agreement (the "Affiliate Agreement") shall constitute an "Affiliate Agreement" as such term is defined in the Agreement. In making this request, Affiliate agrees as follows:

1. Affiliate acknowledges receipt of a copy of the Agreement which includes the description of the Services. Affiliate agrees to be bound by all of the terms and conditions of the Agreement including any terms and conditions in any amendment to the Agreement which may hereafter be agreed to by Customer whether or not Affiliate is provided notice or a copy of or is a signatory to the amendment.

2. Affiliate specifically agrees to comply with the applicable rules, procedures, manuals and instructions of MasterCard, VISA, Network and FDR as in effect from time to time.

3. Customer shall have full authority to represent Affiliate and to act fully on Affiliate's behalf in connection with this Affiliate Agreement and the Agreement including the negotiating with FDR of any amendments, extensions or revisions of this Affiliate Agreement or the Agreement, the asserting, negotiating and resolving of any controversy, dispute or claim under this Affiliate Agreement or Agreement and the execution or delivery of any documents.

4. If Customer shall fail to pay any amounts due under the Agreement, Affiliate shall pay FDR on demand the portion of such amounts due from Customer to FDR for services performed by FDR for or on behalf of Affiliate (as determined by FDR, based upon the percentage that the Processing Fees relating to processing for Affiliate are of the total Processing Fees under the Agreement).

5. This Affiliate Agreement shall be governed by the laws of the State of Nebraska and any claim, suit or proceeding shall be subject to the provisions of Article 5 and Exhibit D of the Agreement.

6. Affiliate acknowledges and agrees that it may not transfer or assign its rights under this Affiliate Agreement without the prior written consent of FDR.

7. Capitalized terms used in this Affiliate Agreement which are not defined herein shall have the same definitions as provided in the Agreement.

8. Any notice to Affiliate shall be given as provided in Section [] of the Agreement except to the following address:

Name:

Address:



Attention:

Telecopy No.:

Any notice to FDR shall be given as provided in Section [] of the Agreement.

9. This Affiliate Agreement shall remain effective until the expiration or termination of the Agreement and all obligations under this Affiliate Agreement and as set forth in Section [] of the Agreement shall survive. This Affiliate Agreement, along with the Agreement as the Agreement may be amended from time to time, sets forth the entire understanding of the parties with respect to the

Exh. B-1

subject matter hereof and supersedes all prior agreements or understandings among the parties with respect to the subject matter hereof. This Affiliate Agreement may not be amended except in a writing signed by an authorized officer or representative of each of the parties hereto. This Affiliate Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

Name of Affiliate
By:

Name:

Title:

Date:

ACCEPTED AND AGREED TO:
FIRST DATA RESOURCES INC.
By:

Name:

Title:

Date:

Exh. B-2

EXHIBIT C

DEFINITIONS

The following definitions apply to the terms set forth below when used in this Agreement:

"AAA" is defined in Exhibit D to this Agreement.

"Acquire" (and with the correlative meaning "Acquisition") means to acquire, directly or indirectly, an interest through purchase, exchange or other acquisition of assets, stock or other equity interests, or to merge or consolidate or any similar transaction.

"Acquirer" means an Entity which has an arrangement with a Merchant to obtain Transaction Card Tickets from the Merchant and present the Transaction Card Tickets through an Interchange to an Issuer.

"Affiliate" means, with respect to any Entity, any other Entity which, directly or indirectly, owns or Controls, is owned or Controlled by, or is under common ownership or common Control with such Entity.

"Affiliate Agreement" shall mean an agreement in the form of Exhibit B which is executed by Customer's Affiliates.

"Agreement" shall mean this Service Agreement as amended from time to time including any Exhibits attached hereto from time to time, and the executed Affiliate Agreements, if any.

"Arbitration Demand" is defined in Exhibit D to this Agreement.

"Arbitration Panel" is defined in Exhibit D to this Agreement.

"Basic Qualifications" is defined in Exhibit D to this Agreement.

"BIN" means a Bank Identification number issued by VISA.

"Business Continuity Plan" is defined in Section 12.2 of this Agreement.

"Cardholder" means an individual or Entity which has a Cardholder Account with an Issuer.

"Cardholder Account" means an arrangement between an individual or an Entity and an Issuer which provides that the individual or Entity may use one or more Transaction Cards issued by the Issuer.

"Change of Control" shall mean a change in the director indirect ownership of a majority of an Entity's (including Customer and any Affiliate of Customer) outstanding capital stock (or other form of ownership) or a majority of the voting power in any election of directors.

"Client" means any client of Customer.

"Control" (and with the correlative meaning "Controlled") means the power to direct the management or affairs of an Entity and "ownership" means the beneficial ownership of more than 50% of the equity securities of the Entity.

"Customer's Accounts" means the Cardholder Accounts of Customer.

"Customer's Proprietary Information" is defined in Section 10.1 of this Agreement.

"Daily Amount" is defined in Exhibit F to this Agreement.

"Deconversion" means cooperation in migration of the Services to Customer or a new processor on behalf of Customer and the transfer of information concerning Customer's accounts from the FDR System to Customer or a new processor pursuant to FDR's standard deconversion procedures upon expiration or following termination of this Agreement.

Exh. C-1

"Dispute" is defined in Section 5.1 of this Agreement.

"Disputing Party" is defined in Exhibit D to this Agreement.

"Enhancements" is defined in Section 2.2 of this Agreement.

"Entity" means a corporation, partnership, sole proprietorship, joint venture, or other form of organization.

"Excluded BIN" is defined in Section 3.1 of this Agreement.

"Existing FDR Agreement" is defined in Section 3.2 of this Agreement.

"Existing Non-FDR Agreement" is defined in Section 3.3(a) of this Agreement.

"FDR Portfolio" is defined in Section 3.2 of this Agreement.

"FDR's Proprietary Information" is defined in Section 10.2 of this Agreement.

"FDR Settlement Rules" means the policies, rules and procedures adopted by FDR from time to time and in effect from time to time to provide for the payment of amounts due as the result of Interchange Settlement, it being understood that FDR shall make known to Customer in advance all changes or modifications to such rules.

"FDR System" means the computer equipment, computer software and related equipment and documentation used at any time and from time to time by FDR to provide the Services.

"Former Accounts" is defined in Section 3.4 of this Agreement.

"ICA" means an InterBank Card Association number issued by MasterCard.

"Indemnified Party" is defined in Exhibit E to this Agreement.

"Indemnifying Party" is defined in Exhibit E to this Agreement.

"Insolvency Event" occurs, with respect to any party, when such party:

(i) is dissolved, becomes insolvent, generally fails to pay or admits in writing its inability generally to pay its debts as they become due;

(ii) makes a general assignment, arrangement or composition agreement with or for the benefit of its creditors; or

(iii) files a petition in bankruptcy or institutes any action under federal or state law for the relief of debtors or seeks or consents to the appointment of an administrator, receiver, custodian, or similar official for the wind up of its business (or has such a petition or action filed against it and such petition action or appointment is not dismissed or stayed within thirty (30) days).

"Interchange" means the contracts, agreements, rules, regulations and procedures governing the relationships between, or the actions in accordance with the contracts, agreements, rules, regulations and procedures by, any two or more Entities in connection with the Interchange Settlement.

"Interchange Settlement" means the process by which FDR, on behalf of Customer and Sponsor Bank (a) facilitates payment for MasterCard, Visa or Network Transaction Card Tickets presented by Acquirers to Customer and Sponsor Bank, and (b) remits and receives payments for chargebacks and other Interchange fees and expenses of or payable by Customer or Sponsor Bank.

"Issuer" means an Entity that has a Cardholder Account with a Cardholder.

"Legal Requirements" is defined in Section 2.4 of this Agreement.

"MasterCard" means MasterCard International Incorporated or its successors or assigns.

Exh. C-2

"Merchant" means an Entity that has the right to acquire or otherwise acquires a Transaction Card Ticket as payment for goods, services, cash advances, cash withdrawals or otherwise or for credit or refund or otherwise.

"Minimum Processing Fees" is defined in Section 4.4 of this Agreement.

"Net Settlement Amount" means the net dollar amount for each business day of FDR of all (a) transactions processed for Customer and Customer's Affiliates for the day determined in accordance with the applicable rules of MasterCard, VISA, Network, and the FDR Settlement Rules, (b) Interchange fees and expenses relating to Customer and Customer's Affiliates, and (c) account expenses including overdraft charges, activity charges, wire transfer fees and other charges relating to Customer and Customer's Affiliates.

"Network" means an online debit electronic funds transfer network currently supported by FDR through which Transaction Card Tickets are processed and switched by FDR and settled on behalf of Customer and Customer's Affiliates.

"Non-FDR Portfolio" is defined in Section 3.3(a) of this Agreement.

"Original Term" is defined in Section 8.1 of this Agreement.

"Processing Fees" means all fees and charges incurred and for Services performed at the prices set forth in Exhibit A to this Agreement (including any Year 1 Minimum Processing Fee or Minimum Processing Fee shortfall payments), as adjusted from time to time by FDR consistent with this Agreement with the exception of Special Fees and specifically excluding all charges for taxes and interest.

"Processing Year" is defined in Section 8.1 of this Agreement.

"Processing Year 1" is defined in Section 8.1 this Agreement.

"Purchaser" is defined in Section 3.2 of this Agreement.

"Scheduled Start-up Date" is defined in Section 2.3(a) of this Agreement.

"Services" is defined in Section 2.1 of this Agreement.

"Settlement Account" is defined in Exhibit F to this Agreement.

"Settlement Late Payment Fee" is defined in Exhibit F to this Agreement.

"Settlement System" is defined in Exhibit F to this Agreement.

"Special Fees" means the amounts payable by Customer on a pass-through or reimbursement basis for services or goods provided by a third party, including tariff line rates, WATS lines rates, data circuit charges and any other rates charged to FDR by a communications common carrier, postage costs, courier costs and costs of forms, and as may be set forth or described in Exhibit A to this Agreement.

"Sponsor Bank" means the financial institution member of the Networks, Visa or MasterCard, and any successor financial institution member thereto reasonably acceptable to FDR, which is the Issuer of the Transaction Cards to Customer's Clients, and which sponsors FDR and Customer in the Networks.

"Start-up" means the transfer of Customer's data relating to Customer's accounts to the FDR System as described in the Start-up Plan and the commencement of Services by FDR.

"Start-up Plan" means the written plan for accomplishing the Start-up as prepared by FDR and Customer pursuant to Section 2.3 of this Agreement

"Surviving Entity' is defined in Section 3.5 of this Agreement.

"Term" means the Original Term together with any other extension of this Agreement.

Exh. C-3

"Total Annual Processing Fees" is defined in Section 4.4 of this Agreement

"Transaction Card" means a card issued pursuant to a license from or agreement with MasterCard, VISA or Network or any other card issuing organization for which FDR currently provides service support, including without limitation, any "virtual" card permitted under the MasterCard or Visa rules and regulations in existence as of the date hereof. This shall include any credit card or debit card program offered by Customer.

"Transaction Card Ticket" means a record (whether paper, magnetic, electronic or otherwise) which is created to evidence the use of a Transaction Card as payment for goods, services, cash advances, cash withdrawals, balance inquiries, transfers, payments or otherwise or for a credit or refund or otherwise.

"User Manuals" means each of the FDR User Manuals listed in Section I of Exhibit A to this Agreement.

"VISA" means, individually or collectively, as appropriate, VISA U.S.A. Inc. or VISA INTERNATIONAL or either of their successors or assigns.

"VISA Agreements" is defined in Section 12.9 of this Agreement.

"Year 1 Minimum Processing Fee" is defined in Section 4.4 of this Agreement.

Exh. C-4

EXHIBIT D

ARBITRATION

Arbitration

(a) If the parties are unable to resolve any dispute as contemplated by Section 5.1 of this Agreement, such Dispute shall be submitted to mandatory and binding arbitration at the election of either party (the "Disputing Party'). Except as otherwise provided in this Exhibit D, the arbitration shall be pursuant to the Commercial Arbitration Rules of the American Arbitration Association (the "AAA").

(b) To initiate the arbitration, the Disputing Party shall notify the other party in writing (the "Arbitration Demand"), which shall (i) describe in reasonable detail the nature of the Dispute, (ii) state the amount of the claim, (iii) specify the requested relief and (iv) name an arbitrator who (A) has been licensed to practice law in the U.S. for at least ten years, (B) is not then an employee of Customer or FDR or an employee of an Affiliate of either, and (C) is experienced in representing clients in connection with commercial agreements (the "Basic Qualifications"). Within fifteen (15) days after the other party's receipt of the Arbitration Demand, such other party shall file, and serve on the Disputing Party, a written statement (i) answering the claims set forth in the Arbitration Demand and including any affirmative defenses of such party; (ii) asserting any counterclaim, which shall (A) describe in reasonable detail the nature of the Dispute relating to the counterclaim, (B) state the amount of the counterclaim, and (C) specify the requested relief; and (iii) naming a second arbitrator satisfying the Basic Qualifications. Promptly, but in any event within fifteen (15) days thereafter, the two arbitrators so named will select a third neutral arbitrator from a list provided by the AAA of potential arbitrators who satisfy the Basic Qualifications and who have no past or present relationships with the parties or their counsel, except as otherwise disclosed in writing to and approved by the parties. The arbitration will be heard by a panel of the three arbitrators so chosen the "Arbitration Panel"), with the third arbitrator so chosen serving as the chairperson of the Arbitration Panel. Decisions of a majority of the members of the Arbitration Panel shall be determinative.

(c) The arbitration hearing shall be held in such neutral location as the parties may mutually agree. The Arbitration Panel is specifically authorized to render partial or full summary judgment as provided for in the Federal Rules of Civil Procedure. In the event summary judgment or partial summary judgment is granted, the non-prevailing party may not raise as a basis for a motion to vacate an award that the Arbitration Panel failed or refused to consider evidence bearing on any dismissed claim or issue. The Federal Rules of Evidence shall apply to the arbitration hearing. The party bringing a particular claim or asserting an affirmative defense will have the burden of proof with respect thereto. The arbitration proceedings and all testimony, filings, documents and information relating to or presented during the arbitration proceedings shall be deemed to be information subject to the confidentiality provisions of this Agreement. The Arbitration Panel will have no power or authority, under the Commercial Arbitration Rules of the AAA or otherwise, to relieve the parties from their agreement hereunder to arbitrate or otherwise to amend or disregard any provision of this Agreement including, without limitation, the provisions of this Exhibit D.

(d) Should an arbitrator refuse or be unable to proceed with arbitration proceedings as called for by this Exhibit D, the arbitrator shall be replaced by the party who selected such arbitrator, or if such arbitrator was selected by the two party-appointed arbitrators, by such two party-appointed arbitrators selecting a new third arbitrator in accordance with Exhibit D. Each such replacement arbitrator shall satisfy the Basic Qualifications. If an arbitrator is replaced pursuant to this paragraph (d) after the arbitration hearing has commence, then a rehearing shall take place in accordance with the provisions of this Exhibit D and the Commercial Arbitration Rules of the AAA.

Exh. D-1

(e) At the time of granting or denying a motion for summary judgment as provided for in (c) and within fifteen (15) days after the closing of the arbitration hearing, the Arbitration Panel shall prepare and distribute to the parties a writing setting forth the Arbitration Panel's finding of facts and conclusions of law relating to the Dispute, including the reasons for the giving or denial of any award. The findings and conclusions and the award, if any, shall be deemed to be information subject to the confidentiality provisions of this Agreement.

(f) The Arbitration Panel is instructed to schedule promptly all discovery and other procedural steps and otherwise to assume case management initiative and control to effect an efficient and expeditious resolution of the Dispute. The Arbitration Panel is authorized to issue monetary sanctions against either party if, upon a showing of good cause, such party is unreasonably delaying the proceeding.

(g) Any award rendered by the Arbitration Panel will be final, conclusive and binding upon the parties and any judgment hereon may be entered and enforced in any court of competent jurisdiction.

(h) Each party will bear one-half of all fees, costs and expenses of the arbitrators, and notwithstanding any law to the contrary, each party will bear all the fees, costs and expenses of its own attorneys, experts and witnesses; provided, however, that in connection with any judicial proceeding to compel arbitration pursuant to this Agreement or to confirm, vacate or enforce any award rendered by the Arbitration Panel, the prevailing party in such a proceeding will be entitled to recover reasonable attorneys' fees and expenses incurred in connection with such proceeding, in addition to any other relief to which it may be entitled.

Judicial Procedure. Nothing in this Exhibit D shall be construed to prevent any party from seeking from a court a temporary restraining order or other temporary or preliminary relief pending final resolution of a Dispute pursuant to this Exhibit D.

Federal Arbitration Act. The parties acknowledge and agree that performance of the obligations under this contract necessitates the use of instrumentalities of interstate commerce and, notwithstanding other general choice of law provisions in this Agreement, the parties agree that the Federal Arbitration Act shall govern and control with respect to relevant provisions of this Exhibit D.

Exh. D-2

EXHIBIT E

INDEMNIFICATION

Customer's Indemnification. Customer shall indemnify and hold harmless FDR and its directors, officers, employees, agents and affiliates from and against any and all third party claims, liabilities, losses and damages (including reasonable attorney fees, expert witness fees, expenses and costs of settlement) arising out of or with respect to this Agreement, to the extent that the claim, liability, loss or damage is caused by, relates to or arises out of (a) the breach by Customer of any of its duties or obligations under this Agreement or (b) a claim or action against FDR for any actual or alleged infringement of any patent, copyright, trade secret or other proprietary rights of any person in connection with the development of software or systems to support an enhancement requested by Customer using designs or specifications provided by Customer or in connection with the production by FDR of cards or other items for Customer using artwork, designs or concepts provided by Customer.

Customer shall not have any obligation to indemnify FDR against any claim, liability, loss or damage FDR or its directors, officers, employees, agents or affiliates may suffer arising solely out of FDR's negligent performance of any of the services provided under this Agreement.

FDR's Indemnification. FDR shall indemnify Customer and its directors, officers, employees and agents from and against any and all third party claims, liabilities, losses or damages (including reasonable attorney fees, expert witness fees, expenses and costs of settlement) arising out of or with respect to this Agreement to the extent that the claim, liability, loss or damage is caused by, relates to or arises out of (a) the breach by FDR of any of its duties or obligations under this Agreement or (b) a claim or action against Customer for actual or alleged infringement of any patent, copyright trade secret or other proprietary rights of any person by the FDR System or any part thereof, except to the extent such claim is caused by (i) Customer's failure to use the FDR System as permitted under this Agreement, (ii) Customer's use of the FDR System in combination with other software or systems not expressly authorized by FDR, or (iii) the development of software by FDR to support an enhancement requested by Customer using designs or specifications provided by Customer or the production by FDR of cards or other items for Customer using artwork, designs or concepts provided by Customer. The provisions of this paragraph shall not be applicable in the case of such liability, claim, demand or dispute that arises out of negligence or willful misconduct of Customer, their assigns or their respective agents or employees.

Notification. In the event a claim, suit or proceeding by a third party for which indemnification may be available under this Agreement is made or filed against any person, party or Entity, the person, party or Entity against which the claim, suit or proceeding is made (the "Indemnified Party"), shall promptly notify the other party (the "Indemnifying Party") in writing of the claim, suitor proceeding. The Indemnifying Party, within thirty (30) days, or such shorter period as is required to avoid any prejudice in the claim, suit or proceeding, after the notice, may elect to defend, compromise, or settle the third party claim, suit or proceeding at its expense. In any third party claim, suit or proceeding which the Indemnifying Party has elected to defend, compromise or settle, the Indemnifying Party shall not after the election be responsible for the expenses, including counsel fees, of the Indemnified Party but the Indemnified Party may participate therein and retain counsel at its own expense. In any third party claim, suit or proceeding the defense of which the Indemnifying Party shall have assumed, the Indemnified Party will not consent to the entry of any judgment or enter into any settlement with respect to the matter without the consent of the Indemnifying Party and the Indemnifying Party will not consent to the entry of any judgment or enter into any settlement affecting the Indemnified Party to the extent that the judgment or settlement involves more than the payment of money without the written consent of the Indemnified Party. The Indemnified Party shall provide to the Indemnifying Party all information, assistance and authority reasonably requested in order to evaluate any third party claim, suit or proceeding and effect any defense, compromise or settlement.

Exh. E-1

Claims Period. Any claim for indemnification under this Agreement must be made prior to the earlier of:

(a) One year after the person, party or Entity claiming indemnification becomes aware of the event for which indemnification is claimed, or

(b) One year after the earlier of the termination of this Agreement or the expiration of the Term.

Exh. E-2

EXHIBIT F

INTERCHANGE SETTLEMENT

Interchange Settlement Account. In order for FDR to provide its Services to Customer pursuant to this Agreement, it is necessary for FDR to handle and settle Interchange Settlement for Customer through the international Interchange networks of the Networks, MasterCard and VISA. Customer understands that FDR handles the Interchange Settlement with the Networks, MasterCard and VISA for its clients including Customer on a net settlement basis (the "Settlement System"). To facilitate the Settlement System, FDR has established, will establish or will direct Customer to establish and may in the future establish or direct Customer to establish one or more interchange settlement Central Clearing Accounts (collectively the "Settlement Account") at one or more banks.

Transfer of Funds. FDR shall calculate and inform Customer on each business day of the amount of funds to be transferred (the "Daily Amount") as the result of (a) current transaction processing, and (b) funding required for incoming transactions of Customer. If the Daily Amount is negative, Customer shall transfer or make available for transfer via Fed Wire Drawdown to the Settlement Account by 4:00 p.m. Eastern Time Zone, an amount equal to the Daily Amount. If the Daily Amount is positive, FDR will transfer to Customer, or will cause the Networks, MasterCard or VISA to transfer to Customer, immediately available funds equal to the Daily Amount prior to the close of business of the Federal Reserve System in New York on such date.

Daily Amount. The Daily Amount shall equal (a) the Net Settlement Amount for Customer, plus (b) the amount necessary to fund incoming Interchange transactions not yet processed, determined in accordance with the FDR Settlement Rules, minus (c) the amount previously advanced by Customer with respect to prior incoming Interchange transactions for which processing is complete.

Failure to Transfer. In the event of the failure of Customer on any business day when required by the terms of this Agreement or the FDR Settlement Rules, to transfer or make available for transfer via Fed Wire Drawdown the Daily Amount to the Settlement Account, FDR may refuse, without incurring any liability to Customer, to act as Customer's agent in discharging any Network, MasterCard and VISA Interchange obligations of Customer and shall have the right to immediately notify the Networks, MasterCard and VISA that it will no longer cause the Networks, MasterCard and VISA Interchange obligations of Customer to be discharged. In addition to the foregoing, FDR may take such actions with respect to Customer's obligations under the Settlement System as FDR deems reasonable to protect FDR or its customers from any loss arising from Customer's non-payment of the Daily Amount.

Settlement Late Payment Fee. In addition to any other provisions in this Agreement, in the event of Customer's failure to transfer or make available for transfer via Fed Wire Drawdown the Daily Amount for any business day, Customer shall pay to FDR a late payment fee (the "Settlement Late Payment Fee") which shall be equal to the amount Customer would have been required to pay as a late payment fee under the Networks, MasterCard or VISA. The amount shall be calculated in accordance with the rules and shall continue to accrue until FDR shall have received the Daily Amount from Customer. Settlement Late Payment Fees shall be paid to FDR based upon the rules even though FDR may have elected to make settlement with the Networks, MasterCard and VISA in a timely manner on behalf of Customer. If FDR has received funds from the Networks, MasterCard or VISA as a result of Interchange Settlement on behalf of Customer and fails to make available the Daily Amount to Customer, FDR shall pay to Customer a late payment fee based on the Daily Amount calculated in the same manner as the Settlement Late Payment Fee.

No Independent Obligation. The obligation of FDR to discharge the Networks, MasterCard and VISA Interchange obligations of Customer shall be solely as an agent of Customer in accordance with

Exh. F-1

the terms and provisions of this Agreement and the FDR Settlement Rules. FDR shall have no independent obligation with respect to the discharge of the Interchange obligations of Customer.

Violation of Rules. In the event that the Networks, MasterCard or VISA shall notify FDR of any violation of the rules and regulations of the Networks, MasterCard or VISA, as appropriate, relating to Customer or transactions processed for Customer, FDR shall have the right, without liability to Customer to terminate the Interchange Settlement of transactions on behalf of Customer under this Agreement with respect to the Networks, MasterCard or VISA, as appropriate, until the time as FDR shall have been notified by the Networks, MasterCard or VISA, as appropriate, that the violation has been corrected. FDR shall provide Customer with prompt written notice of the receipt of any such notification from the Networks, MasterCard or VISA.

Reliance on Other Parties. Customer acknowledges that performance of Interchange Settlement involves the settlement of certain of Customer's transactions jointly and on a combined net basis with the settlement of transactions of other customers of FDR, Accordingly, the payment or receipt by FDR of settlement monies on behalf of Customer may be dependent on equivalent payments or receipts being received or made by or for other customers of FDR and in respect of transactions involving accounts issued by such other customers. FDR and Customer will cooperate and use all reasonable resources to identify the reason for any settlement failure and shall attempt to work to its resolution.

Compliance with Instructions. FDR shall be entitled without further inquiry to execute or otherwise act upon (a) instructions or information or purported instructions or information received through the Networks, MasterCard or VISA payment systems and instructions or information, or (b) purported instructions or information received in accordance with the Networks, MasterCard or VISA rules or settlement manuals otherwise than through the payment systems or in accordance with the FDR Settlement Rules notwithstanding that it may afterwards be discovered that the instructions or information were not genuine or were not initiated by Customer. Such execution or action shall constitute a good discharge to FDR, and FDR shall not be liable for any liability, damage, expense, claim or loss (including loss of business, loss of profit or exemplary, punitive, special, indirect or consequential damages of any kind) whatsoever arising, in whatever manner, directly or indirectly, from or as a result of the execution or action.

Restrictions on Setoff. Customer agrees to discharge its Interchange Settlement obligations to FDR under this Schedule F in full and on first written demand waiving any defense, setoff or right of counterclaim (without prejudice to the ability of Customer to pursue these independently) and notwithstanding any act or omission or alleged act or omission or any insufficiency or deficiency that there is or has been or that may be alleged in the performance by FDR of its obligations under this Agreement or otherwise. FDR agrees, however, that it shall not setoff against any payment to be made by it to Customer or on its behalf pursuant to this Schedule F any amount due and payable by Customer to FDR (without prejudice to the ability of FDR to pursue these independently) other than amounts due and payable by Customer or on their behalf to FDR pursuant to this Exhibit F.

Trailing Activity. If Customer terminates this Agreement or if Customer ceases to obtain processing services from FDR under this Agreement in a manner which results in fees or charges relating to Customer's Accounts continuing to be included as a part of FDR's net settlement with the Networks, MasterCard and VISA, FDR may obtain daily payment from the Settlement Account established under the first paragraph of this Exhibit F or Customer will provide FDR immediately upon notice with access to an account of Customer's funds, not requiring signature, which FDR may draw upon in order to receive payment for such fees and charges. FDR will provide Customer with documentation for all fees and charges paid on behalf of Customer.

Sponsor Bank. During the Term of the Agreement, Customer shall be responsible for and reimburse FDR for all amounts, if any, which may be paid or which may be payable by FDR in

Exh. F-2

connection with fees, costs, assessments or other amounts due by or on behalf of the Sponsor Bank in connection with Interchange Settlement.

Exh. F-3

EXHIBIT G

OFFLINE DEBIT CARD PERFORMANCE CRITERIA

1.: On-Line Systems Update

On-line systems will be updated for monetary and non-monetary transactions by 0700 hours Central Time Zone the first Business Day following each cycle date for 90% of each month=s cycles and by 0900 hours Central Time Zone the first Business Day following each cycle date for 100% of each month=s cycles.

2.: On-Line Systems Availability

On-line systems will be available for inquiry 98% of the time each month between 0700 hours and 2200 hours Central Time Zone. On-line systems will be available for inquiry 95% of the time each month between 2200 hours and 0700 hours Central Time Zone

3.: Authorization Systems Availability

The authorization system will be available to respond to Cardholder Authorization inquiries 98% of the total hours in the month.

4.: ACH Transmission

Daily ACH files produced by FDR for direct transmission to Customer will be available for transmission by 10:00 p.m., Central Time Zone, the first Business Day for 90% of each month=s cycle and by 11:00 p.m., Central Time Zone, the first Business Day for 100% of each month's cycles. These files will contain transaction activity for only that Business Day. This transmission shall be in the FDR (RJE/NDM) format and shall contain information specified in the documentation provided to Customer as part of the Start-Up.

5.: Failed Performance

If FDR fails during any calendar month to perform in accordance with the performance criteria defined above, then, such failure shall be considered to be a "Failed Month" for purposes of this Exhibit G if and to the extent set forth below:Events in Calendar Month

Consecutive Months		2		3		4
1	%	0	%	1	%	2	%
2	%	2	%	3	%	5	%
3	%	5	%	10	%	15	%
4	%	10	%	15	%	20	%

Any reference to "0%", shall not be a Failed Month for any purpose. If FDR experiences a Failed Month per the grid requirements, then Customer shall be entitled to a "Performance Credit" equal to the applicable percentage set forth in the grid multiplied by the applicable month's Processing Fees. In the case of consecutive Failed Months with a different number of failures each month, the Performance Credit will determined by taking the greatest number of failures present in each of the consecutive Failed Months and multiplying the applicable percentage determined from the grid by the applicable month's Processing Fees. For example:

Failures		Performance Credit
3 in month 1		1% of month 1 Processing Fees
2 in month 2		2% of month 2 Processing Fees
4 in month 3		5% of mouth 3 Processing Fees

Exh. G-1

In month 2 above, the example assumes that there have been 2 consecutive months with at least 2 failures. Likewise, the example assumes that in month 3 above, there have been 3 consecutive months with at least 2 failures. Continuing the example, assume that in month 4, there is only 1 failure, then no Performance Credit will be due; in month 5 if there are 2 failures, no Performance Credit will be due; and in month 6, if there are 4 failures, the Performance Credit will be 2% of the month 6 Processing Fees.

