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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended September 30, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
                 to



Commission file number 000-26299



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ARIBA, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0439730                          
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification Number)
|                                                               | 
|807 11th Avenue Sunnyvale, California                          |  | 94089                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



(650) 390-1000

(Registrants telephone number, including area code)



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Securities registered pursuant to Section 12(b) of the Act:

None



Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.002 par value



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Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ̈No  x



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ̈No  x



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.    Yes  x    No ̈



Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ̈



Indicate by check mark whether registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No ̈



Indicate by check mark whether registrant is a shell company (as defined in Exchange Act Rule
12b-2).    Yes ̈No  x



The aggregate market value of the common stock held by non-affiliates of the
registrant as of March 31, 2005, the last business day of the registrants most recently completed second fiscal quarter (based on the closing price of $7.76 on the Nasdaq Stock Market as of that date) was approximately $513.0 million.



As of November 30, 2005, there were 72,219,134 shares of the
Registrants common stock outstanding.



DOCUMENTS
INCORPORATED BY REFERENCE



Portions of the
registrants definitive proxy statement to be delivered to stockholders in connection with the 2006 annual meeting of stockholders are incorporated by reference in Part III of this Form 10-K.



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ARIBA, INC.

FORM 10-K

September 30, 2005



TABLE OF CONTENTS



|           |  |                                                                                                              |  |        
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | -------
|Item       |  |                                                                                                              |  | PageNo.
|PART I    
|1.         |  | Business                                                                                                     |  | 4      
|1A.        |  | Risk Factors                                                                                                 |  | 14     
|1B.        |  | Unresolved Staff Comments                                                                                    |  | 22     
|2.         |  | Properties                                                                                                   |  | 22     
|3.         |  | Legal Proceedings                                                                                            |  | 23     
|4.         |  | Submission of Matters to a Vote of Security Holders                                                          |  | 24     
|          
|PART II   
|5.         |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 25     
|6.         |  | Selected Financial Data                                                                                      |  | 27     
|7.         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 29     
|7A.        |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 47     
|8.         |  | Financial Statements and Supplementary Data                                                                  |  | 49     
|9.         |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 87     
|9A.        |  | Controls and Procedures                                                                                      |  | 87     
|9B.        |  | Other Information                                                                                            |  | 89     
|          
|PART III  
|10.        |  | Directors and Executive Officers of the Registrant                                                           |  | 90     
|11.        |  | Executive Compensation                                                                                       |  | 90     
|12.        |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 90     
|13.        |  | Certain Relationships and Related Transactions                                                               |  | 90     
|14.        |  | Principal Accountant Fees and Services                                                                       |  | 90     
|          
|PART IV   
|15.        |  | Exhibits and Financial Statement Schedules                                                                   |  | 91     
|           | 
|SIGNATURES |  | 95                                                                                                          



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FORWARD-LOOKING STATEMENTS



The information in this report 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 elsewhere in this report in the section entitled Risk Factors and the risks discussed in our other Securities and Exchange Commission (SEC) filings. Ariba, Inc. is referred to herein as
Ariba or we.



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PART I



|ITEM 1. | BUSINESS
|------- | --------



Overview



Ariba provides spend management solutions that allow
enterprises to efficiently manage the purchasing of non-payroll goods and services required to run their business. We refer to these non-payroll expenses as spend. Our solutions include software, network access, professional services and
expertise. They are designed to provide enterprises with technology and business process improvements to better manage their spend and, in turn, save money. Our software 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.



Procurement organizations have increasingly evolved over the last several years from providing a primarily tactical function
to providing a strategic function in an effort to lower costs. Enterprises have increasingly focused on global suppliers, manufacturers and service providers in order to reduce costs, better manage supplier relationships, make faster decisions, and
establish more efficient procurement processes. At the same time, technological advances are further enabling these global business initiatives, as Internet connectivity has defined new ways to identify, negotiate and engage with suppliers and
partners worldwide, while other data aggregation and enrichment tools are providing greater insight into procurement trends and best practices.



We believe that technology alone is not enough to transform procurement from a tactical to a strategic function. Accordingly, Ariba Spend Management
solutions combine domain expertise, operational services, software and network access. We work closely with our customers, providing sourcing, procurement and commodity expertise around the world to help companies optimize their spend management
processes and supplier relationships. We then leverage our broad spend management technology platform to help our customers realize repeatable savings over the long term.



Ariba was incorporated in Delaware in September 1996 and from that date through March 1997 was in the development stage,
conducting research and developing our initial products. Our principal executive offices are located at 807 11thAvenue, Sunnyvale, California 94089.



