Ariba 10Q 2003 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES ACT OF 1934

For the Quarter Ended June 30, 2003

Commission File Number 000-26299

ARIBA, INC.

(Exact name of registrant as specified in its charter)

Delaware

77-0439730

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

807 11th Avenue

Sunnyvale, California 94089

(Address of principal executive offices)

(650) 390-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesx No¨

Indicate by check mark whether the registrant is an accelerated filer (as described in Exchange Act Rule 12b-2).

Yesx No¨

On July 31, 2003, 269,982,344 shares of the registrant’s common stock were issued and outstanding.

ARIBA, INC.

INDEX

		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets as of June 30, 2003 and September 30, 2002	3

	Condensed Consolidated Statements of Operations for the three and nine month periods ended June 30, 2003 and 2002*	4

	Condensed Consolidated Statements of Cash Flows for the nine month periods ended June 30, 2003 and 2002*	5

	Notes to the Condensed Consolidated Financial Statements	6

	* The Condensed Consolidated Statements of Operations for the three and nine month periods ended June 30, 2002 and the Condensed Consolidated Statement of Cash Flows for the nine month period ended June 30, 2002 have been restated as discussed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2002 as filed on April 10, 2003 and its Quarterly Report on Form 10-Q/A for the three months ended June 30, 2002 as filed on April 11, 2003.

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51

Item 4.	Controls and Procedures	52

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	54

Item 2.	Changes in Securities and Use of Proceeds	56

Item 3.	Defaults Upon Senior Securities	56

Item 4.	Submission of Matters to a Vote of Securities Holders	57

Item 5.	Other Information	57

Item 6.	Exhibits and Reports on Form 8-K	57

	SIGNATURES	58

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

ARIBA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

	June 30, 2003			September 30, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	71,967		$	86,935
Short-term investments		43,891			70,346
Restricted cash		263			800
Accounts receivable, net		11,595			7,984
Prepaid expenses and other current assets		9,919			15,590

Total current assets		137,635			181,655
Property and equipment, net		22,965			29,168
Long-term investments		98,072			87,970
Restricted cash		28,521			29,482
Other assets		1,909			2,428
Goodwill, net		181,218			176,451
Other intangible assets, net		—			117,464

Total assets	$	470,320		$	624,618


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	16,840		$	15,187
Accrued compensation and related liabilities		24,996			30,411
Accrued liabilities		36,057			39,029
Restructuring costs		13,869			18,716
Deferred revenue		83,336			52,459
Current portion of other long-term liabilities		11			106

Total current liabilities		175,109			155,908
Restructuring costs, net of current portion		37,605			43,353
Deferred revenue, net of current portion		34,480			99,302
Other long-term liabilities, net of current portion		42			—

Total liabilities		247,236			298,563

Minority interests		17,757			15,027

Commitments and contingencies (Note 4)

Stockholders’ equity:
Common stock		537			531
Additional paid-in capital		4,500,705			4,497,288
Deferred stock-based compensation		(327	)		(4,507	)
Accumulated other comprehensive loss		(1,024	)		(1,412	)
Accumulated deficit		(4,294,564	)		(4,180,872	)

Total stockholders’ equity		205,327			311,028

Total liabilities and stockholders’ equity	$	470,320		$	624,618

See accompanying notes to condensed consolidated financial statements.

ARIBA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2003			2002			2003			2002
Revenues:
License	$	21,288		$	26,915		$	79,486		$	75,213
Maintenance and service		35,275			31,907			98,080			95,713

Total revenues		56,563			58,822			177,566			170,926

Cost of revenues:
License		1,784			538			3,663			2,710
Maintenance and service (exclusive of stock-based compensation expense (benefit) of $(42) and $734 for the three months ended June 30, 2003 and 2002, respectively, and $(751) and $2,551 for the nine months ended June 30, 2003 and 2002, respectively)		11,889			11,024			33,942			31,089

Total cost of revenues		13,673			11,562			37,605			33,799

Gross profit		42,890			47,260			139,961			137,127

Operating expenses:
Sales and marketing (exclusive of stock-based compensation expense of $239 and $1,247 for the three months ended June 30, 2003 and 2002, respectively, and $1,446 and $3,250 for the nine months ended June 30, 2003 and 2002, respectively, and exclusive of business partner warrant expense of zero for each of the three month periods ended June 30, 2003 and 2002, and zero and $5,562 for the nine months ended June 30, 2003 and 2002, respectively)		19,199			19,544			60,320			66,881
Research and development (exclusive of stock-based compensation expense (benefit) of $26 and $(34) for the three months ended June 30, 2003 and 2002, respectively, and $258 and $(203) for the nine months ended June 30, 2003 and 2002, respectively)		13,123			16,726			40,955			48,577
General and administrative (exclusive of stock-based compensation expense of $141 and $1,378 for the three months ended June 30, 2003 and 2002, respectively, and $883 and $6,181 for the nine months ended June 30, 2003 and 2002, respectively)		8,745			8,842			29,578			26,491
Amortization of goodwill and other intangible assets		—			141,291			117,464			424,509
Business partner warrants, net		—			—			—			5,562
Stock-based compensation		364			3,325			1,836			11,779
Restructuring and lease abandonment costs		5,350			57,125			5,350			62,609

Total operating expenses		46,781			246,853			255,503			646,408

Loss from operations		(3,891	)		(199,593	)		(115,542	)		(509,281	)
Interest income		1,163			1,801			4,105			6,257
Interest expense		(74	)		(7	)		(87	)		(34	)
Other income		97			301			494			122

Net loss before income taxes and minority interests		(2,705	)		(197,498	)		(111,030	)		(502,936	)
Provision (benefit) for income taxes		(116	)		1,000			327			2,995
Minority interests in net for income (loss) of consolidated subsidiaries		858			246			2,335			(535	)

Net loss	$	(3,447	)	$	(198,744	)	$	(113,692	)	$	(505,396	)

Net loss per share—basic and diluted	$	(0.01	)	$	(0.76	)	$	(0.43	)	$	(1.96	)

Weighted average shares used in computing net loss per share—basic and diluted		267,002			260,180			265,434			258,184

See accompanying notes to condensed consolidated financial statements.

ARIBA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended June 30,
	2003			2002
Operating activities:
Net loss	$	(113,692	)	$	(505,396	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Recovery of doubtful accounts		(1,317	)		(2,942	)
Depreciation and amortization		126,350			446,390
Stock-based compensation		1,836			11,779
Impairment (recovery) of leasehold improvements		—			(2,182	)
Business partner warrant expense		—			5,562
Minority interests in net loss (income) of consolidated subsidiaries		2,335			(535	)
Changes in operating assets and liabilities:
Accounts receivable		(2,294	)		23,378
Prepaid expenses and other assets		6,190			(1,841	)
Accounts payable		1,653			(11,328	)
Accrued compensation and related liabilities		(5,415	)		(15,048	)
Accrued liabilities		(3,610	)		(2,488	)
Restructuring and lease abandonment costs		(10,595	)		34,927
Deferred revenue		(33,945	)		(14,316	)

Net cash used in operating activities		(32,504	)		(34,040	)

Investing activities:
Purchases of property and equipment, net		(2,218	)		(3,391	)
Sales/purchases of investments, net		16,023			44,230
Business combinations		(3,272	)		—
Allocations from restricted cash, net		1,498			1,989

Net cash provided by investing activities		12,031			42,828

Financing activities:
Repayments of lease obligations		(1,376	)		(220	)
Proceeds from issuance of business partner warrants		—			15,000
Proceeds from issuance of common stock		5,731			8,821
Repurchase of common stock		—			(471	)

Net cash provided by financing activities		4,355			23,130

Net increase (decrease) in cash and cash equivalents		(16,118	)		31,918
Effect of foreign exchange rate changes		1,150			205
Cash and cash equivalents at beginning of period		86,935			71,971

Cash and cash equivalents at end of period	$	71,967		$	104,094

See accompanying notes to condensed consolidated financial statements.

ARIBA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1—Description of Business and Summary of Significant Accounting Policies

Description of business

Ariba, Inc., along with its subsidiaries (collectively referred to herein as the “Company”), provides Enterprise Spend Management solutions that allow enterprises to manage efficiently the purchasing of all non-payroll goods and services required to run their business. The Company refers to these non-payroll expenses associated with running a business as “spend.” The Company’s solutions, which include software applications, services and network access, are designed to provide corporations with technology and business process improvements to better manage their corporate spending and, in turn, save money. The Company was founded in September 1996 and from that date through March 1997 was in the development stage, conducting research and developing its initial products. In March 1997, the Company began selling its products and related services and currently markets them in North America, Europe, the Middle East, Asia, Australia and Latin America primarily through its direct sales force and indirect sales channels.

Basis of presentation

The unaudited condensed consolidated financial statements of the Company have been prepared by the management of the Company and reflect all adjustments (all of which are normal and recurring in nature) that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending September 30, 2003. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted under the Securities and Exchange Commission’s rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, presented in the Company’s Annual Report on Form 10-K for the year ended September 30, 2002 filed on April 10, 2003 with the Securities and Exchange Commission (“SEC”).

Restatement

As a result of a review it initiated in December 2002, the Company has restated its consolidated financial statements for the fiscal years ended September 30, 2000 and 2001 and for the quarters ended December 31, 1999 through June 30, 2002. It has also adjusted the consolidated financial statement information for the quarter and fiscal year ended September 30, 2002 originally announced on October 23, 2002 and for the quarter ended December 31, 2002 originally announced on January 23, 2003. Ariba’s condensed consolidated statements of operations for the three and nine month periods ended June 30, 2002 have been restated as discussed in its Annual Report on Form 10-K for the year ended September 30, 2002 filed on April 10, 2003 and its Quarterly Report on Form 10-Q/A for the three months ended June 30, 2002 filed on April 11, 2003.

Acquisitions

Business combinations have been accounted for under the purchase method of accounting. The Company includes the results of operations of the acquired business from the acquisition date. Net assets of the companies acquired are recorded at their fair value at the acquisition date. The excess of the purchase price over the fair value of net assets acquired is included in goodwill and other intangible assets in the accompanying consolidated

balance sheets. Amounts allocated to in-process research and development are expensed in the period in which the acquisition is consummated.

Use of estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported results of operations during the reporting period. Actual results could differ from those estimates. For example, actual sublease income attributable to the consolidation of excess facilities might deviate from the assumptions used to calculate the Company’s accrual for lease abandonment costs; actual cash flows may differ from estimates used to assess the recoverability of goodwill and other intangible assets; and litigation settlement amounts may differ from estimated amounts. Actual experience in the collection of accounts receivable considered doubtful may differ from estimates used to develop allowances due to changes in the financial condition of customers or the outcomes of collection efforts.

Fair value of financial instruments and concentration of credit risk

The carrying value of the Company’s financial instruments, including cash and cash equivalents, investments, accounts receivable and long-term debt, approximates fair value. Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments and trade accounts receivable. The Company maintains its cash and cash equivalents and investments with high quality financial institutions. The Company’s customer base consists of businesses in North America, Europe, the Middle East, Asia, Australia and Latin America. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. The Company maintains allowances for potential credit losses.

One customer accounted for approximately 10% of total revenues for the three and nine month periods ended June 30, 2003 (see Notes 6 and 9 of Notes to Condensed Consolidated Financial Statements for additional discussion), while no customer accounted for more than 10% of total revenues for the three and nine month periods ended June 30, 2002. There were no individual customers with net accounts receivable comprising more than 10% of total net accounts receivable as of June 30, 2003 and September 30, 2002.

Impairment of long-lived assets

Statement of Financial Accounting Standards (SFAS) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale, broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations, and changes the timing of recognizing losses on such discontinued operations. The Company adopted SFAS No. 144 on October 1, 2002. The adoption of SFAS No. 144 did not affect the Company’s condensed consolidated financial statements. In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to its estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Goodwill and intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

Prior to the adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.

Adoption of accounting standards

On October 1, 2002, the Company adopted SFAS No. 142,Goodwill and Other Intangible Assets. As a result, goodwill and other intangible assets with indefinite useful lives are no longer amortized, but instead are tested for impairment annually. Other intangible assets with definite useful lives will continue to be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-lived Assets. As of the date of adoption, the Company had a remaining unamortized goodwill balance of $176.4 million which would have otherwise resulted in additional amortization expense of $49.0 million for the quarter ended June 30, 2003. A transitional goodwill impairment test was required under SFAS No. 142 as of the date of adoption. During the quarter ended December 31, 2002, the Company completed the transitional goodwill impairment test and was not required to record an impairment charge upon completion of the test. As a result of the adoption of SFAS No. 142, neither the useful lives nor the residual value of the intangible assets acquired required adjustment. Furthermore, reclassifications of existing intangible assets to conform to new classification criteria in SFAS No. 141 were not required. The Company will perform a goodwill impairment test annually each fiscal year or whenever an impairment indicator is present. There can be no assurance that at the time the test is completed an impairment charge may not be recorded.

In June 2001, the FASB issued SFAS No. 143,Accounting for Asset Retirement Obligations. SFAS No. 143 requires that the Company record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that resulted from the acquisition, construction, development, and/or normal use of the assets. The Company would also record a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company’s adoption of SFAS No. 143 on October 1, 2002 did not have a significant impact on its condensed consolidated financial statements. However, in the event that the Company makes alterations in the future to certain leased facilities, its landlord may be entitled to require the Company to restore the property upon termination of the related lease at its expense. As such, any significant alterations might have a material impact on the Company’s condensed consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 revises the accounting for specified employee and contract terminations that are part of restructuring activities and nullifies Emerging Issues Task Force (EITF) No. 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. Companies will be able to record a liability for a cost associated with an exit or disposal activity only when the liability is incurred and can be measured at fair value. Commitment to an exit plan or a plan of disposal expresses only management’s intended future actions and therefore does not meet the requirement for recognizing a liability and related expense. SFAS No. 146 only applies to termination benefits offered for a specific termination event or a specified period. It will not affect accounting for the costs to terminate a capital lease. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a significant impact on the Company’s condensed consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an

interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. FIN 45 also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company’s condensed consolidated financial statements. The Company has adopted the disclosure provisions as required. See Note 4 of Notes to Condensed Consolidated Financial Statements.

Revenue recognition

The Company’s revenue consists of fees for licenses of the Company’s software products, maintenance, hosted services, customer training and consulting. Cost of license revenue primarily includes product, delivery, warranty and royalty costs. Cost of maintenance and service revenue primarily includes labor costs for engineers performing implementation services, consulting services and technical support, training personnel, facilities and equipment costs and warranty costs.

The Company’s spend management applications fall into three solution sets: the Ariba Analysis Solution, the Ariba Sourcing Solution, and the Ariba Procurement Solution. The Ariba Enterprise Sourcing, which was introduced in late fiscal 2001, is derived from the Company’s Dynamic Trade and Sourcing applications which are still available as separate products. The modules that make up the Ariba Analysis Solution and the Ariba Sourcing Solution can be deployed as hosted or installed applications. In addition, the Ariba Workforce and Ariba Marketplace products are also available as hosted applications.

The Company licenses its products through its direct sales force and indirectly through resellers. The license agreements for the Company’s products generally do not provide for a right of return, and historically product returns have not been significant. The Company does not recognize revenue for refundable fees or agreements with cancellation rights until such rights to refund or cancellation have expired. The products are licensed under either a perpetual license or under a time-based license. Access to the Ariba Supplier Network is available to Ariba customers as part of their maintenance agreements for certain products.

The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2,Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9, and Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 101,Revenue Recognition in Financial Statements. The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery of the product has occurred; the Company has no significant obligations with regard to implementation; the fee is fixed and determinable; and collectibility is probable. The Company considers all arrangements with payment terms extending beyond one year to not be fixed and determinable, and revenue is recognized as payments become due from the customer. If collectibility is not considered probable at the inception of the arrangement, then revenue is not recognized until the fee is collected.

SOP 97-2, as amended, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. Revenue recognized from multiple-element arrangements is allocated to undelivered elements of the arrangement, such as maintenance and support services and professional services, based on the relative fair values of the elements specific to the Company. The Company’s determination of the fair value of each element in multi-element arrangements is based on vendor-specific objective evidence (VSOE). The Company limits its assessment of VSOE for each element to either the price charged when the same element is sold separately or the price established by management, having the relevant authority to do so, for an element not yet sold separately.

If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair

value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. Revenue allocated to maintenance and support is recognized ratably over the maintenance term (typically one year) and revenue allocated to training and other services is recognized as the services are performed. Revenue from hosting services is recognized ratably over the term of the arrangement. The proportion of total revenue from new license arrangements that is recognized upon delivery may vary from quarter to quarter depending upon the relative mix of types of licensing arrangements and the availability of VSOE of fair value for undelivered elements.

Certain of the Company’s perpetual and time-based licenses include the right to unspecified additional products and/or payment terms that extend beyond twelve months. The Company recognizes revenue from perpetual and time-based licenses that include unspecified additional software products ratably over the term of the arrangement. Revenue from those contracts with extended payment terms is recognized at the lesser of amounts due and payable or the amount of the arrangement fee that would have been recognized if the fee was fixed or determinable.

Arrangements that include consulting services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When services are not considered essential, the revenue allocable to the services is recognized separately from the software, provided VSOE of fair value exists. If the Company provides consulting services that are considered essential to the functionality of the software products, both the software product revenue and service revenue are recognized under contract accounting in accordance with the provisions of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenues from these arrangements are recognized under the percentage of completion method except in limited circumstances where completion status cannot be reasonably estimated, in which case the completed contract method is used.

The Company’s customers include certain suppliers from whom, on occasion, the Company has purchased goods or services for the Company’s operations at or about the same time the Company has licensed its software to these organizations. These transactions are separately negotiated at terms the Company considers to be arm’s-length. To the extent that the fair value of either the software sold or the goods or services purchased in concurrent transactions cannot be reliably determined, revenues are reduced by the cost of the goods or services acquired. Revenues for the three and nine month periods ended June 30, 2003 and 2002 were not affected by such transactions.

Equity instruments received in conjunction with licensing transactions are recorded at their estimated fair market value and included in the measurement of the related license revenue in accordance with EITF No. 00-8,Accounting by a Grantee for an Equity Investment to Be Received in Conjunction with Providing Goods and Services. For the quarters ended June 30, 2003 and 2002, the Company recorded revenue of $428,000 and $855,000, respectively, while for the nine months ended June 30, 2003 and 2002, the Company recorded revenue of $1.3 million and $2.8 million, respectively based on equity received in such transactions. These transactions were originated in fiscal 2000.

