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

For the three months ended June 30, 2009 compared to same period in the prior year, net revenues decreased 4% to $2.1 billion due primarily to a stronger U.S. dollar partially offset by revenue generated from our recent acquisitions, Bill Me Later, Den Blå Avis, BilBasen and Gmarket. Our operating margin decreased five percentage points to 20% and diluted earnings per share decreased $0.10 to $0.25, compared to the same period of the prior year, due primarily to the negative impact of foreign currency movements, business mix and dilution from our recent acquisitions. Our Marketplaces and Payments segment margins decreased two percentage points and three percentage points, respectively, while our Communications segment margin increased five percentage points. For the three months ended June 30, 2009, we generated cash flow from operations of approximately $730.7 million that, when offset by cash used for capital expenditures of approximately $128.5 million, resulted in free cash flow (operating cash flow less capital expenditures) of $602.2 million.

Some key operating metrics that members of our senior management regularly review to evaluate our financial results include gross merchandise volume (GMV), number of sold items, net total payment volume (TPV), Merchant Services net total payment volume, SkypeOut Minutes, free cash flow, and revenue, excluding acquisitions and foreign currency impact.

Outlook

We expect net revenues and net income in the third quarter of 2009 to be similar to our performance in the second quarter of 2009. Compared to the second quarter of 2009, we expect the inclusion of Gmarket activity for a full quarter, along with a modest benefit from foreign currency movements, will be offset by a decline in take rates, continued softness in our advertising business and the negative impact of seasonality as a larger part of our business is generated internationally. We are seeing signs that our Marketplaces business has stabilized and is beginning to exhibit a slight acceleration in certain metrics. However, we continue to anticipate continued weakness in our vehicles business. We also expect PayPal to continue its growth trajectory.

Results of Operations

Summary of 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 Internet communications products 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 June 30, 2009, foreign currency movements against the dollar negatively impacted net revenues by approximately $178.3 million compared to the same period of the prior year. On a business segment basis for the three months ended June 30, 2009, foreign currency movements against the dollar negatively impacted Marketplaces, Payments and Communications net revenues by approximately $124.6 million, $29.3 million and $24.4 million, respectively, compared to the same period of the prior year. For the six months ended June 30, 2009, foreign currency movements against the dollar negatively impacted net revenues by approximately $369.9 million compared to the same period of the prior year. On a business segment basis for the six months ended June 30, 2009, foreign currency movements against the dollar negatively impacted Marketplaces, Payments and Communications net revenues by approximately $265.6 million, $58.2 million and $46.1 million, respectively, compared to the same prior of 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               Six Months Ended            Percent
                                        June 30, 2008     June 30, 2009    Change         June 30, 2008     June 30, 2009    Change
                                                             (in thousands, except percent changes)
Net Revenues by Type:
Net transaction revenues
Marketplaces                           $     1,233,307   $     1,056,917       (14 %)    $     2,500,940   $     2,090,744       (16 %)
Payments                                       580,287           630,162         9 %           1,140,007         1,234,995         8 %
Communications                                 130,151           155,661        20 %             249,942           298,899        20 %

Total net transaction revenues               1,943,745         1,842,740        (5 %)          3,890,889         3,624,638        (7 %)
Marketing services and other
revenues
Marketplaces                                   224,724           201,782       (10 %)            441,408           392,404       (11 %)
Payments                                        21,508            39,139        82 %              43,367            77,264        78 %
Communications                                   5,684            14,331       152 %              12,220            24,272        99 %

Total marketing services and other
revenues                                       251,916           255,252         1 %             496,995           493,940        (1 %)

Total net revenues                     $     2,195,661   $     2,097,992        (4 %)    $     4,387,884   $     4,118,578        (6 %)

Net Revenues by Segment:
Marketplaces                           $     1,458,031   $     1,258,699       (14 %)    $     2,942,347   $     2,483,148       (16 %)
Payments                                       601,795           669,301        11 %           1,183,374         1,312,259        11 %
Communications                                 135,835           169,992        25 %             262,163           323,171        23 %

Total net revenues                     $     2,195,661   $     2,097,992        (4 %)    $     4,387,884   $     4,118,578        (6 %)

Net Revenues by Geography:
U.S.                                   $     1,002,189   $       959,697        (4 %)    $     2,026,461   $     1,928,281        (5 %)
International                                1,193,472         1,138,295        (5 %)          2,361,423         2,190,297        (7 %)

Total net revenues                     $     2,195,661   $     2,097,992        (4 %)    $     4,387,884   $     4,118,578        (6 %)

                                              Three Months Ended           Percent               Six Months Ended            Percent
                                       June 30, 2008      June 30, 2009    Change         June 30, 2008     June 30, 2009    Change
                                                             (in millions, except percent changes)
Supplemental Operating Data:
Marketplaces Segment:
Gross merchandise volume (1)          $         15,684   $        13,427       (14 %)    $        31,720   $        26,298       (17 %)
Payments Segment:
Net total payment volume (2)          $         14,930   $        16,705        12 %     $        29,347   $        32,564        11 %
Communications Segment:
Registered users (3)                             338.2             480.5        42 %               338.2             480.5        42 %
SkypeOut Minutes (4)                           1,896.3           2,983.2        57 %             3,626.9           5,840.0        61 %

(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, among other things, users who may have registered via non-Skype based websites and users that have more than one account.