Such Performance Credits shall be applied against Processing Fees due FDR by Customer during the month following calculation of the Performance Credit by FDR. FDR agrees to calculate the amount of any Performance Credit to which Customer is entitled hereunder within ninety (90) days following the conclusion of the applicable Failed Month.

If there are one (1) or more occurrences of three (3) consecutive Failed Months in any Processing Year, then Customer, at its election, may terminate this Agreement, provided, that this termination option is exercised within sixty (60) days after Customer receives notice of FDR's third consecutive Failed Month, and provided that such termination shall become effective on a date specified by Customer, which date shall be not later than nine (9) months after Customer's delivery to FDR of a written notice of its intention to so terminate this Agreement.

6.: Sole Remedy.

Customer hereby agrees that due to the difficulty of determining and calculating its damages upon FDR's failure to perform in accordance with the performance criteria in this Exhibit G, the remedies of a Performance Credit or termination as set forth above shall be Customer's sole and exclusive remedies, and that Customer hereby elects to waive any and all other remedies to which Customer maybe entitled under this Agreement, at law or in equity, based upon FDR's failure to perform in accordance with the performance criteria in this Exhibit G; provided, however, that nothing in this paragraph shall be construed to mean Customer is waiving any remedy to which it may be entitled under this Agreement if the basis for its cause of action against FDR is based upon anything other than FDR's nonperformance in accordance with the performance criteria in this Exhibit G.

Exh. G-2

EXHIBIT H

MASTERCARD REQUIREMENTS

See attached letter of September 13, 2000, application and supporting materials.

Exh. H-1

FIRST AMENDMENT TO SERVICE AGREEMENT

This First Amendment to Service Agreement made and entered into this 2^nd day of January, 2001 by and between X.com Corporation, 1840 Embarcadero Road, Palo Alto, California 94303 ("Customer") and First Data Resources Inc., 7301 Pacific Street, Omaha, Nebraska 68114 ("FDR").

W I T N E S S E T H:

WHEREAS, Customer and FDR heretofore entered into a Service Agreement dated as of September 25, 2000 (the "Service Agreement"); and

WHEREAS, Customer and FDR now desire to amend the Service Agreement as hereinafter more particularly set forth;

NOW THEREFORE, Customer and FDR hereby agree as follows:

I. EXHIBIT "A", SECTION III OF THE SERVICE AGREEMENT IS HEREBY AMENDED BY THE ADDITION OF THE FOLLOWING, EFFECTIVE JANUARY 1, 2001 (HEREINAFTER REFERRED TO AS THE "EFFECTIVE DATE"):

"E. FDR ROW/ROWnet SERVICES. FDR agrees to provide to Customer the FDR Report Organizer and Writer ('FDR ROW/ROWnet') Services as described in this Agreement. In order for Customer to obtain the FDR ROW/ROWnet Services (as described herein), FDR shall either distribute to Customer or allow Customer to access via the internet certain software and related documentation which FDR has licensed from Mobius Management Systems, Inc. ('Mobius') pursuant to a Software License Agreement dated September 30, 1996 (hereinafter referred to as the 'Mobius Software').

A. Customer represents and warrants to FDR that it will (a) keep the Mobius Software strictly confidential (b) permit the FDR ROW/ROWnet Services to be utilized or accessed in its internal business only by its own personnel, and (c) use the Mobius Software only in connection with Customer's data which is generated by FDR in conjunction with the FDR ROW/ROWnet Services. Customer shall not copy the Mobius Software. Customer will not reverse assemble or reverse compile the Mobius Software program, nor transfer, sublicense, rent, lease or assign the Mobius Software.

B. The provisions set forth in this section only grant Customer the right to use the Mobius Software and do not grant any rights of ownership to Customer. Customer shall not publish any results of any benchmark tests run on the Mobius Software.

C. If FDR's right to license the use of the Mobius Software to Customer is terminated because the Mobius Software infringes upon the copyright, patent, or other proprietary rights of any party or for any other reason, FDR shall have the right to terminate the provision of the FDR ROW/ROWnet Services upon thirty (30) days notice to Customer, or such shorter period of notice as coincides with the termination of FDR's right to license the use of the Mobius Software, and FDR shall have no further liability to Customer with respect to the terminated services.

D. Within thirty (30) days after the termination of this Agreement, or the earlier termination of Customer's license to use the Mobius Software, Customer shall deliver to FDR all copies of the Mobius Software and related documentation, together with all separate informational materials provided with respect to the FDR ROW/ROWnet Services or the Mobius Software, in Customer's possession, custody or control or, at Customer's discretion, shall destroy the same, as directed by FDR. In addition, an officer of Customer shall certify in writing to FDR that, to the best of its knowledge, use of the Mobius Software has been discontinued and all items have been returned or destroyed as required in this section.

E. Customer agrees to indemnify and hold harmless Mobius, its subsidiaries, Affiliates, officers, directors, employees and agents from and against any and all claims, demands, liability, loss, cost, damage or expense, including attorneys' fees and costs of settlement, resulting from or arising out of (i) the failure of Customer to observe any covenant or condition set forth in this section, (ii) the violation by Customer of any applicable statute, law or regulation associated with the Mobius Software, or (iii) Customer's use of the FDR ROW/ROWnet Services in a manner not provided for in this section.

F. FDR shall indemnify and hold harmless Customer, its subsidiaries, Affiliates, officers, directors, employees and agents from and against any and all claims, demands, liability, loss, cost, damage or expense, including attorneys' fees and costs of settlement, resulting from or arising out of any allegation that the use by Customer of the Mobius Software and any of the FDR ROW/ROWnet Services provided hereunder infringes any patent, trademark, copyright, trade secret or other proprietary right (collectively 'Intellectual Property Rights') of any third party. Such indemnification is contingent upon (a) Customer giving written notice of the claim to FDR in a timely manner after it receives actual notice of its existence, (b) Customer giving FDR full information and assistance (at FDR's expense) necessary for the defense and/or settlement of any such claim, and (c) Customer giving FDR full authority to control the defense and/or settlement of any such claim. FDR shall have no obligation under this paragraph (6) to the extent that a claim (a) is based upon the combination, operation or use of the Mobius Software with software which was not provided by FDR, if such infringement would have been avoided in the absence of such combination, operation or use, or (b) results from the use by Customer of the Mobius Software in a manner other than as described in this Exhibit 'A', Section III-E and the applicable user documentation for the FDR ROW/ROWnet Services. This paragraph states the exclusive remedy of Customer with respect to claims of infringement.

G. Customer acknowledges that the Mobius Software product is subject to restrictions and controls imposed under the U.S. Export Administration Act. Customer certifies that neither the Mobius Software nor any direct product thereof is being or will be acquired, shipped, transferred or reexported, directly or indirectly, into any country prohibited under the Act.

H. NEITHER FDR NOR MOBIUS MAKES ANY WARRANTIES, WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCTS OR SERVICES TO BE PROVIDED HEREUNDER, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. MOBIUS DOES NOT WARRANT THAT THE FUNCTIONS CONTAINED IN THE MOBIUS SOFTWARE WILL MEET CUSTOMER'S REQUIREMENTS OR THAT THE OPERATION OF THE MOBIUS SOFTWARE WILL BE ERROR FREE, OR THAT DEFECTS IN THE SOFTWARE WILL BE CORRECTED. IN NO EVENT WILL CUSTOMER HAVE ANY CAUSE OF ACTION AGAINST MOBIUS, NOR WILL MOBIUS BE LIABLE TO CUSTOMER FOR ANY LOSSES, DAMAGES OR ANY ECONOMIC CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS OR SAVINGS), INCIDENTAL DAMAGES OR PUNITIVE DAMAGES INCURRED OR SUFFERED BY CUSTOMER EVEN IF MOBIUS IS INFORMED OF THEIR POSSIBILITY."

II. EXHIBIT "A", SECTION IV OF THE SERVICE AGREEMENT IS HEREBY AMENDED BY THE ADDITION OF THE FOLLOWING, EFFECTIVE UPON THE EFFECTIVE DATE):

7494	FDR ROW/ ROWnet Services	The FDR system and services which allow Customer the ability to customize the presentation, on Customer's screens, of selected information from Customer's On-Line or Online Access and Retrieval System ('OARS') reports by the use of a graphical user interface, either through on-line access or through FDR's internet web site. Entire reports or selected sections, pages or fields within reports may, using the FDR ROW/ROWnet Services, be exported to a database/analysis tool that can sort, graph, manipulate and/or export data to spreadsheet or other documents. In addition, repetitive applications may be scripted and automated for regular use.
		Total Number of Customer's Report Data Pages (both On-Line Reports and OARS Service) during a Calendar Month*
		0-	1,000,000	[*]
		1,000,001-	2,500,000	[*]
		2,500,001-	5,000,000	[*]
		5,000,001-	7,500,000	[*]
		7,500,001-	10,000,000	[*]
		10,000,001-	15,000,000	[*]
		15,000,001-	20,000,000	[*]
		20,000,001	and above	[*]
				[*]

*Includes volumes for reports set up for viewing on OARS and/or On-Line Reports; counts are not duplicated. In no event shall Customer be charged for FDR ROW/ROWnet Services under both On-Line and OARS for the same report.

The prices set forth above for FDR ROW/ROWnet Services shall not be affected by any default settings within the FDR System for a particular report which would result in one copy of a report at no charge.

Customer will, in connection with the FDR ROWNet Service (if requested), be required to (a) utilize the services of an internet service provider, and (b) acquire certain digital certificates and related security measures necessary to allow connection with the FDR ROWNet Service, both (a) and (b) above to be obtained by Customer prior to the date of commencement of such services by FDR on behalf of Customer.

In addition to the above fees, if FDR provides, at Customer's request, any FDR ROW/ROWnet application customization services on behalf of Customer at Customer's location, Customer shall pay FDR at FDR's then current standard rates for such services, including but not limited to travel and expenses."

III. AS HEREBY AMENDED AND SUPPLEMENTED, THE SERVICE AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT.

IN WITNESS WHEREOF, the parties hereto have executed this Amendment to Service Agreement the day and year first above written.

FIRST DATA RESOURCES INC.		X.COM CORPORATION
By:	/s/ W. GAY RICH	By:	/s/ TODD PEARSON
Title:	Sr. Vice President	Title:	Vice President

SECOND AMENDMENT TO SERVICE AGREEMENT

This Second Amendment to Service Agreement ("Amendment") is made and entered into this [ ] day of January, 2001 by and between X.Com Corporation, 1840 Embarcadero Road, Palo Alto, California 94303 ("Customer") and First Data Resources Inc., 10825 Farnam Drive, Omaha, Nebraska 68154 ("FDR").

Customer and FDR have entered into that certain Service Agreement dated as of September 25, 2000 (the "Agreement"), and now wish to amend the Agreement as set forth in this Amendment. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Customer and FDR agree as follows.

1. Initial Amount of the Letter of Credit. All references to [*] in Section 11.3(b) of the Agreement are changed to read [*].

2. Full Force and Effect of Agreement. As hereby amended, the Agreement shall remain in full force and effect.

FIRST DATA RESOURCES INC.		X.COM CORPORATION
By:	/s/ W. GAY RICH	By:	/s/ TODD PEARSON
Name:	W. Gay Rich	Name:	Todd Pearson
Title:	Sr. Vice President	Title:	Vice President

THIRD AMENDMENT TO SERVICE AGREEMENT

This Third Amendment to Service Agreement made and entered into this 19^th day of September, 2001 by and between PayPal, Inc., formerly known as X.Com Corporation, 1840 Embarcadero Road, Palo Alto, California 94303 ("Customer") and First Data Resources Inc., 7301 Pacific Street, Omaha, Nebraska 68114 ("FDR").

W I T N E S S E T H:

WHEREAS, Customer and FDR heretofore entered into a Service Agreement dated as of September 25, 2000, as previously amended (the "Service Agreement");

WHEREAS, Customer and FDR now desire to amend the Service Agreement as hereinafter more particularly set forth (this "Amendment").

NOW THEREFORE, Customer and FDR hereby agree as follows, as of September 19, 2001 (the "Effective Date"):

1. Section 4.4(a) of the Service Agreement is hereby amended to read as follows, effective on the Effective Date:

"(a) In Processing Year 1, Customer will require FDR to provide Services sufficient to generate aggregate Processing Fees at least equal to one million dollars ($1,000,000) (the "Year 1 Minimum Processing Fee"). In each Processing Year after Processing Year 1, except as provided in subsection (b), Customer will require and shall pay FDR for Services sufficient to generate aggregate Processing Fees at least equal to eighty-five percent (85%) of the Processing Fees paid during the immediately preceding Processing Year, but in no event less than one million dollars ($1,000,000) in each such Processing Year (the "Minimum Processing Fees"). Within ninety (90) days after the end of each Processing Year, FDR shall calculate the total Processing Fees paid by Customer in respect of Services performed during each Processing Year (the "Total Annual Processing Fees"), and determine the amount, if any, by which the Year 1 Minimum Processing Fee or Minimum Processing Fees, as applicable, for the Processing Year exceed the Total Annual Processing Fees for the Processing Year (respectively, the "Year 1 Minimum Shortfall" and "Minimum Shortfall(s)"). In the event there is a Minimum Shortfall in any Processing Year other than Processing Year 1, FDR shall, after ten (10) days written notice to Customer of Customer's Minimum Shortfall, draw upon Customer's account pursuant to Section 4.5 of this Agreement the amount of such Minimum Shortfall. FDR shall waive payment of the Year 1 Minimum Shortfall, if any; provided, however, that Customer shall be required to pay to FDR the Year 1 Minimum Shortfall in the event of termination of this Agreement, as provided for in Section 9.4 through 9.6 herein. For the avoidance of doubt and based on economic assumptions material to each party underlying this transaction, Customer and FDR expressly agree that Customer shall pay FDR Processing Fees in each Processing Year other than Processing Year 1 in an amount at least equal to the Minimum Processing Fees until this Agreement is terminated by Customer pursuant to the provisions of Sections 9.2(a) or 9.2(b), or after Customer shall have paid FDR the Minimum Processing Fees for the year of termination as determined pursuant to this subsection (a) in the case of a termination pursuant to Sections 9.2(d) or 9.2(e) or pursuant to subsection (b) below in the case of a termination pursuant to Section 9.2(c), or until FDR terminates this Agreement and invokes compensatory payments pursuant to Section 9.4."

2. Section 9.2(c) of the Service Agreement is hereby amended to read as follows, effective on the Effective Date:

"(c) at its sole option, at any time during the Original Term after the delivery of written notice to FDR at least six (6) months prior to the effective date of such termination; provided that the effective date of such termination is not prior to the expiration date of Processing Year 2;"

3. Section 9.4 of the Service is hereby amended to read as follows, effective on the Effective Date:

"Section 9.4. Payments Upon Termination.

(a) If FDR terminates this Agreement pursuant to Section 9.1, other than pursuant to Section 9.1(j), or if Customer terminates this Agreement pursuant to Section 9.2(e), Customer and FDR agree that, based an economic assumptions material to each party, Customer shall make a compensatory payment to FDR. Such compensatory payment shall be made by Customer upon termination by FDR or Customer, and prior to Deconversion, and shall equal the sum of:

(i) The Year 1 Minimum Shortfall as set forth in Section 4.4(a);

(ii) the Minimum Processing Fees as set forth in Section 4.4(a) of this Agreement, for the Processing Year in which the termination occurs (after crediting Customer for any Processing Fees paid for Services provided in such Processing Year); and the amount set forth in subsections (iii) or (iv) below, as applicable;

(iii) except as provided in subsection (iv) below, the sum of the present values of a payment in each full Processing Year (other than the year of termination) which remains during the Term of this Agreement in an amount equal to the applicable percentage set forth below for the Processing Year in which termination occurs multiplied by the Year 1 Minimum Processing Fees or the Minimum Processing Fees, as applicable, for the Processing Year in which termination occurs. The applicable percentage shall be as follows:

Processing Year in which termination occurs	Applicable Percentage
Processing Year 1	30	%
Processing Year 2	25	%
Processing Year 3	20	%
Processing Year 4	15	%

(iv) in the event the Agreement shall be terminated by FDR pursuant to Section 9.1(k) or by Customer pursuant to Section 9.2(e), the present value of a payment in the next full Processing Year (other than the year of termination) which remains during the Term of this Agreement in an amount equal to the applicable percentage set forth in subsection (iii) above, for the Processing Year in which termination occurs multiplied by the Year 1 Minimum Processing Fees or the Minimum Processing Fees, as applicable, for the Processing Year in which termination occurs.

(b) In determining the present value of the amount set forth in subsection (a)(iii) or (a)(iv) above, an interest rate equal to the three (3) month Treasury Bill Rate, as quoted by The Wall Street Journal for the date on which termination occurs, or if not available on the date of termination, as soon thereafter as the next edition of The Wall Street Journal is published, shall be assumed and the payments shall be assumed to be made on the first day of each Processing Year.

(d) Despite the foregoing, nothing in this Section 9.4 shall limit FDR's right to recover from Customer any amounts for which Customer is otherwise liable under this Agreement, except that upon

payment of amounts due under Section 9.4(a), Customer shall not be responsible for Minimum Shortfalls after the year of termination."

4. Section 9.5 of the Service Agreement is hereby amended to read as follows, effective on the Effective Date:

"Section 9.5. Payments Upon Termination Pursuant to Section 9.2(c). If Customer terminates this Agreement pursuant to Section 9.2(c), Customer shall not be required to make any payment to FDR pursuant to Section 9.4; provided, however, Customer shall be required to pay to FDR the sum of (a) the Year 1 Minimum Shortfall and (b) the Minimum Shortfall, if any, for the Processing Year in which termination is effective but not for any subsequent Processing Years."

5. Article "9" of the Service Agreement is hereby amended by the addition of the following new Section 9.6, effective on the Effective Date:

"Section 9.6. Payments Upon Termination Pursuant to Section 9.2(d). If Customer terminates this Agreement pursuant to Section 9.2(d), Customer shall not be required to make any payment to FDR pursuant to Section 9.4; provided, however, Customer shall be required to pay to FDR the Year 1 Minimum Shortfall."

6. Exhibit "C" of the Service Agreement is hereby amended by the addition of the foregoing, effective on the Effective Date:

"Minimum Shortfall' is defined in Section 4.4(a) of this Agreement.

"Year 1 Minimum Shortfall' is defined in Section 4.4(a) of this "Agreement."

7. As hereby amended and supplemented, the Service Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the parties hereto have executed this Amendment to Service Agreement the day and year first above written.

FIRST DATA RESOURCES INC.		PAYPAL, INC.
By:	/s/ W. Gay Rich	By:	/s/ Todd Pearson
Title:	Senior Vice President	Title:	Senior Vice President

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EXHIBIT 10.18

SERVICE AGREEMENT
dated September 25, 2000
between
FIRST DATA RESOURCES INC.
and
X.COM CORPORATION
TABLE OF CONTENTS
EXHIBITS
SERVICE AGREEMENT
Recitals
Article 1 Definitions and Interpretation
Article 2 Services
Article 3 Exclusivity, Acquired Portfolios and Merger or Change of Control
Article 4 Payment for Services
Article 5 Dispute Resolution and Indemnification
Article 6 Limitation on Liability
Article 7 Disclaimer of Warranties
Article 8 Term of Agreement
Article 9 Termination
Article 10 Confidential Nature of Data
Article 11 Representations and Covenants
Article 12 Miscellaneous
EXHIBIT A SERVICES/PRICING
Processing Fee Definitions/Prices (Online Processing)
Processing Fee Definitions/Prices (Additional Credit Card Processing Services)
EXHIBIT B AFFILIATE AGREEMENT
EXHIBIT C DEFINITIONS
EXHIBIT D ARBITRATION
EXHIBIT E INDEMNIFICATION
EXHIBIT F INTERCHANGE SETTLEMENT
EXHIBIT G OFFLINE DEBIT CARD PERFORMANCE CRITERIA
EXHIBIT H MASTERCARD REQUIREMENTS
FIRST AMENDMENT TO SERVICE AGREEMENT
W I T N E S S E T H
SECOND AMENDMENT TO SERVICE AGREEMENT
THIRD AMENDMENT TO SERVICE AGREEMENT
EX-10.20 6 a2069647zex-10_20.htm EXHIBIT 10.20 Prepared by MERRILL CORPORATION
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EXHIBIT 10.20

December 29th 2000

INTERACTIVE SUPPORT SERVICES AGREEMENT

This INTERACTIVE SUPPORT SERVICES AGREEMENT (this "Agreement") is made as of this 29th day of December, 2000 (the "Effective Date") by and between Daksh.Com eServices Private Limited ("Daksh"), an Indian corporation, and Xcom Corporation, a Delaware corporation ("Client") (each, a "Party" and collectively, the "Parties").

1. SERVICES. Client hereby commissions Daksh to provide the services described in this Section 1 (the "Services") regarding Client's commercial Internet payment services, including international payments.

1.1 Email Response Services.

1.1.1 Description. Client will either (a) allow Daksh to directly access Client's email server and retrieve selected emails or (b) forward select groups of emails to Daksh for response. Daksh will read or complete Client customer email inquiries ("Email Response"). Those customer email inquiries which are deemed to be "informational questions" shall be answered and a response forwarded directly to the customer ("Completed Response").

1.2 Personnel.

1.2.1 Daksh shall provide 75 (seventy-five) Customer Care Specialists ("CCS") to provide the Services with an appropriate supervisory structure consisting of one operations manager, team leaders and quality editors. As per the requirement of Client, Daksh will also provide a "Product Integration Specialist" for this project. As per Indian labor laws, these personnel will be available for a period of 212 working days per year with 8 working hours per day. The Daksh appointed quality team shall randomly check completed responses for quality assurance, under guidelines agreed to by Client. Before any Personnel perform any Services for Client, each such Personnel shall be required to sign and fax or send to Client a standard Confidentiality Agreement, provided by Client. Client will not be financially responsible except to the extent of the start up cost/charges, until official start date, which will be taken as the day from which training commences for the CCS to undertake the Client's Services (the "Operation Commencement Date"). Client's sole financial responsibility shall be to pay Daksh the fees established in Appendix A. Daksh, and not Client, will be the employer of the CCS. Daksh will indemnify and hold harmless Client and Client's affiliates and subsidiaries, and their respective directors, officers, employees and agents, against any and all claims arising out of the employment of CCS, in accordance with Section 4 of this Agreement.

1.2.2 Client may request the immediate removal of any particular CCS for any performance related reasons, and Daksh shall immediately prohibit such CCS from providing services for Client. In such event, Daksh shall replace such CCS within 15 days of such request by Client. The CCS would then undergo an appropriate training program before being certified "live".

1.2.3 Should Client request additional CCS, then Daksh shall provide such CCS within 30 days of such request, and shall provide training such that the new CCS are fully prepared for going live. Client will conduct quarterly staffing review to enable forecasted hiring. Client will not be financially responsible to pay Daksh fees for the new CCS, except to the extent of the start up cost/charges, until Operations Commencement Date for the new CCS. Client agrees that on successful service delivery for the initial 75 CCS project, as reasonably determined by Client in its discretion, Client will expand project size to 150 CCS or more.

1.3 Basis for Services. The Services will be provided by Daksh consistent with the training provided by the Client, which Client may supplement from time to time. Daksh may escalate to Client (through a mechanism established by Daksh and Client) any customer inquiry which is not specifically addressed by the training materials. Client will grant Daksh reasonable access and interfacing to Client's e-mail servers, e-mail management applications and customer records database for the purpose of allowing Daksh access to information necessary to perform its monitoring, reporting and other functions hereunder. Client will provide all material support to the Daksh transitioning team, which will visit Client premises for the purpose of understanding Client processes and technology as necessary to transfer back to the Daksh team in India.

1.4 Schedule. Daksh shall perform the Services seven days per week, on a three-shift structure as is mutually agreed by both the parties and fifty CCS shall be deployed by Daksh accordingly. Daksh will seek and obtain client approval for any holidays in advance.

1.5 Reporting. Daksh will provide daily reports to Client, in a format to be mutually agreed by the Parties, containing the information set forth in Appendix A #7.

1.6 Prices.

1.6.1 The Services, and the training described below, will be provided in exchange for the payment of the fees set forth on Appendix A. All fees will be payable in US Dollars to a US bank account designated by Daksh.

1.6.2 The fees, as set forth in Appendix A, will be subject on the anniversary date of this Agreement to an increment of the annual US inflation rate or 5%, whichever is less, subject to the rupee not devaluating against the dollar by more than 15% over that year.

2. IMPLEMENTATION

2.1 Schedule and Conditions to Launch. Daksh and Client will mutually agree upon a "Technical Implementation Plan" and will prepare a tentative "Implementation Schedule." The dates in such schedule will be projected dates, and reasonable adherence to the Implementation Schedule (including the date on which the Services are made available on the Client Web Site) is dependent on Client's provision of all information and materials necessary (including training materials and necessary access to Client personnel) to complete the Technical Implementation Plan and to provide the Services. Both Client and Daksh must indicate their satisfaction with the initial training described below in order for the Services to be finalized and implemented. Each Party agrees to use its commercially reasonable best efforts to timely complete the Technical Implementation Plan by no later than 1st February, 2001.

2.2 Training Course. Daksh and Client will jointly train that number of Daksh employees (including CCS, team leaders, quality editors, operations manager(s) and in-house trainers(s)) sufficient to provide the amount of Services agreed to in Section 1 and Appendix A (i) on Client's policies and procedures, and (ii) on the goods and services provided on or through the Client Web Site. Client will assemble and create training materials and provide all materials and information necessary to provide the training of Daksh employees contemplated hereby. Daksh personnel will provide a training materials template, periodic advice an the form and content of the training materials, and a final review of the training materials.

2.3 Additional Professional Services. Additional professional services rendered by Daksh (except for the Services and the Technical Implementation Services) will be charged to Client pursuant to the fee schedule set forth in Appendix A.

3. REPRESENTATIONS, WARRANTIES, AND COVENANTS

3.1 Authority. Each Party represents and warrants that it has the right to enter into this Agreement and to perform its obligations hereunder.

3.2 Client Intellectual Property. Client represents and warrants (i) that no text or graphics on Client's Web Site that is viewable without using the "view source" feature infringes the intellectual property rights of any third party, and (ii) that Client owns or has obtained valid licenses for all worldwide rights, title and interest in the intellectual property consisting of all computer programming, source, object and/or formatting code or operating instructions developed or owned by Client that relates to the Client Web Site (collectively, "Client Intellectual Property").

3.3 Daksh Intellectual Property. Daksh represents and warrants that Daksh owns all worldwide rights, title and interest in the intellectual property consisting of all computer programming and/or formatting code or operating instructions previously developed or owned by Daksh and employed in the delivery of the Services (collectively, "Daksh Intellectual Property").

3.4 Warranty of Workmanlike Conduct. Daksh warrants that it will perform the Services in a workmanlike manner and in accordance with best practices as they evolve in the e-mail management business.

3.5 Submissions and Privacy. Client will, in its terms and conditions of Client Web Site use, indicate that all submissions to Client or Daksh made on, through or in response to the Client Web Site are the property of Client or licensed to Client, and how such information may be used by Client. Client is responsible for the collection, use and transfer of any personally identifiable information collected by it or by Daksh on its behalf. Daksh agrees to abide by the Client privacy policies with regard to any end user information collected by Daksh on behalf of Client. Daksh shall not use or collect any end user information for any purpose other than the Services, and shall not transfer end user information to any third party. Daksh shall store end-user information only as necessary to provide the Services, shall comply with secure data storage practices to be provided by Client, and, in the event of termination of this Agreement, shall delete or destroy all end-user information and certify to Client in writing that such destruction of data has been completed.

3.6 DISCLAIMER OF WARRANTIES. EXCEPT AS EXPRESSLY STATED HEREIN, (i) THE SERVICES AND GOODS TO BE PROVIDED HEREUNDER ARE PROVIDED "AS IS," AND (ii) NEITHER PARTY MAKES, AND BOTH PARTIES HEREBY DISCLAIM, ANY AND ALL EXPRESS AND IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND ANY WARRANTIES ARISING FROM A COURSE OF DEALING, USAGE OR TRADE PRACTICE. NEITHER PARTY WARRANTS THAT THEIR SERVICES WILL BE UNINTERRUPTED, ERROR FREE, OR SECURE.

3.7 LIMITATION OF LIABILITY. EXCEPT IN THE EVENT OF A BREACH OF PRIVACY AND CONFIDENTIALITY OBLIGATIONS IN SECTION 3.5 AND SECTION 5, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR LOST REVENUE OR PROFITS, CONSEQUENTIAL DAMAGES, OR INCIDENTAL, INDIRECT OR PUNITIVE DAMAGES. THE MAXIMUM AGGREGATE LIABILITY OF BOTH PARTIES TO THE OTHER FROM CLAIMS ARISING FROM OR RELATED TO THIS AGREEMENT IS THE GREATER OF (A) $500,000 OR (B) THE TOTAL AMOUNT OF FEES PAID BY CLIENT DURING THE TERM OF THIS AGREEMENT. THIS LIMITATION ON LIABILITY SHALL NOT APPLY TO A PARTY'S INDEMNIFICATION OBLIGATIONS.

4. INDEMNIFICATION AND INSURANCE

4.1 Defense. Each Party will defend the other Party, its subsidiaries and affiliates, and their respective directors, officers, employees, affiliates and agents (collectively, the "Covered Entities") from and against any and all third party claims, actions or demands brought against such other Party or any of its Covered Entities alleging (i) infringement or misappropriation of any intellectual property rights to the extent such infringement is attributed to the Client Web Site or to Client Intellectual Property (if such other Party is Daksh) or to Daksh Intellectual Property (if such other Party is Client); and (ii) defamation, libel, slander, obscenity, indecency or violation of the rights of privacy or publicity to the extent attributed to the Client Web Site or to Client Intellectual Property (if such other Party is Daksh) or to Daksh Intellectual Property or Daksh's action (if such other Party is Client) (collectively, "Covered Claims"). Covered Claims will also include claims brought against Daksh for injury, damages, or violations of law caused by products or services sold by Client on the Client Web Site or relating to Client's operation of its business.

