This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans or intentions (such as those relating to future business or financial results, new features or services, or management strategies). You can identify these forward-looking statements by words such as "may," "will," "would," "should," "could," "expect," "anticipate," "believe," "estimate," "intend," "plan" and other similar expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in "Part II -Item 1A:
Risk Factors," of this Quarterly Report on Form 10-Q as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission, or the SEC. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report.

Overview

We operate three primary business segments: Marketplaces, Payments and Communications. Our Marketplaces segment provides the infrastructure to enable global online commerce on a variety of platforms, including the traditional eBay.com platform, and our other online platforms, such as our online classifieds businesses, our secondary tickets marketplace (StubHub), our online shopping comparison website (Shopping.com), our apartment listing service platform (Rent.com), as well as our fixed price media marketplace (Half.com). Our payments segment is comprised of our online payment solutions - PayPal (which enables individuals and businesses to securely, easily and quickly send and receive payments online in approximately 190 markets worldwide) and Bill Me Later (which we acquired in November 2008 and which enables online U.S. merchants to offer, and U.S. consumers to obtain, transactional credit at the point of sale). Our Communications segment, which consists of Skype, enables Voice over Internet Protocol (VoIP) calls between Skype users and provides low-cost connectivity to traditional fixed-line and mobile telephones.

For the three months ended March 31, 2009, net revenues decreased 8% to $2.0 billion, diluted earnings per share decreased from $0.34 to $0.28 and operating cash flow decreased 13% to $668.5 million, compared to the same period of the prior year. While our Marketplaces segment, in total, experienced a decrease in revenue of 18%, our Payments and Communications segments achieved revenue growth rates of 11% and 21%, respectively. Although our operating margin decreased four percentage points to 21%, our Marketplaces and Communications segment margins increased 1% and 9%, respectively, while our Payments segment margin decreased 5%, due primarily to our acquisition of Bill Me Later during the fourth quarter of 2008.

Outlook

We expect revenues and net income in the second quarter of 2009 to continue to be impacted by weak consumer spending, along with the negative impact resulting from foreign exchange and lower interest rates, both of which will continue to have a significant impact on our businesses. Consistent with recent trends, we assume that the declines in GMV and TPV will remain stable with Q1 2009 levels, excluding the impact of foreign currency fluctuations. In addition, with respect to our Marketplaces segment, we expect our take rate will decline as more sellers qualify for discounts. We also expect advertising to be softer in light of recent trends.

Results of Operations

Net Revenues

Our net transaction revenues from our Marketplaces segment are derived primarily from listing and final value fees paid by sellers. For our Payments segment, net transaction revenues are generated primarily by fees paid by merchants for payment processing services. Our Communications segment net transaction revenues are generated primarily from fees charged to users to connect Skype's VoIP product to traditional fixed-line and mobile telephones. These fees are charged on a per-minute basis or on a subscription basis, and we refer to these minutes as SkypeOut minutes.

Our marketing services and other revenues are generated from all three of our business segments. Our marketing services are derived principally from the sale of advertisements, revenue sharing arrangements, classifieds fees and lead referral fees. Our other revenues are derived principally from interest earned from banks on certain PayPal customer account balances, interest and fees earned on the Bill Me Later loan portfolio and from contractual arrangements with third parties that provide services to our users.

Revenues are attributed to U.S. and international geographies primarily based upon the country in which the seller, payment recipient, customer, Skype user's Internet protocol address, online property that generates advertising, or other service provider, as the case may be, is located. Because we generate the majority of our revenue internationally, fluctuations in foreign currency exchange rates impact our results of operations. For the three months ended March 31, 2009, foreign currency movements against the dollar negatively impacted net revenues by approximately $191.6 million compared to the prior year. On a business segment basis for the three months ended March 31, 2009, foreign currency movements against the dollar negatively impacted Marketplaces, Payments and Communications net revenues by approximately $141.1 million, $28.9 million and $21.6 million, respectively, compared to the prior period.

The following table sets forth the breakdown of net revenues by type, segment and geography for the periods presented. In addition, we have provided a table of certain key operating metrics that we believe are significant factors affecting our net revenues.