Ariba Spend Management Solutions



Ariba provides world-class spend management solutions
that drive rapid and sustainable bottom-line results. Our solutions allow enterprises to take a step-by-step approach with products and services that work together. By combining software, network access, professional services and expertise into a
comprehensive solution, Ariba helps customers to address six key areas of spend management.



| |  |  | Ariba Visibility Solutionsprovide enterprises with a comprehensive set of products and services to enhance spend visibility and control across spend categories,
disparate systems and corporate divisions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ariba Sourcing Solutionsallow enterprises to identify top suppliers across a broad range of categories to negotiate procurement terms, leverage and aggregate spend,
implement best practices and manage procurement contracts.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ariba Contract Management Solutionsenable enterprises to streamline and automate the contract process from contract creation to compliance management.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ariba Procurement and Expense Solutionsdeliver flexible, easy-to-use applications and services for requisitioning and procurement across all types of spend.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ariba Invoice and Payment Solutionsenable enterprises to streamline and automate less efficient, paper-intensive invoicing and payment processes to improve speed and
accuracy.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Ariba Supplier Management Solutionsprovide enterprises with a broad set of products and services to optimize buyer-supplier interactions throughout the spend management
lifecycle.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Ariba Spend Management solutions are
delivered in a flexible manner, depending upon the needs and preferences of the customer. Ariba Spend ManagementBasic Package will enable small to mid-sized companies, or divisions of larger companies, to rapidly and cost-effectively
begin using our solutions, including core software functionality with basic support and empowerment, in an on-demand model. Ariba Spend ManagementProfessional Package will deliver sophisticated spend management capabilities in an
on-demand delivery model, including all of the capabilities of the Basic Package, as well as advanced functionality, flexible configuration capabilities, advanced project support and training services. Ariba Spend ManagementEnterprise
Package delivers the full power of spend management to enterprises looking to achieve a competitive advantage through comprehensive spend management. Enterprise Packages are available as hosted on-demand solutions or as installed applications,
and include prioritized support, interactive training, expert services and extensive customization and control capabilities. Customers may subscribe to our solutions for a specified term, purchase a perpetual license or pay for services on a
time-and-materials basis, depending upon their business requirements.



Ariba
Software Applications



Ariba software applications are
built to leverage the Internet and provide enterprises with real-time access to their business data and their business partners. They are designed to integrate with all major platforms and can be accessed via a web browser. One of the key
differentiators of Ariba Spend Management solutions is the ability to integrate with multi-ERP (enterprise resource planning) software applications. Many large corporations use several different ERP platforms that cannot easily work with each other.
For this reason, our software applications are designed to run on top of major legacy or backend applications for business processes, such as human resource management and accounting, thus eliminating the need for manual transfer of critical
information from Ariba products to ERP systems.



Historically,
our software applications were primarily provided as installed applications that are deployed behind a customers firewall. However, in response to recent customer demand, we are increasingly providing on-demand delivery of our software
applications, whereby applications are hosted by Ariba or a third party, and customers access the solution via the Internet. Throughout fiscal year 2006, we plan to release new versions of our software that are better suited and more cost effective
for an on-demand delivery model. In addition, we plan to offer more of our software as part of bundled solutions that may include the combination of multiple modules as well as our professional services, such as process expertise, commodity
knowledge, training, support and other services.



Ariba
Visibility Solutions modules:



Ariba
Analysis is designed to provide our customers with a single, unified view of their spending activities across all of their suppliers, divisions and purchased goods or services. Analytical tools summarize data into meaningful dashboards to
help purchasing and sourcing professionals identify specific groups of goods and services with the largest opportunities for savings. Savings opportunities are frequently identified for goods or services which employees purchase without proper
authorization or from a fragmented supply base. By providing visibility into and control of spend across all categories, systems and divisions throughout the source-to-pay cycle, Ariba Analysis helps businesses drive significant reductions in spend.
Ariba Analysis was first introduced in March 2002.



Ariba
Data Enrichment facilitates spend analysis by cleansing, classifying and enriching real spend data from an enterprises various data systems. Ariba Data Enrichment uses natural language processing to classify free-form text
descriptions, a database of over 16 million supplier records to further assist in classifying and enriching supplier data, and an exhaustive list of commodity-specific rules to add clarity to all types of spend. The technology base for Ariba
Data Enrichment was developed by Softface, Inc. (Softface), which we acquired in April 2004.