4.2 Indemnification. Each Party hereby agrees to indemnify and hold harmless the other Party and each of its Covered Entities from and against all third party claims, demands, liabilities, losses, damages, expenses, reasonable costs and reasonable fees related to any Covered Claim. Such indemnifying party shall have the option to assume sole control over the defense and settlement of such Covered Claim.

4.3 Notification. Any Party seeking indemnification hereunder will provide the other Party with prompt written notice of each claim of which such Party is aware and provide all reasonable assistance as requested by the indemnifying party.

5. CONFIDENTIALITY

5.1 Confidential Information. The Parties acknowledge that each may, in the course of performing its responsibilities under this Agreement, be exposed to or acquire Confidential Information of the other Party, its affiliates, or its clients. "Confidential Information" means proprietary or non-public information that either Party obtains knowledge of or access to in connection with the transactions contemplated by this Agreement, including without limitation information related to the other Party's business, business processes and practices, marketing strategy, integration layout specifications, user interfaces, other strategic information, and the information presented in the Appendices hereto, in any media (whether tangible or intangible and whether in written, magnetic, optical, electronic or other form). "Confidential Information" will be deemed not to include information which (i) is or becomes publicly known or is publicly available, (ii) becomes known to a Party other than from the other Party or becomes known to third parties other than from such Party (except for disclosures subject to a confidentiality agreement), or (iii) would otherwise constitute "Confidential Information" of the other Party, but which a Party is required by court order or other legal process to disclose.

5.2 Non-Disclosure.

5.2.1 Each Party agrees, during or after the term of this Agreement, to hold the other Party's Confidential Information in strict confidence and not to disclose such Confidential Information to third parties or to use such Confidential Information for any purposes whatsoever other than the provision of Services hereunder. Without limitation of the foregoing, each Party will advise the other Party immediately in the event that such Party learns or has reason to believe that any person who has had access to Confidential Information has violated or intends to violate the terms of this Agreement and each Party will at its expense cooperate with the other Party in seeking injunctive or other equitable relief in the name of the other Party. Upon termination of this Agreement, each Party will destroy or

turn over to the other Party all documents, papers and other matter in its possession or under its control that contain Confidential Information or summaries thereof.

5.3 Injunctive Relief. Each Party acknowledges that a breach of this Article would give rise to irreparable injury that would be inadequately compensable by the award of monetary damages. Notwithstanding Section 8.12, in addition to all other remedies available at law or in equity, each Party will be entitled to obtain specific performance and injunctive or other equitable relief against the breach or threatened breach of any provision of this Article. Each Party acknowledges and agrees that the covenants contained herein are necessary for the protection of legitimate business interests of the other party and are reasonable in scope and content.

6. INTELLECTUAL PROPERTY.

6.1 Ownership.

6.1.1 As between Daksh and Client, Daksh owns all worldwide rights, title and interest in any technology or other intellectual property previously developed or owned by Daksh, including Daksh intellectual Property used in connection with the delivery of the Services including, without limitation, all software, computer programming and/or formatting code, source code, object code, or operating instructions used by Daksh or provided by Daksh to Client.

6.1.2 As between Daksh and Client, Client owns all worldwide rights, title and interest in Client Intellectual Property and any technology or other intellectual property developed or owned by Client or created or developed under this Agreement. Client also owns all worldwide rights, title and interest in the intellectual property in all the text and graphics, all software, computer programming or formatting code, source code, object code, or operating instructions on Client's Web Site or provided to Daksh for use to perform the Services, except for trade marks, service marks and other marks owned or controlled by Daksh.

6.2 Limited License to the Developed Work. Daksh hereby grants Client a limited nonexclusive license throughout the universe for the term of this Agreement to copy, distribute, transmit, display, perform, and otherwise use the Daksh Intellectual Property. All rights under this license will be exercised by the Client solely to operate, maintain and distribute the Client Web Site and provide Internet payment services and will expire with the termination of this Agreement.

6.3 Limited License to the Client Intellectual Property. Client hereby grants to Daksh a limited, nonexclusive right and license to copy, distribute, transmit, display, perform, create derivative works, and otherwise use the Client Intellectual Property provided to Daksh hereby or currently available or subsequently available on the Client Web Site, and all other intellectual property, including all marks, trademarks, service marks or logos, held or used by Client, solely for the purpose of rendering the Services.

6.4 Exclusive Arrangement and "Most Favored Nation" Treatment. Daksh will retain the ownership of, and the right to reuse or incorporate, Daksh Intellectual Property created or acquired before the execution of this Agreement in supporting web sites or interactive projects for other customers; provided, however, that Daksh will not own or have any rights to any of Client's marks or Confidential Information, or Intellectual Property, except as expressly set forth herein. Daksh agrees and covenants that it will not enter or offer to enter into an agreement with any other company to provide services comparable to the Services on pricing terms which are more favorable to such other company than those set forth in this Agreement. Daksh will be entitled to short term arrangements to utilize excess capacity. Short term is defined as three (3) months. Alternatively, Company may offer or grant such more favorable terms to other companies if it offers to amend this Agreement to match such terms within 5 days of offering such terms to a third party. In turn, Client agrees to scale to over 200 CCS with Daksh and offer exclusivity to Daksh (other than within the US) for English emails.

7. TERM AND TERMINATION

7.1 This Agreement begins on the Effective Date and, unless earlier terminated pursuant to this Agreement, continues for two years from the Operation Commencement Date ("Initial Term"). Upon expiration of the Initial Term, this Agreement will automatically renew for a two-year period unless either party provides the other with written notice of intent not to renew at least 4 months prior to the expiry of the Initial Term.

7.2 Effective 90 days after Operation Commencement Date, Client may terminate this Agreement without cause, by giving at least 3 months' prior written notice to Daksh, subject to Client complying with sections 1.3 and 2.1 of this Agreement. In the event of termination of Agreement without cause, Client would be additionally liable to pay Daksh a severance fee equivalent to 25% of the annualized revenues, calculated on the basis of the revenue due to Daksh in the immediately preceding three months.

7.3 Effective 90 days after Operation Commencement Date and subject to Client complying with sections 1.3 and 2.1 of this Agreement, Client may terminate this Agreement by giving at least one month's prior written notice to Daksh upon Daksh's failure to perform the Services at least up to 80% of the mutually agreed performance standards if such failure remains uncured for a period of 30 days after written notice thereof.

7.4 Effective 90 days after Operation Commencement Date, Daksh may terminate this Agreement if (i) Client fails to pay the Fees owed to Daksh and such failure remains uncured for a period of 30 days after written notice thereof, or (ii) Client becomes insolvent, makes a general assignment for the benefit of creditors or commences any proceeding under any reorganization, liquidation or bankruptcy law

7.5 In the event of termination of this Agreement, each Party shall cooperate in good faith with the other Party to attain a smooth transition of services.

7.6 On completion of tenure of this Agreement, if not automatically renewed under Section 7.1, both parties could enter into a fresh agreement on mutually agreed terms, or Client could exercise an option for transfer of CCS and Client-specific processes from Daksh.com to itself, or any authorized subsidiary, subject to assent of concerned personnel and applicable labor laws. The transfer price would be equal to 100% of the annualized revenues calculated on the basis of the revenue due to Daksh in the immediately preceding three months for providing services described in this Agreement, prorated based on the number of CCS to be transferred. If for any reason, the Agreement is terminated by the Client prior to expiry of the Initial Term, the Client would cease to have the right to exercise its option of acquiring the CCS and the Client-specific processes as set out above.

8. MISCELLANEOUS

8.1 Public Announcements and Marketing. With the prior approval of the other Party, either Party may describe its relationship to the other in its printed or electronic press releases, marketing materials or promotional advertisements, but the material terms of the Agreement may not be disclosed or released by either Party, except as required by law or any applicable government regulation or to the Party's legal and financial advisors and other agents of that Party with a need to know the terms. The Parties may work together in good faith to develop joint marketing programs.

8.2 Force Majeure. Neither Party will be liable for any failure or delay in its performance under this Agreement, due to any cause beyond its reasonable control, including acts of war, acts of God, earthquake, flood, embargo, riot, sabotage, power outage, system failure, labor shortage or dispute, negligent or tortuous acts of third parties, or failure of the Internet, except for an

obligation to pay money in which case such obligation shall be equitably extended commensurate with such event above. Each Party will use reasonable commercial efforts to promptly correct any failures created by such causes. In the event that service cannot be resumed after 15 days, either Party may terminate this Agreement without any further obligation to the other Party (other than the obligation of cooperation).

8.3 Non-Solicitation. During the period commencing on the Effective Date and ending on the date one calendar year after the termination of this Agreement, Client agrees that it will not, directly or indirectly, solicit or attempt to solicit for employment any person employed by Daksh. If any former Daksh employee is employed by Client within such year, Client will reimburse Daksh for all training and educational expenses invested in such former employee by Daksh or its clients.

8.4 Assignment. Neither Party may assign its rights or delegate its duties under this Agreement, either in whole or in part, without the prior written consent of the other Party, except that Client may assign this Agreement by operation of law, including merger or acquisition.

8.5 Reliance on Limitations. Client acknowledges that the fees payable pursuant to this Agreement have been calculated in reliance on the limitations and exclusions of liability, the disclaimer of warranties and the indemnification provisions in this Agreement and that these terms form an essential basis of the bargain between the Parties.

8.6 Notices. Any notice or communication required or permitted to be given hereunder must be in writing and may be delivered personally, by overnight courier, or by e-mail to such designated persons, in each case to the address or e-mail of the receiving Party indicated below its signature, or at such other address as either Party may provide to the other by written notice. Notice is deemed given on the date received.

8.7 Fees. Client agrees to pay the fees itemized or described in this Agreement (including the Appendices hereto) every month in US Dollars through wire transfer to a US bank account. Invoices will be raised on a monthly basis and all such invoices will be due and payable within 30 days of the date presented. Failure to pay such invoices within 30 days will subject the balance due to daily interest in the amount of .05% per day up to the maximum amount allowable by applicable law.

8.8 Taxes. Client will pay all federal, state, local or other taxes based on any good or service provided by Daksh under this Agreement, other than taxes based on Daksh's net income, including, without limitation, any collection of requisite sales or use tax for products or services sold on or through the Client Web Site. Client will determine, implement and bear responsibility for customer return policies, customer service policies, order processing policies, collection of appropriate sales or use tax, allocation of income tax, and implementation of warranties and limitations.

8.9 Cooperation. Client will provide Daksh with Client material and information in whatever form required for Daksh to fulfill this Agreement.

8.10 Relationship of Parties. Daksh is an independent contractor and this Agreement will not establish any relationship of partnership, joint venture, employment, franchise or agency between Daksh and Client. Neither Daksh nor Client will have the power to bind the other or incur obligations on the other's behalf without the other's prior written consent.

8.11 Choice of Law. This Agreement will be governed by and construed in accordance with the laws of the State of California, United States of America, excluding its conflict of laws principles. The Parties agree to the sole and exclusive jurisdiction of the state and federal courts located in the City and County of San Francisco, California. The rights and obligations of the

parties will not be subject to the United Nations Convention on Contracts for the International Sale of Goods.

8.12 Dispute Resolution. Except for the obligations of Section 4 and Section 6, in the event of a disagreement arising out of or relating to this Agreement, or breach thereof, Daksh and Client agree first to try in good faith to settle the dispute by mediation in San Francisco under the Commercial Mediation Rules of the American Arbitration Association (AAA). If mediation fails, the disagreement shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the AAA. The dispute shall be submitted to a single arbitrator at the San Francisco offices of the AAA. This arbitrator shall be selected by an arbitrator chosen by each party from the panel of arbitrators of the AAA. Judgment upon the award rendered by the arbitrator may be entered into any court having jurisdiction thereof.

8.13 Construction and Interpretation. This Agreement, together with the appendices hereto, represents the complete agreement and understanding of the Parties with respect to the subject matter herein, and supersedes any prior or contemporaneous written or oral agreement or understanding. This Agreement may be amended or modified only through a written instrument signed by both Parties. No term or provision in any purchase order, invoice or other business form of Client will control the relationship of the Parties or supercede any conflicting term or provision of this Agreement. This Agreement may be executed in multiple counterparts, each of which is deemed an original, but all of which together constitute one and the same instrument. Should any provision of this Agreement be held invalid or unenforceable, such invalidity will not invalidate the whole of this Agreement but rather that provision held invalid only. The invalid provision will be amended to achieve nearly the same effect as the original. Waiver by either Party of any breach of any provision of this Agreement will not operate or be construed as a waiver of any subsequent, similar breach. The captions and headings appearing in this Agreement are for reference only and will not be considered in construing this Agreement.

8.14 Change of Control: In event of change in the majority of the ownership of Daksh and/or change in the management and control of Daksh, Client shall have the right to terminate the Agreement by giving three month notice but without incurring any liability on account of severance fee or otherwise except to the extent of the obligations of Client that have accrued prior to the date of termination.

8.15 Performance Bonus: If the quality targets are met and quantity metrics as laid down in Appendix A are exceeded by Daksh by more than 10% then Daksh shall be entitled to the incremental, performance incentive as set out in the Appendix A over and above the Fee.

8.16 Information Rights: Daksh shall, within 30 days of completion of each quarter, furnish to the Client such information relating to the financial condition of Daksh as Client reasonably determines is necessary to assess the capability of Daksh to provide the Services as per the terms of this Agreement. Further, the Client shall have the right, subject to the confidentiality obligation, to seek any financial information at any time from Daksh and Daksh shall use its best efforts to provide to the Client the requested information within ten working days or as soon thereafter as possible.

IN WITNESS WHEREOF, the Parties have caused their duly authorized representatives to execute and deliver this Agreement as of the Effective Date.

For Daksh		For Client:
Signature:	/s/ VENKAT TADANKI	Signature:	/s/ REID HOFFMAN
Printed Name:	Venkat Tadanki	Printed Name:	Reid Hoffman
Title:	Vice President	Title:	EVP, Business Development
Address:	Gurgaon, India	Address:	Palo Alto, CA
Email:	Venkat.Tadanki@Daksh.com	Email:	reid@paypal.com
Date:	12/29/2000	Date:	1/19/2001

APPENDIX A: Pricing

1. Client shall conduct quarterly staffing reviews with Daksh to provide minimum and maximum range based on Client's forecast of volume of workload. Client shall pay Daksh [*] per month for each of the dedicated CCS. Daksh will commence billing for each CCS from the day of commencement of client-specific training.

2. In addition, Client shall pay a one-time, set-up cost of [*] upon commencement of project (taken as Effective Date).

3. Client shall pay Daksh [*] per month for any additional CCS beyond the first fifty. There will be no set-up costs for additional, dedicated CCS beyond the first fifty.

4. Client shall pay Daksh [*] per month for the Product Integration Specialist.

5. When Client has expanded the project to a size of one hundred dedicated CCS or more and after one year of continuous service delivery with at least 100 CCS (whichever is later) Daksh will provide a discount of [*] on the next month's (i.e. the 13^th month after one year of 100 CCS) billing.

6. Client shall implement a bonus and disincentive system for payment to Daksh on a quarterly basis after completion of 90 days from Operation Commencement Date.

i. Daksh and Client would jointly work out rolling productivity and quality targets on a quarterly basis which be derived from Client's own benchmarks. These targets would be applicable 90 days after Operation Commencement Date;

ii. Quality targets would be two-fold

1. Composite quality score (to be jointly defined)

2. Customer satisfaction results based on replies from customers (Daksh and Client, would jointly define acceptable metrics for % dissatisfied customers based on Omaha results);

iii. Within + or–10% of quantity and quality targets would be considered as an "acceptable range" and the bonus and disincentive system would not apply;

iv. In case Daksh is more than 10% below quality and/or quantity targets, Daksh would get a month's notice to achieve the minimum benchmark of 90%. If Daksh is not able to achieve the targets, even after one month, Daksh would need to augment manpower or expand skill levels at no extra cost to meet the targets. If after 60 days, Daksh continues to perform at 90% or below the agreed upon quality/quantity goals, Client will reduce their monthly payments for each month that Daksh remains below the agreed upon standards at the rates indicated below:

Quantity/Quality metrics	Shortfall	Daksh invoice reduced by % of Shortfall
> 80% and < 90%	100-Actual	[*]
> 70% and < 80%		[*]
> 60% and < 70%		[*]
> 50% and < 60%		[*]

v. However Daksh will be liable for the above only in the event of Client fully complying with sections 1.3 and 2.1 of this Agreement;

A-1

vi. If quality targets are achieved and quantity metrics are exceeded by more than 10%, the following bonus structure would be implemented on a quarterly basis (calculated on total revenues that would have been due to Daksh for the quarter).

Quantity metrics		Daksh share (% upside over 110% shared)
> 110% and < 120%		[*]
> 120% and < 130%		[*]
> 130% and < 140%		[*]
> 140% and < 150%		[*]
> 150%		[*]

Illustration: For example, If Daksh, on quarterly revenues of $250,000, achieved 115% of benchmark, Daksh benefit would be [*].

Quality Metrics Comments

95% of emails recd to be responded in 24 hours. 100% within 48 hours.

Daksh to meet Quality standards which are at the least equal to or better than Client's Omaha facility as measured by the customers (meet/did not meet expectations queue).

Quality scores of Daksh must not fall below a score of 85, according to Omaha QA guidelines.

Quality level to be reached within 60 days of the project going live.

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7. REPORTING

S. No.	Kinds	Input Sources Required from Client	Our report to Client
1	Quality	Quality scores based on the tool used by Client Kana generated or Quality database	Number of Reps reviewed % of Outbound Mails Reviewed Number of Reviews Total number of reviews per rep No. of reps behind on reviews No. of reps current on reviews Overall QA Score Trend analysis of Quality scores - overall and at Rep level
2	Quantity	Quantity reports from Client—Kana generated No. of E-mails resolved No. of E-mails resolved by each Rep Total number of incoming messages Total hours logged in by Rep	Messages received by Daksh Messages resolved by Daksh Messages escalated by Daksh Productivity Average Resolve Time E-mails per hour Trend analysis on Quantity by the Backlog
3	Service Level	Service level report generated by Kana	E-mails answered in 24 hours Trend analysis on service levels Uptime % Downtime at Daksh (hours)
4	Uptime
5	Manpower		Total number of Reps working Additions of Reps Removal of Reps First Time resolution % Trend Analysis, MTD

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EXHIBIT 10.20

INTERACTIVE SUPPORT SERVICES AGREEMENT
APPENDIX A: Pricing
EX-10.21 7 a2069647zex-10_21.htm EXHIBIT 10.21 Prepared by MERRILL CORPORATION
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EXHIBIT 10.21

WELLS FARGO BANK, NATIONAL ASSOCIATION

APPLICATION AND AGREEMENT
for
CASH MANAGEMENT SERVICES

X.com, a Corporation ("you"), request that WELLS FARGO BANK, NATIONAL ASSOCIATION ("Wells Fargo", "we" or "us") provide cash management services (each a "Service") in connection with your Wells Fargo Wholesale Demand Deposit Account ("WDDA"). You acknowledge receipt of our CASH MANAGEMENT SERVICES DISCLOSURE STATEMENT ("Disclosure Statement"). For each Service, this Application and Agreement, the Disclosure Statement and the User Documentation for that Service (collectively, the "Service Documentation") together with our WDDA Disclosure Statement (a copy of which was previously provided to you), as each may be modified or amended from time to time, contain the terms and conditions governing our provision of that Service to you, and any of your subsidiaries or affiliates on whose behalf you are acting. You and such subsidiaries and affiliates agree to be bound by such terms and conditions. (The term "you" as used in the Service Documentation means you and any such subsidiary or affiliate.) If you are already a Wells Fargo cash management customer, the Service Documentation for any Service(s) you are currently receiving replaces your existing agreement(s) with any Wells Fargo Bank or First Interstate Bank with respect to such Service(s), unless such Service(s) are listed as "Excluded Service(s)" on the signature page below. Our existing agreements with you with respect to each Excluded Service will remain in effect and continue to govern each Excluded Service. For your convenience, definitions of certain capitalized terms used below and in other Service Documentation are set out in a Glossary located at the end of the Disclosure Statement.

Certain of the Services involve Funds Transfers or ACH Transfers out of or into your designated WDDAs (each a "Transfer Account"). In an effort to detect unauthorized requests for transfers of funds, we have established the following security procedures ("Security Procedures") with which you agree to comply. Additional details with respect to the Security Procedures are located in the Disclosure Statement and the applicable User Documentation. Wells Fargo shall have no obligation to process a Funds Transfer or ACH Transfer for which you have not complied with the relevant Security Procedure. Except as expressly provided below, Wells Fargo is under no obligation whatsoever, and shall have no liability for failing to investigate or verify, any request for a Funds Transfer or ACH Transfer.

SECURITY PROCEDURES FOR AUTOMATED CLEARING HOUSE
("ACH") TRANSFERS

Direct Transmission and ETS Vendor Transmission. You are required to provide a list of the names and telephone numbers of persons authorized to request and confirm your ACH transactions ("Authorized Representatives"). We will provide a transmission code to you which you must use with each transmission of ACH file(s) through your PC or mainframe. We will also assign a file identification code and a batch identification code to you which you must imbed in each NACHA-formatted ACH file.

ACH Express®. If you use ACH Express to deliver your ACH files, you must install the ACH Express software on your PC in order to communicate with our systems. You may install the software on only one desktop computer, one remote PC or one Local Area Network. You will designate at least one of your employees to be your ACH Express System Administrator. You will communicate to us the name(s), address(es), telephone number(s), maiden name(s) of mother(s), and place(s) of birth of the System Administrator(s) upon whom we may rely with respect to all ACH Express related matters. To enable start-up, we will provide to you six temporary System Administrator IDs and corresponding temporary software access passwords. (You shall be responsible for the temporary System Administrator IDs and temporary software access passwords we have provided for System Administrator start-up, including their security, until you have either used them or have manually deleted them.). Upon first successful log-on using one of the temporary System Administrator IDs and its corresponding temporary software access password, each System Administrator shall create a software access password, which must be changed at least once every 60 days, and a permanent System Administrator ID. The System Administrator(s) shall enable access to ACH Express for those employees you have designated to be Operators by assigning them temporary software access passwords, which must be changed upon first successful log-on and at least once every 60 days thereafter, and permanent Operator IDs. In order to gain access to ACH Express, an Operator must enter his/her software access password and Operator ID. We will also assign a batch identification code to you (which the ACH Express software will imbed in each NACHA-formatted ACH file), and we will provide you a remote identification code which the System Administrator(s) will manually input into the user profile for each Operator allowed to transmit files, which remote identification code will thereafter be imbedded automatically when a file is created. In order to enable file transmission, we will provide a fixed communications password required for access through our Connect Mailbox application. Prior to transmitting a file, such an Operator must input the communications password. You may set the following transfer limits (which will be resident on your PC): number of entries per batch; batch entry dollar amount; batch total dollar amount and transmission dollar amount per file, and each transfer shall be within such limit(s). In addition, ACH Express allows you to separate among your Operators the ability to create, verify and send transfer requests, and we strongly recommend that you do so. IF YOU DISREGARD THIS RECOMMENDATION, YOU INCREASE THE RISK THAT THERE WILL BE A LOSS, FOR WHICH YOU WILL BE RESPONSIBLE, RESULTING FROM AN UNAUTHORIZED OR FRAUDULENT ACH TRANSFER.

SECURITY PROCEDURES FOR ACH TRANSFERS
INITIATED THROUGH OUR
CASH CONCENTRATION SERVICE

If you use our Cash Concentration Service, you may make requests for ACH Transfers by touch-tone telephone or computer terminal. Prior to commencement of the Cash Concentration Service, you must communicate to us the name, address and telephone number of your Cash Concentration Administrator upon whom we may rely with respect to all Cash Concentration related matters. If you use a touch-tone telephone, you must dial the number we provide you and follow the prompts, entering the Customer ID, Location ID and Location Password we provide you and the amount of the ACH Transfer(s) you wish made. If you use a computer terminal to initiate an ACH Transfer, you must use the access number we provide you and follow the prompts, entering the User ID, Location ID, User password and Location password we provide you and the amount of the ACH Transfer you wish made. You must change your Location Password at least once every 90 days by contacting us at the telephone number we provide to you. The Location Code, which we assign you based on the information we receive on your Set-Up Forms, will allow us to determine whether an ACH Transfer will be an ACH Credit or ACH Debit and the account from which and into which the ACH Transfer will be made.

SECURITY PROCEDURES FOR ACH TRANSFERS
INITIATED THROUGH OUR
PAYMENT MANAGE® SERVICE

You must specify, in our Payment Manager Set-Up Forms, the format in which you will transmit your payment files to us, the payment vehicle(s) you will use (e.g., checks, ACH or both), and the applicable transfer limits. You must comply with Wells Fargo's General Transmission Implementation Procedures which are a part of the User Guide for our Payment Manager Service. We will provide you a transmission ID and a customer application ID both of which must be included in the electronic transmission envelope accompanying the files you transmit to us. The customer application ID allows us to verify your transmission by matching certain salient characteristics of your transmission against a predefined processing profile developed from information you have provided in your Payment Manager Set-Up Forms. If no match is created, we will not process the transmission. In addition, if you wish to have your electronic transmissions sent to us through a value added network ("VAN"), we must approve the VAN and set up the transmission detail.

SECURITY PROCEDURES FOR ACH TRANSFERS INITIATED ELECTRONICALLY
THROUGH OUR WellsTax™ SERVICE

We will provide you with a temporary PIN (which you must change upon your first successful log-on to WellsTax and you should change at least once every 90 days thereafter) and an access code, each of which your Operators must use when initiating a transfer through WellsTax. If you initiate transfers of funds through your PC, you must use our WellsTax software.

SECURITY PROCEDURES FOR FUNDS TRANSFERS INITIATED
THROUGH OUR PC MANAGER® SERVICE

You must install our PC Manager software on your PC which will allow you to communicate with our systems. You will determine which of your employees will be Operators and have access to PC Manager. In your communication with our systems, the Operator must enter your User ID (which we will provide), your PCID (which we will provide), your PC Manager Administrator ID (which you will select during PC Manager registration) and his/her temporary password (which we will assign for that Operator). You will assign a temporary password to each of your other Operators, and each of your Operators must be required to change his/her password upon his/her first successful log-on to PC Manager and thereafter at least every 90 days. After your first log-on, communications by any of your Operators can only be initiated by inputting your User ID and the Operator's password. You shall communicate to us the name, address and telephone number of your PC Manager Administrator upon whom we may rely with respect to all PC Manager related matters. You must also set the following transfer and operator limits (which will be resident on your PC): daily transfer limits for each Transfer Account, daily transfer limits for each Operator, and Operator limits for each Funds Transfer, and each Funds Transfer must be within each such limit. In addition, PC Manager permits you to separate among Operators the ability to create, verify and send transfer requests, and we strongly recommend that you do so. IF YOU DISREGARD THIS RECOMMENDATION, YOU INCREASE THE RISK THAT THERE WILL BE A LOSS, FOR WHICH YOU WILL BE RESPONSIBLE, RESULTING FROM AN UNAUTHORIZED OR FRAUDULENT FUNDS TRANSFER.

SECURITY PROCEDURES FOR FUNDS TRANSFERS INITIATED THROUGH
OUR WELLS ELECTRONIC BANKER™ SERVICE

Prior to the commencement of the Wells Electronic Banker ("WellsEB") Service, you shall communicate to us the name and telephone number of at least one person you choose to be your security administrator ("Security Administrator") upon whom we can rely for all WellsEB related matters. WE STRONGLY RECOMMEND THAT YOU APPOINT A MINIMUM OF TWO

SECURITY ADMINISTRATORS IN ORDER TO PROVIDE ADEQUATE BACK UP AND ADMINISTRATIVE SUPPORT.

In order to communicate with our systems, you must install and register our WellsEB software ("WellsEB Software") on your PC. To properly register the WellsEB Software, you will need to follow screen prompts which will require you to enter your Customer ID and Location ID (both of which we provide you); your WellsEB Security Administrator User ID; the name, telephone number, birthplace and mother's maiden name (collectively, the "Personal Data") of your Security Administrator; the serial number located on the back of the token card ("Token Card") we deliver to you; and the Dynamic Password, which is the value the Token Card calculates each time it is turned on. When the appropriate codes and IDs are entered, your system will connect to Wells Fargo and service and account authorization profiles will be automatically downloaded. These profiles will allow us to validate a transaction by determining whether the proposed transaction falls within designated parameters.

Your Security Administrator will determine which of your employees will be Operators having access to WellsEB. He/she will set up the Operators by assigning an individual Operator ID and a temporary password to each Operator. Each Operator will be required to change his/her password upon his/her first successful log-on to WellsEB and thereafter at least every 60 days. After the Security Administrator has registered the WellsEB Software and has set up the Operators, an Operator can only access the WellsEB Software by inputting his/her individual Operator ID and Operator password.

Your Security Administrator will assign a Token Card to each Operator authorized to send Funds Transfers. Only Operators authorized to send Funds Transfers and the Security Administrator who registers the EB Software will be assigned Token Cards. Using the WellsEB Software, the Security Administrator will maintain a current inventory of assigned, activated Token Cards, request deletion and cancellation of Token Cards, and report lost and stolen cards immediately to us so the Token Cards can be disabled to protect against loss. You are responsible for the security of the Token Cards. Token Cards will not be revoked until we receive a revocation or deletion instruction from the Security Administrator. Replacement Token Cards will be issued pursuant to the procedure in the User Documentation.

In order to send a Funds Transfer request, an Operator authorized to send Funds Transfers, when receiving a screen prompt to do so, must reenter his/her Operator password, activate the Token Card and enter, at the appropriate place on the screen, the Dynamic Password generated by the Token Card.

If a Token Card becomes out of synchronization with the Wells Fargo authentication server, the Security Administrator may utilize the Token reset procedure which requires the Security Administrator to call us at the number we have provided you to request Token reset, identify himself/herself as the Security Administrator and give Personal Data that matches what we have on file for the Security Administrator, and follow the telephonic request by delivery to us of a written request submitted on your letterhead signed by the Security Administrator. Such delivery may be made by facsimile. We will reset the Token upon receipt of the written request described above.