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                                                         Three Months Ended               Percent
                                                 March 31, 2008       March 31, 2009      Change
                                                     (in thousands, except percent changes)
Net Revenues by Type:
Net transaction revenues
Marketplaces                                    $      1,267,633     $      1,033,827         (18 %)
Payments                                                 559,720              604,833           8 %
Communications                                           119,791              143,238          20 %

Total net transaction revenues                         1,947,144            1,781,898          (8 %)
Marketing services and other revenues
Marketplaces                                             216,684              190,622         (12 %)
Payments                                                  21,859               38,125          74 %
Communications                                             6,536                9,941          52 %

Total marketing services and other revenues              245,079              238,688          (3 %)


Total net revenues                              $      2,192,223     $      2,020,586          (8 %)

Net Revenues by Segment:
Marketplaces                                    $      1,484,317     $      1,224,449         (18 %)
Payments                                                 581,579              642,958          11 %
Communications                                           126,327              153,179          21 %

Total net revenues                              $      2,192,223     $      2,020,586          (8 %)

Net Revenues by Geography:
U.S.                                            $      1,024,272     $        968,584          (5 %)
International                                          1,167,951            1,052,002         (10 %)

Total net revenues                              $      2,192,223     $      2,020,586          (8 %)

                                                 Three Months Ended
                                          March 31, 2008     March 31, 2009
                                                    (in millions)
          Supplemental Operating Data:
          Marketplaces Segment:
          Gross merchandise volume (1)   $         16,036   $         12,871
          Payments Segment:
          Net total payment volume (2)   $         14,417   $         15,859
          Communications Segment:
          Registered users (3)                      309.3              443.2
          SkypeOut Minutes (4)                    1,730.6            2,856.8

(1) Total value of all successfully closed items between users on eBay Marketplaces trading platforms during the period, regardless of whether the buyer and seller actually consummated the transaction.

(2) Total dollar volume of payments, net of payment reversals, successfully completed through our payments network or on Bill Me Later accounts during the period, excluding the payment gateway business.

(3) Cumulative number of unique user accounts, which includes users who may have registered via non-Skype based websites, as of the end of the period. Users may register more than once and, as a result, may have more than one account.

(4) Cumulative number of minutes that Skype users were connected with Skype's VoIP product to traditional fixed-line and mobile telephones.

Seasonality

The following table sets forth, for the periods presented, our total net
revenues and the sequential quarterly growth of these net revenues:



                                                                   Quarter Ended
                                       March 31            June 30          September 30         December 31
                                                        (In thousands, except percentages)
2007
Net revenues                          $ 1,768,074        $ 1,834,429       $    1,889,220        $  2,180,606
Percent change from prior quarter               3 %                4 %                  3 %                15 %
2008
Net revenues                          $ 2,192,223        $ 2,195,661       $    2,117,531        $  2,035,846
Percent change from prior quarter               1 %                0 %                 (4 %)               (4 %)
2009
Net revenues                          $ 2,020,586                N/A                  N/A                 N/A
Percent change from prior quarter              (1 %)

We expect transaction activity patterns on our websites to increasingly mirror general consumer buying patterns.

Marketplaces Net Transaction Revenues

Marketplaces net transaction revenues decreased $233.8 million, or 18%, during the first quarter of 2009 compared to the same period of the prior year, which is consistent with the 20% decrease in our GMV over the same period. GMV generated by our largest category, vehicles, declined 35%, in-line with the decline in the automotive market generally. Excluding vehicles, GMV decreased 16% due primarily to decreases in our consumer electronics, clothing and apparel and parts and accessories categories. The revenue decrease was attributable to the impact of a strengthening dollar and the decline of the core business in difficult macroeconomic conditions. In addition, pricing changes and seller discounts had a negative impact on revenue growth.

Marketplaces net transaction revenues earned internationally declined 23% to $530.6 million during the first quarter of 2009 from $686.2 million during the first quarter of 2008, representing 51% and 54% of total Marketplaces net transaction revenues in those periods, respectively. The decline in Marketplaces net transaction revenues earned internationally is due primarily to the negative impact of foreign currency movements against the dollar.

Payments Net Transaction Revenues

Payments net transaction revenues increased $45.1 million, or 8%, during the first quarter of 2009, compared to the same period of the prior year, which is consistent with our increase in net TPV of 10% during the same period. Payments net transaction revenues increased due primarily to growth in our Merchant Services business. The continued increase in PayPal penetration on eBay partially offset the negative impact of lower GMV on revenue. Our Merchant Services net TPV experienced 26% growth during the first quarter of 2009, compared to the same period of the prior year and represented 53% of PayPal's net TPV during the first quarter of 2009. The increase in our Merchant Services business is due primarily to an increase in the number of online merchants offering PayPal as a payment option, as well as an increase in the use of PayPal by existing merchants.

Payments net transaction revenues earned internationally totaled $267.0 million and $241.6 million during the first quarter of 2009 and 2008, respectively, representing 44% and 43% of total Payments net transaction revenues, respectively.