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Ariba Sourcing Solutions modules:



Ariba QuickSource is a negotiation platform that allows sourcing professionals to more fully automate the
process of structuring and executing online markets by simplifying and enhancing the request-for-quote/ request-for-proposal process. Ariba QuickSource is a hosted application that delivers rapid, measurable savings and, compared to an installed
application, can be deployed quickly and is easy to use. Ariba QuickSource was developed by FreeMarkets, Inc. (FreeMarkets), which we merged with in July 2004, and was first introduced in February 2001.



Ariba Sourcing is an enterprise-wide strategic sourcing
application designed for all spend categories. It assists professional buyers at many steps in the sourcing process, from defining spending baselines and category requirements to finding suppliers and negotiating agreements. Ariba Sourcing speeds
and streamlines the request-for-quote/request-for-proposal process, dynamic events, auctions and negotiations management by providing event management tools, team management functionality, communications facilitation, and automated supplier bid
collection and analysis. Ariba Sourcing was first introduced in September 2001.



Ariba Supplier Performance Management helps enterprises define, measure and enhance the performance of suppliers to meet business goals. It enables enterprises to gather supplier performance data, use
analysis templates to compare suppliers across a category for better sourcing and procurement decisions, collaborate on ideas, issues and documents throughout the sourcing process, and monitor supplier performance across transactional and subjective
interactions using quantitative and qualitative data. Ariba Supplier Performance Management was first introduced in June 2003.



Ariba Category Management enables sourcing and procurement professionals to collaborate, gain greater organizational visibility and control,
and capture category knowledge. It helps teams make better decisions and increases adoption, compliance and efficiency by providing workspaces for process and knowledge management. Ariba Category Management was first introduced in February 2003.



Ariba Contract Management Solutions modules:



Ariba Contract Workbench provides a set of
functionality focused on addressing the creation, authoring, and repository functions of the contract management lifecycle. It provides organizations with a user-friendly platform that allows users to more efficiently create and manage contracts
with functionality that includes contract search, template selection, clause usage, and process and document management. Ariba Contract Workbench was first introduced in February 2004.



Ariba Contract Compliance provides comprehensive enterprise-wide management of the contract lifecycle and
provides buyers access to a centralized repository of contracted products and services. Using Ariba Contract Compliance, buyers can create, search, amend and re-source contracts, as well as monitor contract usage and supplier price compliance. Ariba
Contract Compliance was first introduced in February 2002.



Ariba Procurement and Expense Solutions modules:



Ariba Buyer is a robust, scalable and reliable application that enables organizations to manage purchasing transactions for any good or service. The automation of the procurement business process is designed to reduce
processing costs, improve productivity and help ensure compliance with enterprise-wide contracts. Ariba Buyer links end-users throughout an organization with approvers, and links the procurement application to back-end financial, purchasing and
human resource systems to access important procurement information, such as supplier product information, price lists, web sites and order status. Ariba Buyer helps customers attain global user and supplier adoption, enforce purchasing compliance
against corporate policies and contracts, and measure progress. All of these factors drive cost savings by reducing transaction expenses, decreasing cycle times and leveraging existing supplier relationships. Ariba Buyer leverages the Ariba Supplier
Network to securely automate commerce transactions with suppliers on the Internet. Ariba Buyer was first introduced in June 1997.



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Ariba Category Procurement enables customers to better manage complex categories of spend,
including catalog, travel, third-party, time-based and project-based purchases. With Ariba Category Procurement, enterprises can improve category spend management across a broad range of categories, including but not limited to facilities
management, information technology and management consulting, temporary labor and print services. Ariba Category Procurement was first introduced in February 2004.



Ariba eForms allows organizations to automate non-standard business processes outside of the core
requisitioning process. Users are able to attach custom forms to existing Ariba software applications or create new software applications for nearly any type of operating resource request. Ariba eForms are created using XML (eXtensible Markup
Language), a definition language that allows organizations to design forms that capture information from end-users and route the information for internal approval. Each Ariba eForm can have its own approval rules and can incorporate standard data
from Ariba Buyer, including financial accounting and human resources information. Ariba eForms was first introduced in September 1998.



Ariba Travel and Expense helps enterprises to manage the procurement of corporate travel and expenses. The application automates the manual
processes required for travel purchases to increase expense policy compliance, decrease administrative costs, and reduce travel approval and expense reimbursement cycle times. Ariba Travel and Expense provides a set of features to generate expense
reports automatically from travel cards or procurement cards and can route expense reports to functional travel and expense managers. Ariba Travel and Expense was first introduced in September 1998.



Ariba Contract Compliance (see description above).



Ariba Invoice and Settlement (see description below).