In the event of an Operator lockout (i.e., an Operator is unable to access the WellsEB Software), the Security Administrator may reset an Operator's password. In the event of a total Security Administrator lockout, you may utilize the SuperUser ID procedure for reset which requires the Security Administrator to call us at the number we have provided to you to request a SuperUser ID, identify him/herself as the Security Administrator, give Personal Data that matches what we have on file for the Security Administrator, and follow the telephonic request with the delivery to us of a written request submitted on your letterhead signed by the Security Administrator. Such delivery may be made by facsimile. Upon receipt of the written request described above, we will issue a SuperUser ID which will allow the Security Administrator to access the WellsEB Software. If necessary, the Security Administrator may then reset individual Operator passwords to provide access to the WellsEB Software.

You must also set the following transfer and Operator limits (which will be resident on your PC): daily transfer limits for each Transfer Account, daily transfer limits for each Operator, and Operator limits for each Funds Transfer, and each Funds Transfer must be within each such limit. In addition, WellsEB permits you to separate among Operators the ability to create, verify and send transfer requests, and WE STRONGLY RECOMMEND THAT YOU DO SO TO REDUCE YOUR RISK OF SUFFERING A LOSS RESULTING FROM AN UNAUTHORIZED OR FRAUDULENT FUNDS TRANSFER.

SECURITY PROCEDURES FOR FUNDS TRANSFERS INITIATED
VIA TELEPHONE

WELLS FARGO DOES NOT RECOMMEND THESE SECURITY PROCEDURES. WE RECOMMEND THE SECURITY PROCEDURES SET FORTH ABOVE FOR FUNDS TRANSFERS INITIATED THROUGH PC MANAGER. IF YOU DISREGARD OUR RECOMMENDATION AND USE THE SECURITY PROCEDURES BELOW BY INITIATING FUNDS TRANSFERS BY VOICE VIA TELEPHONE, YOU SIGNIFICANTLY INCREASE THE RISK THAT THERE WILL BE A LOSS, FOR WHICH YOU WILL BE RESPONSIBLE, RESULTING FROM AN UNAUTHORIZED OR FRAUDULENT FUNDS TRANSFER.

In the Set-Up Forms for our Funds Transfer Services, you are required to provide a list of the names and telephone numbers of those persons ("Transfer Authorizers") who are authorized to request Funds Transfers out of or into each Transfer Account. We will attempt to verify each request for a Funds Transfer by (i) checking the name given by the person requesting, and in the case of non-Repetitive Funds Transfers verifying, the Funds Transfer into or out of a Transfer Account to ensure that it is one of the names of Transfer Authorizers you have given us for the relevant Transfer Account, and (ii) in the case of Repetitive Funds Transfers, checking the repetitive request number given by the person requesting the Funds Transfer into or out of a Transfer Account to ensure that it is one of the repetitive request numbers we assigned to the relevant Transfer Account. No non-repetitive Funds Transfer will be made if it is not verified by such name verification procedure. No request for a Repetitive Funds Transfer will be honored unless the person calling in the request provides a valid Transfer Authorizer name and repetitive request number. No callback will be made to attempt to verify any request. In accepting voice-initiated telephonic requests for Funds Transfers out of or into a Transfer Account, we are only required to determine (a) if the name given by the person requesting or verifying a transfer is listed as the name of a Transfer Authorizer for that Transfer Account, but we are under no obligation to confirm any such person's identity, and (b), in the case of Repetitive Funds Transfers, if the repetitive request number given by the person requesting the transfer is the one which we assigned to that Transfer Account.

SECURITY PROCEDURES FOR FUNDS TRANSFERS INITIATED THROUGH
OUR InfoTouch® SERVICE

You are required to use (a) your identification code (which we will assign) for the Transfer Account or the family of accounts containing the Transfer Account from which or into which the transfer will be made, (b) the identification number of the Operator requesting the transfer (which you will assign for each of your Operators), (c) the password of the Operator requesting the transfer (which we will initially assign and which must be changed by each Operator the first time it is used and thereafter at least once every 90 days), and (d), for Repetitive Funds Transfers, the repetitive request number for the Repetitive Funds Transfer (which we will assign for each Repetitive Funds Transfer series you request be established). You must also set the following transfer and operator limits (which you will determine and communicate to us): (i) a daily transfer limit for each of your Transfer Accounts, and (ii) for Repetitive Funds Transfers, (A) a limit for each Repetitive Funds Transfer, (B) an Operator limit for each Repetitive Funds Transfer, and (C) a daily Repetitive Funds Transfer

limit for each operator, and each Funds Transfer must be within each such limit. In addition, we recommend that you use a supplemental security procedure called "Second Operator Release" which allows you to separate between two Operators the ability to create and to release transfer requests. IF YOU DISREGARD THIS RECOMMENDATION, YOU INCREASE THE RISK THAT THERE WILL BE A LOSS, FOR WHICH YOU WILL BE RESPONSIBLE, RESULTING FROM AN UNAUTHORIZED OR FRAUDULENT FUNDS TRANSFER.

SECURITY PROCEDURES FOR FUNDS TRANSFERS INITIATED BY INCOMING
DRAWDOWN REQUESTS ("DRAWDOWN TRANSFERS")

Any financial institution, acting as your agent ("Drawdown Agent"), in requesting a funds transfer out of your WDDA, must transmit its request to us ("Drawdown Request") through a Federal Reserve Bank by means of a dedicated communications line using the encryption standards of, and access controls established by, that Federal Reserve Bank. The Set-Up Forms for Funds Transfer Services require that you provide us with a list ("Drawdown List") containing (a) the name and ABA routing number of each Drawdown Agent which you have authorized to request and receive Drawdown Transfers out of each Transfer Account, and (b) the titles and account numbers of your accounts with each Drawdown Agent which are to be credited for Drawdown Transfers out of each Transfer Account. Before making a Drawdown Transfer out of a Transfer Account, we will verify that (i) the account to receive the transfer is listed as an account to receive transfers from that Transfer Account, and (ii) the financial institution requesting the Drawdown Transfer is listed as a Drawdown Agent for that Transfer Account. If the above information cannot be verified, we will not be obligated to honor the Drawdown Request nor make the Drawdown Transfer.

Excluded Services:
	/s/ ELON MUSK [Name]
	By:	ELON MUSK
	Title:	CEO

CASH MANAGEMENT SERVICES DISCLOSURE STATEMENT

July 1, 1997

Wells Fargo Bank, National Association ("Wells California"), and Wells Fargo Bank (Texas), National Association ("Wells Texas"), provide their Wholesale Demand Deposit Account ("WDDA") customers with a wide range of cash management services (each a "Service" and collectively the "Services"). Each Service is described in a Service Description, Set-Up Forms and a User Guide for that Service (collectively, the "User Documentation"). The Application and Agreement for Cash Management Services which you signed ("Application and Agreement"), this Disclosure Statement and the User Documentation for each Service (collectively the "Service Documentation") together with our current WDDA Disclosure Statement (a copy of which has previously been provided to you), as each may be modified or amended from time to time, contain the terms and conditions governing Wells Fargo's provision of each Service to you and any of your subsidiaries or affiliates receiving that Service and on whose behalf you are acting. (The term "you" as used below and in the other Service Documentation means you and each such subsidiary or affiliate.) The Services will be primarily provided by the Wells Fargo Bank ("Wells Fargo", "we" or "us") whose Application and Agreement you signed. Your use of any Service after receipt of the Service Documentation for that Service will confirm your agreement to the terms, conditions, fees and charges set out in the Service Documentation for that Service and the WDDA Disclosure Statement. The fees and charges for each Service and the terms for their payment are set out in the User Documentation for the Service. We may debit your WDDA for any fees or charges, and for any other amounts, due and owing to us in connection with the Services. Our provision of the Services is subject to applicable Federal Reserve regulations and operating circulars, and NACHA and other funds transfer system and clearinghouse rules. For your convenience, definitions of certain capitalized terms used below and in the other Service Documentation are set out in a Glossary located at the end of this Disclosure Statement.

CHANGES TO SERVICES; NOTICES. We reserve the right to change the terms, conditions, fees and charges contained in the Service Documentation for any Service after sending you prior notice of such change in writing or electronically or by printing a message on, or enclosing a message with, your WDDA or Account Analysis Statement. If you do not wish to be bound by any such change, you may discontinue using the affected Service before the change becomes effective. If you continue to use a Service after the change becomes effective, you will be bound by the change. Any written notice relating to a Service will be sent to you at your primary address as shown in our current WDDA records. Written notices or reports to us relating to the Services must be sent to Wells Fargo at P.O. Box 63020, San Francisco, California 94163 (fax/telecopy: 415-896-0728).

FUNDS TRANSFERS/ACH TRANSFERS. To make a Funds Transfer on the same Business Day that it is requested, we must receive your request before the deadline we establish. However, we may not accept a request for a Funds Transfer or ACH Transfer or may delay making a requested transfer or ACH Transfer if the transfer would require us to use a financial institution not acceptable to us or cause us to exceed any limitation on our intra-day net funds position established pursuant to Federal Reserve or other regulatory guidelines. If we do not accept a request for a transfer of funds or must delay making a requested transfer, we will attempt to notify you promptly by telephone or, if you are receiving our Information Express®, PC Manager® or Wells Electronic Banker™ Service, by means of an electronic message. We cannot amend or cancel a transfer after we have executed a Funds Transfer request or have received an ACH Transfer request. We may, without prior notice or demand, obtain payment for any transfer by debiting the Transfer Account out of which the transfer was to be made or any of your other accounts with us. We will debit or credit, as appropriate, your Transfer Account for Funds Transfers or ACH Transfers returned to us. We will have no obligation to retransmit a returned transfer. Unless the return is caused by our failure to properly execute a requested funds transfer, we shall have no obligation to credit your Transfer Account with any interest on the amount of any returned transfer we have debited from such Transfer Account. We have the right to reject for any reason any Funds Transfer or ACH Transfer we receive for deposit into any account you have with us. To the extent permitted by law or any payment system rule, credit to your WDDA for an incoming

Funds Transfer or ACH Transfer is provisional until we receive final settlement therefor. In the event final settlement is not received, we may, without prior notice or demand, debit your WDDA for any such amount, and to the extent there are insufficient funds in your WDDA, you agree to refund to us immediately upon demand the residual amount.

SET-UP FORMS. The Set-Up Forms for each Service must be signed by one of your authorized officers, agent, or employee, except that the Set-Up Forms for a Transfer Service (and any changes to such Set-Up Forms) must, unless provided otherwise in the Service Documentation for such Service, be signed (a) by one or more persons authorized by your resolutions, or in the case of non-corporate customers by another appropriate procedure, acceptable to us, to designated individuals who may initiate and verify requests for transfers out of and/or into your Transfer Accounts, or (b) by all those persons required under your WDDA documentation to withdraw funds by check or otherwise out of such Transfer Accounts. Instructions attempting to restrict our acceptance of requests for transfers out of or into any Transfer Account may only be made in a writing which is signed by (i) one or more persons authorized by your resolutions, or in the case of non-corporate customers by another appropriate procedure, acceptable to us, to restrict our acceptance of such requests, or (ii) at least one of the persons authorized under your WDDA documentation to withdraw funds by check or otherwise out of such Transfer Account.

SECURITY PROCEDURES. You must comply with the Security Procedures applicable to Funds Transfers and ACH Transfers as described in the Application and Agreement and other Service Documentation. The Security Procedures describe what steps each of us must take to attempt to detect unauthorized instructions, requests or entries in connection with transfers of funds. You are bound by any such instruction, request or entry (i) authorized or transmitted by you, or (ii) made in your name and accepted by us in good faith and in compliance with the Security Procedures, even if not properly authorized by you. If we take any action beyond those described in the Security Procedures in an attempt to detect unauthorized instructions, requests or entries or to detect errors in the transmission or content of such instructions, requests or entries, such actions will not become part of the Security Procedures and we will not be liable in any situation for failing to take or correctly perform these additional actions.

CODES AND PASSWORDS. You will manage and control access to each Transfer Service using the required passwords, codes and other access procedures. You are responsible for the establishment and maintenance of procedures to assure the confidentiality of the identification codes, passwords, repetitive request numbers and other access procedures (collectively the "Codes") and the Security Procedures. FAILURE TO PROTECT THE CODES OR SECURITY PROCEDURES MAY ALLOW AN UNAUTHORIZED PARTY TO ACCESS THE SERVICES. Except as otherwise specified in the applicable Service Documentation, you are required to develop and put in place internal procedures to limit such risk, including, but not limited to, (a) changing the password of each Operator at least once every 90 calendar days, (b) not permitting Operators to share their identification codes or passwords; (c) deleting the identification codes of Operators who no longer have access to a Service; (d) not keeping, in any form or in any place, any list of passwords; and (e) keeping every identification code and repetitive request number under secure conditions. You agree to comply with any additional access or identification procedures we establish, and, if you have reason to believe that any Code or Security Procedure has or may have become known by an unauthorized person (whether or not employed by you), you will immediately notify us by telephone and confirm to us in writing such oral notification within 24 hours.

HONORING TRANSACTIONS AND INSTRUCTIONS. We are under no obligation to honor, either in whole or in part, any transaction or instruction which (a) exceeds your collected and available funds on deposit with us, (b) is not in accordance with any term or condition applicable to the relevant Service, (c) we have reason to believe may not be authorized by you or your customers, (d) involves

funds subject to a hold, dispute or legal process preventing their withdrawal, (e) would violate any applicable provision of any risk control program of the Federal Reserve or any rule or regulation of any other federal or state regulatory authority, (f) is not in accordance with any other requirement of our policies, procedures or practices, or (g) we have reasonable cause not to honor for our or your protection.

ACCOUNT RECONCILIATION; ERRORS OR UNAUTHORIZED TRANSACTIONS; NOTICE OF CLAIMS. Unless you are using a Service which provides for other notification arrangements, you will be notified of debits or credits to your WDDA in connection with your use of a Service through your periodic WDDA account statements (each such notice, whether provided through your WDDA account statement or electronically, by telephone, in writing or otherwise through your use of another service, a "Confirmation"). You agree to regularly and promptly review and verify each Confirmation, and, if you suspect an error, discrepancy or unauthorized transaction, immediately report it by calling your Wells Fargo Cash Management representative, and also submitting a written report detailing the problem as soon as possible, but in any event within 30 days of the earlier of (i) the closing date of the WDDA statement which first reflected the problem, or (ii) the day we first electronically notify you or otherwise make available (other than a WDDA account statement) a Confirmation to you. If you do not so notify us, you will be precluded from asserting subsequent forgeries, alterations or unauthorized transactions by the same person or entity with respect to any of your WDDA's. Without regard to care or lack of care, your failure to discover and report any suspected error, discrepancy or unauthorized transaction in connection with any Service or your WDDA within two months after a Confirmation or other documentation reflecting the problem was made available to you will bar any claim against Wells Fargo with respect to any such error, discrepancy or unauthorized transaction. You Undertake to notify us immediately of any claim against you or us made by a third party, that any act or omission by us in connection with any Service has caused such third party to sustain any damage. You acknowledge that the reconstruction of an event causing you to suffer damages becomes difficult and may be inaccurate more than one year following the occurrence of such event. Accordingly, Wells Fargo and you agree that any claim action or proceeding against the other for damages arising from or in any way related to an act or omission of the other in connection with the Services or the performance of the Services, including any claim based on negligence, must be brought within one year from the date of such act or omission. Each of us will cooperate with the other in any less recovery effort related to the performance of the Service and will assist the other in the defense or prosecution of any claim, action or proceeding brought by or against a third party related to the Service.

LIMITATION OF LIABILITY. Wells Fargo will be responsible for providing each Service in accordance with the applicable Service Documentation. We cannot, however, accept responsibility for errors, acts or failures to act of others, including, among other entities, banks, communications carriers, clearing houses, your agents, or Federal Reserve Banks, through which such transfers may be made or through which we may receive or transmit information. None of these entities will be deemed our agent. We, of course, also cannot be responsible for any loss, liability or delay caused by fires, earthquakes, wars, civil disturbances, power surges or failures, acts of government, labor disputes, failures in communications networks, legal constraints or other events beyond our control. We make no representations or warranties with respect to any Service other than those expressly made in the related Service Documentation. We will not be liable to you, and you will not be liable to us, for any special, consequential, indirect or punitive damages, whether or not (a) any claim for such damages is based on tort or contract or (b) we or you knew or should have known the likelihood of such damages in any circumstances. Except for Funds Transfers and ACH Transfers, each Service is also subject to the limitation of liability, indemnification and other provisions contained in the "General Provisions" of the WDDA Disclosure Statement.

PROPRIETARY PROPERTY. Except as may be otherwise provided in the Service Descriptions, all computer programs, systems, reset diskettes and other User Documentation for any Service, and all

related information, constitute our proprietary property having great commercial value to us. We will remain the sole owner of all User Documentation and you will not acquire any proprietary interest or rights in such programs, systems or other User Documentation as a result of your use of any of the Services. You will not create or permit others to create, by reverse engineering or otherwise, the source code or any part of the source code from the object code of any such program. You may not transfer, copy, alter, modify, reproduce or convey in any manner any computer program, system or other User Documentation or Security Procedure. Your right to any User Guide is expressly limited to the right to use the User Guide as set out in that Guide.

CONFIDENTIALITY. All information which comes into Wells Fargo's or your possession concerning the other in connection with any Service will be maintained as confidential and will not be used or divulged to any other person or entity except as may be necessary for the performance of any of the Services or as required by applicable law. Specifically, you will keep the contents of all User Documentation confidential and will not permit your employees or agents to disclose, copy, reproduce, lend, sell, assign, transfer, sublicense or otherwise make available any such Documentation in whole or in part to any person or entity, including, but not limited to, any of your successors or affiliates, other than those of your employees who have a need to use the User Documentation. You agree to notify us immediately if you know or suspect that there has been unauthorized disclosure, possession or use of any computer program or other User Documentation for any Service, and if you are responsible for such unauthorized disclosure, possession or use, you shall, at your expense, promptly (i) take all reasonable actions, including, but not limited to, court proceedings, to recover possession of, or to prevent further unauthorized disclosure or use of, any such computer program or other User Documentation, and (ii) obtain redress for any injury caused to us thereby.

RECORDS. Neither the Service Description nor our performance of any Service will relieve you of any obligation imposed by law or contract regarding the maintenance of records or from employing adequate audit, accounting and review practices customarily followed by businesses similar to yours. You will retain and provide to us, upon request, all information necessary to remake or reconstruct any deposit, transmission, file, entry or other order affecting your WDDA until 15 calendar days after we receive such deposit, transmission, file, entry or other order.

SUPPORT SERVICES. Certain support services may be provided by Wells California to Wells Texas in connection with the provision of the Services by Wells Texas to its customers. Each Wells Texas customer authorizes Wells California to initiate such instructions, and to make such debits and credits, to its WDDA as are necessary or appropriate to effect or perform any such Service.

THIRD PARTY NETWORKS. Our provision of certain Services is dependent upon our ability to provide access to third party networks or systems. We will determine the funds transfer, communications or other such system to be used in performing the Services. In the event that any network or system is unavailable, or if we determine in our discretion that we are unable to continue to provide access to such network or system, we may discontinue the affected Service or provide an alternate service.

INCONSISTENCY OF NAME AND ACCOUNT NUMBER. If you request a funds transfer or issue a payment order, we and subsequent parties to the transaction may rely on the identifying number you provide for the beneficiary's account or for the beneficiary's bank, or any intermediary bank, even though such number identifies an account or a bank different from the account or bank you identified by name, the name and number do not agree, or we or subsequent parties knew or had reason to know of the inconsistency. In addition, your obligation to pay us the amount of the funds transfer or payment order is not excused in such circumstances.

COURIERS. You may utilize a courier to deliver or receive banking transactions and in so doing you agree at all times and in all respects that, while for your administrative convenience courier charges

may be billed to Wells Fargo, (a) the courier is your agent and not ours, and you and not we are responsible for any services performed or promised and not performed by the courier, and (b) you assume all risk of loss prior to our acceptance of such transactions from the courier and subsequent to the courier's acceptance of transactions from us. Although we may undertake reasonable efforts to facilitate any loss recovery, you acknowledge that you (and not Wells Fargo) will be responsible for all loss recovery procedures and processes relating to such losses.

AUTHORITY TO COMBINE FUNDS. You acknowledge and assure us that any and all transfers and commingling of funds required or permitted by any Service, and all other aspects of your and our performance of the Services, have been duly authorized by all necessary parties, including, without limitation, the accountholder of each account, and that you have obtained, and shall maintain in your regular business records and make available to Wells Fargo upon reasonable demand for a period of six years after the termination of any Service, adequate documentary evidence of such authorization from the accountholder of each account, executed by the duly authorized officer(s) of each such accountholder in accordance with that accountholder's organizational requirements. You further acknowledge and assure us that each transfer or commingling of funds required or permitted by any Service is not in violation of any of your or your subsidiaries' or affiliates' internal requirements, nor in violation of any applicable federal, state or local statute, ordinance, regulation or rule of law, or of any decree, judgment or order of any judicial or administrative authority.

TERMINATION. We or you may terminate any Service (and any license, sublicense or other agreement [collectively the "Licenses"], relating to any Service) without cause upon written notice of at least 10 calendar days to the other party, unless the User Documentation for a Service provides otherwise. However, if you are in violation of any of the terms or conditions set out in the Service Documentation for a Service, we may immediately terminate that Service or all the Services (and any Licenses relating to the Services) upon written or electronic notice to you. We may also terminate any Service (and any License relating to any Service) if you stop using the computer program provided as part of the User Documentation for that Service. The termination of any Service or the termination of all the Services will not affect your or our rights with respect to transactions which occurred before such termination. Upon any such termination, you will immediately deliver to us all reset diskettes (used or unused), copies of all computer programs and other User Documentation in your possession, custody or control, and, if we request, you will certify in writing to us that all such materials and documents have been delivered to us.

GOVERNING LAW. The Service Documentation for each Service will be governed by and be interpreted in accordance with substantive federal law and regulations, and, to the extent such laws and regulations are not applicable, the substantive law of the state ("Headquarters State") where the Wells Fargo Bank which is providing such Service has its headquarters (collectively, the "Governing Law"). Any Service Documentation or Service which is inconsistent with applicable laws, regulations or rules will be deemed modified and applied in a manner consistent therewith. Any Service Documentation deemed unenforceable or invalid shall not affect the enforceability or validity of the remaining Service Documentation.

CONFLICTS/WAIVERS. In the event of any conflict among the Service Documentation for a Service, the following will govern in accordance with the order of listing: (i) the Service Description, (ii) the Set-Up Forms, (iii) the Disclosure Statement, (iv) the Application and Agreement, and (v) the User Guide. Our or your waiver of any term or provision of any Service Documentation shall not be construed as a waiver of such term or provision at any other time, or as a waiver of any other term or provision.

ASSIGNMENT/THIRD PARTIES. We may assign our rights or obligations with respect to any Service and the related Service Documentation to Wells Fargo & Company or any person or entity owned or controlled by Wells Fargo & Company. We may not otherwise assign or transfer our, and you

may not assign or transfer your, rights or obligations with respect to any Services or the related Service Documentation without the other's prior written consent, which consent will not be unreasonably withheld. No person or entity shall be deemed to be a third party beneficiary under any Service Documentation.

TELEPHONE RECORDING. The decision to record any telephone conversation shall be solely within out discretion, and we shall have no liability for doing so or failing to do so. You acknowledge and assure us, on your behalf and on behalf of your employees and agents, that we may monitor and record telephone conversations at any time without further notice to the parties to such telephone conversations.

USURY. It is never the intention of Wells Fargo to violate any applicable usury, interest rate or other laws. Wells Fargo does not agree to, or intend to contract for, charge, collect, take, reserve or receive (collectively, "charge or collect") any amount in the nature of interest or in the nature of a fee, penalty or other charge which would in any way or event cause Wells Fargo to charge or collect more than the maximum Wells Fargo would be permitted to charge or collect by any applicable federal or state law. Any such excess interest or unauthorized fee shall, notwithstanding anything stated to the contrary in any Service Documentation, be applied first to reduce the amount owed, if any, and any excess amounts will be refunded.

ARBITRATION. Upon the demand of either party, any "Dispute" shall be resolved by binding arbitration (except as set forth below in "Judicial Review of Arbitration Awards") in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Services, or any past, present or future activities, transactions or obligations of any kind related directly or indirectly to any Service, including, without limitation, any of the foregoing arising in connection with the exercise of any self-help or any ancillary or other remedies or actions taken relating to any Service. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute.

RULES GOVERNING ARBITRATION. Arbitration proceedings shall be administered by the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in this Disclosure Statement. The arbitration shall be conducted at a location in the Headquarters State selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided, however, that nothing contained herein shall be deemed to be a waiver by any party which is a bank of the protections afforded to it under 12 U.S.C. 91 or any similar applicable state law.

ARBITRATION: PROVISIONAL REMEDIES. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, or to obtain provisional or ancillary remedies, including, without limitation, injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration hereunder.

ARBITRATOR QUALIFICATIONS AND POWERS, AWARDS. Arbitrators must be active members of the Bar in the Headquarters State with expertise in the substantive laws applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the Governing Law, (ii) may grant any remedy or relief that a federal or state court of the Headquarters State could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the Rules of Civil Procedure of the Headquarters State or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided, however, that all three arbitrators must actively participate in all hearings and deliberations.

JUDICIAL REVIEW OF ARBITRATION AWARDS. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (i) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the Governing Law, (iii) the parties shall have, in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award, the right to judicial review of (a) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (b) whether the conclusions of law are erroneous under the Governing Law. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the Governing Law.

ARBITRATION, OTHER MATTERS. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Service or the subject matter of the Dispute shall control. This arbitration provision shall survive the termination or amendment of the Service Documentation for a Service or the termination of that Service, any agreement relating thereto or any relationship between the parties.

NO ORAL AGREEMENTS. THE SERVICE DOCUMENTATION FOR EACH SERVICE TOGETHER WITH THE WDDA DISCLOSURE STATEMENT REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES, THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

GLOSSARY

"ACH" means automated clearing house.

"ACH Transfer" means any transfer of funds made or processed by, or for which instructions are transmitted through, an automated clearing house.

"Application and Agreement" means the Application and Agreement for Cash Management Services, signed by you, as modified or amended from time to time.

"Business Day" means any day, other than a Saturday, Sunday or holiday, which Wells Fargo is open for the conduct and operation of its wholesale services business.

"Codes" means the identification codes, passwords, repetitive request numbers and other access procedures which allow you to access a Transfer Service.

"Controlled Disbursement Account" means your demand deposit account with another financial institution maintained in connection with our Controlled Disbursement Service.

"Controlled Funding Account" means your WDDA which funds your Controlled Disbursement Account under our Controlled Disbursement Service.

"Disclosure Statement" means this Cash Management Services Disclosure Statement, dated July 1, 1997, as modified or amended from time to time.

"Excluded Service" means any Service not governed by the Service Documentation for that Service as listed on the signature page of the Application and Agreement.

"Funds Transfer" means a transfer of funds (other than an ACH Transfer) which you directly (or through an agent or funds transfer system) and unconditionally (except for time of payment) instruct us to make, or cause another financial institution to make, out of or into one of your Transfer Accounts for the purpose of making a payment of a specified (or determinable) amount of money.

"Governing Law" means the substantive federal law and regulations, and, to the extent such laws and regulations are not applicable, the substantive law of the Headquarters State.

"Headquarters State" means that state in which the Wells Fargo Bank whose Application and Agreement you signed has its headquarters offices.

"NACHA Rules" means the Operating Rules of the National Automated Clearing House, as in effect from time to time.

"Operator" means, for any Transfer Service, each of your employees whom you have designated as operators or users of, or as having access to, that Service.

"Repetitive Funds Transfers" means a series of Funds Transfers, each initiated separately, to be made from time to time between the same two accounts (one of which is a Transfer Account).

"Security Procedures" means, for any Transfer Service, the designated Security Procedures described in the Application and Agreement and other Service Documentation for that Service.

"Service" means any cash management service offered by Wells Fargo.

"Service Description" means, for any Service, the description of that Service and certain of the terms governing its use, as modified or amended from time to time, which Wells Fargo provides with respect to that Service.

"Service Documentation" means, for any Service, the Application and Agreement, the Disclosure Statement and the User Documentation for that Service.

"Set-Up Forms" means, for any Service, those forms, documents, authorizations, agreements, data or information, as modified or amended from time to time, which Wells Fargo requires be completed or provided for that Service.

"Transfer Account" means, for any Service involving Funds Transfers or ACH Transfers, any WDDA you have designated out of or into which Fund Transfers or ACH Transfers are to be made.

"Transfer Service" means any Service providing by its terms for Funds Transfers or ACH Transfers.

"User Documentation" means, for any Service, the Service Description, User Guide and Set-Up Forms for that Service.

"User Guide" means, for any Service, any guides, manuals, price schedules, specifications, materials, computer programs, computer program licenses, reset diskettes, documents, instructions, forms and notices, as modified or amended from time to time, which Wells Fargo provides in connection with that Service.

"WDDA Disclosure Statement" means the WDDA Disclosure Statement last provided to you by Wells Fargo with respect to your WDDA, as modified or amended from time to time.

"Wells California" means Wells Fargo Bank, National Association.

"Wells Fargo" or "we" or "us" means, unless otherwise specified, that Wells Fargo Bank whose Application and Agreement you signed.

"Wells Texas" means Wells Fargo Bank (Texas), National Association.

WHOLESALE DEMAND DEPOSIT ACCOUNT

DISCLOSURE STATEMENT

Dated July 29,1996

This Disclosure Statement contains the terms and conditions of your Wholesale Demand Deposit Account ("WDDA") at Wells Fargo Bank. This Disclosure Statement replaces any prior Wells Fargo Bank Disclosure Statement you received with respect to your WDDA, and, for conversion customers, replaces First Interstate Bank's "Rules Governing Deposit Accounts" and another agreement you may have had with First Interstate Bank with respect to the matters discussed below. All fees and other charges for your WDDA and the services referenced below are detailed in a separate price schedule which has been provided to you; if you are a conversion customer, your relationship manager will provide a price schedule to you upon conversion which schedule replaces First Interstate Bank's "Schedule of Business Account Fees and Rates". This Disclosure Statement also contains the terms and conditions of Wells Fargo's most popular cash management services: Account Reconcilement, CheXstor, our check safekeeping services, and Dollar Authorized Payment. Your use of your WDDA after you receive this Disclosure Statement will indicate your agreement to all terms, conditions, fees and charges set forth below or in the most recent price schedule provided to you.