Deferred revenue includes amounts received from customers for which revenue has not been recognized that generally results from deferred maintenance and support, consulting or training services not yet rendered and license revenue deferred until all requirements under SOP 97-2 are met. Deferred revenue is recognized as revenue upon delivery of our product, as services are rendered, or as other requirements requiring deferral under SOP 97-2 are satisfied. Deferred revenue excludes contract amounts for which payment has yet to be collected. Likewise, accounts receivable exclude amounts due from customers for which revenue has been deferred.

Stock-based compensation

The Company accounts for its employee stock-based compensation plans in accordance with APB Opinion No. 25,Accounting for Stock Issued to Employees and Financial Accounting Standards Board

Interpretation No. 44 (FIN 44),Accounting for Certain Transactions Involving Stock Compensation—an Interpretation of APB Opinion No. 25, and complies with the disclosure provisions of SFAS No. 123,Accounting for Stock-Based Compensationas amended by SFAS No. 148,Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123. Accordingly, no compensation cost is recognized for any of the Company’s fixed stock options granted to employees when the exercise price of the option equals or exceeds the fair value of the underlying common stock as of the grant date for each stock option. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF No. 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Deferred stock-based compensation is included as a component of stockholders’ equity and is being amortized by charges to operations over the vesting period of the options and restricted stock consistent with the method described in Financial Accounting Standards Board Interpretation No. 28 (FIN 28),Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.

Had compensation cost been recognized based on the fair value at the date of grant for options granted and Employee Stock Purchase Plan issuances during the three and nine month periods ended June 30, 2003 and 2002, the Company’s pro forma net loss and net loss per share would have been as follows (in thousands, except per share amounts):

	Three Months Ended June 30,						Nine Months Ended June 30,
	2003			2002			2003			2002
Reported net loss, net of tax	$	(3,447	)	$	(198,744	)	$	(113,692	)	$	(505,396	)
Add back employee stock-based compensation expense related to stock options included in reported net loss		90			1,191			457			4,042
Less employee stock-based compensation expense determined under fair value based method for all employee stock option awards		(1,032	)		(25,453	)		(7,761	)		(75,623	)

Pro forma net loss, net of tax	$	(4,389	)	$	(223,006	)	$	(120,996	)	$	(576,977	)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2003			2002			2003			2002
Reported basic and diluted net loss per share	$	(0.01	)	$	(0.76	)	$	(0.43	)	$	(1.96	)

Pro forma basic and diluted net loss per share	$	(0.02	)	$	(0.86	)	$	(0.46	)	$	(2.24	)

Recent accounting pronouncements

In November 2002, the EITF reached a consensus on Issue No. 00-21,RevenueArrangements with Multiple Deliverables. EITF No. 00-21 provides guidance on how to account for certain arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company believes that the adoption of EITF No. 00-21 will not have a significant impact on its results of operations or financial position.

In April 2003, the FASB issued SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 is effective for contracts

entered into or modified after June 30, 2003 except for the provisions that were cleared by the FASB in prior pronouncements. The Company believes that the adoption of SFAS No. 149 will not have a material impact on its results of operations or financial position.

In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures in its balance sheets certain financial instruments with characteristics of both liabilities and equity. In accordance with this Statement, financial instruments that embody obligations for the issuer are required to be classified as liabilities. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company believes that the adoption of SFAS No. 150 will not have a material impact on its financial position.

Note 2—Goodwill and Other Intangible Assets

Goodwill and other intangible assets as of June 30, 2003 and September 30, 2002 consisted of the following (in thousands):

	June 30, 2003							September 30, 2002
	Gross carrying amount		Accumulated amortization			Net carrying amount		Gross carrying amount		Accumulated amortization			Net carrying amount
Goodwill	$	869,705	$	(688,487	)	$	181,218	$	864,938	$	(688,487	)	$	176,451

Other Intangible Assets
Covenants not-to-compete		1,300		(1,300	)		—		1,300		(1,173	)		127
Core technology		17,392		(17,392	)		—		17,392		(13,194	)		4,198
Intellectual property agreement		786,929		(786,929	)		—		786,929		(673,790	)		113,139

Total	$	805,621	$	(805,621	)	$	—	$	805,621	$	(688,157	)	$	117,464

On January 28, 2003, the Company acquired privately-held Goodex AG (“Goodex”), a European sourcing services provider. The purchase price of approximately $3.3 million consisted of a net cash payment totaling $2.2 million and $1.1 million of direct transaction costs related to the merger. Of the total purchase price, $465,000 was allocated to property and equipment, $1.0 million to current assets and $3.0 million of liabilities assumed, excluding property and equipment, and the remainder was allocated to goodwill ($4.8 million). As part of the merger agreement the Company incurred $750,000 of severance costs that have been included as part of the $1.1 million of transaction costs. Pro forma financial information has been excluded as the information is considered immaterial.

As of June 30, 2003, the Company had unamortized goodwill of approximately $181.2 million. Other intangible assets have been amortized on a straight-line basis over their total expected useful lives ranging from two to three years. As a result of its adoption of SFAS No. 142 on October 1, 2002, the Company ceased amortization of the remaining goodwill that had a net book value of approximately $176.4 million as of October 1, 2002. Other identifiable intangible assets which include covenants not-to-compete, core technology and an intellectual property agreement were fully amortized over their remaining useful lives, all of which expired in the quarter ended March 31, 2003.

Amortization of other intangible assets was zero and $117.5 million for the three and nine month periods ended June 30, 2003, and amortization of goodwill and other intangible assets was $141.3 million and $424.5 million for the three and nine month periods ended June 30, 2002, respectively. The following table reconciles the reported net loss and basic and diluted net loss per share for the three and nine month periods ended June 30, 2003 and 2002 as if the provisions of SFAS No. 142 were in effect for all periods:

	Three Months Ended June 30,						Nine Months Ended June 30,
	2003			2002			2003			2002
Reported net loss	$	(3,447	)	$	(198,744	)	$	(113,692	)	$	(505,396	)
Add back goodwill amortization		—			72,298			—			217,939

Adjusted net loss	$	(3,447	)	$	(126,446	)	$	(113,692	)	$	(287,457	)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2003			2002			2003			2002
Reported basic and diluted net loss per share	$	(0.01	)	$	(0.76	)	$	(0.43	)	$	(1.96	)
Add back goodwill amortization		—			0.28			—			0.84

Adjusted basic and diluted net loss per share	$	(0.01	)	$	(0.48	)	$	(0.43	)	$	(1.12	)

Upon adoption of SFAS No. 142, the Company was required to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform to the new classification criteria in SFAS No. 141 for recognition of intangible assets separate from goodwill. The Company was also required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. For intangible assets identified as having indefinite useful lives, the Company was required to test those intangible assets for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Impairment was measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. The results of this analysis did not require the Company to recognize an impairment loss. There was no impact on the Company’s condensed consolidated financial statements upon adoption of SFAS No. 142.

Note 3—Income Taxes

The Company incurred operating losses for the three and nine month periods ended June 30, 2003 and June 30, 2002. The Company has recorded a valuation allowance for the full amount of the net deferred tax assets, as it is more likely than not that the deferred tax assets will not be realized. For the three month periods ended June 30, 2003 and 2002, the Company incurred an income tax benefit of $116,000 and income tax expense of $1.0 million, respectively, and for the nine month periods ended June 30, 2003 and 2002, the Company incurred income tax expense of $327,000 and $3.0 million, respectively, primarily attributable to state and foreign taxes.

Note 4—Commitments and Contingencies

Leases

In March 2000, the Company entered into a facility lease agreement for approximately 716,000 square feet in four office buildings and an amenities building in Sunnyvale, California for the Company’s headquarters. The operating lease term commenced in phases from January through April 2001 and ends on January 24, 2013. Minimum monthly lease payments are approximately $2.3 million and escalate annually with the total future minimum lease payments amounting to $321.6 million over the remaining lease term. During fiscal 2000 and 2001, the Company also contributed $80.0 million towards leasehold improvement costs of the facility and for the purchase of equipment and furniture, of which approximately $49.2 million was written off in connection

with the abandonment of excess facilities. As part of this lease agreement, the Company is required to hold certificates of deposit totaling $25.7 million as of June 30, 2003, as a form of security through fiscal year 2013, which is classified as restricted cash on the Company’s condensed consolidated balance sheets.

Restructuring and lease abandonment costs

In fiscal year 2001, the Company initiated a restructuring program to conform its expense and revenue levels and to better position the Company for growth and profitability. As part of this program, the Company restructured its worldwide operations including a worldwide reduction in workforce and the consolidation of excess facilities. In addition, the Company implemented a further reduction of its worldwide workforce during the quarter ended December 31, 2001 totaling $5.7 million and recorded an additional restructuring charge in the quarter ended June 30, 2002, totaling $57.1 million, related to its abandonment of certain operating leases as part of its program to restructure its operations and related facilities.

The following table details restructuring activity through June 30, 2003 (in thousands):

	Severance and benefits			Lease abandonment costs			Total
Accrued restructuring costs as of September 30, 2002	$	103		$	61,966		$	62,069
Cash paid		(22	)		(6,794	)		(6,816	)

Accrued restructuring costs as of December 31, 2002		81			55,172			55,253
Cash paid		(8	)		(4,674	)		(4,682	)

Accrued restructuring costs as of March 31, 2003		73			50,498			50,571
Total charge to expense		—			5,350			5,350
Cash paid		(6	)		(4,441	)		(4,447	)

Accrued restructuring costs as of June 30, 2003	$	67		$	51,407			51,474

Less: current portion								13,869

Accrued restructuring costs, less current portion							$	37,605

Lease abandonment costs incurred to date relate to the abandonment of the remaining lease terms of excess leased facilities in Mountain View and Sunnyvale, California, Tampa, Florida, Alpharetta, Georgia, Lisle, Illinois, Burlington, Massachusetts, Dallas, Texas, Hong Kong and Singapore. The estimated net costs of abandoning these leased facilities, including remaining lease liabilities offset by estimated sublease income, were based on market information trend analyses provided by a commercial real estate brokerage firm retained by the Company.

In the quarter ended June 30, 2003, the Company revised its original estimates and expectations for its corporate headquarters and field offices disposition efforts. This revision was a result of changed estimates of sublease commencement dates and rental rate projections to reflect continued declines in market conditions in the commercial real estate market in Northern California. Based on these factors and consultation with an independent appraisal firm retained by the Company, an additional charge to lease abandonment costs of $5.4 million was recorded in the quarter ended June 30, 2003.

As of June 30, 2003, $51.5 million of lease abandonment costs, net of anticipated sublease income of $211.3 million, remains accrued and is expected to be utilized by fiscal 2013. Actual sublease payments due to the Company under noncancelable subleases of excess facilities totaled $71.0 million as of June 30, 2003, and the remainder of anticipated sublease income represents management’s best estimates of amounts to be received under future subleases. Actual future cash requirements and lease abandonment costs may differ materially from the accrual at June 30, 2003, particularly if actual sublease income is significantly different from current estimates. These differences could have a material adverse effect on the Company’s operating results and cash

position. For example, as of June 30, 2003, a reduction in assumed market lease rates of $0.25 per square foot per month for the remaining term of the lease, with all other assumptions remaining the same, would increase the estimated lease abandonment loss of the Company’s Sunnyvale, California headquarters by approximately $7.8 million.

Severance and benefits primarily include involuntary termination and health benefits, outplacement costs and payroll taxes.

Estimated Warranty Costs

The Company generally warrants its products to function in accordance with the documentation provided to customers for one year after sale. Minor defect repairs or bug fixes are provided through patches or updates as part of support services delivered in normal course under maintenance agreements. To the extent that warranty claims require resources beyond those provided under maintenance support agreements, the estimated costs of such claims are accrued as cost of sales in the period such claims are deemed probable and reasonably estimable. The table below reflects a summary of activity of the Company’s continuing operations for warranty obligations through June 30, 2003 (in thousands):

Balance at September 30, 2002	$	3,454
Application/reduction of warranty obligations		(1,426	)

Balance at December 31, 2002		2,028
Application/reduction of warranty obligations		(710	)

Balance at March 31, 2003		1,318
Provision/addition of warranty obligations		50

Balance at June 30, 2003	$	1,368

Litigation

IPO Class Action Litigation

Between March 20, 2001 and June 5, 2001, a number of purported shareholder class action complaints were filed in the United States District Court for the Southern District of New York against the Company, certain of its current or former officers and directors and three of the underwriters of its initial public offering. These actions were purported to be brought on behalf of purchasers of the Company’s common stock in the period from June 23, 1999, the date of the Company’s initial public offering, to December 23, 1999 (or in some cases, to December 5 or 6, 2000), and made certain claims under the federal securities laws, including Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”) and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) relating to the Company’s initial public offering.

On June 26, 2001, these actions were consolidated into a single action bearing the titleIn re Ariba, Inc. Securities Litigation, 01 CIV 2359. On August 9, 2001, that consolidated action was further consolidated before a single judge with cases brought against additional issuers (who numbered in excess of 300) and their underwriters that made similar allegations regarding the initial public offerings of those issuers. The latter consolidation was for purposes of pretrial motions and discovery only. On February 14, 2002, the parties signed and filed a stipulation dismissing the consolidated action without prejudice against the Company and certain individual officers and directors, which the Court approved and entered as an order on March 1, 2002. On April 19, 2002, the plaintiffs filed an amended complaint in which they dropped their claims against the Company and the individual officers and directors under Sections 11 and 15 of the Securities Act, but elected to proceed with their claims against such defendants under Sections 10(b) and 20(a) of the Exchange Act.

The amended complaint alleges that the prospectus pursuant to which shares of common stock were sold in the Company’s initial public offering, which was incorporated in a registration statement filed with the SEC,

contained certain false and misleading statements or omissions regarding the practices of the Company’s underwriters with respect to their allocation to their customers of shares of common stock in the Company’s initial public offering and their receipt of commissions from those customers related to such allocations. The complaint further alleges that the underwriters provided positive analyst coverage of the Company after the initial public offering, which had the effect of manipulating the market for the Company’s stock. Plaintiffs contend that such statements and omissions from the prospectus and the alleged market manipulation by the underwriters through the use of analysts caused the Company’s post-initial public offering stock price to be artificially inflated. Plaintiffs seek compensatory damages in unspecified amounts as well as other relief.

On July 15, 2002, the Company and the officer and director defendants, along with other issuers and their related officer and director defendants, filed a joint motion to dismiss based on common issues. On November 23, 2002, during the pendency of the motion to dismiss, the Court entered as an order a stipulation by which all of the individual defendants were dismissed from the case without prejudice in return for executing a tolling agreement. On February 19, 2003, the Court rendered its decision on the motion to dismiss, granting a dismissal of the remaining Section 10(b) claim against the Company without prejudice. Plaintiffs have indicated that they intend to file an amended complaint.

On June 24, 2003, a Special Litigation Committee of the Board of Directors of the Company approved a Memorandum of Understanding (the “MOU”) reflecting a settlement in which the plaintiffs agreed to dismiss the case against the Company with prejudice in return for the assignment by the Company of claims that the Company might have against its underwriters. No payment to the plaintiffs by the Company is required under the MOU. There can be no assurance that the MOU will result in a formal settlement or that the Court will approve the settlement that the MOU sets forth. In the event that the MOU does not result in a formal settlement approved by the Court, the Company intends to defend against these claims vigorously.

Restatement Class Action Litigation

Beginning January 21, 2003, a number of purported shareholder class action complaints were filed in the United States District Court for the Northern District of California against the Company and certain of its current and former officers and directors, all purporting to be brought on behalf of a class of purchasers of the Company’s common stock in the period from January 11, 2000 to January 15, 2003. The complaints bring claims under the federal securities laws, specifically Sections 10(b) and 20(a) of the Exchange Act, relating to the Company’s announcement that the Company would restate certain of its consolidated financial statements, and, in the case of two complaints, relating to the Company’s acquisition activity and related accounting. Specifically, these actions allege that certain of the Company’s prior consolidated financial statements contained false and misleading statements or omissions relating to its failure to properly recognize expenses and other financial items, as reflected in the then proposed restatement. Plaintiffs contend that such statements or omissions caused the Company’s stock price to be artificially inflated. Plaintiffs seek compensatory damages as well as other relief.

In a series of orders issued by the court in February and March, 2003, these cases were deemed related to each other and assigned to a single judge sitting in San Jose. On July 11, 2003, following briefing and a hearing on related motions, the Court entered two orders that together (1) consolidated the related cases for all purposes into a single action captionedIn re Ariba, Inc. Securities Litigation, Case No. C-03-00277 JF, (2) appointed a lead plaintiff, and (3) approved the lead plaintiff’s selection of counsel. The orders further direct the lead plaintiff to file an amended consolidated class action complaint within sixty days of the date of the orders,i.e., on or around September 9, 2003, and direct defendants to file their responses to that complaint on or around November 10, 2003. This case is still in its early stages. The Company intends to defend against these claims vigorously.

Shareholder Derivative Litigation

Beginning January 27, 2003, several shareholder derivative actions were filed in the Superior Court of California for the County of Santa Clara against certain of the Company’s current and former officers and

directors and against the Company as nominal defendant. These actions were filed by shareholders purporting to assert, on behalf of the Company, claims for breach of fiduciary duties, aiding and abetting, violations of the California insider trading law, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and contribution and indemnification. Specifically, the claims were based on the Company’s acquisition activity and related accounting implemented by the defendants, the alleged understatement of compensation expenses as reflected in the Company’s then proposed restatement, the alleged insider trading by certain defendants, the existence of the restatement class action litigation, in which the Company is alleged to be liable to defrauded investors, and the allegedly excessive compensation paid by the Company to one of its officers, as reflected in the Company’s then proposed restatement. The complaints sought the payment by the defendants to the Company of damages allegedly suffered by the Company, as well as other relief.

These actions were assigned to a single judge sitting in San Jose. On May 7, 2003 following briefing and hearing on related motions, the court issued an order that (1) consolidated the cases for all purposes into a single action captionedIn re Ariba, Inc. Shareholder Derivative Litigation, Lead Case No. CV 814325, and (2) appointed lead plaintiffs’ counsel. Pursuant to that order, plaintiffs filed an amended consolidated derivative complaint on May 28, 2003. The amended consolidated complaint restates the allegations, causes of action and relief sought as pleaded in the original complaints, and adds allegations relating to the Company’s April 10, 2003 announcement of the restatement of certain financial statements and also adds a cause of action for breach of contract. Defendants’ responses to the amended consolidated complaint are currently due on August 13, 2003. This case is still in its early stages.