Ariba Invoice and Payment Solutions module:



Ariba Invoice and Settlement proactively and accurately
manages payment terms, automates vendor disbursements, and drives additional discounts and cash forecast visibility. Ariba Invoice and Settlement provides an intuitive user interface, robust workflow-based exception handling and real-time supplier
communication to boost time, resource, and cost efficiencies. Enterprises can use Ariba Invoice and Settlement to automate supplier interactions, schedule payments, send batch payments, optimize vendor discounts, and share remittance details with
suppliers on the Ariba Supplier Network. Ariba Invoice was first introduced in April 2002 and Ariba Settlement was first introduced in February 2004.



Ariba Supplier Management Solutions module:



Ariba Supplier Connectivity integrates with ERP applications and provides customers with the ability to access and reliably transact with
more than 120,000 registered global suppliers via the Ariba Supplier Network. Ariba Supplier Connectivity enables enterprises to focus on managing spend rather than on the infrastructure needed to connect electronically to suppliers. Ariba Supplier
Connectivity was first introduced in April 2005.



Ariba Supplier Network



Ariba Spend Management solutions also integrate with and
leverage the Ariba Supplier Network. The Ariba Supplier Network is a scalable Internet infrastructure that connects buying organizations with their suppliers to exchange product and service information as well as a broad range of business documents,
such as purchase orders and invoices. Over 120,000 registered suppliers of a wide array of goods and services are connected to the Ariba Supplier Network. As a result, buying organizations can connect once to the Ariba Supplier Network and
simultaneously access many suppliers. By using the Ariba Supplier Network, businesses can realize cost savings through greater process efficiencies, better employee and contract compliance, reduced inventories and fair pricing opportunities.



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The Ariba Supplier Network is a multi-protocol network that allows buyers to send orders from Ariba Buyer
or other eProcurement systems in one standard format that are then converted into the suppliers preferred transaction format. Supported formats include: cXML (Commerce eXtensible Markup Language), a format used on the Internet to describe
commerce data and documents; EDI (Electronic Data Interchange), a format used to electronically exchange data and documents, CIF (Catalog Interchange Format), a format commonly used to electronically transfer catalog information; electronic mail; or
facsimile. In addition, by using Ariba PunchOut, a cXML-based technology, buyers can link to a suppliers web site to find, configure and select products while keeping the purchasing process within Ariba Buyer for internal approval, accounting
and administrative controls. This feature is particularly useful when working with suppliers that have extensive web sites, product configuration systems and large product catalogs.



Frequently, suppliers join the Ariba Supplier Network at the request of buyers who purchase goods and services using Ariba
Spend Management solutions. To help buyers attract and rapidly enable their target suppliers, we have created Ariba Supplier Enablement solutions that provide a broad range of products and services to enable suppliers of various sizes in all
industries to join the Ariba Supplier Network. Ariba Supplier Enablement solutions include tools for content management, order management, order fulfillment, invoicing and settlement that help suppliers manage business transactions and content
simply through a web browser or by using XML. We have also created other Ariba Supplier Programs, including Ariba Supplier Advantage, Ariba Supplier Consulting and Ariba Ready, to help suppliers develop, deploy and promote their capabilities on the
Ariba Supplier Network.



Access to the Ariba Supplier Network
is provided in one of two ways: (1) to buying organizations as part of their Ariba Buyer license and maintenance agreements or (2) through a direct access license to the Ariba Supplier Network itself. Suppliers joining the Ariba Supplier
Network must agree to a standard web-based terms of use agreement with us, and link to the network through any of several formats (e.g. cXML, EDI or facsimile). Suppliers that exceed certain transaction volumes are charged a nominal fee for access
to the Ariba Supplier Network. In addition, suppliers are charged fees for optional solutions such as premium technology and support services.



Ariba Spend Management Expertise



In addition to software applications, Ariba Spend Management solutions include a broad range of strategic services that are provided by our Consulting
team. Ariba Consulting provides professional services such as implementation and strategic consulting services, education and training, commodity expertise, decision support services, benchmarking services, low cost country sourcing services and
procurement outsourcing services. Our professionals work closely with our customers to help them improve their procurement and sourcing processes. All of these additional offerings are designed to improve the return on investment our customers
receive through the use of our solutions.