Wells Fargo's WDDA is designed specifically to meet the unique requirements of sophisticated business checking customers. The service combines efficient paper and electronic transaction processing with fast, detailed account reporting. WDDA customers typically utilize many of Wells Fargo's cash management services and have multiple WDDAs to segregate business functions or locations, producing high WDDA activity and dollar volumes each month.

Wells Fargo reserves the right to change the terms and conditions described in this Disclosure Statement and the fees and charges contained in any price schedule. Except in the case of changes in FDIC charges, we will send you prior notice of any such change or notify you by printing or enclosing a message on/with your WDDA statement. WDDA statements and notices relating to your WDDA will be sent to you at your primary address currently shown on our records. If you do not wish to be bound by any change, you may discontinue using the service affected by the change or close your WDDA before the effective date of the change. If you continue to use your WDDA, or, if the change only affects a specific service, you use that service, after the change becomes effective, you agree to be bound by the change.

Any term or condition contained in this Disclosure Statement which is inconsistent with applicable law or regulation will be deemed modified and applied in a manner consistent with such law or regulation. Any term or condition deemed unenforceable or invalid shall not affect the enforceability or validity of the remaining provisions of this Disclosure Statement.

Wells Fargo will rely on the information you provided us when your WDDA (or, if you are a conversion customer, your converted First Interstate account) was opened, until we receive appropriate written notice of any change. In the case of a corporation, this notice must be signed by the person(s) who opened the WDDA, unless the change affects the corporate titles, or number, of the Authorized Signer(s) on your WDDA, in which case the notice must be in the form of a resolution, certified by the Corporation's Secretary or Assistant Secretary. In the case of a partnership or limited liability company, this notice must be signed by all general partners or managers, respectively, or by the person(s) who opened the WDDA. If a dispute arises over control of or access to your WDDA, we reserve the right to prevent any further withdrawals and may restrict or deny access to the WDDA and return checks unpaid until the dispute is resolved to our satisfaction or we may continue to pay checks and honor withdrawal requests and other payment orders when the instructions to do so are given to us by those who opened your WDDA.

CASH MANAGEMENT SERVICES

We have included below a brief description of only a few of the broad variety of cash management services available to WDDA customers. Capitalized terms not otherwise defined in the text are defined on page 10 of this Disclosure Statement.

CheXstor—When you select Wells Fargo's CheXstor for check safekeeping:

•: Wells Fargo will maintain microfilm records of all checks paid against your WDDA for a period of 7 years or longer if required by applicable law ("Record Period").
•: Canceled checks are shredded and recycled as part of Wells Fargo's commitment to improve the environment.
•: Wells Fargo will provide a photocopy of any check posted against your WDDA which you request during the Record Period. You may request a photocopy electronically via your personal computer and PC Manager® or Wells Electronic Banker™ or you may also telephone Cash Management Client Services on InfoTouch® at 1(800)-AT-WELLS (1-800-289-3557) to request a copy.

If we fail to provide you with a copy of a check you request during the Record Period, we will reimburse you for (and our liability will be limited to) any direct loss you incur as a result of the check's unavailability (not to exceed the amount of the check). We will require that you substantiate any claimed loss.

Account Reconcilement—Wells Fargo's Account Reconcilement automates account balancing procedures and gives you a wide range of reports. Along with detailed statements, you may receive optional reports which highlight specific categories of information, including exception transactions. Partial, Full, PC Recon and Deposit Reconcilement services are available from Wells Fargo. In addition to its other advantages, Account Reconcilement will help prevent the fraudulent use of your checks and your WDDA.

Positive Pay—Wells Fargo offers Positive Pay in conjunction with Account Reconcilement. You provide Wells Fargo with detailed check information on or before each Business Day that you issue checks. This information is electronically matched to checks presented against your WDDA and is provided to our branches to help make decisions on cashing checks presented to tellers. You may instruct us to either automatically return all checks that do not match this information or by using PC Manager, Wells Electronic Banker or Information Express®, you may instruct us to return unmatched checks on an individual basis. Positive Pay and Account Reconcilement are also available as additional features with Wells Fargo's Controlled Disbursement Service.

Dollar Authorized Payment—Our Dollar Authorized Payment Service permits you to establish a dollar authorized payment limit for checks drawn on your WDDA. This limit should be chosen according to your business needs; however, we strongly discourage limits in excess of $100,000. If you require a limit in excess of $100,000, you should use our Positive Pay Service in order to minimize the risk of a large loss from the fraudulent or unauthorized use of your WDDA. Any check drawn against your WDDA in an amount above this dollar limit is automatically (without requiring your specific approval) returned unpaid (marked "Refer to Maker") when presented for payment.

Information Express, PC Manager and Wells Electronic Banker—As an Information Express, PC Manager or Wells Electronic Banker customer, you will be provided with detailed account information on a timely basis via your personal computer, allowing you to actively manage daily activity in your WDDA.

VERIFICATION OF CHECKS

How Checks are Processed at Wells Fargo—Checks are processed for payment at Wells Fargo (as at most large banks) by automated means, and most checks are not individually examined. Expeditious processing of your checks and diligent compliance with expedited funds availability laws and regulations mandate automated check processing. Although we do examine certain checks under check processing procedures which change from time to time, reasonable banking standards permit automated check processing without individual check verification. WELLS FARGO'S CHECK PROCESSING PROCEDURES MAY NOT INCLUDE THE VERIFICATION OF THE SIGNATURES ON YOUR CHECKS AGAINST THOSE OF THE AUTHORIZED SIGNERS, NOR DO OUR PROCEDURES NECESSARILY COMPARE THE NUMBER OF SIGNATURES ON A CHECK AGAINST YOUR REQUIREMENTS.

As the banking industry strives to process and clear checks with greater speed and cost efficiency and chronological advances permit forgers the advantage of quality reproductions, the opportunity for check fraud and related crimes greatly increases. The benefits you gain from faster and more efficient check processing require that you take a more active role and exercise greater diligence in monitoring your WDDA.

WDDA Policy on Checks Over $100,000 ("Large Check Policy")—Wells Fargo offers its WDDA customers products which greatly reduce the risk of check fraud—particularly our Positive Pay and Dollar Authorized Payment Services. Positive Pay permits us to electronically match checks presented to us against check information you provide to us. Our Dollar Authorized Payment Service permits you to set a maximum dollar limit on checks drawn on your WDDA.

It is Wells Fargo's Large Check Policy that WDDA customers should either (i) use our Positive Pay service, or (ii) use our Dollar Authorized Payment service with a maximum dollar limit of $100,000 or less. Any WDDA customer who does not comply with our Large Check Policy assumes all risk of loss for any check in excess of $100,000 and acknowledges that Wells Fargo will not be responsible for any loss, whether caused by fraud, forgery or otherwise, arising out of the payment of any such check.

Restrictive Endorsements or Notations—If a check or other item is presented to us for payment bearing a restrictive endorsement or notation, such as "not valid after 60 days" or "paid in full" or "not valid over $100", we may ignore the notation or restriction and pay the item and we shall incur no liability for not acting upon or not notifying you of the restriction or endorsement.

SUSPECTED FORGERIES OR ALTERATIONS

Responsibility for Losses—Wells Fargo will be responsible (except as otherwise provided in this Disclosure Statement, or, in the case of Positive Pay customers, in the agreement for that service), for any wrongful or illegal use of checks drawn on your WDDA only if Wells Fargo's failure to properly perform its check processing procedures (as described in the preceding "Verification of Checks" section) directly caused the loss, in which case our liability is limited to your direct damages up to the amount of the check. YOU ARE RESPONSIBLE FOR ALL OTHER LOSSES ARISING FROM CHECK FORGERY, CHECK ALTERATION OR OTHER UNAUTHORIZED USE OF YOUR ACCOUNT.

Your role is crucial in the prevention of any wrongful use of your checks or WDDA. You must examine and reconcile your WDDA statement promptly upon receipt. If you suspect a check forgery or alteration or other unauthorized use of your WDDA, you must report it to our Cash Management Client Services by calling 1(800)-AT-WELLS (1-800-289-3557) and submit a written report to Wells Fargo as soon as possible, but in any event, within 30 days of the closing date of the WDDA statement that reflected the first forgery, alteration or unauthorized transaction(s). IF YOU FAIL TO COMPLY WITH THE FOREGOING, WELLS FARGO WILL NOT BE RESPONSIBLE FOR SUBSEQUENT

FORGERIES, ALTERATIONS OR UNAUTHORIZED USE BY THE SAME PERSON OR ORGANIZATION. Without regard to care or lack of care, by either you or Wells Fargo, your failure to discover and report any suspected forged, altered or unauthorized check or other item drawn on, withdrawal request from, ACH debit to, or other unauthorized use of, your WDDA within two months after the check or items, or any report or WDDA statement containing or reflecting the check, item, debit, withdrawal or unauthorized use, is made available to you, will bar any claim against Wells Fargo with respect to any such forgery, alteration, debit, withdrawal or other unauthorized use.

Lost or Stolen Checks—You are in the best position to prevent the wrongful or illegal use of your WDDA. If your checks are lost or stolen, you must notify Cash Management Client Services at 1(800)-AT-WELLS (1-800-289-3557) immediately; your failure to do so will hamper our ability to prevent loss and will, therefore, relieve us of any liability regarding the checks, Upon such notification, we may at our discretion, close your WDDA and open a new one. All checks will then be returned as "Account Closed" unless you specifically request that a particular check be paid. (To make such an exception, you must provide us in a timely manner with the check number, dollar amount and the name of the payee.) If third parties make regular deposits to or withdrawals from your WDDA (such as wires or ACH transfers), you must notify those parties of your new WDDA number immediately.

Internal Controls—Preventing the fraudulent or unauthorized use of your WDDA is your responsibility. You should ensure the integrity of your internal procedures with respect to your checks and your WDDA. Wells Fargo recommends that you consider the following internal controls:

1): Designate different personnel to perform separately the functions of check issuance and reconcilement;
2): Keep your check stock in a secure, locked area with checks under dual control and access to the area limited to authorized personnel;
3): Pay particular attention to checks cashed out of sequence and checks payable to individuals or to "cash";
4): Have check stock reorders handled by authorized persons only and audit the check stock periodically;
5): Visually review all checks before issuance;
6): Review your transaction activity for unexpected fluctuations; and
7): Keep any facsimile signature plates (the use of facsimile signature plates when issuing checks increases your risk of fraud) in a secure controlled access area with dual control over access to signature plates.

OTHER INFORMATION ABOUT YOUR WDDA

When Deposits Are Credited To Your WDDA—All over-the-counter deposits or ATM deposits to your WDDA which are received before the cutoff time posted in that branch on any Business Day will be credited (and will be considered deposited) to your WDDA as of the close of business that day, and will be reflected in that day's Ledger Balance. All other deposits (such as cash letter or lockbox) will be processed in accordance with separate agreements or banking practice. All deposits received after the posted cutoff time on a Business Day or at any time on a day which is not a Business Day will be credited (and will be considered deposited) to your WDDA at the end of the next Business Day. Deposits placed in one of our "night depositories" before 7:00 a.m. on any Business Day will be credited to your WDDA at the close of business on that same day; all other deposits placed in the "night depository" will be credited to your WDDA at the end of the next Business Day. All deposits are accepted subject to verification. We reserve the right to make adjustments to your WDDA for computation or other errors. If you deposit cash, we will count it and verify it in your presence or in

accordance with our existing procedures. If our count differs from yours, our count will be considered to be the correct one. If you make a deposit at a night depository or ATM, and our count differs from the amount keyed or shown on your records, our count will be considered the correct one, regardless of any support tape or listing or other record you may provide.

Withdrawal of Deposited Funds—Wells Fargo's general policy applicable to WDDA customers is to make funds from checks deposited into your WDDA available to you as "collected funds" in accordance with the collected funds schedule provided to you by your relationship manager (this schedule may be changed at anytime by Wells Fargo without prior notice). Electronic direct deposits and cash deposits will be available at the time of final settlement.

However, if Wells Fargo believes that a check you deposit may not be paid, the funds from the deposited check may not be available to you until up to five Business Days after the time set forth in the collected funds schedule for your WDDA. Wells Fargo will notify you of any delay in availability no later than the next Business Day after the day the circumstances become known to us. In addition, if a disaster or emergency occurs, funds may not be available to you for an additional period of time until we are able to resume business. We will notify you as soon as possible of any such delay.

When Checks or Items Are Debited To Your WDDA—Your WDDA will be debited on the day a check or other item drawn on your WDDA is presented to Wells Fargo or at an earlier time if we receive an electronic or other notice that a check drawn on your WDDA has been deposited for collection in another financial institution. A determination of your account balance for purposes of making a decision to dishonor a check or item for insufficiency of funds may be made at any time between the presentment of the check or item (or earlier upon receipt of any such notice) and the time of return of the check or item, and no more than one such determination need be made.

Checks or Items Returned Unpaid—A check or item you deposit or cash may be returned to us unpaid for any reason. Wells Fargo is under no obligation to question, inquire into or otherwise contest the basis for any returned item or check. Prior to such return, we may receive a written or electronic notice that the check or item is being returned. We may choose, without notifying you, to present the check a second time for payment. In any case, upon receipt of a notice of nonpayment or upon return of a check or item (either the first return or, if applicable, the second return), we may debit your WDDA for the amount of the check or item returned (as of the date that it was credited to your WDDA), and, upon receipt of the returned check (after the first return or, if presented a second time, after the second return), we will promptly send it to you; however, we shall not be obligated to notify you of our receipt of any notice of nonpayment with respect to the returned check or of the initial physical return of the check or item if we chose to present it a second time. If a check is returned and there are insufficient funds in your WDDA or your WDDA is closed, you agree to promptly pay Wells Fargo the amount of the check (or in the case of insufficient funds, the amount due Wells Fargo).

Overdrafts, Returned Checks and Insufficient Funds—When Wells Fargo receives a check, withdrawal notice, electronic funds transfer or other item drawn on your WDDA, and there are insufficient collected funds in your WDDA, we may, at our discretion and without prior notice to you, either pay it (thus creating an overdraft in your WDDA), or return it to the party from which it was received. We are under no obligation to allow such payments or withdrawals to be made from your WDDA even on an intraday basis and without regard to whether we may have allowed such activity on one or more previous occasions. You must repay any overdraft in your WDDA immediately. If there is more than one Authorized Signer on your Account, you as owner of the Account, or, when there is more than one owner of the Account, each owner, jointly and severally, is liable to Wells Fargo for any overdraft whether or not you or any such owner (i) signed the item that created the overdraft, or (ii) benefited from the proceeds of the item created by the overdraft. ANY PROVISION OF STATE LAW TO THE CONTRARY IS HEREBY WAIVED BY YOU AND EACH SUCH OWNER.

Wire and ACH Transactions—We may receive funds by wire transfer for credit to your WDDA or, as a member of the National Automated Clearing House Association ("NACHA"), we may be asked to process Automated Clearing House ("ACH") debits or credits to your WDDA. In either case, the following will apply:

•: In accordance with NACHA rules, Wells Fargo may process ACH debits to your WDDA at the request of any member of NACHA. Wells Fargo will process ACH debits to your WDDA without any authorization by you to Wells Fargo (nor any prior notice to you from Wells Fargo) on the assumption, as prescribed by NACHA rules, that you have authorized the other NACHA member to initiate such ACH debits to your WDDA. If you do not wish Wells Fargo to process ACH debits to your WDDA, you must write to your relationship manager requesting that Wells Fargo block the processing of all ACH debits to your WDDA. If at a later time you wish to alter this arrangement, simply let us know in writing.
•: Any ACH credit to your WDDA will be provisional until Wells Fargo has received final settlement in accordance with NACHA rules or otherwise has received payment as provided by applicable law. If such settlement or payment is not received, Wells Fargo shall be entitled to debit your WDDA for the amount of the settlement or payment (as of the date it was credited to your WDDA). If at that time there are insufficient funds in your WDDA or your WDDA is closed, you agree to promptly pay Wells Fargo the amount of the credit (or in the case of insufficient funds, the remaining amount due Wells Fargo).
•: You will receive notice of credits and debits to your WDDA through your WDDA statement which you will receive at regular intervals, but we will not provide any separate notice of wire, ACH or other funds transfers into or out of your WDDA. If you desire faster notice, you may obtain it by using our Information Express, Wells Electronic Banker or PC Manager service. You must immediately inform us of any credits or debits which are incorrect or not authorized by you.

Stop Payments—We may pay a check against your WDDA whenever it is presented and without regard to its date. If you do not want us to pay a check, you must place a stop payment order which is valid for the period specified when you opened your WDDA or when your account was converted to a WDDA and must be received within sufficient time for us to act. You may renew a stop payment order via PC Manager, Wells Electronic Banker or InfoTouch or telephone to Cash Management Client Services. A stop payment order will be ineffective with respect to (a) a check deposited to an account at any Wells Fargo Bank if it cannot be charged back without creating an overdraft in that account, and (b) a check that was cashed by another Wells Fargo Bank. You may request a stop payment of a check by using PC Manager or Wells Electronic Banker or you may also telephone our Cash Management Client Services, on InfoTouch at 1 (800)-AT-WELLS (1-800-289-3557), Monday through Friday, 7:00 am to 6:00 p.m., Pacific Time. You authorize us to accept telephone stop payment orders from any person who we in good faith believe is acting on your behalf. In Texas, you must confirm an oral stop payment order in writing.

Payment Over Stop Order or Dollar Authorized Payment Limit—If Wells Fargo inadvertently pays a check when a stop payment order should have been effective or the check is in excess of your Dollar Authorized Payment limit, we will be liable only for any direct loss you incur (not to exceed the amount of the check, or in the case of our payment of a check in excess of your Dollar Authorized Payment limit, not to exceed the amount by which such check exceeds your limit) as a result of our failure to stop payment so long as you are able to establish that you do not owe the money to the party who received it and you are able to substantiate any claimed loss (in which case you agree to assign us your rights, and cooperate with Wells Fargo in pursuing its claims, against the payee or other holder of the check).

Earnings Allowance—The average monthly Investible Balance in your WDDA may earn an "Earnings Allowance" which, depending on your WDDA arrangements, may be applied against that month's service charges for your WDDA. An Earnings Allowance in excess of the total monthly service charges cannot be credited to your WDDA as interest and cannot be carried forward to the following month.

Earnings Allowances are calculated on a 365-day year basis using an "Earnings Credit Rate", which is a variable rate (which may be as low as zero percent) established by Wells Fargo. This rate is determined monthly and is applied to your average Investible Balance for that month using the following formula: Earnings Credit Rate multiplied by the number of days in the month divided by 365 days multiplied by the average Investible Balance for that month. As the factors used in the formula change, the Earnings Allowance earned on a given average monthly Investible Balance will vary. Please call your relationship manager with questions on your current Earnings Credit Rate.

Finance Charges—You may either be directly debited or invoiced for fees and charges incurred in connection with your WDDA. Wells Fargo may assess finance charges on any invoiced amounts that are not paid within 45 days of the date of invoice. If the invoice is paid within 45 days, then% no finance charge will be assessed. If the invoice is not paid within 90 days of the date of the invoice, Wells Fargo may debit your WDDA for the amount outstanding.

Finance charges are assessed at a rate of 1.5% per month (18% per annum). Charges for accrued and unpaid interest and previously assessed finance charges will not be included when calculating finance charges. Payments and other reductions of amounts owed will be applied first to that portion of outstanding fees attributable to charges for accrued and unpaid interest and previously assessed finance charges, then to other charges.

Should you wish to question any service charge, please call your relationship manager. Service charges will be automatically debited from your WDDA (which occurs approximately five business days after you receive your account analysis statement). This minimizes the possibility of finance charges and also eliminates the need to process the invoice through your accounts payable area.

FDIC Insurance—Funds on deposit in your WDDA are insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC), an agency of the United States Government.

Lost Items—When you cash or deposit a check or other item at Wells Fargo, we act as your collecting agent to collect the item. You have the risk of loss, including reconstruction costs, for items lost while in the process of collection. If an item deposited in your WDDA is lost in transit, we may reverse the credit given for that item. If an item you cash at Wells Fargo is lost in transit, we may recover the funds given to you from any of your Wells Fargo accounts or directly from you.

Inactive WDDAs—When your WDDA has had no withdrawal or deposit activity, and we have had no contact from you regarding your WDDA for one year, the WDDA will be considered inactive and we nay cease sending your WDDA statements. Service charges and other terms applicable to active WDDAs, including all changes to these terms, will apply to your WDDA while it is inactive. If your WDDA has any deposit or withdrawal activity or you contact us about the WDDA, it will be reinstated as an active WDDA.

Abandoned WDDAs—If your WDDA remains inactive for the period required for escheat under applicable state law, it will be deemed abandoned and any funds in the WDDA must be transferred to the appropriate state.

Usury Savings Clause—It is never the intention of Wells Fargo to violate any applicable usury or interest rate laws. Wells Fargo does not agree or intend to contract for, charge, collect, take, reserve or receive (collectively referred to herein as "charge or collect"), any amount in the nature of interest or in the nature of a fee, penalty or other charge, which would in any way or event (including demand,

prepayment or acceleration) cause Wells Fargo to charge or collect more than the maximum Wells Fargo would be permitted to charge or collect by any applicable federal or state law. Any such excess interest or unauthorized fee shall, notwithstanding anything stated to the contrary, be applied first to reduce the true indebtedness, if any, and any excess amounts will be refunded.

Legal Process—If we are served with restraining orders, writs of attachment or execution, subpoenas, tax levies or other legal process related to your WDDA, Wells Fargo must comply. We will try to notify you when we receive such an item, unless we are prohibited by law from doing so.

When You Contact Wells Fargo By Telephone—To ensure that your inquiries are handled promptly, courteously, and accurately, telephone calls between you and Wells Fargo may be recorded or monitored by supervisory personnel.

Credit Reports—You authorize Wells Fargo to obtain credit reports and make whatever other inquiries Wells Fargo deems appropriate concerning you or any individual whose Authorized Signature you have provided to us.

Disclosure of WDDA Information—Wells Fargo may disclose information about your WDDA to its affiliates, to credit reporting agencies and to other persons or agencies who, in Wells Fargo's judgment, have a legitimate purpose for obtaining such information, such as to verify the existence and balance of your WDDA to a third party, to comply with government agencies or court orders, to comply with requests from bank regulatory agencies, to expedite or complete a transfer of funds to a third party, or in response to requests by Wells Fargo's outside auditors, consultants, attorneys or other agents. Wells Fargo is also authorized to provide WDDA information to individuals identifying themselves as your agents or employees.

Governing Law—This, Disclosure Statement shall be governed by and interpreted in accordance with federal laws and regulations, and to the extent federal laws and regulations are not applicable, the law of the state where the Wells Fargo Bank at which you maintain your WDDA has its headquarters. In addition to this Disclosure Statement, all transactions relating to your WDDA are subject to federal reserve regulations and operating circulars, clearing house and fund transfer system rules, Wells Fargo's clearing arrangements with other financial institutions and Wells Fargo's policies and procedures.

Disputes—IF ANY DISPUTE ARISES WITH RESPECT TO YOUR WDDA, WELLS FARGO WANTS TO RESOLVE THE DISPUTE FAIRLY AND QUICKLY. IN THE UNLIKELY EVENT OF LITIGATION, WELLS FARGO AND YOU EACH AGREE TO WAIVE THE RIGHT TO A JURY TRIAL.

ARBITRATION—WITH RESPECT TO FIRST INTERSTATE BANK CUSTOMERS WHOSE ACCOUNTS ARE BEING CONVERTED TO THE WDDA SYSTEM, THE ARBITRATION PROVISIONS OF YOUR EXISTING CONTRACTUAL ARRANGEMENTS WITH FIRST INTERSTATE WILL CONTINUE TO APPLY.

Closing Your WDDA—Either Wells Fargo or you, through your Authorized Signer(s), may close your WDDA at any time without prior notice. If the signature of more than one Authorized Signer is required for signing checks, the same number of Authorized Signers will be required to close your WDDA. Instructions received by facsimile to close your WDDA will not be accepted. Closure of your WDDA will not affect your obligation to pay Wells Fargo any amounts owed with respect to your WDDA.

Large Currency Transactions—Governmental regulations require us to report, without notice to you, transactions involving currency in excess of $10,000 to the IRS. We have the obligation even if the $10,000 is spread out over several transactions in one day, or if two or more transactions that total more than $10,000 occur on different days, but are processed on the same day. We are also obligated

to report transactions we believe suspicious or to have been structured in a manner or in an attempt to avoid the currency transaction reporting requirements.

Check Endorsement Requirements—By Federal regulation, the "Depository Bank Indorsement Area" on the back of a check is reserved for bank indorsement and must be kept clear and unobstructed.

The Depository Bank Indorsement Area is that portion of the reverse side of a check between 1¹/2 inches from the "trailing edge" and 3 inches from the "leading edge" of the back of the check. The indorsement of the payee or depositor should be placed on the back of the check along the "trailing edge" but must not be placed in the reserved space described.

[ADD CHECK CONFIGURATION]

If you do mark or obscure the Depository Bank Indorsement Area or you cash or deposit a check on which the area is marked or obscured, a delay may occur if the item must be returned. Examples of marks which may obscure the reserved area are indorsements, rubber stamp imprints, carbon bands and preprinted information. Any loss resulting from marks caused by you which obscure the reserved area is your responsibility. YOU AGREE TO HOLD US HARMLESS FROM ANY LOSS, LIABILITY OR DAMAGE WE MAY SUFFER OR INCUR ARISING FROM OR IN ANY WAY RELATED TO MARKS CAUSED BY YOU WHICH OBSCURE THE DEPOSITORY BANK INDORSEMENT AREA.

CERTAIN DEFINED TERMS

Business Day—is a day, other than a Saturday, Sunday or day when Federal Reserve Banks are closed.

Collected Balance—is the Ledger Balance in your WDDA less Deposit Float.

Deposit Float—is the total dollar amount of items deposited in your WDDA for which, based on the most recent collected funds schedule provided to you, your WDDA has not yet been credited for purposes of calculating your Collected Balance.

Ledger Balance—is the balance in your WDDA after all debits and credits for the day are posted.

Legal Reserves—is the portion of the Collected Balance in your WDDA that Wells Fargo is required by law to hold in reserve at a Federal Reserve Bank.

Investible Balance—is the Collected Balance in your WDDA less Legal Reserves and other adjustments.

GENERAL PROVISIONS

Cash Management Services—As a WDDA customer, cash management services ("Services") offered by Wells Fargo may be available to you. Wells Fargo's performance of any Service will be subject to the terms and conditions set forth in any agreement which Wells Fargo and you may enter into for that service as well as the following terms and conditions which shall apply to all services (excluding funds transfer and ACH services) and shall survive the termination of any agreement:

•: Wells Fargo will perform the Services in a manner consistent with the quality provided when Wells Fargo performs similar services for its own account. Wells Fargo, however, cannot be responsible for the errors, acts or omissions of others, such as communications carriers, correspondents or clearing houses through which Wells Fargo may effect your instructions or receive or transmit information in the performance of a Service. Also, Wells Fargo cannot be responsible for any loss, liability or delay resulting from or caused by war, communications networks outages, labor disputes, legal constraints, fires, power surges or failures, earthquakes, civil disturbances or other events beyond Wells Fargo's control. WELLS FARGO MAKES NO

EXPRESS OR IMPLIED REPRESENTATIONS OR WARRANTIES WITH RESPECT TO ANY SERVICE OTHER THAN THOSE EXPRESSLY SET FORTH IN THE AGREEMENT FOR THAT SERVICE.

•: In the event that you or Wells Fargo suffer or incur losses, liabilities, claims (including third party claims) or expenses, including, but not limited to, attorneys' fees, as a result of or in connection with the performance of a Service (collectively,"Losses"), Wells Fargo and you shall negotiate in good faith in an effort to reach a mutually satisfactory allocation of the Losses, it being understood that Wells Fargo shall not be responsible for any Losses due to any cause other than Wells Fargo's negligence or breach of an agreement in which case Wells Fargo's liability shall be limited to, and you will be responsible for any Losses in excess of, direct money damages in an amount not to exceed ten times the charges for the Service in connection with which the Losses were incurred during the calendar month immediately preceding the calendar month in which such Losses were incurred (or, if there were no such charges in the preceding month, the charges for such Services incurred in the month in which the Losses were incurred). The limitation of Wells Fargo's liability set forth above shall not be applicable to the extent any such Losses are directly caused by the gross negligence or willful misconduct of Wells Fargo.

WDDA/Cash Management Services—WHETHER IN CONNECTION WITH A SERVICE OR YOUR WDDA, IN NO EVENT SHALL WELLS FARGO BE LIABLE FOR ANY SPECIAL CONSEQUENTIAL, INDIRECT OR PUNITIVE DAMAGES, WHETHER ANY CLAIM IS BASED ON CONTRACT OR TORT OR WHETHER THE LIKELIHOOD OF SUCH DAMAGES WAS KNOWN TO WELLS FARGO.

Customer Service—In the event of questions or errors regarding your WDDA transactions, records or statements you should immediately call Cash Management Client Services at 1(800)-AT-WELLS (1-800-289-3557). If you cannot resolve the issue this way, speak to your relationship manager.