On March 7 and March 21, 2003, respectively, two shareholder derivative actions were filed in the United States District Court for the Northern District of California against certain of the Company’s current and former officers and directors and against the Company as nominal defendant. These actions were filed by shareholders purporting to assert, on behalf of the Company, claims for violations of the Sarbanes-Oxley Act, violations of the California insider trading law, breach of fiduciary duties, misappropriation of information, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. Specifically, the claims were based on the Company’s announcements that it intended to and/or had restated certain financial statements and on alleged insider trading by certain defendants. The complaints sought the payment by the defendants to the Company of damages allegedly suffered by the Company, as well as other relief.

By orders issued by the court on May 27 and June 23, 2003, these two derivative cases were deemed related to each other and to the securities class actions pending before the same court as now consolidated intoIn re Ariba, Inc. Securities Litigation, Case No. C-03-00277 JF, and accordingly these two derivative actions were assigned to the same judge sitting in San Jose assigned to that action. On June 23, 2003, following submission of a related stipulation of the parties, the Court issued an order that (1) consolidated the two derivative cases for all purposes into a single action captionedIn re Ariba, Inc. Derivative Litigation, Case No. C-03-02172 JF, and (2) appointed lead plaintiffs’ counsel. In accordance with that order, plaintiffs filed an amended consolidated derivative complaint on June 26, 2003. The amended consolidated complaint restates the allegations, causes of action and relief sought as pleaded in the original complaints. Defendants’ responses to the amended consolidated complaint are currently due in September, 2003. This case is still in its early stages.

General

The Company is also subject to various claims and legal actions arising in the ordinary course of business. For example, on December 28, 2001, BCE Emergis, Inc., a distributor in Canada of certain of the Company’s products, filed a lawsuit against the Company in the United States District Court for the Northern District of California (No. 01-21221 PVT). Plaintiff seeks approximately thirty million dollars in alleged damages based on claims of breach of contract and promissory fraud/fraudulent concealment. Plaintiff alleges that the Company breached the Strategic Alliance Master Agreement between the parties and committed fraud in connection with its failure to provide specified software. The Company has counterclaimed against BCE Emergis. After a series of pleadings, Court rulings and a mediation, the matter has not yet been resolved. A previously set trial date has

been vacated by the Court due to an ongoing discovery dispute that is now before the Ninth Circuit Court of Appeals. The Court has ordered a second mediation, which has been scheduled for August 29, 2003, and no trial is currently scheduled. Although litigation is inherently uncertain, the Company believes that it has meritorious defenses to all claims in the lawsuit. The Company has accrued for estimable and probable losses in its condensed consolidated financial statements for those matters where it believes that the likelihood that a loss has occurred is probable and the amount of loss is reasonably estimable. There can be no assurance that existing or future litigation arising in the ordinary course of business or otherwise will not have a material adverse effect on the Company’s business, results of operations or financial condition or that the amount of accrued losses is sufficient for any actual losses that may be incurred.

Indemnification

The Company sells software licenses and services to its customers under contracts which the Company refers to as Software License and Service Agreements (each an “SLSA”). Each SLSA contains the relevant terms of the contractual arrangement with the customer, and generally includes certain provisions for indemnifying the customer against losses, expenses, and liabilities from damages that may be incurred by or awarded against the customer in the event the Company’s software or services are found to infringe upon a patent, copyright, trade secret, trademark, or other proprietary right of a third party. The SLSA generally limits the scope of remedies for such indemnification obligations in a variety of industry-standard respects, including but not limited to certain product usage limitations and geography-based scope limitations and a right to replace an infringing product or modify it to make it non-infringing. If the Company cannot address the infringement by replacing the product or services, or modifying the product or services, the Company is allowed to cancel the license or services and return the fees paid by the customer. The Company requires its employees to sign a proprietary information and inventions assignment agreement, which assigns the rights in its employees’ development work to the Company.

To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions and no material claims are outstanding as of June 30, 2003. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the SLSA, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. There can be no assurance that potential future payments will not have a material adverse effect on the Company’s business, results of operations or financial condition.

Note 5—Minority Interests in Subsidiaries

As of June 30, 2003, minority interests of approximately $17.8 million are recorded on the condensed consolidated balance sheet in order to reflect the share of the net assets of Nihon Ariba K.K. and Ariba Korea, Ltd. held by minority investors. In addition, the Company recognized approximately $858,000 and $246,000 as an increase to other loss for the minority interests’ share in the net income of these majority-owned subsidiaries for the quarters ended June 30, 2003 and 2002, respectively. For the nine month periods ended June 30, 2003 and 2002, the Company recognized approximately $2.3 million and $(535,000) as an increase (decrease) to other loss for the minority interests’ share in the net income (loss) of these majority-owned subsidiaries, respectively.

Note 6—Segment Information

The Company follows SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company has one operating segment, enterprise spend management solutions. The Company markets its products in the United States and in foreign countries through its direct sales force and indirect distribution channels. The Company’s chief operating decision maker evaluates resource allocation decisions and the

performance of the Company based upon revenue recorded in geographic regions and does not receive financial information about expense allocations on a disaggregated basis.

Information regarding revenue for the three and nine month periods ended June 30, 2003 and 2002 and long-lived assets in geographic areas as of June 30, 2003 and September 30, 2002, is as follows (in thousands):

	Three Months Ended June 30,				Nine Months Ended June 30,
	2003		2002		2003		2002
Revenues:
United States	$	38,359	$	41,491	$	120,140	$	118,211
Japan		6,083		6,499		19,890		17,969
Other international		12,121		10,832		37,536		34,746

Total	$	56,563	$	58,822	$	177,566	$	170,926

	June 30, 2003		September 30, 2002
Long-Lived Assets:
United States	$	201,261	$	322,017
International		3,670		2,156

Total	$	204,931	$	324,173

Approximately 10% of total revenues for each of the three and nine month periods ended June 30, 2003 and approximately 7% and 8% of total revenues for the three and nine month periods ended June 30, 2002, respectively, were from entities affiliated with Softbank, a related party. See Note 9 of Notes to Condensed Consolidated Financial Statements for additional information. Revenues are attributed to countries based on the location of the Company’s customers. The Company’s other international revenues were derived from sales in Europe, Canada, Asia, Australia and Latin America. The Company had net liabilities of $14.5 million and $67.9 million related to its international locations as of June 30, 2003 and September 30, 2002, respectively.

Note 7—Stockholders’ Equity

Common Stock Repurchase Program

On October 22, 2002, the Company announced that its Board of Directors authorized the repurchase of up to $50 million of its currently outstanding common stock to reduce the dilutive effect of its stock option and stock purchase plans. Stock purchases under the common stock repurchase program are expected to be made periodically in the open market based on market conditions. To date there have been no stock repurchases under this program.

Warrants

In March 2000, in connection with a sales and marketing alliance agreement with a third party, the Company issued an unvested warrant to purchase up to 3,428,572 shares of the Company’s common stock at an exercise price of $87.50 per share. Of the total shares underlying the warrant, 2,700,000 shares have expired unexercised and 728,572 shares remain unvested as of June 30, 2003. These unvested shares, if they remain unvested, will expire on a quarterly basis through March 2005. The business partner can partially vest in this warrant each quarter upon attainment of certain periodic milestones related to revenue targets. The warrant generally expires as to any earned or earnable portion when the milestone period expires or eighteen months after the specific milestone is met. The warrant can be earned over an approximately five-year period. Since the quarter ended March 31, 2001, the business partner has not vested in any shares of this warrant and accordingly, no business partner warrant expense has been recorded since that period. No amounts related to the unvested warrants are reflected in the accompanying condensed consolidated financial statements.

Deferred stock-based compensation

The Company recorded deferred stock-based compensation totaling approximately $263.7 million from inception through June 30, 2003. Of this amount, $38.4 million related to the issuance of stock options prior to the Company’s initial public offering in June 1999, and $71.0 million and $124.6 million related to the acquisitions of TradingDynamics, Inc. and SupplierMarket.com, Inc., respectively, in fiscal year 2000. These amounts are amortized in accordance with Financial Accounting Standards Board Interpretation No. 28 (FIN 28),Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans over the vesting period of the individual options and restricted common stock, generally between two to five years.

During fiscal year 2000, certain individuals received stock options from companies acquired by the Company shortly before such acquisitions. The total intrinsic value and fair value for the options granted was $71.0 million and $40.5 million, respectively. The intrinsic value of these options was recorded as deferred stock-based compensation and is being amortized over the four year vesting period using an accelerated method consistent with FIN 28. The compensation charge recorded for these options was zero and $284,000 for the quarters ended June 30, 2003 and 2002, respectively. In addition, certain consultants to these companies received options that vested based on providing services to the Company. The compensation charge recorded for these options was zero for each of the quarters ended June 30, 2003 and 2002.

For the quarters ended June 30, 2003 and 2002, the Company recorded $364,000 and $3.3 million of stock-based compensation, respectively. For the nine month periods ended June 30, 2003 and 2002, the Company recorded $1.8 million and $11.8 million of stock-based compensation, respectively. As of June 30, 2003, the Company had an aggregate of approximately $327,000 of deferred stock-based compensation remaining to be amortized.

Comprehensive loss

SFAS No. 130,Reporting Comprehensive Income,establishes standards of reporting and display of comprehensive income and its components of net income and other comprehensive income. Other comprehensive income refers to revenues, expenses, gains and losses that are not included in net income but rather are recorded directly in stockholders’ equity. The components of comprehensive loss for the quarters ended June 30, 2003 and 2002 are as follows (in thousands):

	Three Months Ended June 30,						Nine Months Ended June 30,
	2003			2002			2003			2002
Net loss	$	(3,447	)	$	(198,744	)	$	(113,692	)	$	(505,396	)
Unrealized loss on securities		51			780			(331	)		(1,057	)
Foreign currency translation adjustments		290			3,567			719			205

Comprehensive loss	$	(3,106	)	$	(194,397	)	$	(113,304	)	$	(506,248	)

The income tax effects related to unrealized losses on securities and foreign currency translation adjustments are not considered material.

The components of accumulated other comprehensive loss as of June 30, 2003 and September 30, 2002 are as follows (in thousands):

	June 30, 2003			September 30, 2002
Unrealized gain on securities	$	1,571		$	1,902
Foreign currency translation adjustments		(2,595	)		(3,314	)

Accumulated other comprehensive loss	$	(1,024	)	$	(1,412	)

Note 8—Net Loss Per Share

The following table presents the calculation of basic and diluted net loss per common share (in thousands, except per share data):

	Three Months Ended June 30,						Nine Months Ended June 30,
	2003			2002			2003			2002
Net loss	$	(3,447	)	$	(198,744	)	$	(113,692	)	$	(505,396	)

Weighted-average common shares outstanding		268,078			264,446			267,089			263,368
Less: Weighted-average common shares subject to repurchase		(1,076	)		(4,266	)		(1,655	)		(5,184	)

Weighted-average common shares used in computing basic and diluted net loss per common share		267,002			260,180			265,434			258,184

Basic and diluted net loss per common share	$	(0.01	)	$	(0.76	)	$	(0.43	)	$	(1.96	)

At June 30, 2003 and 2002, approximately 48.9 million and 48.7 million potential common shares, respectively, are excluded from the determination of diluted net loss per share, as the effect of such shares is anti-dilutive. Of these, 728,572 shares and 2,446,246 shares at June 30, 2003 and 2002, respectively, would be issuable under certain warrants contingent upon completion of certain revenue milestones.

The weighted-average exercise price of stock options outstanding as of June 30, 2003 and 2002 was $3.47 and $3.96, respectively. The weighted average repurchase price of unvested stock outstanding as of June 30, 2003 and 2002 was $0.00 and $0.14, respectively. The weighted average exercise price of warrants outstanding at each of June 30, 2003 and 2002 was $87.50.

Note 9—Related Party Transactions

In the first and third quarters of fiscal 2001, the Company sold approximately 41% of its consolidated subsidiary, Nihon Ariba K.K., and approximately 42% of its consolidated subsidiary, Ariba Korea, Ltd., respectively, to Softbank Corp., a Japanese corporation and its subsidiaries (collectively, “Softbank”). An affiliate of Softbank also received the right to distribute Ariba products from these subsidiaries in their respective jurisdictions. Related to transactions with Softbank, the Company recorded revenue of $5.8 million and $4.3 million for the quarters ended June 30, 2003 and 2002, respectively, and $17.8 million and $13.5 million for the nine month periods ended June 30, 2003 and 2002, respectively, pursuant to a long-term revenue commitment. See Note 4 of Notes to Condensed Consolidated Financial Statements for additional information.

During fiscal year 2001, Keith Krach, the Company’s chairman and co-founder, was deemed to have contributed $4.0 million to the Company in connection with a loan of $4.0 million in cash by an entity controlled by him to Robert Calderoni in connection with his hiring as the Company’s chief financial officer. Because the Company is not the beneficiary of the loan and would not receive any cash upon repayment of the loan, the Company recorded the principal amount of this loan as compensation expense in fiscal year 2001. The loan, along with accrued interest, is expected to be forgiven in annual installments over four years, conditioned on Mr. Calderoni’s continued employment with the Company. The Company has entered into an agreement with Mr. Calderoni pursuant to which he is entitled to receive annual cash payments from the Company to compensate him for income tax incurred as a result of such forgiveness and payments. As a result, the Company incurs additional compensation expense of approximately $300,000 per quarter related to this tax reimbursement agreement.

The Company entered into an agreement with an executive officer in October 2001 which provides for an unsecured loan from the Company in the amount of $1,500,000. The principal amount of the loan becomes

payable in full immediately after the individual’s employment with the Company terminates for any reason other than a termination by the Company without cause. Further, the agreement provides that the loan will be forgiven over three years based on continued service. The Company entered into an agreement with another executive officer in April 2002 which provides for two unsecured loans from the Company, the first in the amount of $600,000 and the second in the amount of $400,000. The principal amount of the loans becomes immediately payable in full if the individual’s employment with the Company terminates. The agreement provides that the principal amounts will be forgiven over three years based on continued service. The Company recorded the principal amounts of these loans as operating expense in fiscal year 2002 based upon its assessment that recoverability of the loans in the event of the employees’ termination prior to the expiration of the related forgiveness periods was remote.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, words such as “may”, “will”, “should”, “estimates”, “predicts”, “potential”, “continue”, “strategy”, “believes”, “anticipates”, “plans”, “expects”, “intends”, and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statement. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed under the heading “Risk Factors” and the risks discussed in our other Securities and Exchange Commission (“SEC”) filings, including our Annual Report on Form 10-K as filed with the SEC on April 10, 2003.

Recent Event

As a result of a review we initiated in December 2002, we have restated our consolidated financial statements for the fiscal years ended September 30, 2000 and 2001 and for the quarters ended December 31, 1999 through June 30, 2002. We have also adjusted the consolidated financial statement information for the quarter and fiscal year ended September 30, 2002 originally announced on October 23, 2002 and for the quarter ended December 31, 2002 originally announced on January 23, 2003. Ariba’s condensed consolidated statements of operations for the three and nine month periods ended June 30, 2002 have been restated as discussed in our Annual Report on Form 10-K for the year ended September 30, 2002 as filed on April 10, 2003 and our Quarterly Report on Form 10-Q/A for the three months ended June 30, 2002 as filed on April 11, 2003.

Overview

Ariba (referred to herein as “Ariba” or “we”) provides Enterprise Spend Management solutions that allow enterprises to manage efficiently the purchasing of all non-payroll goods and services required to run their business. We refer to these non-payroll expenses associated with running a business as “spend.” Our solutions, which include software applications, services and network access, are designed to provide corporations with technology and business process improvements to better manage their corporate spending and, in turn, save money. Our software applications and services streamline and improve the business processes related to the identification of suppliers of goods and services, the negotiation of the terms of purchases, and ultimately the management of ongoing purchasing and settlement activities. These goods and services include commodities, raw materials, operating resources, services, temporary labor, travel, and maintenance, repair and operations equipment.

Our software applications were built to leverage the Internet and provide enterprises with real-time access to their business data and their business partners. We have built the Ariba Spend Management solutions to integrate seamlessly on all major platforms. Our software applications can be accessed via web browser.

Ariba Spend Management applications fall into three solution sets, each designed to address a business process related to corporate spending. The Ariba Analysis Solution provides strategic planning and analysis capabilities that leverage historical spending patterns. The Ariba Sourcing Solution enables the sourcing, negotiation and creation of contracts for products and services. Finally, the Ariba Procurement Solution enables contract compliance for the purchase of goods and services and manages purchasing workflow on an ongoing basis. The Ariba Procurement Solution, which includes our flagship product Ariba Buyer, continues to represent a majority of our current business, which is focused on managing unplanned spend.

Ariba Spend Management solutions integrate with and leverage the Ariba Supplier Network. The Ariba Supplier Network (ASN) is a scalable Internet infrastructure that connects our customers with their business partners and suppliers to exchange product and service information as well as a broad range of business documents such as purchase orders and invoices. Over 50,000 suppliers of a wide array of goods and services are connected to the Ariba Supplier Network. As a result, our customers can connect once to the Ariba Supplier Network and access many suppliers simultaneously.

In addition to application software, Ariba Spend Management solutions include implementation and consulting services, education and training, and access to the Ariba Supplier Network. All of these additional offerings are designed to improve the return on investment our customers receive through the use of our software applications.

We were incorporated in Delaware in September 1996 and from that date through March 1997 were in the development stage, conducting research and developing our initial products. In March 1997, we began selling our products and related services and currently market them in North America, Europe, the Middle East, Asia, Australia and Latin America primarily through our direct sales force and indirect sales channels.

We have incurred significant losses since inception. As of June 30, 2003, we had an accumulated deficit of approximately $4.3 billion, including cumulative charges for the amortization of goodwill and other intangible assets totaling $2.3 billion, impairment of goodwill and other intangible assets totaling $1.4 billion, business partner warrant expense totaling $68.9 million, of which $9.0 million has been reclassified as a reduction of revenues due to our adoption of EITF No. 01-9, and amortization of stock-based compensation totaling $134.9 million.