Since our inception,
Ariba customers have used our team of consultants who maintain deep knowledge of Ariba applications and industry leading best practices to lead the implementation process by utilizing our SMART methodology (Spend Management Accelerated Results
Tool). Through our merger with FreeMarkets and acquisition of Alliente, Inc. (Alliente) in fiscal year 2004, we have enhanced our Ariba Consulting organization over the past eighteen months both by adding professionals with expertise in
strategic sourcing and specific commodity knowledge, as well as by adding a procurement outsourcing capability. We now offer service capabilities in the following key areas:



| |  |  | Strategic Advisory Serviceshelp customers with the development of a spend management program focusing on organizational needs, spend management processes and the
integration of appropriate spend management applications.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Data Serviceshelp our customers navigate data-rich, complex spend management environments, thereby transforming spend management data into a useful
tool for the procurement professional. Better
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | spend management data leads to better targeted spend management programs, more effective sourcing projects and improved decision analytics. Our capabilities
extend from core data extraction through project-specific analytics.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Category Sourcing Servicesprovide in-depth commodity and spend management knowledge to the customer. Our capabilities extend from commodity-specific sourcing advisory
services and expertise to benchmarking support and market analysis.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Supplier Servicesenable customers to utilize our global supply base knowledge and leading market experience to manage critical activities throughout the entire supplier
lifecycle, including identifying new suppliers, moving negotiated savings to the bottom-line and determining and tracking ongoing supplier performance against strategic performance metrics.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Managed Servicesimprove the execution of spend management projects by integrating best practices and global project support throughout the lifecycle of the project. We
provide customers with project advice, dedicated project management, staff augmentation and procurement outsourcing services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Implementation Servicesenable companies to leverage world-wide functional and technical experts to help with the deployment of Ariba Spend Management applications.
These services include basic application deployment, ongoing technology assessment and upgrade strategies, as well as a wide range of supplier management capabilities enabling companies to optimize their spend management technical capabilities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Application Managementhelps companies manage, maintain and benefit from their Ariba Spend Management technologies. These services include help desk support, site
administration, hosting and providing ongoing application support for our technology.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Employees



As of
September 30, 2005, we had a total of 1,506 employees, including 272 in research and development, 222 in sales and marketing, 843 in professional services, customer support and training, and 169 in administration, finance, legal, human
resources and information technology. Of these employees, 963 were located in the United States of America and 543 were located outside the United States of America. None of our employees are represented by a collective bargaining agreement, nor
have we experienced any work stoppage. We consider our relations with our employees to be good.



Our future operating results depend in significant part on the continued service of our key technical, sales and senior management personnel, none of whom
is bound by an employment agreement. Our future success also depends on our continuing ability to attract and retain highly qualified personnel. Competition for these personnel is intense, and we may not be able to retain our key technical, sales
and senior management personnel or attract these personnel in the future. We have experienced difficulty in recruiting qualified personnel, and we expect to experience these difficulties in the future. If we are unable to hire and retain qualified
personnel in the future, this inability could harm our business.



Sales



We sell our solutions primarily through our worldwide
direct sales organization. Our direct sales force consisted of sales professionals, application specialists and supporting personnel located in several North American locations and in offices in Europe and Asia.



During our sales process, we typically engage the senior executive management
teams of each prospective customer, often including the chief financial officer, chief procurement officer, chief information officer and chief executive officer. We utilize sales teams led by sales professionals and consisting of sales, technical
and business process experts who work with our strategic partners to create organization-specific proposals, presentations and demonstrations that address the specific needs of each potential customer.



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Marketing



We focus our marketing efforts toward educating our target market, generating new sales opportunities, and creating awareness for our spend management
solutions. We conduct a variety of marketing programs worldwide to educate our target market, including business seminars, trade shows, press relations and industry analyst programs.



Our marketing organization also serves an integral role in acquiring, organizing and prioritizing customer and industry
feedback in order to help provide product direction to our development organizations. We formalized this customer-driven approach by establishing advisory council meetings, made up of numerous industry experts, to provide forums for discussing
customer needs and requirements. In addition to providing information to prospective customers, advisory council meetings provide a useful forum in which to share information, test product concepts and collect data on customer and industry needs. We
intend to continue to pursue these programs in the future.



Customer
Service, Training and Support



We believe that customer
satisfaction is essential for our long-term success, and therefore offer comprehensive customer assistance programs. Our technical support provides response to and resolution of customer technical inquiries and is available to clients by telephone,
over the web or by electronic mail. We use a customer service automation system to track each customer inquiry until it is resolved.



Our education services group delivers education and training to our clients and partners. We offer a comprehensive series of classes to provide the
knowledge and skills to successfully deploy, use and maintain our products and solutions. These courses focus on the technical aspects of our products as well as real-world business issues and processes. All of our classes include lecture,
demonstration, discussion and hands-on use of our solutions. Classes are held regularly in training facilities at our headquarters in Sunnyvale, California and in our offices in Pittsburgh, Pennsylvania, London and Singapore.