(4) Cumulative number of minutes that Skype users were connected with Skype's Internet communications products 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       $ 2,097,992                 N/A                N/A
Percent change from prior quarter                (1 %)              4 %

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

Marketplaces Net Transaction Revenues

Marketplaces net transaction revenues decreased $176.4 million and $410.2 million, or 14% and 16%, respectively, during the second quarter and first six months of 2009 compared to the same periods of the prior year, which is consistent with the 14% and 17% decrease in our GMV over the same periods. GMV generated by our largest category, vehicles, declined 32% and 33% during the second quarter and first six months of 2009, respectively, which was reflective of the decline in the automotive market generally as well as a shift in consumer preference to online automotive classified listings. Excluding vehicles, GMV during the second quarter and first six months of 2009 decreased 10% and 13%, respectively. The decrease in both revenue and GMV was attributable to a stronger dollar and difficult macroeconomic conditions. In addition, seller discounts and buyer loyalty programs had a negative impact on revenue growth.

Marketplaces net transaction revenues earned internationally totaled $569.0 million and $1.1 billion during the second quarter and the first six months of 2009, respectively, representing 54% and 53% of total Marketplaces net transaction revenues during those periods, respectively. Marketplaces net transaction revenues earned internationally totaled $676.3 million and $1.4 billion during the second quarter and the first six months of 2008, respectively, and represented 55% and 54% of total Marketplaces net transaction revenues during 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 $49.9 million and $95.0 million, or 9% and 8%, during the second quarter and first six months of 2009, respectively, compared to the same periods of the prior year, which is consistent with our increases in net TPV of 12% and 11% during the same period. Payments net transaction revenues increased due primarily to growth in our Merchant Services business, partially offset by a decline in revenue attributable to eBay. Our Merchant Services net TPV experienced 26% growth during both the second quarter and first six months of 2009 compared to the same periods of the prior year and represented 55% and 54% of PayPal's net TPV during the second quarter and first six months of 2009, respectively. 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.

Payments net transaction revenues earned internationally totaled $286.2 million and $553.2 million during the second quarter and first six months of 2009, respectively, representing 45% of total Payments net transaction revenues during both periods. Payments net transaction revenues earned internationally were $255.7 million and $497.2 million during the second quarter and first six months of 2008, respectively, and represented 44% of total Payments net transaction revenues during both periods.

Communications Net Transaction Revenues

Communications net transaction revenues increased $25.5 million, or 20%, and $49.0 million, or 20%, during the second quarter and first six months of 2009, respectively, compared to the same periods of the prior year. The increase in net transaction revenues was due primarily to a 57% and 61% increase in SkypeOut minutes during the second quarter and first six months of 2009 compared to the same periods of the prior year. The increase in SkypeOut minutes during the second quarter and first six months of 2009 was due primarily to the growth in the cumulative number of Skype registered users to 480.5 million at June 30, 2009 from 338.2 million at June 30, 2008. We believe that the growth in Skype registered users was primarily due to its marketing activities, ongoing viral adoption (whereby users encourage others to become users), strategic partnership initiatives and the expansion of its product offerings.

Marketing Services and Other Revenues

Marketing services and other revenues increased $3.3 million or 1% during the second quarter of 2009, compared to the same period of the prior year, and represented 12% of total net revenues during the second quarter of 2009, compared to 11% of total net revenues during the second quarter of 2008. The increase in marketing services and other revenues during the second quarter of 2009 was due primarily to income generated from our Bill Me Later portfolio (acquired November 2008) and an increase in our Classifieds business, primarily attributable to Den Blå Avis and BilBasen (acquired October 2008). These increases were partially offset by a decrease in Shopping.com revenue related to the impact of rule changes made in the third quarter of 2008 by third-party search engines that adversely affected click-though traffic to retailers from our Shopping.com website and reduced associated fees, as well as a decline in interest rates reduced interest earned on certain PayPal customer account balances resulting from decreased interest rates.