Our operating expenses include amortization of goodwill and other intangible assets that we recorded in connection with our fiscal year 2000 acquisitions of TradingDynamics, Tradex and SupplierMarket and an intellectual property agreement with a third party. During the year ended September 30, 2000, we also had a charge related to the purchase of in-process research and development related to these acquisitions. During the year ended September 30, 2001, we recorded a $1.4 billion impairment charge relating to goodwill and other intangible assets acquired in the Tradex acquisition as a result of an impairment assessment of goodwill and identifiable assets recorded in connection with the acquisitions of TradingDynamics, Tradex and SupplierMarket.

On January 28, 2003, we acquired privately-held Goodex AG (“Goodex”), a European sourcing services provider. The acquisition was accounted for using the purchase method of accounting and accordingly, the purchase price of $3.3 million was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date with the remainder allocated to goodwill.

As a result of our adoption of SFAS No. 142 on October 1, 2002 we ceased amortization of the remaining goodwill that had a net book value of approximately $176.4 million as of October 1, 2002. As of June 30, 2003, we had unamortized goodwill and other intangible assets of approximately $181.2 million which includes $4.8 million of goodwill related to the recently completed Goodex acquisition. Other intangible assets have been amortized on a straight-line basis over their total expected useful lives ranging from two to three years. Other identifiable intangible assets which include covenants not-to-compete, core technology and an intellectual property agreement were fully amortized as of March 31, 2003. See Note 2 of Notes to Condensed Consolidated Financial Statements for more detailed information.

In connection with certain stock options granted to our employees, stock options issued pursuant to the TradingDynamics and SupplierMarket acquisitions and restricted common stock issued to certain senior executives, officers and employees, we recorded deferred stock-based compensation totaling approximately $263.7 million from inception through June 30, 2003. Of this amount, we recorded $71.0 million and $124.6 million related to the acquisitions of TradingDynamics and SupplierMarket, respectively, in fiscal year 2000. Deferred stock-based compensation is included as a component of stockholders’ equity and is being amortized by charges to operations over the vesting period of the options and restricted stock. During the quarter ended June 30, 2003, we recorded $364,000 of related stock-based compensation amortization expense. As of June 30, 2003, we have approximately $327,000 of deferred stock-based compensation remaining to be amortized. The amortization of the remaining deferred stock-based compensation is expected to result in additional charges to operations through fiscal year 2007. The amortization of stock-based compensation is presented as a separate component of operating expenses in our Condensed Consolidated Statements of Operations. See Note 7 of Notes to Condensed Consolidated Financial Statements for more detailed information.

During fiscal year 2001, we initiated a restructuring program to align our expense and revenue levels and to better position us for growth and profitability. In addition, we implemented a further reduction of our worldwide workforce during the quarter ended December 31, 2001 and recorded an additional restructuring charge in the quarter ended June 30, 2002 related to our abandonment of certain operating leases as part of our program to restructure our operations and related facilities. In the quarter ended June 30, 2003, we revised our original estimates and expectations for our corporate headquarters and field offices disposition efforts. This revision was a result of changed estimates of sublease commencement dates and rental rate projections to reflect continued declines in market conditions in the commercial real estate market in Northern California. Based on these factors and consultation with an independent appraisal firm retained by us, we recorded an additional charge to lease abandonment costs of $5.4 million in the quarter ended June 30, 2003. See Note 4 of Notes to Condensed Consolidated Financial Statements for more detailed information.

Our recent restructurings have placed significant demands on our management and operational resources. To position our company for future growth, we must continue to invest in and implement scalable operational systems, procedures and controls. We must also be able to recruit and retain qualified employees and expect any future expansion to continue to challenge our ability to hire, train, manage and retain our employees. As of June 30, 2003, we had 854 full-time employees.

The market for our solutions is intensely competitive, evolving and subject to rapid technological change. The intensity of competition has increased and is expected to further increase in the future. This increased competition has resulted in price pressure and could result in reduced gross margins and loss of market share, either of which could seriously harm our business. Competitors vary in size and in the scope and breadth of the products and services offered. We compete with several major client server enterprise software companies, including SAP, Oracle and PeopleSoft. In the area of sourcing solutions specifically, we compete with services companies such as FreeMarkets, as well as other small software companies such as b2emarkets, eBreviate, Emptoris and Frictionless Commerce, among others. In addition, because spend management is a relatively new software category, we expect additional competition from other established and emerging companies, if this market continues to develop and expand.

To maintain and grow our current revenue level, we must grow our customer base, develop our products and services, and adapt to current information technology purchasing patterns. However, if we continue to sell an increasing percentage of our newer lower priced products, our average selling prices may decline. We intend to continue to invest in sales, marketing, research and development and, to a lesser extent, support infrastructure. As a result, we may incur substantial losses in the future.

Our limited operating history makes the prediction of future operating results very difficult. We believe that period-to-period comparisons of operating results should not be relied upon as predictive of future performance. Our operating results are expected to vary significantly from quarter to quarter and are difficult or impossible to

predict. We believe that our success in fiscal year 2003 will depend particularly upon our ability to effectively market our Enterprise Spend Management solutions and maintain tight control over expenses and cash. We believe that key risks include our market execution in Europe, the status of our relationship with Softbank, the overall level of information technology spending and the potential adverse impact resulting from the restatement of our consolidated financial statements and related inquiries and legal proceedings. Our prospects must also be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly given that we operate in new and rapidly evolving markets, have completed several acquisitions and face an uncertain economic environment. We may not be successful in addressing such risks and difficulties. Please refer to the “Risk Factors” section for additional information.

Application of Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Accounting policies, methods and estimates are an integral part of the preparation of consolidated financial statements in accordance with GAAP and, in part, are based upon management’s current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly sensitive because of their significance to the consolidated financial statements and because of the possibility that future events affecting them may differ markedly from management’s current judgments. While there are a number of accounting policies, methods and estimates affecting our consolidated financial statements, areas that are particularly significant include revenue recognition policies, the assessment of recoverability of goodwill and other intangible assets, restructuring liabilities related to abandoned operating leases and contingencies related to the collectibility of accounts receivable and pending litigation. These critical accounting policies and estimates, their related disclosures and other accounting policies, methods and estimates have been reviewed by our senior management and audit committee. These policies and our practices related to these policies are described below and in Note 1 of Notes to the Condensed Consolidated Financial Statements.

Revenue recognition

Our revenues are principally derived from licenses of our products, from maintenance and support contracts and from the delivery of implementation, consulting and training services. Our products are licensed under a perpetual license model or under a time-based license model. Access to the Ariba Supplier Network is available to Ariba customers as part of their maintenance agreements for certain products.

We recognize revenue in accordance with Statement of Position (SOP) 97-2,Software Revenue Recognition, as amended. We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery of the product has occurred; we have no significant obligations with regard to implementation; the fee is fixed and determinable; and collectibility is probable. We consider all arrangements with payment terms extending beyond one year to not be fixed and determinable, and revenue is recognized as payments become due from the customer. If, at the inception of the arrangement, collectibility is not considered probable, revenue is not recognized until the fee is collected.

SOP 97-2, as amended, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. Revenue recognized from multiple-element arrangements is allocated to undelivered elements of the arrangement, such as maintenance and support services and professional services, based on the relative fair values of the elements specific to us. Our determination of the fair value of each element in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). We limit our assessment of VSOE for each element to either the price charged when the same element is sold separately or the price established by management, having the relevant authority to do so, for an element not yet sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.

Arrangements that include consulting services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When services are not considered essential, the revenue allocable to the services is recognized separately from the software, provided that VSOE of fair value exists for the services. If we provide consulting services that are considered essential to the functionality of the software products, both the software product revenue and service revenue are recognized using contract accounting in accordance with the provisions of SOP 81-1,Accounting for Performance of Construction-Type and Certain Production-Type Contracts.

We frequently enter into contracts where we recognize only a portion of the total revenue under the contract in the quarter in which we enter into the contract. For example, we may recognize revenue on a ratable basis over the life of the contract or enter into contracts where the recognition of revenue is conditioned upon delivery of future product or service elements. The portion of revenues recognized on a deferred basis may vary significantly in any given quarter, and revenues in any given quarter are a function of both contracts signed in such quarter and contracts signed in prior quarters. For example, the portion of revenues recognized from contracts entered into in prior quarters generally declined in fiscal year 2000 and increased in fiscal year 2001. Since then, the portion of revenues recognized from contracts entered into in prior quarters has remained relatively stable and has represented at least a majority of the revenues recognized each quarter. See Note 1 of Notes to Condensed Consolidated Financial Statements for detailed discussion of our revenue recognition policies.

Allowance for doubtful accounts receivable

We maintain an allowance for doubtful accounts at an amount we estimate to be sufficient to provide for actual losses resulting from collecting less than full payment on our receivables. A considerable amount of judgment is required when we assess the realizability of receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts might be required. Alternatively, if the financial condition of our customers were to improve such that their ability to make payments was no longer considered impaired, we would reduce related estimated reserves with a credit to the provision for doubtful accounts.

Recoverability of goodwill and other intangible assets

Management is required to regularly review all of its long-lived assets, including goodwill and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, and decreases in our market capitalization below net book value. When management determines that an impairment review is necessary based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate commensurate with the risk inherent in our current business model. Significant judgment is required in the development of projected cash flows for these purposes including assumptions regarding the appropriate level of aggregation of cash flows, their term and discount rate as well as the underlying forecasts of expected future revenue and expense. We have recorded significant impairment charges for goodwill and intangible assets in the past, and to the extent that events or circumstances cause our assumptions to change, additional charges may be required which could be material.

Lease abandonment costs

We initially recorded a significant restructuring charge in the third quarter of fiscal year 2001 upon abandoning certain operating leases as part of our program to restructure our operations and related facilities and we recorded an additional charge in the third quarter of fiscal year 2002. In the quarters ended June 30, 2003 and 2002, we revised our estimates and expectations for our corporate headquarters and field offices disposition efforts as a result of changed estimates of sublease commencement dates and rental rate projections to reflect continued declines in market conditions in the commercial real estate market in Northern California. Lease abandonment costs for the abandoned facilities were estimated to include the impairment of leasehold improvements, remaining lease liabilities and brokerage fees offset by estimated sublease income. Estimates related to sublease costs and income are based on assumptions regarding the period required to locate and contract with suitable sub-lessees and sublease rates which were achieved using market trend information analyses provided by a commercial real estate brokerage firm retained by us. Each reporting period we review these estimates, and to the extent that our assumptions change, the ultimate restructuring expenses for these abandoned facilities could vary significantly from current estimates. For example, as of June 30, 2003, a reduction in assumed market lease rates of $0.25 per square foot per month for the remaining term of the lease, with all other assumptions remaining the same, would increase the estimated lease abandonment loss of our Sunnyvale, California headquarters by approximately $7.8 million.

Legal contingencies

We are subject to various claims and legal actions. We have accrued for estimated losses in the accompanying condensed consolidated financial statements for those matters where we believe that the likelihood that a loss has occurred is probable and the amount of loss is reasonably estimable. Although we currently believe that we have adequately accrued for estimable and probable losses regarding the outcome of outstanding legal proceedings, claims and litigation involving us, litigation is inherently uncertain, and there can be no assurance that existing or future litigation will not have a material adverse effect on our business, results of operations or financial condition or that the current amount of accrued losses is sufficient for any actual losses that may be incurred.

Results of Operations

The following table sets forth statements of operations data for the periods indicated (in thousands, except per share data). The data has been derived from the unaudited Condensed Consolidated Financial Statements contained in this Form 10-Q which, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for the interim periods presented. The operating results for any period should not be considered indicative of results for any future period. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Form 10-K for the fiscal year ended September 30, 2002 filed with the SEC on April 10, 2003.

	Three Months Ended June 30,						Nine Months Ended June 30,
	2003			2002			2003			2002
Revenues:
License	$	21,288		$	26,915		$	79,486		$	75,213
Maintenance and service		35,275			31,907			98,080			95,713

Total revenues		56,563			58,822			177,566			170,926

Cost of revenues:
License		1,784			538			3,663			2,710
Maintenance and service (exclusive of stock-based compensation expense (benefit) of $(42) and $734 for the three months ended June 30, 2003 and 2002, respectively, and $(751) and $2,551 for the nine months ended June 30, 2003 and 2002, respectively)		11,889			11,024			33,942			31,089

Total cost of revenues		13,673			11,562			37,605			33,799

Gross profit		42,890			47,260			139,961			137,127

Operating expenses:
Sales and marketing (exclusive of stock-based compensation expense of $239 and $1,247 for the three months ended June 30, 2003 and 2002, respectively, and $1,446 and $3,250 for the nine months ended June 30, 2003 and 2002, respectively, and exclusive of business partner warrant expense of zero for each of the three month periods ended June 30, 2003 and 2002, and zero and $5,562 for the nine months ended June 30, 2003 and 2002, respectively)		19,199			19,544			60,320			66,881
Research and development (exclusive of stock-based compensation expense (benefit) of $26 and $(34) for the three months ended June 30, 2003 and 2002, respectively, and $258 and $(203) for the nine months ended June 30, 2003 and 2002, respectively)		13,123			16,726			40,955			48,577
General and administrative (exclusive of stock-based compensation expense of $141 and $1,378 for the three months ended June 30, 2003 and 2002, respectively, and $883 and $6,181 for the nine months ended June 30, 2003 and 2002, respectively)		8,745			8,842			29,578			26,491
Amortization of goodwill and other intangible assets		—			141,291			117,464			424,509
Business partner warrants, net		—			—			—			5,562
Stock-based compensation		364			3,325			1,836			11,779
Restructuring and lease abandonment costs		5,350			57,125			5,350			62,609

Total operating expenses		46,781			246,853			255,503			646,408

Loss from operations		(3,891	)		(199,593	)		(115,542	)		(509,281	)
Interest income		1,163			1,801			4,105			6,257
Interest expense		(74	)		(7	)		(87	)		(34	)
Other income		97			301			494			122

Net loss before income taxes and minority interests		(2,705	)		(197,498	)		(111,030	)		(502,936	)
Provision (benefit) for income taxes		(116	)		1,000			327			2,995
Minority interests in net income (loss) of consolidated subsidiaries		858			246			2,335			(535	)

Net loss	$	(3,447	)	$	(198,744	)	$	(113,692	)	$	(505,396	)

Net loss per share—basic and diluted	$	(0.01	)	$	(0.76	)	$	(0.43	)	$	(1.96	)

Weighted average shares used in computing net loss per share—basic and diluted		267,002			260,180			265,434			258,184

Comparison of the Three and Nine Month Periods Ended June 30, 2003 and 2002

Revenues

License

License revenues for the quarter ended June 30, 2003 were $21.3 million, a 21% decrease from license revenues of $26.9 million for the quarter ended June 30, 2002. This decrease is attributable to a reduced number of license sales during the three months ended June 30, 2003 reflecting the continued sluggish information technology spending and lower revenues from prior quarter license transactions. License revenues for the nine months ended June 30, 2003 were $79.5 million, a 6% increase over license revenues of $75.2 million for the nine months ended June 30, 2002. This increase is primarily attributable to an expansion of our customer base in our domestic operations, new product introductions and enhancements and the timing of revenue recognition of certain large contracts during the first half of fiscal 2003. Additionally, the increase for the nine months ended June 30, 2003 is also attributable to revenue from Softbank as discussed below. We anticipate that license revenues for the quarter ending September 30, 2003 will be flat or down compared to the quarter ended June 30, 2003. In addition, we have experienced and expect to continue to experience declines in deferred revenue that may adversely impact revenues over the long term.

We recognized license revenues of $4.7 million and $3.5 million for the quarters ended June 30, 2003 and 2002, respectively, and $14.5 million and $10.7 million for the nine months ended June 30, 2003 and 2002, respectively, from Softbank, a related party, pursuant to a long-term revenue commitment. These amounts represent 22% and 13% of license revenues for the quarters ended June 30, 2003 and 2002, respectively, and 18% and 14% of license revenues for the nine months ended June 30, 2003 and 2002, respectively. Revenues under our agreement with Softbank are recognized based on the lower of cumulative ratable subscription revenue or cumulative cash received. We have in the past extended the time period over which Softbank must provide committed levels of revenue, thereby reducing their quarterly revenue commitments. Softbank has not been in compliance with the performance levels contemplated by our strategic relationship, and in June 2003 we submitted the matter for arbitration. See the Risk Factor herein entitled “Our Dispute with Softbank May Adversely Impact Our Business” for additional information. There is no assurance that we can achieve a mutually satisfactory resolution of our dispute with Softbank. The failure to realize future revenues from Softbank at committed levels could have an material adverse impact on our business.

Maintenance and service

Maintenance and service revenues for the quarter ended June 30, 2003 were $35.3 million, an 11% increase over maintenance and service revenues of $31.9 million for the quarter ended June 30, 2002. Maintenance and service revenues for the nine months ended June 30, 2003 were $98.1 million, a 3% increase over maintenance and service revenues of $95.7 million for the nine months ended June 30, 2002. Maintenance revenues remained relatively stable and these increases principally relate to increases in consulting revenues including revenues related to completion of certain large implementation projects during the third quarter of fiscal 2003.

Cost of Revenues

License

Cost of license revenues for the quarter ended June 30, 2003 was $1.8 million, a 232% increase over cost of license revenues of $538,000 for the quarter ended June 30, 2002. Cost of license revenues for the nine months ended June 30, 2003 was $3.7 million, a 35% increase over cost of license revenues of $2.7 million for the nine months ended June 30, 2002. The increases are primarily related to an increase in royalties payable to third parties for integrated technology and for the quarter ended June 30, 2003, increases in co-sell and reseller fees.

Maintenance and service

Cost of maintenance and service revenues for the quarter ended June 30, 2003 was $11.9 million, an 8% increase over cost of maintenance and service revenues of $11.0 million for the quarter ended June 30, 2002. Cost of maintenance and service revenues for the nine months ended June 30, 2003 was $33.9 million, a 9% increase over cost of maintenance and service revenues of $31.1 million for the nine months ended June 30, 2002. These increases are primarily attributable to increased headcount in our services organization, offset by reductions in maintenance expense.