Research and Development



We introduced our initial product, Ariba Buyer, in June 1997, and since then
have released a number of new products and product enhancements to address the needs of sourcing and procurement professionals. We began to operate the Ariba Supplier Network in April 1999 and continue to provide enhancements to it on an ongoing
basis. We introduced Ariba Sourcing in September 2001, and upgraded the solution in September 2004 to incorporate functionality from legacy FreeMarkets applications. Over the past few years, we have introduced several new products, including Ariba
Data Enrichment (based on technology acquired from Softface), Ariba QuickSource (which was previously offered by FreeMarkets), and several internally developed products such as Ariba Contract Workbench, Ariba Category Procurement and Ariba Invoice
and Settlement. In addition to developing new functionality, we have also been re-architecting our applications to be more easily deployed via an on-demand model. Throughout fiscal year 2006, we plan to release on-demand versions of many of our
software applications. If we are unable to develop new products or enhancements to existing products or corrections on a timely and cost-effective basis, or if these new products or enhancements do not have the features or quality measures to make
them successful in the marketplace, our business will be harmed.



Our research and development expenses were $47.2 million, $54.1 million and $54.0 million during the fiscal years ended September 30, 2005, 2004 and 2003, respectively. We also recorded amortization of acquired technology as part of
cost of revenues of $5.3 million, $1.7 million and $4.0 million during the fiscal years ended September 30, 2005, 2004 and 2003, respectively.



Our research and development organization is divided into teams focused on our various Ariba Spend Management solutions and the Ariba Supplier Network, as
well as on server and infrastructure development, user interface and Internet application design, tools development, enterprise integration, operations, quality assurance, documentation, release management and advanced development. These teams
regularly share resources and collaborate on code development, quality assurance and documentation.



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International Operations



We currently have offices in 23 countries. All of our international operations are conducted through wholly-owned subsidiaries. Revenues from our
international operations were $90.6 million, $85.0 million and $75.4 million for the fiscal years ended September 30, 2005, 2004 and 2003, respectively. For the years ended September 30, 2005, 2004 and 2003, Softbank accounted for
approximately 1%, 2% and 10% of our revenue, respectively. Also see Note 9 of Notes to Consolidated Financial Statements for financial information about our geographic areas. See Note 13 of Notes to Consolidated Financial Statements for the impact
of our settlement with Softbank.



Competition



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 and in the scope and breadth of the products and services they offer. We compete with several major enterprise software companies
including SAP and Oracle. We also compete with several service providers including McKinsey and A.T. Kearney. In addition, we occasionally compete with other small niche providers of sourcing or procurement products and services, including Emptoris,
Frictionless Commerce, Ketera Technologies, Perfect Commerce, Procuri and Verticalnet. 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. 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. These third parties, which include
IBM, Accenture, Capgemini, Deloitte Consulting, BearingPoint and Unisys, are generally not subject to confidentiality or non-compete agreements that restrict such competitive behavior.



We believe that the principal competitive factors affecting our market include a significant base of reference customers,
breadth and depth of solution, product quality and performance, customer service, core technology, product features, ability to implement solutions, ability to integrate with multiple ERP platforms and size of vendor. Although we believe that our
solutions currently compete favorably with respect to these factors, our market is rapidly evolving. We may not be able to maintain our competitive position against current and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other resources.



Many of our current and potential competitors have longer operating histories, significantly greater current and potential financial, technical, marketing and other resources, significantly greater name recognition, and a larger installed
base of customers than we do. Some of these vendors have and may continue to introduce spend management modules that are included as part of broader enterprise applications at little or no cost. 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 other 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. As a result, we may not be able to
successfully compete against our current and future competitors.



Intellectual Property and Other Proprietary Rights



We depend on our ability to develop and maintain the proprietary aspects of our technology. To protect our proprietary technology, we rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets, and
patent, copyright and trademark laws.



We license rather than
sell our software products and require our customers to enter into license agreements, which impose restrictions on their ability to utilize the software. In addition, we seek to avoid disclosure of our trade



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secrets through a number of means, including but not limited to requiring those persons with access to our proprietary information to execute confidentiality
agreements with us and restricting access to our source code. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which may afford only limited protection. We can make no assurance that
any of our proprietary rights with respect to the Ariba Supplier Network will be viable or of value in the future since the validity, enforceability and type of protection of proprietary rights in Internet-related industries are uncertain and still
evolving.