Marketing services and other revenues decreased $3.1 million, or 1%, during the first six months of 2009, compared to the same period of the prior year, and represented 12% of total net revenues during the first six months of 2009, compared to 11% of total net revenues during the first six months of 2008. The decrease in marketing services and other revenues during the first six months of 2009 is due primarily to a decrease in Shopping.com revenue related to the impact of search engine rule changes described above, and a decrease in interest earned on certain PayPal customer accounts resulting from decreased interest rates. These decreases were partially offset by income generated from our Bill Me Later portfolio and an increase in our Classifieds business, primarily attributable to Den Blå Avis and BilBasen.

Summary of Cost of Net Revenues

The following table summarizes changes in cost of net revenues:



                                                                        Three Months Ended                                            Six Months Ended
                                                                                          Change from                                                    Change from
                                                               June 30,                   2008 to 2009                      June 30,                     2008 to 2009
                                                         2008           2009          in Dollars       in %          2008             2009           in Dollars       in %
                                                                                               (in thousands, except percentages)
Cost of net revenues:
Marketplaces                                           $ 224,432      $ 221,689      $     (2,743 )      (1 %)    $   442,851      $   437,432      $     (5,419 )      (1 %)
As a percentage of total Marketplaces net revenues          15.4 %         17.6 %                                        15.1 %           17.6 %
Payments                                                 266,377        289,140            22,763         9 %         505,261          570,142            64,881        13 %
As a percentage of total Payments net revenues              44.3 %         43.2 %                                        42.7 %           43.4 %
Communications                                            71,294         80,944             9,650        14 %         139,403          157,585            18,182        13 %
As a percentage of total Communications net revenues        52.5 %         47.6 %                                        53.2 %           48.8 %

Total cost of net revenues                             $ 562,103      $ 591,773      $     29,670         5 %     $ 1,087,515      $ 1,165,159      $     77,644         7 %

As a percentage of net revenues                             25.6 %         28.2 %                                        24.8 %           28.3 %

Cost of net revenues consists primarily of costs associated with payment processing, customer support and site operations and Skype call termination costs. 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.

Marketplaces cost of net revenues decreased $2.7 million, or 1%, and $5.4 million, or 1%, during the second quarter and first six months of 2009, respectively, compared to the same periods of the prior year. The decreases during both periods were not material. Marketplaces cost of net revenues increased as a percentage of Marketplaces net revenues due primarily to the impact of foreign currency movements on revenues, pricing discounts and growth of lower margin Marketplaces businesses.

Payments cost of net revenues increased $22.8 million, or 9%, and $64.9 million, or 13%, during the second quarter and first six months of 2009, respectively, compared to the same periods of the prior year. The increase in cost of net revenues is primarily due to an increase in site operations and payment processing costs in conjunction with the acquisition of Bill Me Later (acquired November 2008) as well as the impact from our net TPV growth. Cost of net revenues as a percentage of Payments net revenues during the second quarter of 2009 decreased, compared to the same period of the prior year, driven primarily by a more favorable geographic and processor mix. Cost of net revenues as a percentage of Payments net revenues during the first six months of 2009 increased, compared to the same period of the prior year, driven primarily by increased investment in our site operations, partially offset by a more favorable geographic and processor mix.

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

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



                                                               Three Months Ended                                             Six Months Ended
                                                   June 30,               Change from 2008 to 2009                June 30,             Change from 2008 to 2009
                                               2008        2009           in Dollars            in %          2008         2009        in Dollars            in %
                                                                                      (in thousands, except percentages)
Sales and marketing                          $ 496,883   $ 464,500      $       (32,383 )         (7 %)    $ 1,011,437   $ 867,816   $      (143,621 )         (14 %)
Product development                            186,791     198,403               11,612            6 %         363,551     399,919            36,368            10 %
General and administrative                     263,161     257,498               (5,663 )         (2 %)        544,882     525,789           (19,093 )          (4 %)
Provision for transaction and loan losses       86,438      92,681                6,243            7 %         172,603     173,915             1,312             1 %
Amortization of acquired intangible assets      54,918      63,795                8,877           16 %         109,752     127,263            17,511            16 %
Restructuring                                       -       17,653               17,653           -                 -       24,264            24,264            -
Interest and other income (expense), net        22,766      (4,529 )            (27,295 )       (120 %)         49,510      13,563           (35,947 )         (73 %)
Provision for income taxes                     107,788      79,818              (27,970 )        (26 %)        227,591     163,561           (64,030 )         (28 %)

Sales and Marketing



                                     Three Months Ended                            Six Months Ended
                                  June 30,       June 30,       Percent        June 30,        June 30,       Percent
                                    2008           2009         Change           2008            2009         Change
                                                          (in thousands, except percentages)
Sales and marketing               $ 496,883      $ 464,500           (7 %)    $ 1,011,437      $ 867,816          (14 %)
As a percentage of net revenues        22.6 %         22.1 %                         23.1 %         21.1 %

Sales and marketing expenses consist primarily of advertising costs, marketing . . .