Operating Expenses

Sales and marketing

Sales and marketing expenses include costs associated with our sales and marketing personnel and consist primarily of compensation and benefits, commissions and bonuses, promotional and advertising expenses, travel and entertainment expenses related to these personnel and the provision for doubtful accounts. Sales and marketing expenses for the quarter ended June 30, 2003 were $19.2 million, a 2% decrease from sales and marketing expenses of $19.5 million for the quarter ended June 30, 2002. Sales and marketing expenses for the nine months ended June 30, 2003 were $60.3 million, a 10% decrease from sales and marketing expenses of $66.9 million for the nine months ended June 30, 2002. These decreases are primarily attributable to decreases in bonuses and commissions, provision for doubtful accounts, and reduced overhead, partially offset by an increase in compensation and benefits, severance and fees to outside professional service providers. These expenses may increase over the longer term.

Research and development

Research and development expenses include costs associated with the development of new products, enhancements of existing products for which technological feasibility has not been achieved, and quality assurance activities, and primarily include employee compensation and benefits, consulting costs and the cost of software development tools and equipment. Research and development expenses for the quarter ended June 30, 2003 were $13.1 million, a decrease of 22% from research and development expenses of $16.7 million for the quarter ended June 30, 2002. Research and development expenses for the nine months ended June 30, 2003 were $41.0 million, a decrease of 16% from research and development expenses of $48.6 million for the nine months ended June 30, 2002. These decreases are primarily attributable to a reduction in bonuses, fees paid to outside service providers, a decrease in the localization of our software and reduced overhead, offset by an increase in compensation and benefits. To date, all software development costs have been expensed in the period incurred. We believe that continued investment in research and development is critical to attaining our strategic objectives. These expenses may increase over the longer term.

General and administrative

General and administrative expenses consist primarily of compensation and benefits costs for executive, finance and administrative personnel and fees to outside professional service providers. General and administrative expenses for the quarter ended June 30, 2003 were $8.7 million, an increase of 1% over general and administrative expenses of $8.8 million for the quarter ended June 30, 2002. General and administrative expenses for the nine months ended June 30, 2003 were $29.6 million, an increase of 12% over general and administrative expenses of $26.5 million for the nine months ended June 30, 2002. These increases are primarily attributable to increases in fees to outside professional service providers in connection with our recently completed accounting review and increases in other administrative fees, offset by a reduction in bonuses and compensation and benefits. Although we believe the expenses associated with our recently completed internal accounting review are substantially complete, we expect, over the near term and perhaps for much longer, to incur significant fees and expenses relating to our ongoing regulatory and legal proceedings, including litigation relating to the recent restatement of our consolidated financial statements.

Amortization of goodwill and other intangible assets

On January 28, 2003, we acquired privately-held Goodex, a European sourcing services provider. The acquisition was accounted for using the purchase method of accounting and accordingly, the purchase price of $3.3 million was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remainder allocated to goodwill.

In fiscal year 2000, we sold 5,142,858 shares of common stock with a fair market value of $834.4 million to an independent third party in connection with an intellectual property agreement. As part of the sale we received intellectual property and $47.5 million in cash. The intellectual property was valued at the difference between the fair market value of the stock being exchanged and the cash received, which is $786.9 million. This amount is classified within other intangible assets and has been amortized over three years based on the terms of the related intellectual property purchase agreement. The total amortization of the value of this intellectual property was zero and $65.6 million for the quarters ended June 30, 2003 and 2002, respectively.

Amortization of other intangible assets was zero and $117.5 million for the three and nine month periods ended June 30, 2003 and amortization of goodwill and other intangible assets was $141.3 million and $424.5 million for the three and nine month periods ended June 30, 2002, respectively.

As a result of our adoption of SFAS No. 142 on October 1, 2002, we ceased amortization of the remaining goodwill that had a net book value of approximately $176.4 million as of October 1, 2002. As of June 30, 2003, we had unamortized goodwill of approximately $181.2 million, which includes $4.8 million of goodwill related to the recently completed Goodex acquisition. Other intangible assets have been amortized on a straight-line basis over their total expected useful lives ranging from two to three years. These assets, which include covenants not-to-compete, core technology and an intellectual property agreement were fully amortized as of March 31, 2003.

Business partner warrants

In the past, we have issued warrants for the purchase of our common stock to certain business partners which vested either immediately or vested contingently upon the achievement of certain milestones related to targeted revenue. We recognized business partner warrant expenses associated with these warrants totaling zero and $5.6 million for of the three and nine months periods ended June 30, 2002, respectively. There was no expense recorded for business partner warrant expense for the three and nine month periods ended June 30, 2003.

In April 2000, we entered into an agreement with a third party as part of our vertical industry strategy to obtain a major partner in the financial services industry. In connection with the agreement, we issued warrants to purchase up to 6,776,000 shares of our common stock at an exercise price based on the ten-day average of our stock price prior to the vesting date. Upon signing of this agreement, 1,936,000 shares of our common stock with a fair value of $56.2 million were immediately vested. The agreement provided that we would receive $25.0 million in guaranteed gainshare to be paid over a period of two years which we determined to represent payment for the vested warrants rather than revenue. Accordingly, $31.2 million representing the fair value of the vested warrants less the guaranteed gainshare was recorded as an intangible asset related to the strategic relationship to be amortized over the three year term of the agreement. During the third quarter of fiscal year 2001, we determined that the carrying value of the intangible asset was impaired and wrote off the remaining net book value with a $17.7 million charge to business partner warrant expense. The guaranteed gainshare of $25.0 million was recorded as a receivable in “Other Current Assets”. During the quarter ended March 31, 2002, this receivable’s outstanding balance of $20.0 million was settled for $15.0 million cash which was received in April 2002 and the cancellation of the remaining unvested warrants to purchase 4,840,000 shares of our common stock. As a result, we recorded a charge of $5.6 million representing the uncollected receivable and related settlement costs as business partner warrant expense in the quarter ended March 31, 2002.

Stock-based compensation

We have recognized deferred stock-based compensation associated with stock options granted to employees at prices below market value on the date of grant, stock options issued to certain employees in conjunction with the consummation of the TradingDynamics and SupplierMarket acquisitions in fiscal year 2000 and the issuance of restricted shares of common stock to certain senior executives, officers and employees. These amounts are included as a component of stockholders’ equity and are charged to operations over the vesting period of the options or the lapse of restrictions for the restricted stock, consistent with the method described in FIN 28. Stock-based compensation expense is presented as a separate line item in our condensed consolidated statements of operations, net of the effects of reversals related to terminated employees for cancellation of unvested stock options previously amortized to expense (benefit) under FIN 28. For the quarters and nine months ended June 30, 2003 and 2002, stock-based compensation expense (benefit), net of the effects of cancellations, is attributable to various operating expense categories as follows (in thousands):

	Three Months Ended June 30,						Nine Months Ended June 30,
	2003			2002			2003			2002
Cost of revenues	$	(42	)	$	734		$	(751	)	$	2,551
Sales and marketing		239			1,247			1,446			3,250
Research and development		26			(34	)		258			(203	)
General and administrative		141			1,378			883			6,181

Total	$	364		$	3,325		$	1,836		$	11,779

As of June 30, 2003, we had an aggregate of approximately $327,000 of deferred stock-based compensation remaining to be amortized through fiscal year 2007.

Restructuring and lease abandonment costs

In fiscal year 2001, we initiated a restructuring program to conform our expense and revenue levels and to better position us for growth and profitability. As part of the restructuring program, we restructured our worldwide operations including a worldwide reduction in workforce and the consolidation of excess facilities. In addition, we implemented a further reduction of our worldwide workforce during the quarter ended December 31, 2001 totaling $5.7 million and recorded an additional restructuring charge in the quarter ended June 30, 2002, totaling $57.1 million, related to our abandonment of certain operating leases as part of our program to restructure our operations and related facilities. The following table details restructuring activity through June 30, 2003 (in thousands):

	Severance and benefits			Lease abandonment costs			Total
Accrued restructuring costs as of September 30, 2002	$	103		$	61,966		$	62,069
Cash paid		(22	)		(6,794	)		(6,816	)

Accrued restructuring costs as of December 31, 2002		81			55,172			55,253
Cash paid		(8	)		(4,674	)		(4,682	)

Accrued restructuring costs as of March 31, 2003		73			50,498			50,571
Total charge to expense		—			5,350			5,350
Cash paid		(6	)		(4,441	)		(4,447	)

Accrued restructuring costs as of June 30, 2003	$	67		$	51,407			51,474

Less: current portion								13,869

Accrued restructuring costs, less current portion							$	37,605

Lease abandonment costs incurred to date relate to the abandonment for the remaining lease terms of excess leased facilities in Mountain View and Sunnyvale, California, Tampa, Florida, Alpharetta, Georgia, Lisle,

Illinois, Burlington, Massachusetts, Dallas, Texas, Hong Kong and Singapore. The estimated net costs of abandoning these leased facilities, including remaining lease liabilities offset by estimated sublease income, were based on market information trend analyses provided by a commercial real estate brokerage firm retained by us.

In the quarter ended June 30, 2003, we revised our original estimates and expectations for our corporate headquarters and field offices disposition efforts. This revision was a result of changed estimates of sublease commencement dates and rental rate projections to reflect continued declines in market conditions in the commercial real estate market in Northern California. Based on these factors and consultation with an independent appraisal firm retained by us, we recorded an additional charge to lease abandonment costs of $5.4 million was recorded in the quarter ended June 30, 2003.

As of June 30, 2003, $51.5 million of lease abandonment costs, net of anticipated sublease income of $211.3 million, remains accrued and is expected to be utilized by fiscal 2013. Actual sublease payments due to us under noncancelable subleases of excess facilities totaled $71.0 million as of June 30, 2003, and the remainder of anticipated sublease income represents management’s best estimates of amounts to be received under future subleases. Actual future cash requirements and lease abandonment costs may differ materially from the accrual at June 30, 2003, particularly if actual sublease income is significantly different from current estimates. These differences could have a material adverse effect on our operating results and cash position. For example, as of June 30, 2003, a reduction in assumed market lease rates of $0.25 per square foot per month for the remaining term of the lease, with all other assumptions remaining the same, would increase the estimated lease abandonment loss of our Sunnyvale, California headquarters by approximately $7.8 million.

Severance and benefits primarily include involuntary termination and health benefits, outplacement costs and payroll taxes.

Interest income

Interest income for the quarter ended June 30, 2003 was $1.2 million, a decrease of 36% from interest income of $1.8 million for the quarter ended June 30, 2002. Interest income for the nine months ended June 30, 2003 was $4.1 million, a decrease of 34% from interest income of $6.3 million for the nine months ended June 30, 2002. The decrease is primarily attributable to lower invested cash, cash equivalents and investment balances and a decline in interest rates.

Minority interests

In December 2000, our consolidated subsidiary, Nihon Ariba K.K., issued and sold approximately 41% of its common stock for cash consideration of approximately $40.0 million to Softbank and its affiliate. In April 2001, Nihon Ariba K.K. issued and sold an additional 2% of its common stock for cash consideration of approximately $4.0 million to third parties. Prior to the transactions, we held 100% of the equity of Nihon Ariba K.K. in the form of common stock. Nihon Ariba K.K.’s operations consist of the marketing, distribution, service and support of our products in Japan.

As of June 30, 2003, minority interest of approximately $14.9 million is recorded on the condensed consolidated balance sheets in order to reflect the share of the net assets of Nihon Ariba K.K. held by minority investors. We recognized $884,000 and $300,000 as a loss for the minority interest’s share of Nihon Ariba K.K.’s income for the quarters ended June 30, 2003 and 2002, respectively. For the nine months ended June 30, 2003, we recognized $2.4 million as a loss for the minority interest’s share of Nihon Ariba K.K.’s income. For the nine months ended June 30, 2002, we recognized $405,000 as income for the minority interest’s share of Nihon Ariba K.K.’s loss.

In April 2001, our consolidated subsidiary, Ariba Korea, Ltd., issued and sold approximately 42% of its common stock for cash consideration of approximately $8.0 million to Softbank and its affiliate. Prior to the

transaction, we held 100% of the equity of Ariba Korea, Ltd. in the form of common stock. Ariba Korea, Ltd.’s operations consist of the marketing, distribution, service and support of our products in Korea.

As of June 30, 2003, minority interest of approximately $2.9 million is recorded on the condensed consolidated balance sheets in order to reflect the share of the net assets of Ariba Korea, Ltd. held by minority investors. We recognized $26,000 and $54,000 as income for the minority interest’s share of Ariba Korea, Ltd.’s loss for the quarters ended June 30, 2003 and 2002, respectively. For the nine months ended June 30, 2003, we recognized $92,000 as income for the minority interest’s share of Ariba Korea, Ltd.’s loss. For the nine months ended June 30, 2002, we recognized $130,000 as income for the minority interest’s share of Ariba Korea Ltd’s loss.

Provision for income taxes

We incurred operating losses for the three and nine month periods ended June 30, 2003 and June 30, 2002. We have recorded a valuation allowance for the full amount of the net deferred tax assets, as it is more likely than not that the deferred tax assets will not be realized. For the three month periods ended June 30, 2003 and 2002, we incurred an income tax benefit of $116,000 and income tax expense of $1.0 million, respectively, and for the nine month periods ended June 30, 2003 and 2002, we incurred income tax expense of $327,000 and $3.0 million, respectively, primarily attributable to state and foreign taxes.

Liquidity and Capital Resources

As of June 30, 2003, we had $115.9 million in cash, cash equivalents and short-term investments, $98.1 million in long-term investments and $28.8 million in restricted cash, for total cash and investments of $242.8 million, and a $37.5 million working capital deficiency. All significant cash and investments are held in accounts in the United States except for approximately $44.0 million and $7.0 million held by Nihon Ariba K.K. and Ariba Korea, Ltd, respectively, our majority-owned subsidiaries in Japan and Korea, respectively, to fund their activities and operations. As of September 30, 2002, we had $157.3 million in cash, cash equivalents and short-term investments, $88.0 million in long-term investments and $30.3 million in restricted cash, for total cash and investments of $275.6 million, and $25.7 million in working capital. The decline in working capital of $63.2 million since September 30, 2002 is primarily attributed to a decrease in cash and cash equivalents by approximately $15.7 million, a reduction of the portion of investments classified as current due to changes in relative maturity of our portfolio and an increase in the portion of deferred revenue classified as current due to reduction of multi-year prepayments and resolution of uncertainties regarding the timing of recognition for certain contracts for which recognition was previously considered indefinite and therefore classified as non-current.

Net cash used in operating activities was approximately $32.5 million for the nine months ended June 30, 2003, compared to $34.0 million of net cash used in operating activities for the nine months ended June 30, 2002. Net cash used in operating activities for the nine months ended June 30, 2003 is primarily attributable to decreases in deferred revenue, restructuring and lease abandonment costs, accrued compensation and related liabilities and accrued liabilities and increases in accounts receivable. These cash flows used in operating activities were partially offset by non-cash expenses in excess of the net loss for the period and increases in accounts payable and decreases in prepaid expenses and other assets. Partly as a result of increased use of extended payment terms during recent quarters, deferred revenues have declined and may continue to decline.

Net cash provided by investing activities was approximately $12.0 million for the nine months ended June 30, 2003, compared to $42.8 million of net cash provided by investing activities for the nine months ended June 30, 2002. Net cash provided by investing activities for the nine months ended June 30, 2003 is primarily attributable to the redemption of our investments, partially offset by cash used in connection with our acquisition of Goodex and purchases of property and equipment.

Net cash provided by financing activities was approximately $4.4 million for the nine months ended June 30, 2003, compared to $23.1 million of net cash provided by financing activities for the nine months ended

June 30, 2002. Net cash provided by financing activities for the nine months ended June 30, 2003 is primarily attributable to proceeds from the exercise of stock options, partly offset by the payment of capital lease obligations.

In March 2000, we entered into a new facility lease agreement for approximately 716,000 square feet constructed in four office buildings and an amenities building in Sunnyvale, California for our headquarters. The operating lease term commenced in phases from January through April 2001 and ends on January 24, 2013. As of June 30, 2003 minimum monthly lease payments are $2.3 million and escalate annually with the total future minimum lease payments amounting to $321.6 million over the remaining lease term. During fiscal 2000 and 2001, we also contributed $80.0 million towards leasehold improvement costs of the facility and for the purchase of equipment and furniture, of which approximately $49.2 million was written off in connection with the abandonment of excess facilities. As part of this lease agreement, we are required to hold certificates of deposit totaling $25.7 million as of June 30, 2003 as a form of security through fiscal 2013, which is classified as restricted cash on our condensed consolidated balance sheets.

Future minimum lease payments under all noncancelable operating leases are as follows as of June 30, 2003 (in thousands):

Year Ending June 30,	Operating leases
2004	$	37,339
2005		37,610
2006		36,960
2007		34,535
2008		33,357
Thereafter		168,849

Total minimum lease payments	$	348,650

Operating lease payments shown above exclude any adjustment for future lease income due under noncancelable subleases of excess facilities, which amounted to $71.0 million as of June 30, 2003. Interest expense related to capital lease obligations is immaterial for all periods presented.

We do not have commercial commitments under lines of credit, standby repurchase obligations or other such debt arrangements. We do have standby letters of credit, which are cash collateralized. These instruments are issued by our banks in lieu of a cash security deposit required by landlords for our real estate leases. We have approximately $28.5 million in standby letters of credit related to all domestic and international real estate lease requirements classified as restricted cash on our condensed consolidated balance sheets as of June 30, 2003.

We expect to incur significant operating expenses, particularly research and development and sales and marketing expenses, for the foreseeable future in order to execute our business plan. We anticipate that such operating expenses, as well as planned capital expenditures, will constitute a material use of our cash resources. As a result, our net cash flows will depend heavily on the level of future sales, our ability to manage infrastructure costs and the outcome of our subleasing activities related to the costs of abandoning excess leased facilities and the level of expenditures relating to our recently completed accounting review and ongoing regulatory and legal proceedings.

Additionally, on October 22, 2002, we announced that our Board of Directors authorized the repurchase of up to $50 million of our currently outstanding common stock to reduce the dilutive effect of our stock option and purchase plans. Stock purchases under the common stock repurchase program are expected to be made periodically in the open market based on market conditions. To date there have been no stock repurchases under this program. Cash flows from operations and existing cash balances may be used to repurchase our common stock. As a result, we may incur a significant impact on cash flows and cash balances.

Although our existing cash, cash equivalents and investment balances together with our anticipated cash flow from operations should be sufficient to meet our working capital and operating resource expenditure requirements for at least the next 12 months, given the significant changes in our business and results of operations in the last 12 to 18 months, the fluctuation in cash, cash equivalents and investments balances may be greater than presently anticipated. See “Risk Factors”. After the next 12 months, we may find it necessary to obtain additional funds. In the event additional funds are required, we may not be able to obtain additional financing on favorable terms or at all.