We currently have twelve U.S. patents issued and 46
U.S. patent applications pending. We also have one foreign patent issued and 36 foreign patent applications pending. It is possible that the patents that we have applied for, if issued, or our potential future patents may be successfully challenged
or that no patents will be issued from our pending patent applications. It is also possible that we may not develop proprietary products or technologies that are patentable, that any patent issued to us may not provide us with any competitive
advantages, or that the patents of others will harm our ability to do business.



We rely on technology that we license from third parties, including software that is integrated with internally developed software and used in our software products to perform key functions. For example, we license
integration software from TIBCO for Ariba Buyer. If we are unable to continue to license any of this software on commercially reasonable terms, or at all, we will face delays in releases of our software until equivalent technology can be identified,
licensed or developed, and integrated into our current product. These delays, if they occur, could materially and adversely affect Ariba.



Ariba and the Ariba logo are registered trademarks in the United States of America. In addition, we have Ariba, the Ariba logo and the Ariba
boomerang design registered in one or more foreign countries. We also have filed applications to register these trademarks in several additional countries. The above-mentioned trademark applications are subject to review by the
applicable governmental authority, may be opposed by private parties, and may not issue.



Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our
products is difficult, and while we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States of America. Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop similar technology, duplicate our products or
design around patents issued to us or our other intellectual property.



There has been a substantial amount of litigation in the software and Internet industries regarding intellectual property rights. For example, in February 2005, we settled patent infringement claims filed against us by ePlus, Inc. for $37.0
million and incurred significant legal expenses. In addition, we have recently been sued for patent infringement by Sky Technologies, Inc. It is possible that in the future other third parties may claim that we or our current or potential future
products infringe their intellectual property rights. We expect that software product developers and providers of electronic commerce solutions will increasingly be subject to infringement claims as the number of products and competitors in our
industry segment grows and the functionality of products in different industry segments overlaps. 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 harm our business. See Legal Proceedings.



Available Information



Our Internet address is www.ariba.com. There we make available, free of charge, our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our SEC reports can be accessed through the investor
relations section of our website. The information found on our website is not part of this or any other report we file with or furnish to the SEC.



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EXECUTIVE OFFICERS OF THE REGISTRANT



The executive officers of Ariba and their ages as of November 30, 2005 are as follows:



|                    |  |     |  |                                                             
|------------------- |  | --- |  | ------------------------------------------------------------
|Name                |  | Age |  | Position(s)                                                 
|Robert M. Calderoni |  | 45  |  | Chairman and Chief Executive Officer and a Director         
|Kevin Costello      |  | 43  |  | Executive Vice President and Chief Commercial Officer       
|James W. Frankola   |  | 41  |  | Executive Vice President and Chief Financial Officer        
|Kent Parker         |  | 44  |  | Executive Vice President, Ariba Global Services Organization
|H. Tayloe Stansbury |  | 44  |  | Executive Vice President, Engineering                       



Robert M. Calderonihas served as Aribas Chairman and Chief Executive Officer and a Director since July 2004. From October 2001 to July 2004, Mr. Calderoni served as Aribas President and Chief Executive Officer and a Director. From October 2001 to
December 2001, Mr. Calderoni also served as Aribas Interim Chief Financial Officer. From January 2001 to October 2001, Mr. Calderoni served as Aribas Executive Vice President and Chief Financial Officer. Mr. Calderoni was
also an employee of the Company from November 2000 to January 2001. From November 1997 to January 2001, he was Chief Financial Officer at Avery Dennison Corporation, a manufacturer of pressure-sensitive materials and office products. From June 1996
to November 1997, Mr. Calderoni was Senior Vice President of Finance at Apple Computer, Inc., and prior to that time, Mr. Calderoni held various positions with IBM Storage Systems Division, most recently as Vice President of Finance. In
addition to serving as a director of Ariba, he is also a member of the board of directors of Juniper Networks, Inc., a provider of network infrastructure systems. Mr. Calderoni holds a Bachelor of Science degree in Accounting and Finance from
Fordham University.



Kevin Costellohas served as
Aribas Executive Vice President and Chief Commercial Officer since October 2004. Mr. Costello also served as Aribas Executive Vice President of Sales and Solutions from October 2003 until October 2004. From May 2002 until
October 2003, Mr. Costello served as Aribas Executive Vice President, Ariba Solutions Delivery. From June 1984 until May 2002, Mr. Costello worked at Andersen Business Consulting, most recently as a Partner. Mr. Costello holds a
Bachelor of Science degree in Accounting from the University of Illinois.