Wells Fargo ACH Services

Pricing Schedules

Wells Fargo ACH Services

X.com Domestic Pricing Summary

Service		Price
*General Account Services*
	Account Maintenance	$	[*]	Per Account, Per Month
	Per Credit	$	[*]	Per Item
	Per Debit	$	[*]	Per Item
*ACH Services*
	ACH Monthly Base Fee	$	[*]	Per Customer, Per Month
	Per Incoming Transmission	$	[*]	Monthly Maximum of $200.00
	Return Item Transmission	$	[*]	Per Customer, Per Month
	ACH Delete	$	[*]	Per Item
	ACH Reversal	$	[*]	Per Item
	ACH Research - Less than 60 Days	$	[*]	Per Item
	ACH Research - Past 60 Days	$	[*]	Per Item
			Transit	On-Us
ACH Item Processed *
	0 - 100,000	$	[*]	$[*]
	100,001 - 500,000	$	[*]	$[*]
	500,001 - 1 MM	$	[*]	$[*]
	1MM - 10 MM	$	[*]	$[*]

*: Monthly Minimum Billing of [*] (Up to 10,000 Items Per Month)

Wells Fargo ACH Services

X.com Canadian Pricing Summary

Service Description	Volume	Unit Price	Monthly Activity Charges
*International*
XACH BASE CHARGE	1	[*]	[*]
XACH CANADA ITEM	5000	[*]	[*]
XACH FILE	20	[*]	[*]
XACH FILE RECALL	1	[*]	[*]
XACH FILE RECALL PER ITEM	1	[*]	[*]
XACH ITEM RECALL	1	[*]	[*]
XACH RETURN	50	[*]	[*]
*Subtotal*			[*]
Total monthly charges			[*]
*One-time fees*
XACH SETUP	1	[*]	[*]
*Total set-up fees*			[*]

INTERNATIONAL TREASURY MANAGEMENT

I N T E R N AT I O N A L A C H
Price Schedule

Basic Services			Charge Basis	Price
Direct Origination
Setup
	Customer Setup		one time	$	[*]
Monthly Base Fee
	Base Fee		per month	$	[*]
Input Charges
	Transmission		per transmission	$	[*]
Transaction Charges—Monthly
	Items Processed—Canada
		1-4,999	per transaction	$	[*]
		5,000-9,999	per transaction	$	[*]
		10,000+	per transaction	$	[*]
	Items Processed¹—France, Germany, Mexico, Netherlands, UK
		1-2,499	per transaction	$	[*]
		2,500-4,999	per transaction	$	[*]
		5,000+	per transaction	$	[*]
Returns & Exceptions
	Return/Reject		per item	$	[*]
	Item Delete		per item	$	[*]
	Cross Border ACH File Recall		per file	$	[*]
	Cross Border ACH File Recall		per item	$	[*]
	Cross Border ACH Item Recall		per item	$	[*]

¹: Volume tiers are achieved on a per country basis

Basic Services			Charge Basis	Price
ACH Express Origination
Setup
	Customer Setup		one time	$	[*]
Monthly Base Fee
	Base Fee		per month	$	[*]
Input Charges
	Transmission		per transmission	$	[*]
Transaction Charges—Monthly
	Items Processed—Canada
		1-4,999	per transaction	$	[*]
		5,000-9,999	per transaction	$	[*]
		10,000+	per transaction	$	[*]
	Items Processed¹—France, Germany, Mexico, Netherlands, UK
		1-2,499	per transaction	$	[*]
		2,500-4,999	per transaction	$	[*]
		5,000+	per transaction	$	[*]
Returns & Exceptions
	Return/Reject		per item	$	[*]
	Item Delete		per item	$	[*]
	Cross Border ACH File Recall		per file	$	[*]
	Cross Border ACH File Recall		per item	$	[*]
	Cross Border ACH Item Recall		per item	$	[*]

¹: Volume tiers are achieved on a per country basis

For more information on Wells Fargo's International Treasury Management services, please contact us toll-free at 1-877-300-9998 or at intltreasmgmt@wellsfargo.com.

QuickLinks

EXHIBIT 10.21

APPLICATION AND AGREEMENT for CASH MANAGEMENT SERVICES
SECURITY PROCEDURES FOR AUTOMATED CLEARING HOUSE ("ACH") TRANSFERS
SECURITY PROCEDURES FOR ACH TRANSFERS INITIATED THROUGH OUR CASH CONCENTRATION SERVICE
SECURITY PROCEDURES FOR ACH TRANSFERS INITIATED THROUGH OUR PAYMENT MANAGE® SERVICE
SECURITY PROCEDURES FOR ACH TRANSFERS INITIATED ELECTRONICALLY THROUGH OUR WellsTax™ SERVICE
SECURITY PROCEDURES FOR FUNDS TRANSFERS INITIATED THROUGH OUR PC MANAGER® SERVICE
SECURITY PROCEDURES FOR FUNDS TRANSFERS INITIATED THROUGH OUR WELLS ELECTRONIC BANKER™ SERVICE
SECURITY PROCEDURES FOR FUNDS TRANSFERS INITIATED VIA TELEPHONE
SECURITY PROCEDURES FOR FUNDS TRANSFERS INITIATED THROUGH OUR InfoTouch® SERVICE
SECURITY PROCEDURES FOR FUNDS TRANSFERS INITIATED BY INCOMING DRAWDOWN REQUESTS ("DRAWDOWN TRANSFERS")
CASH MANAGEMENT SERVICES DISCLOSURE STATEMENT
GLOSSARY
WHOLESALE DEMAND DEPOSIT ACCOUNT DISCLOSURE STATEMENT
EX-10.23 8 a2069647zex-10_23.htm EXHIBIT 10.23 Prepared by MERRILL CORPORATION
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EXHIBIT 10.23

MERCHANT AGREEMENT

In consideration of the mutual promises and covenants contained in this Merchant Agreement ("Agreement"), the parties agree as follows:

1. Parties. The parties to this Agreement are ELECTRONIC PAYMENT EXCHANGE, INC., a Delaware Corporation, whose address is One Corporate Commons, Suite 214, 100 W. Commons Boulevard, New Castle, Delaware 19720 ("EPX"), and The Bancorp.com Bank a Delaware Corporation whose address is 405 Silverside Road, Wilmington DE 19809 ("Bank") and PAYPAL, INC., a Delaware Corporation, whose address is 1840 Embarcadero Road, Palo Alto, California 94303 (called "Merchant").

2. Definitions. For the purposes of this Agreement and the Schedules and Exhibits referred to herein, the following definitions apply unless the context otherwise requires:

(a): Address Verification shall mean a service which allows Merchant to verify Cardholder's billing address with Issuer.
(b): Associations shall mean MasterCard International Inc., American Express or Discover for the particular card in question.
(c): Authorization shall mean an affirmative response by or on behalf of an Issuer, to a request to the Authorization Center to effect a Transaction, that a Transaction is within the Cardholder's available credit limit and that the Cardholder has not reported the Card lost or stolen. All Transactions require Authorization.
(d): Business Day shall mean any day other than (i) a Saturday or Sunday, or (ii) a day on which national banking institutions are authorized by law or executive order to be closed (and on which Bank is in fact closed).
(e): Card(s) shall mean a MasterCard, American Express, or Discover credit or debit card.
(f): Card Not Present shall mean mail order, telephone order, e-commerce (Internet) order, Pre-Authorized Recurring Order Transactions, or other "card not present" sales.
(g): Card Present shall mean a Transaction in which the Card is swiped through a terminal, register or other device, capturing the Card information encoded on the magnetic strip.
(h): Cardholder shall mean a person authorized to use a Card.
(i): Chargeback shall mean a Transaction that Bank returns to Merchant pursuant to this Agreement, because it was denied or returned after it was entered into the settlement network for payment.
(j): Forced Sale shall mean a sales Transaction processed without an approved electronic authorization number being obtained for the full amount of the sales Transaction at the time the Transaction is processed.
(k): Issuer shall mean an Association member that issued a Card to a Cardholder.
(l): Merchant Statement shall mean an itemized monthly statement of all charges and credits to the Operating Account.

(m): Mid-Qualified Transactions shall mean (i) key-entered retail transactions; (ii) Visa telephone or mail Transactions without Address Verification; or (iv) any Card Transaction designated as such by Associations.
(n): Non-Qualified Transactions shall mean (i) any Transaction submitted for processing more than 48 hours past the time the Authorization occurred; (ii) any Transaction missing required data; or (iii) any Card Transaction designated as such by Associations.
(o): Pre-Authorized Recurring Order Transactions shall mean Transactions which have been pre-authorized by the Cardholder and for which the goods or services are to be delivered or performed in the future by Merchant without having to obtain further approval from the Cardholder each time.
(p): Qualified Transactions shall mean (i) retail Transactions in which the Card is swiped; (ii) Visa telephone, Internet, or mail Transactions with Address Verification; or (iii) Transactions that are part of a special registered program approved by the Association.
(q): Services shall mean the transaction processing services provided by Bank under this Agreement.
(r): Transaction shall mean the acceptance by Merchant of a Card or information embossed on the Card for payment for goods sold and/or leased or services provided to Cardholders by Merchant and receipt of payment from Bank, whether the Transaction is approved, declined, or processed as a Forced Sale. Transaction also includes credits, errors, returns and adjustments.

3. Merchant agrees to participate in program. Merchant agrees to participate in the credit card processing services program established by Bank, and EPX.

4. EPX to provide services to Merchant. During the term of this Agreement, subject to the terms and conditions of this Agreement, EPX agrees to provide software and technical documentation in order to allow Merchant to accept and process Card Transactions. EPX shall provide software and technical support and customer support for all Merchant Transactions, including authorization, settlement, chargeback processing and reporting from 8:00a.m. to 8:00p.m. Eastern Standard Time Monday through Friday. Customer service on all other days and times shall be provided on an "on call" basis as set forth in Exhibits "A" and "B" which are incorporated herein and made part of this agreement. Notwithstanding, the fines set forth in Exhibits "A" and "B" shall not be issued simultaneously and the total fines issued shall not exceed those outlined in Exhibit "A."

5. Bank and EPX to Provide Services to Merchant. Bank agrees to sponsor Merchant's acceptance of Cards for Transactions. EPX agrees to provide Merchant with the Services indicated on Schedule A, as amended from time to time by EPX or Bank, during the term of this Agreement, subject to the terms and conditions of this Agreement.

6. Independent Contractor. In the performance of its duties hereunder, each party shall be an independent contractor, not an employee or agent of another party.

7. Compliance with Association Rules. Merchant agrees to comply with the bylaws, rules, regulations, policy statements and guidelines of the Association. EPX agrees to keep Merchant advised of Association rules and regulations as they are applied.

8. Term. This Agreement shall become effective when signed by all parties and, unless sooner terminated in accordance with this Agreement, shall remain in effect for a term of one (1) year. This Agreement shall renew automatically for successive terms of one (1) year each, unless any party provides written notice of termination to the other parties at least sixty (60) days prior to the end of the then current term. All existing obligations, warranties, indemnities and agreements with respect to Transactions entered into before such termination shall remain in full force and effect and Merchant

shall remain liable for all obligations to Cardholders, EPX and Bank incurred while this Agreement is in effect, and prior to termination, EPX and Bank shall remain liable for providing settlement to Merchant for those transactions subject to the exceptions noted in paragraph 10, 11 and 38.

9. Merchant Operating Account. Prior to accepting any Cards, Merchant shall establish a demand deposit account at Bank, or at a financial institution designated by Merchant ("Operating Account"), through which fees, charges and credits due in accordance with this Agreement may be processed. If Merchant fails to remit payment when due, Merchant authorizes Bank or EPX to debit all amounts Merchant owes Bank, and EPX hereunder from the Operating Account, whether maintained at Bank or another financial institution, at times deemed appropriate by Bank or EPX through the ACH Banking Network or by a manual debit of the account. Merchant waives any claims for loss or damage arising out of any charges or debits to the Operating Account against any other financial institution where the Operating Account is maintained.

10. Reserve Account. Upon execution of this Agreement and Bank's or EPX's written notification requesting a Reserve Account from Merchant, Merchant shall establish a reserve account at Bank ("Reserve Account") for all future indebtedness of Merchant to Bank, or EPX which may arise out of this Agreement, including, but not limited to, Chargebacks, fees and fines, in such amount as defined below:

Chargeback rate (as a unit based % of credit card sales volume per Association)			Reserve requirement
	>1. 0%		Total $ amount of chargebacks from prior (30) days
	>1.5%		Total $ amount of chargebacks from prior (45) days
	>2.0%		Total $ amount of chargebacks from prior (60) days
	> 2.5%		Total $ amount of chargebacks from prior (120) days

Additionally, if in the opinion of the Bank or EPX there is a substantial negative change in the Merchant's business or financial position, or Association fines the Bank, Bank may require additional reserve.

11. Funding of Reserve Account. The Reserve Account shall be funded on seven days notice to the Merchant or in the cases of suspected fraud or suspected or known financial loss to Bank, the Reserve Account shall be funded immediately. Bank may fund the Reserve Account by deduction from payments due Merchant or a charge against Merchant's Operating Account or against any of Merchant's accounts at Bank. The Reserve Account will be maintained for a minimum of six months from the termination date of this Agreement or until such time as Bank determines that the release of the funds to Merchant is prudent, in the best interest of Bank, commercially reasonable and Merchant's account with Bank is fully resolved. Upon expiration of this period, any balance remaining in the Reserve Account will be paid to Merchant. Bank will inform Merchant in writing of any charges debited to the Reserve Account during this period.

12. Fees. Merchant shall pay Bank all fees specified on Schedule B, as amended by Bank from time to time when having been given 30 days written notice. Any increases to the fees shall be directly attributed to increases in Association pass-through fees. Bank shall also be obligated to pass through any decreases in Association fees. EPX, and Bank will not increase the non-Association fees or charges over which it maintains control for a period of one-year from the date of the execution of this agreement.

Merchant agrees that Bank will deduct Merchant Discount Fees from the Operating Account or Reserve Account on a daily basis unless a monthly basis is specified in Schedule B. Merchant also agrees to pay Bank the amount of any fees, charges or penalties assessed against Bank by any Association or Issuer for Merchant's violation of the by-laws, rules, regulations, guidelines, policy statements or threshold requirements of such parties. Merchant shall pay Bank for any other services provided to Merchant by Bank and for all other fees, including, but not limited to monthly service fees, Chargebacks and set-up fees provided for in this Agreement, as shown in Schedule B

13. Billing. All amounts Merchant owes Bank may be charged to the Operating Account as designated, the Reserve Account, recouped by adjustment of any credits due to Merchant or set off against any account or property Bank holds for or on behalf of Merchant.

14. Security Interest. Merchant hereby grants Bank, and EPX a security interest in the funds held in the Operating Account and in the Reserve Account. On request of Bank, and/or EPX, Merchant will execute one or more documents in satisfactory form to Bank, and/or EPX and will pay all costs and expenses of filing the same or of filing this Agreement in all public filing offices, where filing is deemed by Bank to be desirable, in order to perfect Bank's security interest in the Operating and Reserve Accounts. EPX, and/or Bank is authorized to file financing statements relating to the Operating Account and the Reserve Account without Merchant's signature where authorized by law.

15. Power of Attorney. Merchant appoints Bank, and/or EPX as its attorney-in-fact to execute such documents as are necessary or desirable to accomplish perfection of any security interests. The appointment is coupled with an interest and shall be irrevocable as long as Merchant owes any amount to Bank, or EPX.

16. Software. In processing Transactions, Merchant shall use only software programs, file formats and processing methods that have been approved and certified by EPX's Business Integration staff, such approval is not to be unreasonably withheld or delayed. Use of software programs certified by EPX or approved by EPX and related equipment installed or approved by EPX, will be subject to the following additional terms:

a.: Merchant shall provide the information required by the merchant input form provided to Merchant by EPX and shall promptly notify EPX and Bank of any changes in this information;
b.: If Merchant is using Software, Merchant acknowledges receipt of a copy of the Software User's Guide. Merchant will use and operate the Software only in accordance with the Software Users' Guide, as amended from time to time by Bank or EPX;
c.: Bank will have no liability to Merchant if any installation is delayed or cannot be completed. EPX will not have liability to Merchant if any installation is delayed or cannot be completed for reasons not caused by the act or neglect of EPX;
d.: All Software shall be installed and operated in accordance with the instructions provided by EPX.
e.: The Merchant's Software and Equipment shall be suitable for processing the Services and will comply with the Association's minimum requirements
f.: EPX Systems and Software Components. Merchant acknowledges that its use of the EPX System and Software is in accordance with the terms of the manuals and instructions supplied by EPX and within the terms of the license granted by EPX if such a license is granted. Any Software supplied to Merchant by EPX is owned by EPX. It is licensed to Merchant and not sold. The Software, manuals and accompanying printed materials related to the EPX System, if any, are protected by copyright laws and international copyright treaties, as well as other intellectual property laws and treaties. Merchant is prohibited from copying the Software,

manuals or any other accompanying printed materials related to the EPX System. Merchant shall not sell, lease, encumber or otherwise dispose of the Software. Merchant acknowledges that the proper functioning of the Software and EPX System requires computer hardware suitable to operate the Software and System applications. EPX will not have any liability to Merchant if the Software or EPX System fails to operate because of Merchant's inappropriate, inadequate or faulty computer hardware, because of the failure of Merchant, its employees and agents to operate the Software and/or EPX System properly in accordance with the instructions provided by EPX or because of the neglect or misuse of the Software and/or the EPX System by Merchant, its employees or agents. If the Software and/or EPX System fails to operate for any other reason not attributable to Merchant, the liability of EPX shall be limited to the damages as defined in Exhibit A.

17. Data Connection. In the event Merchant requires the installation of a dedicated data connection for electronic transmissions to EPX, Merchant shall make arrangements for such installation and the maintenance thereof with EPX. EPX shall coordinate the installation and maintenance of the dedicated data connection. Merchant shall pay EPX for all reasonable out-of-pocket costs related to the installation and maintenance of the dedicated data connection.

18. Documenting Transactions. Merchant shall submit the following information to Bank in connection with Transaction processing:

(a): The DBA name of Merchant, name of Merchant;
(b): Merchant customer service telephone number;
(c): Merchant Internet address;
(d): Merchant Number assigned by Bank;
(e): The Card account number, validation date and/or expiration date of the Card, if one appears on the Card;
(f): Name and address of Cardholder; and
(g): Such additional information as may from time to time be required by Bank and/or the Association.

Merchant shall not submit a Transaction to Bank (electronically or otherwise) until Merchant has performed its obligations to the Cardholder in connection with the Transaction or obtained Cardholder's consent for a Pre-Authorized Recurring Order Transaction. Merchant must not transmit a Transaction to Bank that Merchant knows or should have known to be fraudulent or not authorized by the Cardholder. Merchant is responsible for its employees' actions. Merchant may transmit a Transaction which effects a prepayment of services if Merchant advises Cardholder of the immediate billing at the time of the Transaction and within time limits established by the Association.

19. Authorization for Transactions. Merchant shall obtain authorization of Transactions as follows:

(a): Electronically Transmitted Transaction. Merchant shall submit each Card Present Transaction for authorization to Bank's Authorization Center using the Software. Bank's Authorization Center shall authorize or decline a Card Present Transaction transmitted for authorization and shall capture and process for Merchant the information relating to the Card Present Transaction. If a terminal or software application is inoperable at the time of an authorization request, the Transaction may be authorized by using the appropriate dial-up facility. In that case, the Transaction shall be entered as a Forced Sale Transaction, provided the approval number is also entered, and Merchant shall be subject to an additional voice or audio response unit ("ARU") authorization fee as outlined in Schedule B.

(b)

The following additional requirements apply to Card Not Present Transactions:

(1): All Card Not Present Transactions are at Merchant's risk. As to each Card Not Present Transaction, Merchant warrants to Bank that the person whose name is submitted to Bank as Cardholder either made or authorized another to make the purchase. Upon breach of this warranty, Bank may charge back the Transaction to Merchant. If Bank charges back the Transaction to Merchant, Merchant shall pay Bank the amount of the Transaction, any Chargeback fee in Schedule B, plus any Association fine or assessment. Bank may charge the Transaction to the Operating Account or Reserve Account without prior notice to Merchant;
(2): All Card Not Present Transactions must be electronically authorized via Software application and, in addition to the information required in Paragraph 18, also shall indicate: an authorization code, if required; customer address and address verification; and in lieu of Cardholder's signature, a notation of (i) mail order (MO), (ii) telephone order (TO), (iii) e-commerce order (EO), or (iv) pre-authorized order (PO) on the signature line;
(3): If Merchant accepts a pre-authorized recurring order, the Cardholder shall execute and deliver to Merchant a written request for this pre-authorization. This written request, which shall include on-line consent (i.e., web), shall be maintained by Merchant and made available upon request to Bank. All annual billings must be reaffirmed at least once a year. Merchant shall not deliver goods or perform services covered by a pre-authorization order after receiving notification from the Cardholder that the pre-authorization is canceled or from Bank that the Card covering the Pre-authorization is not to be honored; and
(4): Merchant shall verify Cardholder's address from the Association network. For telephone or mail order sales, Merchant shall transmit a ticket/invoice number and shall do an Address Verification to qualify for the Qualified Merchant Discount Rate.

20. Prohibited Transactions. Merchant shall not do any of the following with respect to any Transaction:

(a): Impose a surcharge on a Cardholder who elects to use a Card in lieu of payment by cash, check or other mode of payment;
(b): Charge a Cardholder more than the amount the Cardholder would pay if payment were made by cash or check;
(c): Establish a minimum or maximum dollar Transaction amounts exclusively for those customers choosing to use credit cards as a payment option. EPX further understands that Merchant's normal transaction limits ("TL") are for risk purposes. Merchant represents that its TL and Instant Transfer Policy ("ITP") do not violate the Association Rules or any laws. To the extent Merchant's TL and/or ITP violates either any Association Rule or applicable law, Merchant agrees to indemnify and hold EPX and Bank harmless and pay EPX, and Bank any attorneys fees, damages or fines incurred by them resulting from Merchant's incorrect interpretation of the TL's and /or ITP's propriety.
(d): Obtain multiple authorizations for amounts less than the total credit sale amount;
(e): Obtain authorization for purposes of setting aside Cardholder's credit line for use in future sales;
(f): Extend credit for or defer the time of payment of the total cash price in any Transaction;
(g): Honor a Card except in a Transaction where a total cash price is due and payable;

(h): Make any special charge to or extract any special agreement or security from any Cardholder in connection with any Transaction;
(i): Transmit or accept for payment any Transaction which was not originated directly between Merchant and a Cardholder for the sale or lease of goods or the performance of services of the type indicated in Merchant's application for card processing services initially submitted to and approved by Bank;
(j): Honor or accept a Card as payment for any legal services or expenses arising out of or related to (1) the defense of any crime other than a traffic violation; (2) any domestic relations matter where such services or expenses are furnished to a person whose name is not embossed on a Card; or (3) any bankruptcy, insolvency, compromise, composition or other process affecting Cardholder's creditors;
(k): Use Merchant's own Card, or one to which Merchant has access, to process a Transaction for the purpose of obtaining credit for Merchant's own benefit;
(l): Redeposit a previously charged Transaction, regardless of whether Cardholder consents;
(m): Initiate a Transaction credit without a balance in the Operating Account equal to the credit, unless Merchant is a participant in an approved Association program.;
(n): Use the Software and any data received thereon for any other purpose except for determining whether or not Merchant should accept checks or Cards in connection with a current sale or lease of goods or services;
(o): Use the Software and data received thereon for credit inquiry purposes or any other purpose not authorized by this Agreement;
(p): Draw or convey any inference concerning a person's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics or mode of living when any Card or check is processed as non-accepted;
(q): Disclose any information obtained through the Software to any person except for necessary disclosures to affected Cardholders, Bank and/or the Issuer;
(r): Add any tax to Transactions unless applicable law expressly requires that Merchant collect a tax. Any tax, if allowed, must be included in the Transaction amount and not collected separately;
(s): Disburse funds in the form of cash advance, travelers cheques, if the sole purpose is to allow the Cardholder to make a cash purchase of goods or services from Merchant;
(t): Disburse funds in the form of cash;
(u): Accept a Card to collect or refinance an existing debt;
(v): Issue a transaction credit for returned goods or services acquired in a cash transaction; or
(w): Make any cash refund to a Cardholder who has made a purchase with a Card. All transaction credits will be issued to the same Card account number as the sale.

21. Prohibition of Furnishing Account Information. Merchant shall not, without the Cardholder's consent, sell, purchase, provide or exchange Card account number information in the form of Transaction documents, mailing lists, tapes, journal rolls or other media obtained by reason of a Card Transaction to any third party.

22. Daily Reconciliation of Transactions.

(a): Electronically Transmitted Transactions. Transactions will be settled on a daily basis. Bank shall deliver payment to Merchant by a credit to the Operating Account equal to the reconciled summary Transaction total of all of Merchants' total summary Transactions since the previous credit. This credit will be reduced, if necessary, by (i) the sum of all Cardholder charges denied, refused or charged back, (ii) all refunds processed on account of Cardholders during said time period, (iii) the fees and charges, including Chargebacks, Merchant owes Bank, and/or EPX hereunder, (iv) all taxes, penalties, charges and other items incurred by Bank that are reimbursable pursuant to this Agreement and (v) all rates, fees and charges in Schedule B.
(b): Provisional Credit. Any credits to the Operating Account are provisional only and subject to revocation by Bank until such time that the Transaction is final and no longer subject to chargeback by the Issuer, Cardholder or Association. Bank may withhold settlement to the Operating Account for a Transaction to Merchant for at least one but not more than three days from the processing date of the Transaction if Bank needs time to evaluate Transaction for unusual or fraudulent activity. EPX and Bank agree to notify Merchant if settlement is withheld and will cooperate with Merchant to investigate unusual or fraudulent activity.

23. Adjustments and Returns. Merchant will maintain a fair exchange and return policy and make adjustments with respect to goods and services sold and/or leased to its customers whenever appropriate. If goods are returned, or services are terminated or canceled, or any price is adjusted, Merchant will prepare and transmit a credit or return Transaction, either electronically or by paper, for the amount of the adjustment as a deduction from the total amount of Transactions transmitted that day. If the amount of credit or return Transactions exceeds the amount of sales Transactions, Merchant shall pay Bank the excess. Merchant shall make no cash refunds on Transactions and shall handle all credit adjustments as provided in this paragraph. If no refund or return will be given, Cardholder must be advised in writing that the sale is a "final sale" and "no returns" are permitted at the time of the Transaction. Cardholder also must be advised in writing of any no-cash refund policy, in store credit only. Merchant shall follow Association reservation/no-show policy. Merchant must notify Cardholders in writing of this policy on all advance reservations. The Cardholder must be notified at the time of the reservation of the exact number of days required for reservation deposit refunds.

24. Chargebacks. The acceptance by Bank of any Transaction processed in accordance with the terms of this Agreement shall be without recourse to Merchant, except for (i) Card-Not-Present Transactions, (ii) as otherwise indicated in this Agreement and (iii) as follows:

(a): No specific prior authorization for the Transaction was obtained from the Authorization Center,
(b): The Transaction was forced based on a pre-authorization form and the Card on which the authorization was based has been canceled and Merchant was so notified prior to the Transaction;
(c): The Card giving rise to the Transaction was canceled and prior to, or at the time of, the Transaction, Merchant received notice of the cancellation through the electronic terminal, in writing or otherwise;
(d): The Card expired prior to the date of the Transaction or the date of Transaction was prior to the validation date, if any, indicated on the Card;
(e): The information required in Paragraphs 18 and 19(b) above was not submitted to Bank;
(f): Bank or Issuer has received a complaint from or on behalf of a Cardholder stating that there is an unresolved dispute or defense to a charge (whether or not valid) between Merchant and Cardholder, provided that Merchant retains the right to challenge (represent) such

chargebacks per the Association regulations. Notwithstanding, until EPX or Bank have notice in writing with documentation from the Associations that said chargeback has been reversed, EPX and Bank reserve the right to take any actions consistent with the existence of a chargeback.

(g): The Cardholder makes a written complaint to Bank or Issuer that the Cardholder did not make or authorize the Transaction;
(h): A setoff or counterclaim of any kind exists in favor of any Cardholder against Merchant that may be asserted in defense of an action to enforce payment against the Cardholder in a Transaction;
(i): The Transaction was made at or by a Merchant other than Merchant named in this Agreement;
(j): The Transaction otherwise violates the terms of this Agreement or any other Association or Issuer bylaw, rule, regulation, policy or guideline;
(k): A Transaction is charged back by an Issuer; or
(l): Any representation or warranty made by Merchant in connection with the Transaction is false or inaccurate in any respect.

In any such case, Bank shall not be obligated to accept a Transaction for credit to the Operating Account. If Bank has credited the Operating Account or Reserve Account for such a Transaction, Bank may return the Transaction to the Merchant, and Merchant shall pay Bank the amount of the Transaction. Merchant agrees that Bank, without prior notice to Merchant, may (i) charge the amount of the Transaction to the Operating Account or Reserve Account; (ii) recoup the amount of the Transaction by adjustment of the credits due to Merchant; or (iii) set off the amount of the Transaction against any account or property Bank holds for or on behalf of Merchant. If Merchant disagrees with a Chargeback Transaction, Merchant must so notify Bank and EPX in writing within five (5) days of the Chargeback, and provide documentation that the dispute has been resolved to Cardholder's satisfaction, or proof that a credit has been issued and proof from the association that the Chargeback has been reversed. If Bank or EPX takes legal action against Merchant for any Chargebacks or any amounts due Bank and/or EPX hereunder and the Merchant stipulates or is found liable to Bank and/or EPX Merchant shall pay all costs and attorneys fees incurred by Bank and/or EPX.

25. Unique Transaction Identification. EPX shall retain with each transaction through its lifecycle a unique transaction identifier provided by PayPal in a field of the authorization and settlement records. This ID will be provided back to PayPal in all Chargeback records and in all transaction-level reports designated by PayPal

26. Merchant Statement. On a daily basis, Bank shall provide data to EPX to enable EPX to provide Merchant a Merchant Statement in written or electronic format. All information appearing on the Merchant Statement shall be deemed accurate and affirmed by Merchant unless Merchant objects by written notice specifying the particular item in dispute within 30 days of receipt of the Merchant Statement

27. Retention of Original Sales Information. Merchant shall retain the information required by Paragraphs 18 and 19(a) for three years from the date of the Transaction. At the request of Bank, Merchant shall provide such information to Bank or EPX, as directed by Bank, within five (5) days of receipt of a written or electronic request from Bank. Failure to meet such time frame or non-delivery of any item or delivery of an illegible copy of an item requested by an Issuer shall constitute a waiver by Merchant of any claims and may result in an irrevocable Chargeback for the full amount of the Transaction. Electronic records of such information shall suffice.