Risk Factors

In addition to other information in this Form 10-Q, the following risk factors should be carefully considered in evaluating Ariba and its business because such factors may have a significant impact on Ariba’s business, operating results and financial condition. As a result of the risk factors set forth below and elsewhere in this Form 10-Q, and the risks discussed in Ariba’s other SEC filings, actual results could differ materially from those projected in any forward-looking statements. We believe that our success in fiscal year 2003 will depend particularly upon our ability to effectively market our Enterprise Spend Management solutions and maintain tight control over expenses and cash. We believe that key risks include our market execution in Europe, the status of our relationship with Softbank, the overall level of information technology spending and the potential adverse impact resulting from the restatement of our consolidated financial statements and related inquiries and regulatory and legal proceedings.

We Have a Relatively Limited Operating History and Compete in New and Rapidly Evolving Markets. These Facts Make it Difficult to Evaluate Our Future Prospects Based on Historical Operating Results.

We were founded in September 1996 and have a relatively limited operating history. Our limited operating history makes an evaluation of our future prospects very difficult. We introduced our first product, Ariba Buyer, in June 1997 and began to operate the predecessor to the Ariba Supplier Network in April 1999. We began shipping Ariba Dynamic Trade in February 2000 following our acquisition of TradingDynamics, Ariba Marketplace in March 2000 following our acquisition of Tradex, and Ariba Sourcing in August 2000 following our acquisition of SupplierMarket. Ariba Dynamic Trade and Ariba Sourcing were subsequently incorporated into Ariba Enterprise Sourcing. In addition, we repositioned our product offerings as the Ariba Spend Management solution in September 2001, and introduced additional procurement applications in March 2002 and March 2003. As we adjust to evolving customer requirements and competitor pressures, we may be required to further reposition our product and service offerings and introduce new products and services.

We will encounter risks and difficulties frequently encountered by companies in new and rapidly evolving markets. Many of these risks are described in more detail in this “Risk Factors” section. We may not successfully address any of these risks. If we do not successfully address these risks, our business will be seriously harmed.

The Slowdown in Information Technology Spending May Adversely Impact Our Business.

Our business has been adversely impacted by the decline in information technology spending. The majority of Ariba’s business continues to be from sales of the Ariba Buyer product and related products and services, which sales are from a relatively small number of customers each quarter. As a result, the number of such sales could be significantly impacted by a decline in spending. We expect the effects of the slowdown to continue to adversely impact our business for the next few quarters and perhaps significantly longer. The adverse impacts from the slowdown include longer sales cycles, lower average selling prices and reduced bookings and revenues.

The Market for Our Products and Services is at an Early Stage. They May Not Achieve Continued Market Acceptance.

The market for spend management software applications and services is at an early stage of development. Our success depends on a significant number of large buying organizations implementing our products and

services. We have recently announced several new products, which at this point have had limited deployment and which may be more challenging to implement than our more established products. If our products and services do not achieve continued market acceptance, our business will be seriously harmed.

We Have a History of Losses and May Incur Significant Additional Losses in the Future.

We had an accumulated deficit of approximately $4.3 billion as of June 30, 2003, including cumulative charges for the amortization of goodwill and other intangible assets totaling $2.3 billion, impairment of goodwill and other intangible assets totaling $1.4 billion, business partner warrant expense totaling $68.9 million, of which $9.0 million has been reclassified as a reduction of revenues due to our adoption of EITF No. 01-9, and amortization of stock-based compensation totaling $134.9 million. We may incur significant losses in the future for a number of reasons, including the following:

•

We may incur substantial non-cash expenses resulting from the impairment of goodwill, the amortization of deferred compensation and potentially the issuance of warrants;

•

Although revenues for the nine months ended June 30, 2003 increased compared to the nine months ended June 30, 2002, revenues from products and services may decline in the future;

•

Although we have significantly reduced expense levels, we may need to further reduce expenses in the future should revenues decline; and

•

We have significant cash commitments under noncancelable leases for excess office space. Net cash commitments, related expense accruals and possible future restructuring charges will depend on the level of sublease income we receive for this office space.

Our Quarterly Operating Results Are Volatile and Difficult to Predict.

Our quarterly operating results have varied significantly in the past and will likely vary significantly in the future. We believe that period-to-period comparisons of our results of operations may not be meaningful and should not be relied upon as indicators of future performance trends. We anticipate that license revenues for the quarter ending September 30, 2003 will be flat or down compared to the quarter ended June 30, 2003. In addition, we have experienced and expect to continue to experience declines in deferred revenue that may adversely impact revenues over the long term.

Our quarterly operating results have varied or may vary depending on a number of factors, including the following:

Risks Related to Revenues

•

fluctuations in demand, mix and average selling price for our products and services;

•

fluctuations in the number of new customer contracts, especially for Ariba Buyer and related products;

•

changes in the timing of sales of our products and services;

•

changes in the mix of types of licensing arrangements and related timing of revenue recognition;

•

actions taken by our competitors, including new product introductions and enhancements, or consolidation efforts of certain large enterprise software vendors;

•

recent declines in our deferred revenue; and

•

the impact of the restatement of our consolidated financial statements and our ongoing regulatory and legal proceedings on customer demand.

Risks Related to Expenses

•

payment of compensation to sales personnel based on achieving sales quotas and co-sale payments, referral fees and other commissions to our strategic partners based on our sales;

•

royalties paid to third parties for technology incorporated into our products and services;

•

our ability to control costs, including managing reductions in expense levels;

•

costs resulting from the write off of intangible assets relating to recent and any future acquisitions;

•

fluctuations in non-cash charges related to the issuance of warrants to purchase common stock due to fluctuations in our stock price; and

•

the level of expenditures relating to our ongoing regulatory and legal proceedings.

Risks Related to Operations

•

our ability to develop, introduce and market new products and enhancements to our existing products on a timely basis;

•

changes in our pricing policies and business model or those of our competitors;

•

integration of our recent acquisitions and any future acquisitions; and

•

our ability to scale our network and operations to support a larger numbers of customers, suppliers and transactions.

Our Success Depends on Retaining Our Current Key Personnel and Attracting Additional Key Personnel.

Our future performance depends on the continued service of our senior management, product development and sales personnel. We do not carry key person life insurance. The loss of the services of one or more of our key personnel could seriously harm our business. In addition, our success depends on our continuing ability to attract, hire, train and retain a selected number of highly skilled managerial, technical, sales, marketing and customer support personnel. Our ability to retain key employees may be harder, given recent adverse changes in our business. In addition, new hires frequently require extensive training before they achieve desired levels of productivity. Competition for qualified personnel is substantial, and we may fail to retain our key employees or to attract or retain other highly qualified personnel.

Our Revenues in Any Quarter Depend on a Relatively Small Number of Relatively Large Orders. We Have Experienced Lengthening Sales Cycles and Deferrals of a Number of Relatively Large Anticipated Orders.

Our quarterly revenues are especially subject to fluctuation because they depend on the sale of relatively large orders for our products and related services. Many of these relatively large orders are realized at the end of the quarter. As a result, our quarterly operating results, including average selling prices, may fluctuate significantly if we are unable to complete one or more substantial sales in any given quarter. We have experienced lengthening sales cycles and deferrals of a number of relatively large anticipated orders, which we believe, have been affected by general economic uncertainty. Approximately 10% of total revenues for each of the three and nine month periods ended June 30, 2003 and approximately 7% and 8% of total revenues for the three and nine month periods ended June 30, 2002, respectively, were from entities affiliated with Softbank, a related party, pursuant to a long-term revenue commitment agreement. See the Risk Factor herein entitled “Our Dispute with Softbank May Adversely Impact Our Business” for additional information.

Revenues in Any Quarter May Vary to the Extent Recognition of Revenue is Deferred when Contracts Are Signed.

contracts signed in such quarter and contracts signed in prior quarters. For example, the portion of revenues recognized from contracts entered into in prior quarters generally declined in fiscal year 2000 and increased in fiscal year 2001. Since then, the portion of revenues recognized from contracts entered into in prior quarters has remained relatively stable and has represented at least a majority of the revenues recognized each quarter. In addition, deferred revenue is impacted by the time of cash collections.

Our Acquisitions Will, and Any Future Acquisitions May, Require Us to Incur Significant Charges for Intangible Assets.

Our acquisitions will, and any future acquisitions may, require us to incur significant charges for goodwill and other intangible assets, which will negatively affect our operating income. As a result of our adoption of SFAS No. 142 on October 1, 2002, we ceased amortization of the remaining goodwill that had a net book value of approximately $176.4 million as of October 1, 2002. As of June 30, 2003, we had unamortized goodwill and other intangible assets of approximately $181.2 million which includes $4.8 million of goodwill related to the recently completed Goodex acquisition. Other intangible assets were being amortized on a straight-line basis over their total expected useful lives ranging from two to three years. These assets which include covenants not-to-compete, core technology and an intellectual property agreement were fully amortized as of March 31, 2003.

On January 28, 2003, we acquired privately-held Goodex, a European sourcing services provider. The acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date.

A Decline in Revenues May Have a Disproportionate Impact on Operating Results And Require Further Reductions in Our Operating Expense Levels.

Because our expense levels are relatively fixed in the near term and are based in part on expectations of our future revenues, any decline in our revenues to a level that is below our expectations would have a disproportionately adverse impact on our operating results for that quarter. We incurred restructuring and lease abandonment charges of $62.6 million for the year ended September 30, 2002 and $5.4 million for the quarter ended June 30, 2003. We may incur additional restructuring charges if we experience additional revenue declines.

In the Future, We May Need to Raise Additional Capital in Order to Remain Competitive. This Capital May Not Be Available on Acceptable Terms, If at All.

Although our existing cash, cash equivalent and investment balances together with our anticipated cash flow from operations should be sufficient to meet our anticipated working capital and operating resource expenditure requirements for at least the next 12 months, given the significant changes in our business and results of operations in the last 12 to 18 months, the fluctuation in cash, cash equivalents and investments balances may be greater than presently anticipated. For example, cash balances will be impacted to the degree that we implement our recently adopted common stock buyback program, pursuant to which we may expend up to $50.0 million in cash to repurchase our common stock. After the next 12 months, we may need to raise additional funds and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products and services, take advantage of future opportunities, grow our business or respond to competitive pressures or unanticipated requirements, which could seriously harm our business.

Implementation of Our Products by Large Customers Is Complex, Time Consuming and Expensive. We Frequently Experience Long Sales and Implementation Cycles.

Ariba Buyer, Ariba Enterprise Sourcing and our other products are complex solutions that are generally deployed with many users. Implementation of these applications by buying organizations is complex, time

consuming and expensive. In many cases, our customers must change established business practices. In addition, they must generally consider a wide range of other issues before committing to purchase our products and services, including product benefits, ease of installation, ability to work with existing computer systems, ability to support a larger user base, reliability and return on investment. Furthermore, the purchase of our products is often discretionary and generally involves a significant commitment of capital and other resources by a customer. It frequently takes several months to finalize a sale and requires approval at a number of management levels within the customer organization. The implementation and deployment of our products requires a significant commitment of resources by our customers and third parties and/or professional services organizations.

We May Continue to Depend on Ariba Buyer for a Substantial Portion of Our Business for the Foreseeable Future. This Business Could Be Concentrated in a Relatively Small Number of Customers.

We anticipate that revenues from Ariba Buyer and related products and services will continue to constitute a substantial portion of our revenues for the foreseeable future. For the quarter ended June 30, 2003, revenues from Ariba Buyer and related products and services were a majority of our total revenues. If we experience price declines or fail to achieve broad market acceptance of Ariba Buyer, our business could be seriously harmed. In addition, a relatively small number of customers generally accounted for a substantial portion of revenues from sales of Ariba Buyer and related products.

Electronic Commerce Networks, Including the Ariba Supplier Network, Are at an Early Stage of Development and Market Acceptance.

We began operating the Ariba Supplier Network, formerly known as the Ariba Commerce Services Network, in April 1999. Our business would be seriously harmed if the Ariba Supplier Network does not achieve broad and timely market acceptance. Market acceptance of this network is subject to a number of significant risks. These risks include:

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the market for Internet-based spend management applications is new;

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our network may not be able to support a larger number of buyers and suppliers, and increases in the number of buyers and suppliers may cause slower response times and other problems;

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our need to enhance the interface between Ariba Buyer, Ariba Enterprise Sourcing, our other Ariba products and the Ariba Supplier Network;

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our need to significantly enhance the features and services of the Ariba Supplier Network to achieve widespread commercial acceptance of our network; and

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our need to significantly expand our internal resources to support planned growth of the Ariba Supplier Network.

If a Sufficient Number of Suppliers Do Not Join and Maintain Their Participation In the Ariba Supplier Network, the Network Will Not Attract a Sufficient Number of Buyers and Other Sellers Required to Make the Network Successful.

We depend on suppliers joining the Ariba Supplier Network. Any failure of suppliers to join the Ariba Supplier Network in sufficient numbers, or of existing suppliers to maintain their participation in the Ariba Supplier Network, would make the network less attractive to buyers and consequently other suppliers. In order to provide buyers on the Ariba Supplier Network an organized method for accessing goods and services, we rely on suppliers to maintain web-based product catalogs, indexing services (services that provide electronic product indices) and other content aggregation tools (software tools that allow users to aggregate information maintained in electronic format). Our inability to access and index these catalogs and services would result in our customers having fewer products and services available to them through our solution, which would adversely affect the perceived usefulness of the Ariba Supplier Network.

We Rely on Third Parties to Expand, Manage and Maintain the Computer and Communications Equipment and Software Needed for the Day-to-Day Operations of the Ariba Supplier Network.

We rely on several third parties to provide hardware, software and services required to expand, manage and maintain the computer and communications equipment and software needed for the day-to-day operations of the Ariba Supplier Network. Services provided by these parties include managing the Ariba Supplier Network web server, maintaining communications lines and managing network data centers. We may not successfully obtain these services on a timely and cost effective basis. For example, many of these third parties have experienced significant outages in the past and could experience outages, delays and other difficulties due to system failures unrelated to our systems. Any problems caused by these third parties could cause users of the Ariba Supplier Network to perceive our network as functioning improperly and to use other methods to buy goods and services.

We Depend on Strategic Relationships with Our Partners.

We have established strategic relationships with certain outside companies. These companies are entitled to resell our products and/or to host our products for their customers. We cannot be assured that any of these resellers, ASP partners or hosting partners, or those we may contract with in the future, will be able to resell our products to an adequate number of customers. If our current or future strategic partners are not able to successfully resell our products or experience financial difficulties that impair their operating capabilities, our business could be seriously harmed.

Our Dispute with Softbank May Adversely Impact Our Business.

We have a strategic relationship with Softbank and its affiliates (“Softbank”), as a minority shareholder of our Japanese subsidiary, Nihon Ariba K.K., from which we derive significant revenues. The strategic relationship includes certain quarterly minimum revenue commitments from Softbank to Nihon Ariba. Softbank has not been in compliance with the performance levels contemplated by our strategic relationship, and in June 2003, we submitted a demand for arbitration against Softbank relating to Softbank’s failure to pay contractually required minimum payments to Nihon Ariba. The demand seeks payment in an amount to be determined, and other relief. There is no assurance we can achieve a mutually satisfactory resolution of our dispute with Softbank. The failure to realize future revenues from Softbank at committed levels could have a material adverse impact on our business.

We Face Intense Competition From Many Participants in the Enterprise Software Applications Industry. If We Are Unable to Compete Successfully, Our Business Will Be Seriously Harmed.

The market for our solutions is intensely competitive, evolving and subject to rapid technological change. The intensity of competition has increased and is expected to further increase in the future. This increased competition has resulted in price reductions and could result in further price pressure, reduced profit margins and loss of market share, any one of which could seriously harm our business. Competitors vary in size, scope and breadth of the products and services they offer. In addition, because spend management is a relatively new software category, we expect additional competition from other established and emerging companies. For example, third parties that currently help implement Ariba Buyer and our other products could begin to market products and services that compete with our products and services. Also, there are consulting companies that offer services that may compete with parts of Ariba’s offering. We could also face competition from other companies who introduce Internet-based spend management solutions.

Many of our current and potential competitors, such as ERP vendors including Oracle, SAP and PeopleSoft, have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than us. In addition, many of our competitors have well-established relationships with our current and potential customers and have extensive knowledge of our industry. In the past, we have lost potential customers to competitors for various reasons,

including lower prices and incentives not matched by us. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address customer needs. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. We also expect that competition will increase as a result of industry consolidations. We may not be able to compete successfully against our current and future competitors.

If We Fail to Develop Products and Services in a Timely and Cost-Effective Basis, Our Business Will Be Seriously Harmed.

In developing new products and services, we may:

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fail to develop, introduce and market products in a timely or cost-effective manner;

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find that our products and services are obsolete, noncompetitive or have shorter life cycles than expected; or

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fail to develop new products and services that adequately meet market requirements or achieve market acceptance.

For example, the introduction of Version 7.0 of Ariba Buyer was delayed significantly in the first quarter of fiscal year 2001, and we have experienced delays in the introduction of other products and releases in the past. If new releases of our products or potential new products are delayed, we could experience a delay or loss of revenues and customer dissatisfaction.

Our Business Will Be Seriously Harmed If We Fail to Establish and Maintain Relationships With Third Parties That Will Effectively Implement Ariba Buyer, Ariba Enterprise Sourcing and Our Other Products.

We rely on a number of third parties to implement Ariba Buyer, Ariba Enterprise Sourcing and our other products at customer sites. These products are enterprise-wide solutions that must be deployed within the customer’s organization. The implementation process is complex, time-consuming and expensive. We rely on third parties such as IBM, Accenture, Cap Gemini Ernst & Young, Deloitte Consulting and Bearing Point (formerly KPMG Consulting) to implement our products, because we lack the internal resources to implement our products at current and potential customer sites. If we are unable to establish and maintain effective, long-term relationships with our implementation providers, or if they do not meet the needs or expectations of their customers, our business would be seriously harmed. Our current implementation partners are not contractually required to continue to help implement our products, and since calendar 2000, many systems integrators have reduced their levels of investment in the procurement space from prior years. As a result of the limited resources and capacities of many third-party implementation providers, we may be unable to establish or maintain relationships with third parties having sufficient resources to provide the necessary implementation services to support our needs. If these resources are unavailable, we will be required to provide these services internally, which would significantly limit our ability to meet our customers’ implementation needs. For example, a number of our competitors, including Oracle, SAP and PeopleSoft, have significantly better established relationships with these third party systems integrators, and these systems integrators may be more likely to recommend competitors’ products and services than our own. In addition, we cannot control the level and quality of service provided by our current and future implementation partners.