Communications Net Transaction Revenues

Communications net transaction revenues increased $23.4 million, or 20%, during the first quarter of 2009, compared to the same period of the prior year. The increase in net transaction revenues was due primarily to a 65% increase in SkypeOut minutes during the first quarter of 2009 compared to the same period of the prior year. The increase in SkypeOut minutes was due primarily to the growth in the cumulative number of Skype registered users to 443.2 million at March 31, 2009 from 309.3 million at March 31, 2008. We believe that the growth in Skype registered users was primarily due to its marketing activities, strategic partnership initiatives and the expansion of its product offerings.

Marketing Services and Other Revenues

Marketing services and other revenues decreased $6.4 million, or 3%, during the first quarter of 2009 compared to the same period of the prior year, and represented 12% of total net revenues during the first quarter of 2009 compared to 11% of total net revenues during the first quarter of 2008. The decline in marketing services and other revenues was due primarily to a decrease in Shopping.com revenue related to the impact of rule changes made by third-party search engines that adversely affected click-though traffic to retailers from our Shopping.com website and reduced associated fees. Additionally, a decline in interest rates reduced interest earned on certain PayPal customer account balances. These decreases were partially offset by interest income generated from our Bill Me Later loan portfolio (acquired on November 7, 2008) and an increase in our Classifieds business primarily attributable to Den Blå Avis and BilBasen (acquired on October 6, 2008).

Summary of Cost of Net Revenues, Operating Expenses, Non-Operating Items and
Provision for Income Taxes

The following table summarizes changes in cost of net revenues, operating
expenses, non-operating items and provision for income taxes:



                                               Three Months Ended          Change from
                                                   March 31,              2008 to 2009
(in thousands, except percentages)              2008        2009      in Dollars       in %
Cost of net revenues                         $  525,412   $ 573,386   $    47,974        9%
Sales and marketing                             514,554     403,316      (111,238 )   (22%)
Product development                             176,760     201,516        24,756       14%
General and administrative                      281,721     268,291       (13,430 )    (5%)
Provision for transaction and loan losses        86,165      81,234        (4,931 )    (6%)
Amortization of acquired intangible assets       54,834      63,468         8,634       16%
Restructuring                                        -        6,611         6,611      100%
Interest and other income, net                   26,744      18,092        (8,652 )   (32%)
Provision for income taxes                      119,803      83,743       (36,060 )   (30%)

Cost of Net Revenues



                                                  Three Months Ended
                                          March 31, 2008        March 31, 2009
                                          (In thousands, except percentages)
      Cost of net revenues              $          525,412     $        573,386
      As a percentage of net revenues                 24.0 %               28.4 %

Cost of net revenues consists primarily of costs associated with payment processing, customer support and site operations and Skype telecommunications. Significant components of these costs include bank transaction fees, credit card interchange fees, assessments, Bill Me Later related interest charges, employee compensation, contractor costs, facilities costs, depreciation of equipment and amortization expense.

The increase in cost of net revenues in the first quarter of 2009 of $48.0 million, or 9%, compared to the same period in the prior year, was due primarily to an increase in customer support and site operations costs, Skype telecommunication costs, Bill Me Later interest related charges and amortization of developed technology. Aggregate customer support and site operations costs increased approximately $28.0 million, or 13%, due primarily to the development and expansion of our customer support and site operations infrastructure. Skype telecommunications costs increased by $8.5 million, or 13%, due to the increase in SkypeOut minutes. Amortization of developed technology increased $5.0 million, or 83%, due to the amortization of acquired intangible assets associated with businesses acquired in 2008. Interest charges related to Bill Me Later (acquired on November 7, 2008) were $2.9 million. Cost of net revenues increased as a percentage of net revenues primarily as a result of the growth of our lower gross margin businesses, particularly PayPal and Skype.

Sales and Marketing



                                                  Three Months Ended
                                          March 31, 2008        March 31, 2009
                                          (In thousands, except percentages)
      Sales and marketing               $          514,554     $        403,316
      As a percentage of net revenues                 23.5 %               20.0 %

Sales and marketing expenses consist primarily of advertising costs, marketing programs and employee compensation for sales and marketing staff.

The decrease in sales and marketing expenses in the first quarter of 2009 of $111.2 million, or 22%, compared to the same period of the prior year, was due primarily to a decline in marketing and advertising program costs. During the first quarter of 2009, marketing expenses were lower primarily due to reduced marketing spend and a shift in focus from customer acquisition to customer retention (for which certain associated expenses are recorded as a reduction in revenue instead of sales and marketing expense). Sales and marketing expense as a percentage of net revenues during the first quarter of 2009 decreased from the same period of the prior year due to lower, more efficient spending within our Marketplaces segment as well as the growth of our Payments and Communications segments, each of which has a lower relative sales and marketing expenses than our Marketplaces segment.