28. Recovery of Cards. In the Card Present Transaction, Merchant will use its best efforts to reasonably and peaceably recover and retain any Card for which Merchant receives notification of cancellation, restrictions, theft or counterfeiting. This notice may be given (i) electronically through the terminal or Software; (ii) by Bank's Authorization Center by any means; or (iii) by listing on any canceled Card or restricted Card list. Merchant shall also take reasonable steps to recover a Card which it has reasonable grounds to believe is counterfeit, fraudulent or stolen

29. Customer Complaints. Merchant shall respond promptly to inquiries from Cardholders and shall make reasonable efforts to resolve any disputes amicably. If unresolved disputes occur with a frequency unacceptable to standards as noted in the Association Rules and Regulations, Bank may terminate this Agreement. Merchant agrees to maintain the following information in writing with respect to each claim or defense asserted by a Cardholder for which Merchant has received notice

(a): The Cardholder's name;
(b): The Card account number;
(c): The date and time the Cardholder asserted the claim or defense;
(d): The nature of the claim or defense; and
(e): The action, which Merchant took in an attempt to resolve the dispute.

Upon request by EPX and/or Bank, Merchant shall furnish this information in writing within 3 days.

30. Confidentiality. Merchant shall treat all information received in connection with this Agreement as confidential. Merchant shall prevent the disclosure of this information except for necessary disclosures to affected Cardholders, to Bank, to EPX, to Issuers, and to financial and legal advisors.

31. Associations' and Issuers' Requirements. Merchant shall comply with all bylaws; rules, regulations, policies and guidelines of the Association and any Issuer whose Cards are used to process Transactions in accordance with this Agreement. Merchant will display prominently on its website Card emblems. Subject to the prior written consent of Bank and upon such conditions as authorized by Bank, Merchant may use Card service marks or design marks in its own advertisement and promotional materials.

that it is in compliance with the Telephone Disclosure and Dispute Resolution Act and the regulations of the Federal Trade Commission and the Federal Communications Commission. Merchant shall comply with all present and future federal, state and local laws and regulations pertaining to Transactions, including, without limitation, the Federal Fair Credit Reporting Act, the Federal Truth-in-Lending Act, the Electronic Fund Transfer Act and the Federal Equal Credit Opportunity Act, as amended.

33. Taxes. Each party hereto shall report its income and pay its own taxes to any applicable jurisdiction. If Bank or EPX are required to pay any taxes, interest, fine or penalties owed by Merchant, said amount shall become immediately due and payable by Merchant to Bank or EPX. If excise, sale or use taxes are imposed on the Transactions, Merchant shall be responsible for the collection and payment thereof. Bank or EPX shall be entitled to recover any of said taxes paid by it on behalf of Merchant from Merchant immediately after payment.

34. Limitation of Liability. Neither Bank, nor EPX shall be liable to Merchant or Merchant's customers or any other person for any of the following:

(a): Any loss or liability resulting from the denial of credit to any person or Merchant's retention of any Card or any attempt to do so;
(b): Any loss cause by either a Transaction downgrade resulting from defective or faulty hardware and/or software to the extent said software is owned by Merchant or a Transaction downgrade resulting from defective or faulty hardware and/or software owned by EPX for which EPX is liable under paragraph 16 of this agreement;
(c): The unavailability of Services caused by the termination of contracts with computer hardware vendors, processors or installers, if terminated by Merchant; or

NEITHER BANK, NOR EPX SHALL BE LIABLE FOR ANY PUNITIVE, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES TO MERCHANT OR TO ANY THIRD PARTY IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE SERVICES TO BE PERFORMED BY BANK, OR EPX PURSUANT TO THIS AGREEMENT.

MERCHANT ACKNOWLEDGES THAT BANK HAS PROVIDED NO WARRANTIES, EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR PURPOSE, WITH RESPECT TO ANY SOFTWARE INSTALLED OR PROVIDED BY EPX AND THAT BANK HAS NO LIABILITY WITH RESPECT TO ANY SOFTWARE. BANK MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE SERVICES IT PROVIDES HEREUNDER. SHOULD THERE BE ERRORS, OMISSIONS, INTERRUPTIONS OR DELAYS RESULTING FROM BANK'S, OR EPX'S PERFORMANCE OR FAILURE TO PERFORM OF ANY KIND, BANK'S, AND EPX'S LIABILITY SHALL BE LIMITED TO CORRECTING SUCH ERRORS IF COMMERCIALLY REASONABLE OR SUPPLYING SUCH OMISSIONS IN THE WORK PRODUCT IN WHICH THEY HAVE OCCURRED.

35. Limitation on Damages. In no case shall Merchant be entitled to recover damages from EPX, or Bank, which exceed the lesser of (a) the fees retained by Bank, and EPX pursuant to this Agreement during the six-month period immediately prior to the event giving rise to the claim for damages, or (b) those damages defined in paragraph 12 of Exhibit A attached herein

36. Indemnification. Merchant agrees to indemnify and hold Bank, and EPX harmless from any and all losses, claims, damages, liabilities and expenses, including attorneys' fees and costs (whether or not an

attorney is an employee of Bank or Bank's affiliates, or EPX or affiliates of EPX) arising out of any of the following:

(a): Merchant's failure to comply with this Agreement;
(b): Any act or omission of Merchant;
(c): Merchant's failure to comply with the Software Users' Guide;
(d): Merchant's failure to comply with any bylaw, rule, regulation, guideline or policy of any Association or Issuer;
(e): Merchant's failure to comply with any applicable law, rule or regulation;
(f): Any dispute concerning the quality, condition or delivery of any service;
(g): The fraud or dishonesty of Merchant or Merchant's employees, licensees, successors, agents and/or assigns;
(h): Merchant's selection of an Internet service provider or other telecommunication services provider;
(i): The theft of or damage or destruction to any Software; or
(j): Card-Not-Present Transactions, unauthorized Transactions and prohibited Transactions.

37. Credit Investigation and Bank Auditing. Merchant will provide Bank with quarterly financial statements within 45 days after the end of each fiscal quarter and annual audited financial statements within 90 days after the end of the Merchant's fiscal year end. Bank may audit Merchant's compliance with the terms of this Agreement. After being given reasonable notice, Merchant shall provide all information reasonably requested by Bank to complete Bank's audit. Merchant authorizes parties contacted by Bank to release the credit information requested by Bank and Merchant agrees to provide Bank a separate authorization for release of credit information if requested. Merchant shall deliver to Bank such information as Bank may reasonably request from time to time, including without limitation, financial statements and information pertaining to Merchant's financial condition. Such information shall be true, complete and accurate.

38. Termination of Agreement by Bank, or EPX. Bank, or EPX may terminate this Agreement upon 30 days' notice to Merchant under any of the below listed circumstances. Any such notice of termination by Bank is effective upon receipt.

(a): In the opinion of Bank, there is a substantial negative change in the Merchant's business or financial position.
(b): Chargebacks exceed the Association guidelines, or appear to be the result of fraudulent Transactions as defined by the Association. EPX will provide Merchant with information defining the Association guidelines which, at present, do not require termination for negligible violations that do not exceed two (2) months
(c): Material breach of this Agreement by Merchant;
(d): Merchant fails to provide financial statements suitable to Bank on request, provided that those statements are same as those provided to Merchant's board of directors and investors; or

EPX and/or Bank may terminate this agreement immediately, without notice in the following circumstances:

(a): Any act of fraud or dishonesty is committed by Merchant, its employees and/or agents or EPX or Bank believes in good faith that Merchant, its employees and/or agents have committed,

are committing or are planning to commit any acts of fraud or misrepresentation in connection with transaction processing;

(b): Any representation or warranty made by Merchant in this Agreement or the Application for Services hereunder that is not true and correct, in a material respect; or
(c): Merchant fails to maintain sufficient funds in the Operating Account to cover the amounts due to Bank hereunder
(d): Merchant files a petition under any bankruptcy or insolvency law;

Bank may selectively terminate one or more of Merchant's approved locations without terminating this entire Agreement. In the event of termination, all obligations of Merchant incurred or existing under this Agreement prior to termination shall survive the termination. Merchant's obligations with respect to any Transaction shall be deemed incurred and existing on the transaction date of the Card Transaction.

Bank is not obligated to provide replacement services if EPX does not or cannot perform.

39. Termination of Agreement by Merchant. Merchant may terminate this Agreement upon at least 30 days' prior written notice to the other parties if Bank amends Schedule B pursuant to Paragraph 42 to increase the rates, fees or charges Merchant pays hereunder, except for fees or rates that result from a pass through from an Association.

40. Setoff. In addition to any other legal or equitable remedy available to it in accordance with this Agreement or by law, Bank and/or EPX may set off any amounts due to Bank and/or EPX under this Agreement against any property of Merchant in the possession or control of Bank or EPX.

41. Exclusivity. Merchant shall submit at least50% of its Card Transactions made during the term hereof through EPX to Bank for processing unless EPX or Bank cannot or will not support this level of Merchant's processing activity. In the event that Merchant submits less than 50% of its Card Transactions through EPX to Bank, Merchant agrees to pay a fixed amount to cover EPX's upfront development costs, in addition to a penalty fee. The fee will decline by one twelfth (¹/12) following each month of the term. The amount will begin at one million dollars ($1,000,000) and amortize each month of the term (e.g. month 1= $1,000,000, month 7= $500,000, month 12= $83,333)

42. Amendments to this Agreement. From time to time Bank may amend this Agreement as follows:

(a): Amendment to Cards and/or Services. EPX and Bank may add Cards or Services listed in Schedule A by notifying Merchant in writing of any amendment. EPX and Bank may not voluntarily delete Cards without Merchant's explicit consent unless there is a material change in the relationship between the Card Associations and EPX or the Bank. All provisions of this Agreement shall apply to Cards or Services added to this Agreement. Bank shall notify Merchant of the fees to be charged for processing the additional Cards and Services. Acceptance by Merchant of a new approved Card as payment for a Transaction or use of a new Service after Bank has sent Merchant notice of an amendment shall constitute Merchant's agreement to the amendment and the fees or charges related to these additions.
(b): Amendment to Fees and Charges. From time to time, Bank may change all rates, fees and charges set forth in Schedule B subject to the limitations noted in paragraph 11. Bank will provide written notice to Merchant of all amendments. Bank may change the rates, fees and charges upon 30 days' notice if Merchant's sales volume or average Transaction amount does not meet Merchant's projections contained in Merchant's application for card processing services initially submitted to and approved by Bank for more than 2 consecutive months. If notice is required, Bank will give written notice on the Merchant Statement. All new rates, fees and charges will become effective for the month immediately following the month in

which the notice appeared on the Merchant Statement unless Merchant terminates this Agreement in accordance with Paragraph 39.

43. Assignment. This Agreement may not be assigned by Merchant without the prior written consent of Bank. Bank and/or EPX may assign this Agreement without limitation to another bank qualified by the Association or Service Provider. Assignment of this Agreement by Bank and/or EPX shall relieve the assigning party (Bank and/or EPX)of any further obligations under this Agreement.

44. Financial Accommodations. Bank, EPX and Merchant intend this Agreement to be construed as a contract to extend financial accommodations for the benefit of Merchant.

45. Waiver. To the extent that Merchant becomes a debtor under any chapter of title 11 of the United States Code and such event does not result in the termination of this Agreement, Merchant hereby unconditionally and absolutely waives any right or ability that Merchant may otherwise have had to oppose, defend against or otherwise challenge any motion filed by Bank for relief from the automatic stay of 11 U.S.C. § 362(a) to enforce any of Bank's rights or claims under this Agreement.

46. Cooperation. In their dealings with one another, each party agrees to act reasonably and in good faith and to fully cooperate with each other in order to facilitate and accomplish the matters contemplated hereby.

47. Entire Agreement. This Agreement, together with the Schedules attached hereto, supersedes any other agreement, whether written or oral, that may have been made or entered into by any party (or by any officer or officers of any party) relating to the matters covered herein and constitutes the entire agreement of the parties hereto.

48. Severability. If any provisions of this Agreement shall be held, or deemed to be, or shall, in fact, be, inoperative or unenforceable as applied in any particular situation, such circumstance shall not have the effect of rendering any other provision or provisions herein contained invalid, inoperative or unenforceable to any extent whatsoever. The invalidity of any one or more phrases, sentences, clauses or paragraphs herein contained shall not affect the remaining portions of this Agreement or any part hereof.

49. Notices. Except for notices provided by Bank to Merchant on the Merchant Statement, all notices, requests, demands or other instruments which may or are required to be given by any party hereunder shall be in writing and each shall be deemed to have been properly given when (i) served personally on an officer of the party to whom such notice is to be given, (ii) upon expiration of a period of three (3) Business Days from and after the date of mailing thereof when mailed postage prepaid by registered or certified mail, requesting return receipt, or (iii) upon delivery by a nationally recognized overnight delivery service, addressed as follows:

If to BANK:
The Bancorp.com Bank
405 Silverside Road
Wilmington, DE 19809

If to EPX:
Electronic Payment Exchange, Inc.
One Corporate Common, Suite 214
100 W. Commons Boulevard
New Castle, Delaware 19720

If to MERCHANT:

PayPal, Inc.
1840 Embarcadero Road
Palo Alto, California 94303

Any party may change the address to which subsequent notices are to be sent by notice to the others given as aforesaid.

50. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware, without regard to internal principles of conflict of laws and federal law. The parties agree to the submission of any disputes or claims under this Agreement to the appropriate courts in Delaware and waive any claims that the appropriate Courts in Delaware lack personal jurisdiction over the parties.

51. Captions. Captions in this Agreement are for convenience of reference only and are not to be considered as defining or limiting in any way the scope or intent of the provisions of this Agreement.

52. No Waiver. Any delay, waiver or omission by Bank to exercise any right or power arising from any breach or default of the other party in any of the terms, provisions or covenants of this Agreement shall not be construed to be a waiver of any subsequent breach or default of the same or any other terms, provisions or covenants on the part of the other party. All remedies afforded by this Agreement for a breach hereof shall be cumulative.

53. Force Majeure. The parties shall be excused from performing any of their respective obligations under this Agreement which are prevented or delayed by any occurrence not within their respective control including but not limited to strikes or other labor matters, destruction of or damage to any building, natural disasters, accidents, riots or any regulation, rule, law, ordinance or order of any federal, state or local government authority. Force majeure includes the other party's failure to perform it obligations under this agreement in a timely manner due to conditions that affect the Internet throughout the United States. In the even a force majeure (other than Client's failure to perform) interferes with EPX Performance of the service, (i) EPX will immediately take commercially reasonable steps to mitigate the force majeure as quickly as commercially reasonable to do so, and (ii) if the force majeure continues for the thirty (30) or more days, client at its sole option may immediately terminate this agreement

By signing below, the parties agree to the terms of this Agreement. If Merchant is a corporation, its proper corporate officers sign. This Agreement may be signed in one or more counterparts and all signed agreements shall be considered as one.

Agreed to and accepted on: November 14, 2001.

The Bancorp.com Bank:		MERCHANT: Paypal, Inc.

By:		By:
	/s/ Frank Mastrangello Frank Mastrangello President		/s/ Todd Pearson Todd Pearson Senior Vice President, Financial Services
ELECTRONIC PAYMENT EXCHANGE, INC.
By:
	/s/ Ray Moyer Ray Moyer President

SCHEDULE A
CARDS, SERVICES AND EQUIPMENT/SOFTWARE

1.: Cards available to Merchant

Bank currently provides Card transaction processing services for MasterCard. EPX currently provides Card transaction processing services for American Express and Discover.

2.

Services available to Merchant

(a): As of the date of this Agreement, Merchant has requested and Bank has approved Merchant's use of the following services:

/ / Authorization services for MasterCard,

/ / Card Transaction processing services for MasterCard

/ / Cardholder Address Verification

/ / CVC2 verification for MasterCard,

/ / Chargeback reporting and services for MasterCard

(b): As of the date of this Agreement, Merchant has requested and EPX has approved Merchant's use of the following services:

/ / Authorization services for American Express and Discover,

/ / Card Transaction processing services for American Express and Discover

/ / Cardholder Address Verification

/ / CID for American Express and Discover

/ / Chargeback reporting and Services for American Express and Discover

SCHEDULE B
RATES, FEES AND CHARGES

1.: Merchant Discount Rates. Merchant shall be charged for all MasterCard, assessments and the following discount rates:

MASTERCARD U.S.A	Percentage	Dollar Amount
Merit III	[*]	[*]
Travel Industries Premiere	[*]	[*]
Key Entered	[*]	[*]
Merit I	[*]	[*]
World MasterCard T&E	[*]	[*]
Consumer Standard	[*]	[*]
International Electronic	[*]	[*]
International Standard	[*]	[*]
Corporate Face-to-Face	[*]	[*]
Corporate Data Rate III	[*]	[*]
Corporate Date Rate II	[*]
Corporate T&E II	[*]	[*]
Corporate Data Rate I	[*]	[*]
Corporate T&T I	[*]	[*]
Corporate Standard	[*]	[*]
Purchasing Data Rate II	[*]	[*]
International Corporate Purchasing	[*]	[*]
International Corporate	[*]	[*]

Assessments		Percentage		Dollar Amount
MasterCard		[*]		[*]

These fees, assessments and discount rates are subject to change as dictated by the Association and the merchant is responsible for any additional fee, assessments, discount rates or fine at the time the Association implements any change. Discount rates (not including fees or assessments) are assessed on the net amount of daily settlements.

2.: Merchant Transaction Fees. Merchant shall be charged the following Transaction Fees in addition those fees charged by the Association:

Authorization Fees. Merchant will be charged the following per Item Fees:

Each MasterCard, American Express or Discover Authorization Request: [*]

Settlement Fees: Merchant will be charged the following per Item Fee:

Each MasterCard, American Express or Discover Settlement Transaction: [*]

Chargeback Fee: Merchant will be charged the following per Item Fee:

Each MasterCard Chargeback: [*] per item

Each unanswered Retrieval Request [*] per item

(As defined in Exhibit B)

Merchant shall pay any and all other fees, costs and charges owed to the American Express and Discover Associations directly to American Express and Discover.

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EXHIBIT 10.23

MERCHANT AGREEMENT
EX-10.24 9 a2069647zex-10_24.htm EXHIBIT 10.24 Prepared by MERRILL CORPORATION
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EXHIBIT 10.24

MERCHANT AGREEMENT

In consideration of the mutual promises and covenants contained in this Merchant Agreement ("Agreement"), the parties agree as follows:

1. Parties. The parties to this Agreement are ELECTRONIC PAYMENT EXCHANGE, INC., a Delaware Corporation, whose address is One Corporate Commons, Suite 214, 100 W. Commons Boulevard, New Castle, Delaware 19720 ("EPX"), and Certegy Card Services, Inc. a Florida Corporation whose address is 11601 Roosevelt Boulevard, St Petersburg, FL ("Certegy"), First Union National Bank ("Bank") and PAYPAL, INC., a Delaware Corporation, whose address is 1840 Embarcadero Road, Palo Alto, California 94303 (called "Merchant"). Certegy is authorized by Bank to enter into this Agreement on its own behalf and on behalf of Bank.

2. Definitions. For the purposes of this Agreement and the Schedules and Exhibits referred to herein, the following definitions apply unless the context otherwise requires:

(a): Address Verification shall mean a service which allows Merchant to verify Cardholder's billing address with Issuer.
(b): Association shall mean VISA USA, Inc.
(c): Authorization shall mean an affirmative response by or on behalf of an Issuer, to a request to the Authorization Center to effect a Transaction, that a Transaction is within the Cardholder's available credit limit and that the Cardholder has not reported the Card lost or stolen. All Transactions require Authorization.
(d): Business Day shall mean any day other than (i) a Saturday or Sunday, or (ii) a day on which national banking institutions are authorized by law or executive order to be closed (and on which Bank is in fact closed).
(e): Card(s) shall mean a Visa credit or debit card.
(f): Card Not Present shall mean mail order, telephone order, e-commerce (Internet) order, Pre-Authorized Recurring Order Transactions, or other "card not present" sales.
(g): Card Present shall mean a Transaction in which the Card is swiped through a terminal, register or other device, capturing the Card information encoded on the magnetic strip.
(h): Cardholder shall mean a person authorized to use a Card.
(i): Chargeback shall mean a Transaction that Bank/Certegy returns to Merchant pursuant to this Agreement, because it was denied or returned after it was entered into the settlement network for payment.
(j): Forced Sale shall mean a sales Transaction processed without an approved electronic authorization number being obtained for the full amount of the sales Transaction at the time the Transaction is processed.
(k): Issuer shall mean an Association member that issued a Card to a Cardholder.

(l): Merchant Statement shall mean an itemized monthly statement of all charges and credits to the Operating Account.
(m): Mid-Qualified Transactions shall mean (i) key-entered retail transactions; (ii) Visa telephone or mail Transactions without Address Verification; or (iv) any Card Transaction designated as such by Certegy.
(n): Non-Qualified Transactions shall mean (i) any Transaction submitted for processing more than 48 hours past the time the Authorization occurred; (ii) any Transaction missing required data; or (iii) any Card Transaction designated as such by Certegy.
(o): Pre-Authorized Recurring Order Transactions shall mean Transactions which have been pre-authorized by the Cardholder and for which the goods or services are to be delivered or performed in the future by Merchant without having to obtain further approval from the Cardholder each time.
(p): Qualified Transactions shall mean (i) retail Transactions in which the Card is swiped; (ii) Visa telephone, Internet, or mail Transactions with Address Verification; or (iii) Transactions that are part of a special registered program approved by the Association.
(q): Services shall mean the transaction processing services provided by Bank/Certegy under this Agreement.
(r): Transaction shall mean the acceptance by Merchant of a Card or information embossed on the Card for payment for goods sold and/or leased or services provided to Cardholders by Merchant and receipt of payment from Bank or Certegy, whether the Transaction is approved, declined, or processed as a Forced Sale. Transaction also includes credits, errors, returns and adjustments.

3. Merchant agrees to participate in program. Merchant agrees to participate in the credit card processing services program established by Bank, Certegy and EPX.

4. EPX to provide services to Merchant. During the term of this Agreement, subject to the terms and conditions of this Agreement, EPX agrees to provide software and technical documentation in order to allow Merchant to accept and process Visa Transactions. EPX shall provide software and technical support and customer support for all Merchant Transactions, including authorization, settlement, chargeback processing and reporting from 8:00a.m. to 8:00p.m. Eastern Standard Time Monday through Friday. Customer service on all other days and times shall be provided on an "on call" basis as set forth in Exhibits "A" and "B" which are incorporated herein and made part of this agreement. Notwithstanding, the fines set forth in Exhibits "A" and "B" shall not be issued simultaneously and the total fines issued shall not exceed those outlined in Exhibit "A."

5. Bank and Certegy to Provide Services to Merchant. Bank agrees to sponsor Merchant's acceptance of Cards for Transactions. Certegy and EPX agrees to provide Merchant with the Services indicated on Schedule A, as amended from time to time by Certegy, EPX or Bank, during the term of this Agreement, subject to the terms and conditions of this Agreement.

6. Independent Contractor. In the performance of its duties hereunder, each party shall be an independent contractor, not an employee or agent of another party.

the then current term. All existing obligations, warranties, indemnities and agreements with respect to Transactions entered into before such termination shall remain in full force and effect and Merchant shall remain liable for all obligations to Cardholders, Certegy, EPX and Bank incurred while this Agreement is in effect, and prior to termination, Certegy, EPX and Bank shall remain liable for providing settlement to Merchant for those transactions subject to the exceptions noted in paragraph 10, 11 and 38.

9. Merchant Operating Account. Prior to accepting any Cards, Merchant shall establish a demand deposit account at Bank, or at a financial institution designated by Merchant ("Operating Account"), through which fees, charges and credits due in accordance with this Agreement may be processed. If Merchant fails to remit payment when due, Merchant authorizes Bank or Certegy to debit all amounts Merchant owes Bank, Certegy or EPX hereunder from the Operating Account, whether maintained at Bank or another financial institution, at times deemed appropriate by Bank or Certegy through the ACH Banking Network or by a manual debit of the account. Merchant waives any claims for loss or damage arising out of any charges or debits to the Operating Account against any other financial institution where the Operating Account is maintained.

10. Reserve Account. Upon execution of this Agreement and Bank's or Certegy's written notification requesting a Reserve Account from Merchant, Merchant shall establish a reserve account at Bank ("Reserve Account") for all future indebtedness of Merchant to Bank, Certegy or EPX which may arise out of this Agreement, including, but not limited to, Chargebacks, fees and fines, in such amount as defined below:

Chargeback rate (as a unit based % of credit card sales volume per Association)		Reserve requirement
>1.0%		Total $ amount of chargebacks from prior (30) days
>1.5%		Total $ amount of chargebacks from prior (45) days
>2.0%		Total $ amount of chargebacks from prior (60) days
> 2.5%		Total $ amount of chargebacks from prior (120) days

Additionally, if in the opinion of the Bank or Certegy there is a substantial negative change in the Merchant's business or financial position, or Association fines the Bank, Certegy or Bank may require additional reserve.

11. Funding of Reserve Account. The Reserve Account shall be funded on seven days notice to the Merchant or in the cases of suspected fraud or suspected or known financial loss to Bank or Certegy, the Reserve Account shall be funded immediately. Bank or Certegy may fund the Reserve Account by deduction from payments due Merchant or a charge against Merchant's Operating Account or against any of Merchant's accounts at Bank. The Reserve Account will be maintained for a minimum of six months from the termination date of this Agreement or until such time as Bank or Certegy determines that the release of the funds to Merchant is prudent, in the best interest of Bank and Certegy, commercially reasonable and Merchant's account with Bank and Certegy is fully resolved. Upon expiration of this period, any balance remaining in the Reserve Account will be paid to Merchant. Bank or Certegy will inform Merchant in writing of any charges debited to the Reserve Account during this period.

12. Fees. Merchant shall pay Bank/Certegy and EPX all fees specified on Schedule B, as amended by Bank/Certegy and EPX from time to time when having been given 30 days written notice. Any increases to the fees shall be directly attributed to increases in Association pass-through fees. Bank/

Certegy shall also be obligated to pass through any decreases in Association fees. EPX, Certegy and Bank will not increase the non-Association fees or charges over which it maintains control for a period of one-year from the date of the execution of this agreement.

Merchant agrees that Bank/Certegy will deduct Merchant Discount Fees from the Operating Account or Reserve Account on a daily basis unless a monthly basis is specified in Schedule B. Merchant also agrees to pay Bank/Certegy the amount of any fees, charges or penalties assessed against Bank/Certegy by any Association or Issuer for Merchant's violation of the by-laws, rules, regulations, guidelines, policy statements or threshold requirements of such parties. Merchant shall pay Bank/Certegy for any other services provided to Merchant by Bank/Certegy and for all other fees, including, but not limited to monthly service fees, Chargebacks and set-up fees provided for in this Agreement, as shown in Schedule B

13. Billing. All amounts Merchant owes Bank/Certegy may be charged to the Operating Account as designated, the Reserve Account, recouped by adjustment of any credits due to Merchant or set off against any account or property Bank/Certegy holds for or on behalf of Merchant.

14. Security Interest. Merchant hereby grants Bank, Certegy and EPX a security interest in the funds held in the Operating Account and in the Reserve Account. On request of Bank, Certegy and/or EPX, Merchant will execute one or more documents in satisfactory form to Bank, Certegy and/or EPX and will pay all costs and expenses of filing the same or of filing this Agreement in all public filing offices, where filing is deemed by Bank/Certegy to be desirable, in order to perfect Bank's/Certegy's security interest in the Operating and Reserve Accounts. EPX, Certegy and/or Bank is authorized to file financing statements relating to the Operating Account and the Reserve Account without Merchant's signature where authorized by law.

15. Power of Attorney. Merchant appoints Bank, Certegy and/or EPX as its attorney-in-fact to execute such documents as are necessary or desirable to accomplish perfection of any security interests. The appointment is coupled with an interest and shall be irrevocable as long as Merchant owes any amount to Bank, Certegy or EPX.

a.: Merchant shall provide the information required by the merchant input form provided to Merchant by EPX and shall promptly notify EPX and Bank/Certegy of any changes in this information;
b.: If Merchant is using Software, Merchant acknowledges receipt of a copy of the Software User's Guide. Merchant will use and operate the Software only in accordance with the Software Users' Guide, as amended from time to time by Bank/Certegy or EPX;
c.: Bank/Certegy will have no liability to Merchant if any installation is delayed or cannot be completed. EPX will not have liability to Merchant if any installation is delayed or cannot be completed for reasons not caused by the act or neglect of EPX;
d.: All Software shall be installed and operated in accordance with the instructions provided by EPX.
e.: The Merchant's Software and Equipment shall be suitable for processing the Services and will comply with the Association's minimum requirements

f.: EPX Systems and Software Components. Merchant acknowledges that its use of the EPX System and Software is in accordance with the terms of the manuals and instructions supplied by EPX and within the terms of the license granted by EPX if such a license is granted. Any Software supplied to Merchant by EPX is owned by EPX. It is licensed to Merchant and not sold. The Software, manuals and accompanying printed materials related to the EPX System, if any, are protected by copyright laws and international copyright treaties, as well as other intellectual property laws and treaties. Merchant is prohibited from copying the Software, manuals or any other accompanying printed materials related to the EPX System. Merchant shall not sell, lease, encumber or otherwise dispose of the Software. Merchant acknowledges that the proper functioning of the Software and EPX System requires computer hardware suitable to operate the Software and System applications. EPX will not have any liability to Merchant if the Software or EPX System fails to operate because of Merchant's inappropriate, inadequate or faulty computer hardware, because of the failure of Merchant, its employees and agents to operate the Software and/or EPX System properly in accordance with the instructions provided by EPX or because of the neglect or misuse of the Software and/or the EPX System by Merchant, its employees or agents. If the Software and/or EPX System fails to operate for any other reason not attributable to Merchant, the liability of EPX shall be limited to the damages as defined in Exhibit A.