Some of Our Customers May Represent Credit Risks.

Some of our customers include small emerging growth companies. Many of these companies have limited operating histories, are operating at a loss and have limited access to capital. With the significant slowdown in global economic growth over the past several years and uncertainty relating to its near-term prospects, some of our customers, including these small emerging growth customers, may represent a credit risk. If our customers

experience financial difficulties or fail to experience commercial success, we may have difficulty collecting on our accounts receivable. Although we maintain allowances for doubtful accounts based on estimates of non-collectible amounts, the actual level of non-collectible amounts may exceed the level of such allowances.

New Versions and Releases of Our Products May Contain Errors or Defects.

Ariba Buyer, Ariba Enterprise Sourcing and our other products are complex. They may contain undetected errors or failures when first introduced or as new versions are released. This may result in loss of, or delay in, market acceptance of our products. We have in the past discovered software errors in our new releases and new products after their introduction. For example, in fiscal year 2000 we discovered problems with respect to the ability of software written in Java to scale to allow for large numbers of concurrent users of Ariba Buyer. We have experienced delays in product release, lost revenues and customer frustration during the periods required to correct these errors. We may in the future discover errors and additional scalability limitations in new releases or new products after the commencement of commercial shipments.

Litigation Regarding Our IPO Could Seriously Harm Our Business.

Between March 20, 2001 and June 5, 2001, a number of purported shareholder class action complaints were filed in the United States District Court for the Southern District of New York against us, certain of our current or former officers and directors and three of the underwriters of our initial public offering. These actions purport to be brought on behalf of purchasers of our common stock in the period from June 23, 1999, the date of our initial public offering, to December 23, 1999 (in some cases, to December 5 or 6, 2000), and make certain claims under the federal securities laws, including Sections 11 and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act, relating to our initial public offering.

On June 26, 2001, these actions were consolidated into a single action bearing the titleIn re Ariba, Inc. Securities Litigation, 01 CIV 2359. On August 9, 2001, that consolidated action was further consolidated before a single judge with cases brought against additional issuers (who numbered in excess of 300) and their underwriters that made similar allegations regarding the initial public offerings of those issuers. The latter consolidation was for purposes of pretrial motions and discovery only. On February 14, 2002, the parties signed and filed a stipulation dismissing the consolidated action without prejudice against us and certain individual officers and directors, which the Court approved and entered as an order on March 1, 2002. On April 19, 2002, the plaintiffs filed an amended complaint in which they dropped their claims against us and the individual officers and directors under Sections 11 and 15 of the Securities Act, but elected to proceed with their claims against such defendants under Sections 10(b) and 20(a) of the Exchange Act.

The amended complaint alleges that the prospectus pursuant to which shares of common stock were sold in our initial public offering, which was incorporated in a registration statement filed with the SEC, contained certain false and misleading statements or omissions regarding the practices of our underwriters with respect to their allocation to their customers of shares of common stock in our initial public offering and their receipt of commissions from those customers related to such allocations. The complaint further alleges that the underwriters provided positive analyst coverage of Ariba after the initial public offering, which had the effect of manipulating the market for our stock. Plaintiffs contend that such statements and omissions from the prospectus and the alleged market manipulation by the underwriters through the use of analysts caused our post-initial public offering stock price to be artificially inflated. Plaintiffs seek compensatory damages in unspecified amounts as well as other relief.

On July 15, 2002, Ariba and the officer and director defendants, along with other issuers and their related officer and director defendants, filed a joint motion to dismiss based on common issues. On November 23, 2002, during the pendency of the motion to dismiss, the Court entered as an order a stipulation by which all of the individual defendants were dismissed from the case without prejudice in return for executing a tolling agreement. On February 19, 2003, the Court rendered its decision on the motion to dismiss, granting a dismissal of the

remaining Section 10(b) claim against us without prejudice. Plaintiffs have indicated that they intend to file an amended complaint.

On June 24, 2003, a Special Litigation Committee of the Board of Directors of the Company approved a Memorandum of Understanding (the “MOU”) reflecting a settlement in which the plaintiffs agreed to dismiss the case against Ariba with prejudice in return for the assignment by us of claims that we might have against its underwriters. No payment to the plaintiffs by Ariba is required under the MOU. There can be no assurance that the MOU will result in a formal settlement or that the Court will approve the settlement that the MOU sets forth. In the event that the MOU does not result in a formal settlement approved by the Court, we intend to defend against these claims vigorously.

Defending against securities class action relating to our initial public offering may require significant management time and, regardless of the outcome, result in significant legal expenses. If our defenses are unsuccessful or we are unable to settle on favorable terms, we could be liable for large damages that could seriously harm our business and results of operations.

Litigation and Regulatory Proceedings Regarding the Restatement of Our Financial Statements Could Seriously Harm Our Business.

Beginning January 21, 2003, a number of purported shareholder class action complaints were filed in the United States District Court for the Northern District of California against us and certain of our current and former officers and directors, all purporting to be brought on behalf of a class of purchasers of our common stock in the period from January 11, 2000 to January 15, 2003. The complaints bring claims under the federal securities laws, specifically Sections 10(b) and 20(a) of the Exchange Act, relating to our announcement that we would restate certain of our consolidated financial statements, and also, in the case of two complaints, relating to our acquisition activity and related accounting. Specifically, these actions allege that certain of our prior consolidated financial statements contained false and misleading statements or omissions relating to our failure to properly recognize expenses and other financial items, as reflected in the then proposed restatement. Plaintiffs contend that such statements or omissions caused our stock price to be artificially inflated. Plaintiffs seek compensatory damages as well as other relief.

In a series of orders issued by the court in February and March, 2003, these cases were deemed related to each other and assigned to a single judge sitting in San Jose. On July 11, 2003, following briefing and a hearing on related motions, the Court entered two orders that together (1) consolidated the related cases for all purposes into a single action captionedIn re Ariba, Inc. Securities Litigation, Case No. C-03-00277 JF, (2) appointed a lead plaintiff, and (3) approved the lead plaintiff’s selection of counsel. The orders further direct the lead plaintiff to file an amended consolidated class action complaint within sixty days of the date of the orders,i.e., on or around September 9, 2003, and direct defendants to file their responses to that complaint on or around November 10, 2003. This case is still in its early stages. We intend to defend against these claims vigorously.

Beginning January 27, 2003, several shareholder derivative actions were filed in the Superior Court of California for the County of Santa Clara against certain of our current and former officers and directors and against us as nominal defendant. The actions were filed by shareholders purporting to assert, on our behalf, claims for breach of fiduciary duties, aiding and abetting, violations of the California insider trading law, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and contribution and indemnification. Specifically, the claims were based on our acquisition activity and related accounting implemented by the defendants, the alleged understatement of compensation expenses as reflected in our then proposed restatement, the alleged insider trading by certain defendants, the existence of the restatement class action litigation, in which we are alleged to be liable to defrauded investors, and the allegedly excessive compensation paid by us to one of our officers, as reflected in our then proposed restatement. The complaints sought the payment by the defendants to us of damages allegedly suffered by us, as well as other relief.

These actions were assigned to a single judge sitting in San Jose. On May 7, 2003 following briefing and hearing on related motions, the court issued an order that (1) consolidated the cases for all purposes into a single action captionedIn re Ariba, Inc. Shareholder Derivative Litigation, Lead Case No. CV 814325, and (2) appointed lead plaintiffs’ counsel. Pursuant to that order, plaintiffs filed an amended consolidated derivative complaint on May 28, 2003. The amended consolidated complaint restates the allegations, causes of action and relief sought as pleaded in the original complaints, and adds allegations relating to our April 10, 2003 announcement of the restatement of certain financial statements and also adds a cause of action for breach of contract. Defendants’ responses to the amended consolidated complaint are currently due on August 13, 2003. This case is still in its early stages.

On March 7 and March 21, 2003, respectively, two shareholder derivative actions were filed in the United States District Court for the Northern District of California against certain of our current and former officers and directors and against Ariba as nominal defendant. These actions were filed by shareholders purporting to assert, on behalf of Ariba, claims for violations of the Sarbanes-Oxley Act, violations of the California insider trading law, breach of fiduciary duties, misappropriation of information, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. Specifically, the claims were based on our announcements that we intended to and/or had restated certain financial statements and on alleged insider trading by certain defendants. The complaints sought the payment by the defendants to Ariba of damages allegedly suffered by Ariba, as well as other relief.

Litigating existing and potential securities class actions and shareholder derivative actions relating to the restatement of our consolidated financial statements will likely require significant attention and resources of management and, regardless of the outcome, result in significant legal expenses. In the case of the securities class actions, if our defenses were ultimately unsuccessful, or if we were unable to achieve a favorable settlement, we could be liable for large damages awards that could seriously harm our business, results of operations and financial condition.

In addition, the SEC has commenced an informal inquiry regarding the circumstances leading up to the restatement of our consolidated financial statements. Responding to any such review could require significant diversion of management’s attention and resources in the future. For example, if the SEC elects to pursue an enforcement action, the defense against this type of action could be costly and require additional management resources. If we are unsuccessful in defending against this or other investigations or proceedings, we may face civil or criminal penalties or fines that would seriously harm our business and results of operations.

General Litigation

the parties and committed fraud in connection with our failure to provide specified software. We have counterclaimed against BCE Emergis. After a series of pleadings, Court rulings and a mediation, the matter has not yet been resolved. A previously set trial date has been vacated by the Court due to an ongoing discovery dispute that is now before the Ninth Circuit Court of Appeals. The Court has ordered a second mediation, which has been scheduled for August 29, 2003, and no trial is currently scheduled. Although litigation is inherently uncertain, we believe that we have meritorious defenses to all claims in the lawsuit. We have accrued for estimable and probable losses in our condensed consolidated financial statements for those matters where we believe that the likelihood that a loss has occurred is probable and the amount of loss is reasonably estimable based on estimates by management after consultation with legal counsel. However, there can be no assurance that existing or future litigation arising in the ordinary course of business or otherwise will not result in outcomes that differ significantly from these estimates.

We Could Be Subject to Potential Product Liability Claims and Third Party Liability Claims Related to Our Products and Services or Products and Services Purchased Through the Ariba Supplier Network.

Our customers use our products and services to manage their spend. Any errors, defects or other performance problems could result in financial or other damages to our customers. A product liability claim brought against us, even if not successful, would likely be time consuming and costly and could seriously harm our business. Although our customer license agreements typically contain provisions designed to limit our exposure to product liability claims, existing or future laws or unfavorable judicial decisions could negate these limitation of liability provisions.

The Ariba Supplier Network provides our customers with indices of products that can be purchased from suppliers participating in the Ariba Supplier Network. The law relating to the liability of providers of listings of products and services sold over the Internet for errors, defects or other performance problems with respect to those products and services is currently unsettled. We do not pre-screen the types of products and services that may be purchased through the Ariba Supplier Network.

Some of these products and services could contain performance or other problems. We may not successfully avoid civil or criminal liability for problems related to the products and services sold through the Ariba Supplier Network or other electronic networks using our market maker applications. Any claims or litigation could require expenditures in terms of management time and other resources to defend ourselves. Liability of this sort could require us to implement measures to reduce our exposure to this liability, which may require us, among other things, to expend substantial resources or to discontinue certain product or service offerings or to take precautions to ensure that certain products and services are not available through the Ariba Supplier Network or other electronic networks using our market maker applications.

In addition, we warrant the performance of the Ariba Supplier Network to customers to conduct their transactions. To the extent we fail to meet warranted performance levels, we could be obligated to provide refunds of maintenance fees or credits toward future maintenance fees. Further, to the extent that a customer incurs significant financial hardship due to the failure of the Ariba Supplier Network to perform as warranted, we could be exposed to additional liability claims.

Our Stock Price Is Highly Volatile.

Our stock price has fluctuated dramatically. There is a significant risk that the market price of our common stock will decrease in the future in response to any of the following factors, some of which are beyond our control:

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variations in our quarterly operating results;

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announcements that our revenues or income are below analysts’ expectations;

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changes in analysts’ estimates of our performance or industry performance;

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general economic slowdowns;

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changes in market valuations of similar companies;

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sales of large blocks of our common stock;

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announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

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loss of a major customer or failure to complete significant license transactions;

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additions or departures of key personnel; and

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fluctuations in stock market prices and volumes, which are particularly common among highly volatile securities of software and Internet-based companies.

We Are at Risk of Further Securities Class Action Litigation Due to Our Stock Price Volatility.

In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We have in the past experienced significant volatility in the price of our stock. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources, which could seriously harm our business.

If the Protection of Our Intellectual Property Is Inadequate, Our Competitors May Gain Access to Our Technology, and We May Lose Customers.

We depend on our ability to develop and maintain the proprietary rights of our technology. To protect our proprietary technology, we rely primarily on a combination of contractual provisions, including customer licenses that restrict use of our products, confidentiality agreements and procedures, and patent, copyright, trademark and trade secret laws. We have only two issued patents and may not develop proprietary products that are patentable. Despite our efforts, we may not be able to adequately protect our proprietary rights, and our competitors may independently develop similar technology, duplicate our products or design around any patents issued to us or our other intellectual property. This is particularly true because some foreign laws do not protect proprietary rights to the same extent as those of the United States and, in the case of the Ariba Supplier Network, because the validity, enforceability and type of protection of proprietary rights in Internet-related industries are uncertain and evolving.

In the quarter ended March 31, 2000, we entered into an intellectual property agreement with an independent third party. The intellectual property agreement was classified as an other intangible asset and was fully amortized as of March 31, 2003. This intellectual property agreement protects our products against any claims of infringement regarding patents of this outside party that are currently issued, pending and are to be issued over the three year period subsequent to the date of the agreement.

There has been a substantial amount of litigation in the software industry and the Internet industry regarding intellectual property rights. We expect that software product developers and providers of electronic commerce solutions will increasingly be subject to infringement claims, and third parties may claim that we or our current or potential future products infringe their intellectual property. Any claims, with or without merit, could be time- consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business.

We must now, and may in the future have to, license or otherwise obtain access to intellectual property of third parties. For example, we are currently dependent on developers’ licenses from enterprise resource planning, database, human resource and other system software vendors in order to ensure compliance of our products with their management systems. We may not be able to obtain any required third party intellectual property in the future.

If We Do Not Effectively Manage Our Growth, Our Business Will be Harmed.

Even after giving effect to our recent workforce reductions, the scope of our operations and our workforce has expanded significantly over a relatively short period. This expansion has placed a significant strain upon our management systems and resources. If we are unable to manage our expanded operations, our business will be seriously harmed. Our ability to compete effectively and to manage future expansion of our operations, if any, will require us to continue to review, evaluate and, as appropriate, enhance our financial and management controls, reporting systems and procedures on a timely basis, and expand, train and manage our employee workforce.

Failure or Circumvention of Our Controls and Procedures Could Seriously Harm our Business.

Although we have reviewed our disclosure and internal controls and procedures in order to determine whether they are effective, our controls and procedures may not be able to prevent all error or fraud in the future. Faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established controls and procedures may make it impossible for us to ensure that the objectives of the control system are met. A failure of our controls and procedures to detect error or fraud could seriously harm our business and results of operations.

Our Business Is Susceptible to Numerous Risks Associated with International Operations.

International operations have represented an increasing portion of our revenues over the past three years. We have committed and expect to continue to commit significant resources to our international sales and marketing activities. We are subject to a number of risks associated with these activities. These risks generally include:

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currency exchange rate fluctuations;

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seasonal fluctuations in purchasing patterns;

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unexpected changes in regulatory requirements;

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tariffs, export controls and other trade barriers;

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longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

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difficulties in managing and staffing international operations;

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potentially adverse foreign tax consequences, including withholding in connection with the repatriation of earnings;

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the burdens of complying with a wide variety of foreign laws;

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the risks related to the recent global economic slowdown and adverse economic circumstances in Europe and Asia; and

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political instability.

While international revenues for the quarters ended June 30, 2003, March 31, 2003 and December 31, 2002 have remained fairly stable as a percentage of total revenue compared to the year ended September 30, 2002, there can be no assurance that such relative performance can be sustained in light of such risks.

Our international sales are denominated in U.S. dollars and in foreign currencies. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and, therefore, potentially less competitive in foreign markets. For international sales and expenditures denominated in foreign currencies, we are subject to risks associated with currency fluctuations. We hedge risks associated with foreign currency transactions in order to minimize the impact of changes in foreign currency exchange rates on earnings. We utilize forward contracts to hedge trade and intercompany receivables and payables. All hedge contracts are marked to market through operations each period. There can be no assurance that such hedging strategy will be successful and that currency exchange rate fluctuations will not have a material adverse effect on our operating results.

We May Be Unable to Complete Any Future Acquisitions. Our Business Could Be Adversely Affected as a Result.

On January 28, 2003, we acquired privately-held Goodex, a European sourcing services provider. In the quarter ended September 30, 2000, we acquired SupplierMarket.com, a provider of online collaborative sourcing technologies. We anticipate that it may be necessary or desirable to acquire additional businesses, products or technologies. If we identify an appropriate acquisition candidate, we may not be able to negotiate the terms of the acquisition successfully, finance the acquisition or integrate the acquired business, products or technologies into our existing business and operations. For example, in the second quarter of fiscal year 2001, we entered into, but subsequently terminated, an agreement to acquire Agile Software Corporation. If our acquisition efforts are not successful, our business could seriously be harmed.

Any Future Acquisitions May Dilute Our Equity and Adversely Affect Our Financial Position.

Any future acquisition in which the consideration consists of stock or other securities may significantly dilute our equity. Any future acquisition in which the consideration consists of cash may require us to use a substantial portion of our available cash. Financing for future acquisitions may not be available on favorable terms, or at all.

Our Acquisitions Are, and Any Future Acquisitions Will Be, Subject to a Number of Risks.

Our acquisitions are, and any future acquisitions will be, subject to a number of risks, including:

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the diversion of management time and resources;

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the difficulty of assimilating the operations and personnel of the acquired companies;

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the potential disruption of our ongoing businesses;

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the difficulty of incorporating acquired technology and rights into our products and services;

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unanticipated expenses related to technology integration;

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difficulties in maintaining uniform standards, controls, procedures and policies;

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the impairment of relationships with employees and customers as a result of any integration of new management personnel; and

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potential unknown liabilities associated with acquired businesses.