Product Development



                                                  Three Months Ended
                                          March 31, 2008        March 31, 2009
                                          (In thousands, except percentages)
      Product development               $          176,760     $        201,516
      As a percentage of net revenues                  8.1 %               10.0 %

Product development expenses consist primarily of employee compensation, contractor costs, facilities costs and depreciation on equipment. Product development expenses are net of required capitalization of major site and other product development efforts, including the development of our next generation platform architecture, migration of certain platforms, seller tools and Payments services projects. These capitalized costs totaled $26.0 million and $24.7 million during the first quarter of 2009 and 2008, respectively, and are primarily reflected as a cost of net revenues when amortized in future periods.

Product development expenses increased in the first quarter of 2009 by $24.8 million, or 14%, compared to the same period of the prior year. Product development also increased as a percentage of revenue, period over period. The increase in both dollars and as a percentage of revenue, was due primarily to an increase in employee-related costs (including consultant costs, facility costs and equipment-related costs) driven by increased investment in our top technology priorities - search, catalog, platform, and user experience.

General and Administrative



                                                  Three Months Ended
                                          March 31, 2008        March 31, 2009
                                          (In thousands, except percentages)
      General and administrative        $          281,721     $        268,291
      As a percentage of net revenues                 12.9 %               13.3 %

General and administrative expenses consist primarily of employee compensation, contractor costs, facilities costs, depreciation of equipment, employer payroll taxes on employee stock-based compensation, insurance and professional fees.

The decrease in general and administrative expenses in the first quarter of 2009 of $13.4 million, or 5%, compared to the same period of the prior year, was due primarily to decreases in employee-related and contractor costs partially offset by acquisition related costs and the impact of the change in foreign currency rates. General and administrative expenses as a percentage of net revenue in the first quarter of 2009 increased slightly due to a decline in net revenues year over year.

Provision for Transaction and Loan Losses



                                                      Three Months Ended
                                              March 31, 2008        March 31, 2009
                                              (In thousands, except percentages)
  Provision for transaction and loan loss   $            86,165     $        81,234
  As a percentage of net revenues                           3.9 %               4.0 %

Provision for transaction and loan losses primarily consists of bad debt expense associated with our accounts receivable balance, loan reserves associated with our Bill Me Later loan receivable balance, PayPal transaction loss expense, as well our losses resulting from our customer protection programs.

The decrease in the provision for transaction and loan losses during the first quarter of 2009 of $4.9 million, or 6%, compared to the same period of the prior year, was due primarily to decreases in bad debt expense and customer protections programs, partially offset by an increase in PayPal transaction loss expense and the provision for loan losses associated with our Bill Me Later business (acquired on November 7, 2008).

Amortization of Acquired Intangible Assets



                                                        Three Months Ended
                                                March 31, 2008        March 31, 2009
                                                (In thousands, except percentages)
 Amortization of acquired intangible assets   $            54,834     $        63,468
 As a percentage of net revenues                              2.5 %               3.1 %

From time to time we have purchased, and we expect to continue to purchase, assets or businesses to accelerate category and geographic expansion, improve the features, functions, and formats available to our users and maintain a leading role in ecommerce, online payments and online communications. These purchase transactions generally result in the creation of acquired intangible assets with finite lives and lead to a corresponding increase in our amortization expense in future periods. We amortize intangible assets over the period of estimated benefit, using the straight-line method and estimated useful lives ranging from one to eight years. The increase in amortization of acquired amortizable intangibles during the first quarter of 2009, compared to the same period of the prior year, was due to the business acquisitions that we completed during the year ended December 31, 2008.

Restructuring

During the first quarter of 2009, total restructuring charges amounted to $6.6 million. The restructuring charges incurred during the period primarily related to employee severance and benefits. Once completed, the restructuring activities are expected to result in an annual cost savings of approximately $150.0 million. See "Note 9 - Restructuring" to the condensed consolidated financial statements included in this report.

Interest and Other Income, Net



                                                  Three Months Ended
                                          March 31, 2008        March 31, 2009
                                          (In thousands, except percentages)
      Interest and other income, net    $            26,744     $        18,092
      As a percentage of net revenues                   1.2 %               0.9 %

Interest and other income, net, consists of interest earned on cash, cash equivalents and investments, as well as foreign exchange transaction gains and . . .