18. Documenting Transactions. Merchant shall submit the following information to Bank/Certegy in connection with Transaction processing:

(a): The DBA name of Merchant, name of Merchant;
(b): Merchant customer service telephone number;
(c): Merchant Internet address;
(d): Merchant Number assigned by Bank/Certegy;
(e): The Card account number, validation date and/or expiration date of the Card, if one appears on the Card;
(f): Name and address of Cardholder; and
(g): Such additional information as may from time to time be required by Bank/Certegy and/or the Association.

Merchant shall not submit a Transaction to Bank/Certegy (electronically or otherwise) until Merchant has performed its obligations to the Cardholder in connection with the Transaction or obtained Cardholder's consent for a Pre-Authorized Recurring Order Transaction. Merchant must not transmit a Transaction to Bank/Certegy that Merchant knows or should have known to be fraudulent or not authorized by the Cardholder. Merchant is responsible for its employees' actions. Merchant may transmit a Transaction which effects a prepayment of services if Merchant advises Cardholder of the immediate billing at the time of the Transaction and within time limits established by the Association.

19. Authorization for Transactions. Merchant shall obtain authorization of Transactions as follows:

(a): Electronically Transmitted Transaction. Merchant shall submit each Card Present Transaction for authorization to Bank's/Certegy's Authorization Center using the Software. Bank's/Certegy's Authorization Center shall authorize or decline a Card Present Transaction

transmitted for authorization and shall capture and process for Merchant the information relating to the Card Present Transaction. If a terminal or software application is inoperable at the time of an authorization request, the Transaction may be authorized by using the appropriate dial-up facility. In that case, the Transaction shall be entered as a Forced Sale Transaction, provided the approval number is also entered, and Merchant shall be subject to an additional voice or audio response unit ("ARU") authorization fee as outlined in Schedule B.

(b)

The following additional requirements apply to Card Not Present Transactions:

(1): All Card Not Present Transactions are at Merchant's risk. As to each Card Not Present Transaction, Merchant warrants to Bank/Certegy that the person whose name is submitted to Bank/Certegy as Cardholder either made or authorized another to make the purchase. Upon breach of this warranty, Bank/Certegy may charge back the Transaction to Merchant. If Bank/Certegy charges back the Transaction to Merchant, Merchant shall pay Bank/Certegy the amount of the Transaction, any Chargeback fee in Schedule B, plus any Association fine or assessment. Bank/Certegy may charge the Transaction to the Operating Account or Reserve Account without prior notice to Merchant;
(2): All Card Not Present Transactions must be electronically authorized via Software application and, in addition to the information required in Paragraph 18, also shall indicate: an authorization code, if required; customer address and address verification; and in lieu of Cardholder's signature, a notation of (i) mail order (MO), (ii) telephone order (TO), (iii) e-commerce order (EO), or (iv) pre-authorized order (PO) on the signature line;
(3): If Merchant accepts a pre-authorized recurring order, the Cardholder shall execute and deliver to Merchant a written request for this pre-authorization. This written request, which shall include on-line consent (i.e., web), shall be maintained by Merchant and made available upon request to Bank/Certegy. All annual billings must be reaffirmed at least once a year. Merchant shall not deliver goods or perform services covered by a pre-authorization order after receiving notification from the Cardholder that the pre-authorization is canceled or from Bank/Certegy that the Card covering the Pre-authorization is not to be honored; and
(4): Merchant shall verify Cardholder's address from the Association network. For telephone or mail order sales, Merchant shall transmit a ticket/invoice number and shall do an Address Verification to qualify for the Qualified Merchant Discount Rate.

20. Prohibited Transactions. Merchant shall not do any of the following with respect to any Transaction:

(a): Impose a surcharge on a Cardholder who elects to use a Card in lieu of payment by cash, check or other mode of payment;
(b): Charge a Cardholder more than the amount the Cardholder would pay if payment were made by cash or check;
(c): Establish a minimum or maximum dollar Transaction amounts exclusively for those customers choosing to use credit cards as a payment option. EPX further understands that Merchant's normal transaction limits ("TL") are for risk purposes. Merchant represents that its TL and Instant Transfer Policy ("ITP") do not violate the Association Rules or any laws. To the extent Merchant's TL and/or ITP violates either any Association Rule or applicable law, Merchant agrees to indemnify and hold EPX and bank/Certegy harmless and pay EPX, Certegy and Bank any attorneys fees, damages or fines incurred by them resulting from Merchant's incorrect interpretation of the TL's and /or ITP's propriety.

(d): Obtain multiple authorizations for amounts less than the total credit sale amount;
(e): Obtain authorization for purposes of setting aside Cardholder's credit line for use in future sales;
(f): Extend credit for or defer the time of payment of the total cash price in any Transaction;
(g): Honor a Card except in a Transaction where a total cash price is due and payable;
(h): Make any special charge to or extract any special agreement or security from any Cardholder in connection with any Transaction;
(i): Transmit or accept for payment any Transaction which was not originated directly between Merchant and a Cardholder for the sale or lease of goods or the performance of services of the type indicated in Merchant's application for card processing services initially submitted to and approved by Bank/Certegy;
(j): Honor or accept a Card as payment for any legal services or expenses arising out of or related to (1) the defense of any crime other than a traffic violation; (2) any domestic relations matter where such services or expenses are furnished to a person whose name is not embossed on a Card; or (3) any bankruptcy, insolvency, compromise, composition or other process affecting Cardholder's creditors;
(k): Use Merchant's own Card, or one to which Merchant has access, to process a Transaction for the purpose of obtaining credit for Merchant's own benefit;
(l): Redeposit a previously charged Transaction, regardless of whether Cardholder consents;
(m): Initiate a Transaction credit without a balance in the Operating Account equal to the credit, unless Merchant is a participant in an approved Association program.;
(n): Use the Software and any data received thereon for any other purpose except for determining whether or not Merchant should accept checks or Cards in connection with a current sale or lease of goods or services;
(o): Use the Software and data received thereon for credit inquiry purposes or any other purpose not authorized by this Agreement;
(p): Draw or convey any inference concerning a person's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics or mode of living when any Card or check is processed as non-accepted;
(q): Disclose any information obtained through the Software to any person except for necessary disclosures to affected Cardholders, Bank/Certegy and/or the Issuer;
(r): Add any tax to Transactions unless applicable law expressly requires that Merchant collect a tax. Any tax, if allowed, must be included in the Transaction amount and not collected separately;
(s): Disburse funds in the form of cash advance, travelers cheques, if the sole purpose is to allow the Cardholder to make a cash purchase of goods or services from Merchant;
(t): Disburse funds in the form of cash;
(u): Accept a Card to collect or refinance an existing debt;
(v): Issue a transaction credit for returned goods or services acquired in a cash transaction; or
(w): Make any cash refund to a Cardholder who has made a purchase with a Card. All transaction credits will be issued to the same Card account number as the sale.

22. Daily Reconciliation of Transactions.

(a): Electronically Transmitted Transactions. Transactions will be settled on a daily basis. Bank/Certegy shall deliver payment to Merchant by a credit to the Operating Account equal to the reconciled summary Transaction total of all of Merchants' total summary Transactions since the previous credit. This credit will be reduced, if necessary, by (i) the sum of all Cardholder charges denied, refused or charged back, (ii) all refunds processed on account of Cardholders during said time period, (iii) the fees and charges, including Chargebacks, Merchant owes Bank, Certegy and/or EPX hereunder, (iv) all taxes, penalties, charges and other items incurred by Bank/Certegy that are reimbursable pursuant to this Agreement and (v) all rates, fees and charges in Schedule B.
(b): Provisional Credit. Any credits to the Operating Account are provisional only and subject to revocation by Bank/Certegy until such time that the Transaction is final and no longer subject to chargeback by the Issuer, Cardholder or Association. Bank/Certegy may withhold settlement to the Operating Account for a Transaction to Merchant for at least one but not more than three days from the processing date of the Transaction if Bank/Certegy needs time to evaluate Transaction for unusual or fraudulent activity. EPX and Bank/Certegy agree to notify Merchant if settlement is withheld and will cooperate with Merchant to investigate unusual or fraudulent activity.

23. Adjustments and Returns. Merchant will maintain a fair exchange and return policy and make adjustments with respect to goods and services sold and/or leased to its customers whenever appropriate. If goods are returned, or services are terminated or canceled, or any price is adjusted, Merchant will prepare and transmit a credit or return Transaction, either electronically or by paper, for the amount of the adjustment as a deduction from the total amount of Transactions transmitted that day. If the amount of credit or return Transactions exceeds the amount of sales Transactions, Merchant shall pay Bank/Certegy the excess. Merchant shall make no cash refunds on Transactions and shall handle all credit adjustments as provided in this paragraph. If no refund or return will be given, Cardholder must be advised in writing that the sale is a "final sale" and "no returns" are permitted at the time of the Transaction. Cardholder also must be advised in writing of any no-cash refund policy, in store credit only. Merchant shall follow Association reservation/no-show policy. Merchant must notify Cardholders in writing of this policy on all advance reservations. The Cardholder must be notified at the time of the reservation of the exact number of days required for reservation deposit refunds.

24. Chargebacks. The acceptance by Bank/Certegy of any Transaction processed in accordance with the terms of this Agreement shall be without recourse to Merchant, except for (i) Card-Not-Present Transactions, (ii) as otherwise indicated in this Agreement and (iii) as follows:

(a): No specific prior authorization for the Transaction was obtained from the Authorization Center,
(b): The Transaction was forced based on a pre-authorization form and the Card on which the authorization was based has been canceled and Merchant was so notified prior to the Transaction;
(c): The Card giving rise to the Transaction was canceled and prior to, or at the time of, the Transaction, Merchant received notice of the cancellation through the electronic terminal, in writing or otherwise;

(d): The Card expired prior to the date of the Transaction or the date of Transaction was prior to the validation date, if any, indicated on the Card;
(e): The information required in Paragraphs 18 and 19(b) above was not submitted to Bank/Certegy;
(f): Bank/Certegy or Issuer has received a complaint from or on behalf of a Cardholder stating that there is an unresolved dispute or defense to a charge (whether or not valid) between Merchant and Cardholder, provided that Merchant retains the right to challenge (represent) such chargebacks per the Association regulations. Notwithstanding, until EPX or Certegy have notice in writing with documentation from the Associations that said chargeback has been reversed, EPX and Certegy reserve the right to take any actions consistent with the existence of a chargeback.
(g): The Cardholder makes a written complaint to Bank/Certegy or Issuer that the Cardholder did not make or authorize the Transaction;
(h): A setoff or counterclaim of any kind exists in favor of any Cardholder against Merchant that may be asserted in defense of an action to enforce payment against the Cardholder in a Transaction;
(i): The Transaction was made at or by a Merchant other than Merchant named in this Agreement;
(j): The Transaction otherwise violates the terms of this Agreement or any other Association or Issuer bylaw, rule, regulation, policy or guideline;
(k): A Transaction is charged back by an Issuer; or
(l): Any representation or warranty made by Merchant in connection with the Transaction is false or inaccurate in any respect.

In any such case, Bank/Certegy shall not be obligated to accept a Transaction for credit to the Operating Account. If Bank/Certegy has credited the Operating Account or Reserve Account for such a Transaction, Bank/Certegy may return the Transaction to the Merchant, and Merchant shall pay Bank/Certegy the amount of the Transaction. Merchant agrees that Bank/Certegy, without prior notice to Merchant, may (i) charge the amount of the Transaction to the Operating Account or Reserve Account; (ii) recoup the amount of the Transaction by adjustment of the credits due to Merchant; or (iii) set off the amount of the Transaction against any account or property Bank/Certegy holds for or on behalf of Merchant. If Merchant disagrees with a Chargeback Transaction, Merchant must so notify Bank/Certegy and EPX in writing within five (5) days of the Chargeback, and provide documentation that the dispute has been resolved to Cardholder's satisfaction, or proof that a credit has been issued and proof from the association that the Chargeback has been reversed. If Bank/Certegy or EPX takes legal action against Merchant for any Chargebacks or any amounts due Bank/Certegy and/or EPX hereunder and the Merchant stipulates or is found liable to Bank/Certegy and/or EPX Merchant shall pay all costs and attorneys fees incurred by Bank/Certegy and/or EPX.

26. Merchant Statement. On a daily basis, Bank/Certegy shall provide data to EPX to enable EPX to provide Merchant a Merchant Statement in written or electronic format. All information appearing on the Merchant Statement shall be deemed accurate and affirmed by Merchant unless Merchant objects by written notice specifying the particular item in dispute within 30 days of receipt of the Merchant Statement

27. Retention of Original Sales Information. Merchant shall retain the information required by Paragraphs 18 and 19(a) for three years from the date of the Transaction. At the request of Bank/Certegy, Merchant shall provide such information to Bank/Certegy or EPX, as directed by Bank/Certegy, within five (5) days of receipt of a written or electronic request from Bank/Certegy. Failure to meet such time frame or non-delivery of any item or delivery of an illegible copy of an item requested by an Issuer shall constitute a waiver by Merchant of any claims and may result in an irrevocable Chargeback for the full amount of the Transaction. Electronic records of such information shall suffice.

28. Recovery of Cards. In the Card Present Transaction, Merchant will use its best efforts to reasonably and peaceably recover and retain any Card for which Merchant receives notification of cancellation, restrictions, theft or counterfeiting. This notice may be given (i) electronically through the terminal or Software; (ii) by Bank's/Certegy's Authorization Center by any means; or (iii) by listing on any canceled Card or restricted Card list. Merchant shall also take reasonable steps to recover a Card which it has reasonable grounds to believe is counterfeit, fraudulent or stolen

29. Customer Complaints. Merchant shall respond promptly to inquiries from Cardholders and shall make reasonable efforts to resolve any disputes amicably. If unresolved disputes occur with a frequency unacceptable to standards as noted in the Association Rules and Regulations, Bank/Certegy may terminate this Agreement. Merchant agrees to maintain the following information in writing with respect to each claim or defense asserted by a Cardholder for which Merchant has received notice

(a): The Cardholder's name;
(b): The Card account number;
(c): The date and time the Cardholder asserted the claim or defense;
(d): The nature of the claim or defense; and
(e): The action, which Merchant took in an attempt to resolve the dispute.

Upon request by EPX and/or Bank/Certegy, Merchant shall furnish this information in writing within 3 days.

30. Confidentiality. Merchant shall treat all information received in connection with this Agreement as confidential. Merchant shall prevent the disclosure of this information except for necessary disclosures to affected Cardholders, to Bank/Certegy, to EPX, to Issuers, and to financial and legal advisors.

31. Associations' and Issuers' Requirements. Merchant shall comply with all bylaws; rules, regulations, policies and guidelines of the Association and any Issuer whose Cards are used to process Transactions in accordance with this Agreement. Merchant will display prominently on its website Card emblems. Subject to the prior written consent of Bank/Certegy and upon such conditions as authorized by Bank/Certegy, Merchant may use Card service marks or design marks in its own advertisement and promotional materials.

32. Compliance with Applicable Law. Merchant represents and warrants that it has obtained all necessary regulatory approvals, certificates and licenses to provide any services it intends to offer and that it is in compliance with the Telephone Disclosure and Dispute Resolution Act and the regulations of the Federal Trade Commission and the Federal Communications Commission. Merchant shall comply with all present and future federal, state and local laws and regulations pertaining to Transactions, including, without limitation, the Federal Fair Credit Reporting Act, the Federal

Truth-in-Lending Act, the Electronic Fund Transfer Act and the Federal Equal Credit Opportunity Act, as amended.

33. Taxes. Each party hereto shall report its income and pay its own taxes to any applicable jurisdiction. If Bank/Certegy or EPX are required to pay any taxes, interest, fine or penalties owed by Merchant, said amount shall become immediately due and payable by Merchant to Bank/Certegy or EPX. If excise, sale or use taxes are imposed on the Transactions, Merchant shall be responsible for the collection and payment thereof. Bank/Certegy or EPX shall be entitled to recover any of said taxes paid by it on behalf of Merchant from Merchant immediately after payment.

34. Limitation of Liability. Neither Bank, Certegy nor EPX shall be liable to Merchant or Merchant's customers or any other person for any of the following:

(a): Any loss or liability resulting from the denial of credit to any person or Merchant's retention of any Card or any attempt to do so;
(b): Any loss cause by either a Transaction downgrade resulting from defective or faulty hardware and/or software to the extent said software is owned by Merchant or a Transaction downgrade resulting from defective or faulty hardware and/or software owned by EPX for which EPX is liable under paragraph 16 of this agreement;
(c): The unavailability of Services caused by the termination of contracts with computer hardware vendors, processors or installers, if terminated by Merchant; or

NEITHER BANK, CERTEGY NOR EPX SHALL BE LIABLE FOR ANY PUNITIVE, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES TO MERCHANT OR TO ANY THIRD PARTY IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE SERVICES TO BE PERFORMED BY BANK, CERTEGY OR EPX PURSUANT TO THIS AGREEMENT.

MERCHANT ACKNOWLEDGES THAT BANK/CERTEGY HAS PROVIDED NO WARRANTIES, EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR PURPOSE, WITH RESPECT TO ANY SOFTWARE INSTALLED OR PROVIDED BY EPX AND THAT BANK/CERTEGY HAS NO LIABILITY WITH RESPECT TO ANY SOFTWARE. BANK/CERTEGY MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE SERVICES IT PROVIDES HEREUNDER. SHOULD THERE BE ERRORS, OMISSIONS, INTERRUPTIONS OR DELAYS RESULTING FROM BANK'S, CERTEGY'S OR EPX'S PERFORMANCE OR FAILURE TO PERFORM OF ANY KIND, BANK'S, CERTEGY'S AND EPX'S LIABILITY SHALL BE LIMITED TO CORRECTING SUCH ERRORS IF COMMERCIALLY REASONABLE OR SUPPLYING SUCH OMISSIONS IN THE WORK PRODUCT IN WHICH THEY HAVE OCCURRED.

35. Limitation on Damages. In no case shall Merchant be entitled to recover damages from EPX, Certegy or Bank, which exceed the lesser of (a) the fees retained by Bank, Certegy and EPX pursuant to this Agreement during the six-month period immediately prior to the event giving rise to the claim for damages, or (b) those damages defined in paragraph 12 of Exhibit A attached herein

36. Indemnification. Merchant agrees to indemnify and hold Bank, Certegy and EPX harmless from any and all losses, claims, damages, liabilities and expenses, including attorneys' fees and costs (whether or not an attorney is an employee of Bank or Bank's affiliates, Certegy or Certegy's affiliates or EPX or affiliates of EPX) arising out of any of the following:

(a): Merchant's failure to comply with this Agreement;
(b): Any act or omission of Merchant;
(c): Merchant's failure to comply with the Software Users' Guide;

(d): Merchant's failure to comply with any bylaw, rule, regulation, guideline or policy of any Association or Issuer;
(e): Merchant's failure to comply with any applicable law, rule or regulation;
(f): Any dispute concerning the quality, condition or delivery of any service;
(g): The fraud or dishonesty of Merchant or Merchant's employees, licensees, successors, agents and/or assigns;
(h): Merchant's selection of an Internet service provider or other telecommunication services provider;
(i): The theft of or damage or destruction to any Software; or
(j): Card-Not-Present Transactions, unauthorized Transactions and prohibited Transactions.

37. Credit Investigation and Bank/Certegy Auditing. Merchant will provide Bank/Certegy with quarterly financial statements within 45 days after the end of each fiscal quarter and annual audited financial statements within 90 days after the end of the Merchant's fiscal year end. Bank/Certegy may audit Merchant's compliance with the terms of this Agreement. After being given reasonable notice, Merchant shall provide all information reasonably requested by Bank/Certegy to complete Bank/Certegy's audit. Merchant authorizes parties contacted by Bank/Certegy to release the credit information requested by Bank/Certegy and Merchant agrees to provide Bank/Certegy a separate authorization for release of credit information if requested. Merchant shall deliver to Bank/Certegy such information as Bank/Certegy may reasonably request from time to time, including without limitation, financial statements and information pertaining to Merchant's financial condition. Such information shall be true, complete and accurate.

38. Termination of Agreement by Bank, Certegy or EPX. Bank, Certegy or EPX may terminate this Agreement upon 30 days' notice to Merchant under any of the below listed circumstances. Any such notice of termination by Bank/Certegy is effective upon receipt.

(a): In the opinion of Bank/Certegy, there is a substantial negative change in the Merchant's business or financial position.
(b): Chargebacks exceed the Association guidelines, or appear to be the result of fraudulent Transactions as defined by the Association. EPX will provide Merchant with information defining the Association guidelines which, at present, do not require termination for negligible violations that do not exceed two (2) months
(c): Material breach of this Agreement by Merchant;
(d): Merchant fails to provide financial statements suitable to Bank/Certegy on request, provided that those statements are same as those provided to Merchant's board of directors and investors; or

EPX and/or Bank/Certegy may terminate this agreement immediately, without notice in the following circumstances:

(a): Any act of fraud or dishonesty is committed by Merchant, its employees and/or agents or EPX or Bank/Certegy believes in good faith that Merchant, its employees and/or agents have committed, are committing or are planning to commit any acts of fraud or misrepresentation in connection with transaction processing;
(b): Any representation or warranty made by Merchant in this Agreement or the Application for Services hereunder that is not true and correct, in a material respect; or

(c): Merchant fails to maintain sufficient funds in the Operating Account to cover the amounts due to Bank/Certegy hereunder
(d): Merchant files a petition under any bankruptcy or insolvency law;

Bank/Certegy may selectively terminate one or more of Merchant's approved locations without terminating this entire Agreement. In the event of termination, all obligations of Merchant incurred or existing under this Agreement prior to termination shall survive the termination. Merchant's obligations with respect to any Transaction shall be deemed incurred and existing on the transaction date of the Card Transaction.

Bank/Certegy is not obligated to provide replacement services if EPX does not or cannot perform.

39. Termination of Agreement by Merchant. Merchant may terminate this Agreement upon at least 30 days' prior written notice to the other parties if Bank/Certegy amends Schedule B pursuant to Paragraph 42 to increase the rates, fees or charges Merchant pays hereunder, except for fees or rates that result from a pass through from an Association.

40. Setoff. In addition to any other legal or equitable remedy available to it in accordance with this Agreement or by law, Bank/Certegy and/or EPX may set off any amounts due to Bank/Certegy and/or EPX under this Agreement against any property of Merchant in the possession or control of Bank/Certegy or EPX.

41. Exclusivity. Merchant shall submit at least50% of its Card Transactions made during the term hereof through EPX to Bank/Certegy for processing unless EPX or Bank/Certegy cannot or will not support this level of Merchant's processing activity. In the event that Merchant submits less than 50% of its Card Transactions through EPX to Certegy/Bank, Merchant agrees to pay a fixed amount to cover EPX's upfront development costs, in addition to a penalty fee. The fee will decline by one twelfth (¹/12) following each month of the term. The amount will begin at one million dollars ($1,000,000) and amortize each month of the term (e.g. month 1= $1,000,000, month 7= $500,000, month 12= $83,333)

42. Amendments to this Agreement. From time to time Bank/Certegy may amend this Agreement as follows:

(a): Amendment to Cards and/or Services. EPX and Bank/Certegy may add Cards or Services listed in Schedule A by notifying Merchant in writing of any amendment. EPX and Bank/Certegy may not voluntarily delete Cards without Merchant's explicit consent unless there is a material change in the relationship between the Card Associations and EPX or the Bank/Certegy. All provisions of this Agreement shall apply to Cards or Services added to this Agreement. Bank/Certegy shall notify Merchant of the fees to be charged for processing the additional Cards and Services. Acceptance by Merchant of a new approved Card as payment for a Transaction or use of a new Service after Bank/Certegy has sent Merchant notice of an amendment shall constitute Merchant's agreement to the amendment and the fees or charges related to these additions.
(b): Amendment to Fees and Charges. From time to time, Bank/Certegy may change all rates, fees and charges set forth in Schedule B subject to the limitations noted in paragraph 11. Bank/Certegy will provide written notice to Merchant of all amendments. Bank/Certegy may change the rates, fees and charges upon 30 days' notice if Merchant's sales volume or average Transaction amount does not meet Merchant's projections contained in Merchant's application for card processing services initially submitted to and approved by Bank/Certegy for more than 2 consecutive months. If notice is required, Bank/Certegy will give written notice on the Merchant Statement. All new rates, fees and charges will become effective for the month immediately following the month in which the notice appeared on the Merchant Statement unless Merchant terminates this Agreement in accordance with Paragraph 39.

43. Assignment. This Agreement may not be assigned by Merchant without the prior written consent of Bank/Certegy. Bank/Certegy and/or EPX may assign this Agreement without limitation to another bank qualified by the Association or Service Provider. Assignment of this Agreement by Bank/Certegy and/or EPX shall relieve the assigning party (Bank/Certegy and/or EPX)of any further obligations under this Agreement.

44. Financial Accommodations. Bank/Certegy, EPX and Merchant intend this Agreement to be construed as a contract to extend financial accommodations for the benefit of Merchant.

45. Waiver. To the extent that Merchant becomes a debtor under any chapter of title 11 of the United States Code and such event does not result in the termination of this Agreement, Merchant hereby unconditionally and absolutely waives any right or ability that Merchant may otherwise have had to oppose, defend against or otherwise challenge any motion filed by Bank or Certegy for relief from the automatic stay of 11 U.S.C. § 362(a) to enforce any of Bank's or Certegy's rights or claims under this Agreement.

49. Notices. Except for notices provided by Bank/Certegy to Merchant on the Merchant Statement, all notices, requests, demands or other instruments which may or are required to be given by any party hereunder shall be in writing and each shall be deemed to have been properly given when (i) served personally on an officer of the party to whom such notice is to be given, (ii) upon expiration of a period of three (3) Business Days from and after the date of mailing thereof when mailed postage prepaid by registered or certified mail, requesting return receipt, or (iii) upon delivery by a nationally recognized overnight delivery service, addressed as follows:

If to CERTEGY/BANK:
11601 Roosevelt Boulevard, TA 78St. Petersburg,
FL 33716-2202

If to EPX:
Electronic Payment Exchange, Inc.
One Corporate Common, Suite 214
100 W. Commons Boulevard
New Castle, Delaware 19720

If to MERCHANT:

PayPal, Inc.
1840 Embarcadero Road
Palo Alto, California 94303

Any party may change the address to which subsequent notices are to be sent by notice to the others given as aforesaid.

50. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Florida, without regard to internal principles of conflict of laws and federal law. The parties agree to the submission of any disputes or claims under this Agreement to the appropriate courts in Florida and waive any claims that the appropriate Courts in Florida lack personal jurisdiction over the parties.

52. No Waiver. Any delay, waiver or omission by Bank/Certegy to exercise any right or power arising from any breach or default of the other party in any of the terms, provisions or covenants of this Agreement shall not be construed to be a waiver of any subsequent breach or default of the same or any other terms, provisions or covenants on the part of the other party. All remedies afforded by this Agreement for a breach hereof shall be cumulative.

Agreed to and accepted on: November 14, 2001.

CERTEGY CARD SERVICES, INC.: On its own behalf and on behalf of BANK		MERCHANT: Paypal, Inc.

By:		By:
	/s/ Thomas McMahon Thomas McMahon Vice President Merchant Services		/s/ Todd Pearson Todd Pearson Senior Vice President, Financial Services

ELECTRONIC PAYMENT EXCHANGE, INC.
By:
	/s/ Ray Moyer Ray Moyer President

SCHEDULE A
CARDS, SERVICES AND EQUIPMENT/SOFTWARE

1.: Cards available to Merchant

Bank/Certegy and EPX currently provides Card transaction processing services for Visa.

2.: Services available to Merchant

As of the date of this Agreement, Merchant has requested and Bank has approved Merchant's useof the following services:

/ / Authorization services for Visa,

/ / Card Transaction processing services for Visa

/ / Cardholder Address Verification

/ / CVV2 verification for Visa,

/ / Chargeback reporting and services for Visa

SCHEDULE B
RATES, FEES AND CHARGES

1.: Merchant Discount Rates. Merchant shall be charged for all Visa fees, assessments and the following discount rates:

Interchange-per transactions, by card type VISA U.S.A	Percentage	Dollar Amount
CPS/Retail Check Card Signature-Based	[*]	[*]
CPS/Retail Credit	[*]	[*]
CPS/Retail 2	[*]	[*]
CPS Card Not Present	[*]	[*]
CPS/Retail Key-Entry	[*]	[*]
CPS / Hotel and Car Rental	[*]	[*]
Consumer Card Electronic EIRF	[*]	[*]
Consumer Card Standard	[*]	[*]
Signature Card T&E Electronic	[*]	[*]
Signature Card T&E Standard	[*]	[*]
Commercial Card Electronic	[*]	[*]
Commercial Card Standard	[*]	[*]

Assessments		Percentage		Dollar Amount
Visa		[*]		[*]

These fees, assessments and discount rates are subject to change as dictated by the Association and the merchant is responsible for any additional fee, assessments, discount rates or fine at the time the Association implements any change. Discount rates (not including fees and assessments) are assessed on the net amount of daily settlements.

2.: Merchant Transaction Fees. Merchant shall be charged the following Transaction Fees in addition those fees charged by the Association:

Authorization Fees. Merchant will be charged the following per Item Fees:

Each Visa Authorization Request: [*]

Settlement Fees: Merchant will be charged the following per Item Fee:

Each Visa Settlement Transaction: [*]

Chargeback Fee: Merchant will be charged the following per Item Fee:

Each Visa Chargeback: [*] per item

Each unanswered Retrieval Request [*] per item

(As defined in Exhibit B)

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EXHIBIT 10.24

MERCHANT AGREEMENT
EX-23.1 10 a2068352zex-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 appears 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
February 7, 2002

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CONSENT OF INDEPENDENT ACCOUNTANTS
EX-23.2 11 a2068352zex-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, except as to the third paragraph of note 1, which is as of December 14, 2001, relating to the consolidated financial statements of PayPal, Inc., which appears 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
February 7, 2002

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CONSENT OF INDEPENDENT ACCOUNTANTS
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