We Have Implemented Certain Anti-Takeover Provisions That Could Make it More Difficult for a Third Party to Acquire Us.

Provisions of our amended and restated certificate of incorporation and bylaws, including certain anti-takeover provisions, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders.

We Depend on the Acceptance of the Internet as a Commercial Marketplace, and This Acceptance May Not Occur on a Timely Basis.

The Internet may not be accepted as a viable long-term commercial marketplace for a number of reasons. These reasons include:

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potentially inadequate development of the necessary communication and computer network technology, particularly if rapid growth of the Internet continues;

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delayed development of enabling technologies and performance improvements;

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delays in the development or adoption of new standards and protocols; and

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increased governmental regulation.

Since our business depends on the increased acceptance and use of the Internet as a medium of commerce, if the Internet is not accepted as a viable medium of commerce or if that acceptance takes place at a rate that is slower than anticipated, our business would be harmed.

Security Risks and Concerns May Deter the Use of the Internet for Conducting Electronic Commerce.

A significant barrier to electronic commerce and communications is the secure transmission of confidential information over public networks. Advances in computer capabilities, new innovations in the field of cryptography or other events or developments could result in compromises or breaches of our security systems or those of other Internet sites to protect proprietary information. If any well-publicized compromises of security were to occur, it could have the effect of substantially reducing the use of the Internet for commerce and communications. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. The Internet is a public network, and data is sent over this network from many sources. In the past, computer viruses, software programs that disable or impair computers, have been distributed and have rapidly spread over the Internet. Computer viruses could be introduced into our systems or those of our customers or suppliers, which could disrupt the Ariba Supplier Network or make it inaccessible to customers or suppliers. We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. To the extent that our activities may involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could expose us to a risk of loss or litigation and possible liability. Our security measures may be inadequate to prevent security breaches, and our business would be harmed if it does not prevent them.

Increasing Government Regulation Could Limit the Market for, or Impose Sales and Other Taxes on the Sale of, Our Products and Services or on Products and Services Purchased Through the Ariba Supplier Network.

As Internet commerce evolves, we expect that federal, state or foreign agencies will adopt regulations covering issues such as user privacy, pricing, content and quality of products and services. It is possible that legislation could expose companies involved in electronic commerce to liability, which could limit the growth of electronic commerce generally. Legislation could dampen the growth in Internet usage and decrease our acceptance as a communications and commercial medium. If enacted, these laws, rules or regulations could limit the market for our products and services.

We do not collect sales or other similar taxes in respect of goods and services purchased through the Ariba Supplier Network. However, one or more states may seek to impose sales tax collection obligations on out-of- state companies like us that engage in or facilitate electronic commerce. A number of proposals have been made at the state and local level that would impose additional taxes on the sale of goods and services over the Internet. These proposals, if adopted, could substantially impair the growth of electronic commerce and could adversely affect our opportunity to derive financial benefit from such activities. Moreover, a successful assertion by one or more states or any foreign country that we should collect sales or other taxes on the exchange of goods and services through the Ariba Supplier Network could seriously harm our business.

Legislation limiting the ability of the states to impose taxes on Internet-based transactions has been enacted by the U.S. Congress. This legislation is presently set to expire on November 1, 2003. Failure to enact or renew this legislation could allow various states to impose taxes on electronic commerce, and the imposition of these taxes could seriously harm our business.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk

We develop products in the United States and market our products in the United States, Latin America, Europe, Canada, Australia, Middle East and Asia. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Since the majority of our sales are currently made in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets. If any of the events described above were to occur, our net sales could be seriously impacted, since a significant portion of our net sales are derived from international operations. For the quarters ended June 30, 2003 and 2002, approximately 32% and 34%, respectively, of our total net sales were derived from customers outside of the United States. As a result, our U.S. dollar earnings and net cash flows from international operations may be adversely affected by changes in foreign currency exchange rates.

We use derivative instruments to manage risks associated with foreign currency transactions in order to minimize the impact of changes in foreign currency exchange rates on earnings. We utilize forward contracts to reduce our net exposures, by currency, related to the monetary assets and liabilities of our foreign operations denominated in local currency. In addition, from time to time, we may enter into forward exchange contracts to establish with certainty the U.S. dollar amount of future firm commitments denominated in a foreign currency. The forward contracts do not qualify for hedge accounting and accordingly, all of these instruments are marked to market at each balance sheet date by a charge to earnings. We believe that these forward contracts do not subject us to undue risk due to foreign exchange movements because gains and losses on these contracts are generally offset by losses and gains on the underlying assets and liabilities. We do not use derivatives for trading or speculative purposes. All contracts have a maturity of less than one year.

The following table provides information about our foreign exchange forward contract outstanding as of June 30, 2003 (in thousands):

		Contract Value
	Buy/Sell	Foreign Currency	USD		Unrealized Loss in USD
Foreign Currency
Swiss Francs	Buy	650	$	497	$	(14	)
Euro	Sell	3,800	$	4,469	$	(124	)

The unrealized loss represents the difference between the contract value and the market value of the contract based on market rates as of June 30, 2003.

Given our foreign exchange position, a ten percent change in foreign exchange rates upon which this forward exchange contract is based would result in unrealized exchange gains or losses of approximately $497,000. In all material aspects, these exchange gains and losses would be fully offset by exchange losses or gains on the underlying net monetary exposures for which the contract is designated as a hedge. We do not expect material exchange rate gains and losses from other foreign currency exposures.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified investments, consisting only of investment grade securities such as debt, equity or both. We do hold investments in both fixed rate and floating rate interest earning instruments, and both carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.

Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which may have declined in market value due to changes in interest rates. Our investments may fall short of expectations due to changes in market conditions and as such we may suffer losses at the time of sale due to the decline in market value. All investments in the table below are carried at market value, which approximates cost.

The table below represents principal (or notional) amounts and related weighted-average interest rates by year of maturity of our investment portfolio (in thousands, except for interest rates).

	Year Ending June 30, 2004			Year Ending June 30, 2005			Year Ending June 30, 2006			Year Ending June 30, 2007		Year Ending June 30, 2008		Thereafter		Total
Cash equivalents	$	53,589		$	—		$	—		$	—	$	—	$	—	$	53,589
Average interest rate		1.10	%		—			—			—		—		—		1.10	%
Investments	$	43,891		$	56,741		$	41,331			—		—		—	$	141,963
Average interest rate		4.04	%		4.09	%		3.76	%		—		—		—		3.98	%

Total investment securities	$	97,480		$	56,741		$	41,331		$	—	$	—	$	—	$	195,552

Note that these amounts exclude equity investments totaling $1.2 million and uninvested cash of $47.2 million. Cash equivalents includes $28.8 million of restricted cash as of June 30, 2003.

Item 4. Controls and Procedures

As of August 5, 2003 (the “Evaluation Date”), we evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” for purposes of filing reports under the Exchange Act, and our “internal controls and procedures” for financial reporting purposes. This evaluation (the “controls evaluation”) was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). As part of their controls evaluation, the CEO and CFO considered the results of the review undertaken at the direction of the Board of Directors that resulted in the restatement of our consolidated financial statements, including the controls and corporate governance initiatives that were adopted by the Board of Directors. The CEO and CFO also considered the recommendations of KPMG LLP, the Company’s independent auditors, regarding the Company’s disclosure controls and procedures. Rules adopted by the SEC require that we present the conclusions of the CEO and the CFO about the effectiveness of our disclosure controls and internal controls based on and as of the Evaluation Date.

Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal controls and procedures are designed with the objective of providing reasonable assurance that (i) our transactions are properly authorized; (ii) our assets are safeguarded against unauthorized or improper use; and (iii) our transactions are properly recorded and reported, all to permit the preparation of our consolidated financial statements in conformity with generally accepted accounting principles.

Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of

fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

We plan to evaluate our disclosure and internal controls and procedures on a quarterly basis in accordance with the Exchange Act and the regulations and thereunder so that the conclusions concerning controls effectiveness can be reported in our quarterly reports on Form 10-Q and our annual reports on Form 10-K. The overall goals of these various evaluation activities are to monitor our disclosure and internal controls and procedures and to make modifications as necessary; our intent in this regard is that these controls and procedures will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant.

Among other matters, we sought in our evaluation to determine whether there were any “significant deficiencies” or “material weaknesses” in our internal controls and procedures, or whether we had identified any acts of fraud involving personnel who have a significant role in our internal controls and procedures. This information was important both for the controls evaluation generally and because the CEO and CFO certification requirement pursuant to items 5 and 6 of Section 302 of the Sarbanes-Oxley Act of 2002 mandates that they disclose that information to our Audit Committee and to our independent auditors and to report on related matters in this section of the quarterly report on Form 10-Q. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions”; those control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the consolidated financial statements. A “material weakness” is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the consolidated financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to address other control matters in the controls evaluation and where appropriate to consider what revision, improvement and/or correction to make in accord with our ongoing procedures.

Based upon the controls evaluation, our CEO and CFO have concluded that, subject to the limitations noted above, as of the Evaluation Date our disclosure controls and procedures are effective to ensure that material information relating to the company and our consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our internal controls and procedures are effective to provide reasonable assurance that our consolidated financial statements are fairly presented in conformity with generally accepted accounting principles. In accordance with SEC requirements, the CEO and CFO note that, since the Evaluation Date to the date of this quarterly report on Form 10-Q, there have been no significant changes in internal controls and procedures or in other factors that could significantly affect internal controls and procedures, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

IPO Class Action Litigation

Between March 20, 2001 and June 5, 2001, a number of purported shareholder class action complaints were filed in the United States District Court for the Southern District of New York against us, certain of our current or former officers and directors and three of the underwriters of our initial public offering. These actions purport to be brought on behalf of purchasers of our common stock in the period from June 23, 1999, the date of our initial public offering, to December 23, 1999 (or in some cases, to December 5 or 6, 2000), and make certain claims under the federal securities laws, including Sections 11 and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act, relating to our initial public offering.

On June 26, 2001, these actions were consolidated into a single action bearing the titleIn re Ariba, Inc. Securities Litigation, 01 CIV 2359. On August 9, 2001, that consolidated action was further consolidated before a single judge with cases brought against additional issuers (who numbered in excess of 300) and their underwriters that made similar allegations regarding the initial public offerings of those issuers. The latter consolidation was for purposes of pretrial motions and discovery only. On February 14, 2002, the parties signed and filed a stipulation dismissing the consolidated action without prejudice against us and certain individual officers and directors, which the Court approved and entered as an order on March 1, 2002. On April 19, 2002, the plaintiffs filed an amended complaint in which they dropped their claims against us and the individual officers and directors under Sections 11 and 15 of the Securities Act, but elected to proceed with their claims against such defendants under Sections 10(b) and 20(a) of the Exchange Act.

The amended complaint alleges that the prospectus pursuant to which shares of common stock were sold in our initial public offering, which was incorporated in a registration statement filed with the SEC, contained certain false and misleading statements or omissions regarding the practices of our underwriters with respect to their allocation to their customers of shares of common stock in our initial public offering and their receipt of commissions from those customers related to such allocations. The complaint further alleges that the underwriters provided positive analyst coverage of Ariba after the initial public offering, which had the effect of manipulating the market for our stock. Plaintiffs contend that such statements and omissions from the prospectus and the alleged market manipulation by the underwriters through the use of analysts caused our post-initial public offering stock price to be artificially inflated. The actions seek compensatory damages in unspecified amounts as well as other relief.

On June 24, 2003, a Special Litigation Committee of the Board of Directors of the Company approved a Memorandum of Understanding (the “MOU”) reflecting a settlement in which the plaintiffs agreed to dismiss the case against Ariba with prejudice in return for the assignment by Ariba of claims that Ariba might have against its underwriters. No payment to the plaintiffs by the Company is required under the MOU. There can be no assurance that the MOU will result in a formal settlement or that the Court will approve the settlement that the MOU sets forth. In the event that the MOU does not result in a formal settlement approved by the Court, Ariba intends to defend against these claims vigorously.

Restatement Class Action Litigation

Beginning January 21, 2003, a number of purported shareholder class action complaints were filed in the United States District Court for the Northern District of California against us and certain of our current and former officers and directors, all purporting to be brought on behalf of a class of purchasers of our common stock in the period from January 11, 2000 to January 15, 2003. The complaints bring claims under the federal securities laws, specifically Sections 10(b) and 20(a) of the Exchange Act, relating to our announcement that we would restate certain of our consolidated financial statements, and, in the case of two complaints, relating to our acquisition activity and related accounting. Specifically, these actions allege that certain of our prior consolidated financial statements contained false and misleading statements or omissions relating to our failure to properly recognize expenses and other financial items, as reflected in the then proposed restatement. Plaintiffs contend that such statements or omissions caused the stock price to be artificially inflated. Plaintiffs seek compensatory damages as well as other relief.

In a series of orders issued by the court in February and March, 2003, these cases were deemed related to each other and assigned to a single judge sitting in San Jose. On July 11, 2003, following briefing and a hearing on related motions, the Court entered two orders that together (1) consolidated the related cases for all purposes into a single action captionedIn re Ariba, Inc. Securities Litigation, Case No. C-03-00277 JF, (2) appointed a lead plaintiff, and (3) approved the lead plaintiff’s selection of counsel. The orders further direct the lead plaintiff to file an amended consolidated class action complaint within sixty days of the date of the orders,i.e., on or around September 9, 2003, and direct defendants to file their responses to that complaint on or around November 10, 2003. This case is still in its early stages. We intend to defend against these claims vigorously.

Shareholder Derivative Litigation

Beginning January 27, 2003, several shareholder derivative actions were filed in the Superior Court of California for the County of Santa Clara against certain of our current and former officers and directors and against us as nominal defendant. These actions were filed by shareholders purporting to assert, on our behalf, claims for breach of fiduciary duties, aiding and abetting, violations of the California insider trading law, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and contribution and indemnification. Specifically, the claims were based on our acquisition activity and related accounting implemented by the defendants, the alleged understatement of compensation expenses as reflected in our then proposed restatement, the alleged insider trading by certain defendants, the existence of the restatement class action litigation, in which we are alleged to be liable to defrauded investors, and the allegedly excessive compensation paid by us to one of our officers, as reflected in our then proposed restatement. The complaints sought the payment by the defendants to us of damages allegedly suffered by us, as well as other relief.

These actions were assigned to a single judge sitting in San Jose. On May 7, 2003 following briefing and hearing on related motions, the court issued an order that (1) consolidated the cases for all purposes into a single action captionedIn re Ariba, Inc. Shareholder Derivative Litigation, Lead Case No. CV 814325, and (2) appointed lead plaintiffs’ counsel. Pursuant to that order, plaintiffs filed an amended consolidated derivative complaint on May 28, 2003. The amended consolidated complaint restates the allegations, causes of action and relief sought as pleaded in the original complaints, and adds allegations relating to our April 10, 2003 announcement of the restatement of certain financial statements and also adds a cause of action for breach of contract. Defendants’ responses to the amended consolidated complaint are currently due on August 13, 2003. This case is still in its early stages.

mismanagement, waste of corporate assets and unjust enrichment. Specifically, the claims were based on our announcements that we intended to and/or had restated certain financial statements and on alleged insider trading by certain defendants. The complaints sought the payment by the defendants to Ariba of damages allegedly suffered by Ariba, as well as other relief.

General

We are subject to various claims and legal actions arising in the ordinary course of business. For example, on December 28, 2001, BCE Emergis, Inc., a distributor in Canada of certain of our products, filed a lawsuit against us in the United States District Court for the Northern District of California (No. 01-21221 PVT). Plaintiff seeks approximately thirty million dollars in alleged damages based on claims of breach of contract and promissory fraud/fraudulent concealment. Plaintiff alleges that we breached the Strategic Alliance Master Agreement between the parties and committed fraud in connection with our failure to provide specified software. We have counterclaimed against BCE Emergis. After a series of pleadings, Court rulings and a mediation, the matter has not yet been resolved. A previously set trial date has been vacated by the Court due to an ongoing discovery dispute that is now before the Ninth Circuit Court of Appeals. The Court has ordered a second mediation, which has been scheduled for August 29, 2003, and no trial is currently scheduled. Although litigation is inherently uncertain, we believe that we have meritorious defenses to all claims in the lawsuit. We have accrued for estimable and probable losses in our condensed consolidated financial statements for those matters where we believe that the likelihood that a loss has occurred is probable and the amount of loss is reasonably estimable based on estimates by management after consultation with legal counsel. However, there can be no assurance that existing or future litigation arising in the ordinary course of business or otherwise will not result in outcomes that differ significantly from these estimates.

Item 2. Changes in Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Securities Holders

The Company held its annual meeting of stockholders in San Mateo, California on June 30, 2003. Of the 268,413,179 shares outstanding as of the record date, 196,744,306 shares were present or represented by proxy at the meeting on June 30, 2003. At the meeting the following actions were voted upon:

To elect the following director to serve for a term ending upon the 2006 Annual Meeting of Stockholders or until his successor is elected and qualified:

		FOR		WITHHELD
Richard A. Kashnow		190,917,180		5,827,126

To ratify the appointment of KPMG LLP as the Company’s independent public accountants for the fiscal year ending September 30, 2003:

FOR		AGAINST		ABSTAIN
193,491,569		3,066,146		186,591

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

10.36*		Severance Agreement, dated May 21, 2003, by and between Registrant and John True.

31.1		Certifications Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

(b)

Reports on Form 8-K

A current report on Form 8-K was filed with the Securities and Exchange Commission on April 11, 2003 to report the completion of our internal review of certain accounting matters, the filing of certain required periodic reports with the Securities and Exchange Commission and the earnings release date of the second quarter of fiscal year 2003 financial results, and updating of our expense guidance for the second quarter fiscal 2003.

A current report on Form 8-K was filed with the Securities and Exchange Commission on April 28, 2003 to announce our earnings for the second quarter of fiscal year 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ARIBA, INC.

By:		/s/ JAMES W. FRANKOLA
		James W. Frankola Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Date: August 11, 2003

EXHIBIT INDEX

Exhibit No.		Exhibit Title
10.36*		Severance Agreement, dated May 21, 2003, by and between Registrant and John True.
31.1		Certifications Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Ariba (ARBA) Inactive 10-Q2003 Q3 Quarterly report

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