James W. Frankolahas served as Aribas Executive Vice President and Chief Financial Officer since December 2001. Mr. Frankola was also an employee of the Company from October 2001 to December 2001.
From December 1997 to October 2001, Mr. Frankola held various positions with Avery Dennison Corporation, a manufacturer of pressure-sensitive materials and office products, most recently as Vice President of Finance and IS, Fasson Roll
Worldwide. From May 1995 to December 1997, Mr. Frankola held various positions with IBM Storage Systems Division, most recently as Director of Financial Analysis. Mr. Frankola holds a Bachelor of Science degree in accounting from
Pennsylvania State University and an M.B.A. from New York University.



Kent Parkerhas served as Aribas Executive Vice President and General Manager, Ariba Global Services Organization since July 2004. From April 2000 to July 2004, Mr. Parker held numerous positions including Senior Vice
President of Global Sourcing Services at FreeMarkets, Inc. Mr. Parker holds a degree in mechanical engineering from the University of Evansville and an M.B.A from the Amos Tuck School of Business Administration at Dartmouth College.



H. Tayloe Stansbury has served as Aribas Executive Vice
President of Engineering since May 2003. From February 2001 through April 2003, Mr. Stansbury held various positions with Ariba, most recently as Senior Vice President of Engineering. From January 1999 until January 2001, Mr. Stansbury
held various positions at Calico Commerce, a software and services company, most recently as Senior Vice President of Engineering. Mr. Stansbury holds an A.B. in Applied Mathematics and Computer Science from Harvard University.



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|ITEM 1A. | RISK FACTORS
|-------- | ------------



Risk Factors



In addition to other information in this Form 10-K, the
following risk factors should be carefully considered in evaluating Ariba and our business because such factors may have a significant impact on our business, operating results and financial condition. As a result of the risk factors set forth below
and elsewhere in this Form 10-K, actual results could differ materially from those projected in any forward-looking statements.



We Compete in New and Rapidly Evolving Markets, and Our Spend Management Solutions Are At a Relatively Early Stage of Development. These Factors Make
Evaluation of Our Future Prospects Difficult.



Spend
management software applications and services are at a relatively early stage of development. We introduced our initial Ariba Spend Management solutions in September 2001, and we recently introduced several new products that have achieved limited
deployment, including recent product releases and upgrades integrating functionality acquired in our 2004 merger with FreeMarkets. As discussed below, we plan to introduce on-demand versions of a number of our software products throughout 2006.
These new and planned products may be more challenging to implement than our more established products, as we have less experience deploying these applications. The markets in which we compete are characterized by rapid technological change,
evolving customer needs and frequent introductions of new products and services. As we adjust to evolving customer requirements and competitive pressures, we may be required to further reposition our product and service offerings and introduce new
products and services. We may not be successful in developing and marketing such product and service offerings, or we may experience difficulties that could delay or prevent the development and marketing of such product and service offerings, which
could have a material adverse effect on our business, financial condition or results of operations.



Economic Conditions and Reduced Information Technology Spending May Adversely Impact Our Business.



Our business depends on the overall demand for enterprise software and
services and on the economic health of our current and prospective customers. Weak economic conditions, or a reduction in information technology spending even if economic conditions improve, could adversely impact our business in a number of ways
including longer sales cycles, lower average selling prices and reduced bookings and revenues.



Our Success Depends on Market Acceptance of Standalone Spend Management Solutions.



Our success depends on widespread customer acceptance of standalone spend management solutions from vendors like Ariba, rather than solutions from
enterprise resource planning (ERP) software vendors and others that are part of a broader enterprise application solution. For example, ERP vendors, such as Oracle and SAP, could bundle spend management modules with their existing applications and
offer these modules at little or no cost. If our products and services do not achieve continued customer acceptance, our business will be seriously harmed.



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



We have a significant accumulated deficit as of September 30, 2005,
resulting in large part from cumulative charges for the amortization and impairment of goodwill and other intangible assets, including a goodwill impairment charge of $247.8 million in the quarter ended June 30, 2005. We may incur significant
losses in the future for a number of reasons, including those discussed in subsequent risk factors and the following:



| |  |  | adverse economic conditions, in particular declines in information technology spending, and corporate and consumer confidence in the economy;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the failure of our standalone spend management solution business to mature as a separate market category;
| | - |  | ---------------------------------------------------------------------------------------------------------



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| |  |  | declines in average selling prices of our products and services resulting from competition, our introduction of newer products that generally have lower list prices than our more
established products and other factors;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure to successfully grow our sales channels;
| | - |  | ------------------------------------------------



| |  |  | increased reliance on managed services and subscription offerings that result in lower near-term revenues from customer deployments;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure to maintain control over costs;
| | - |  | ---------------------------------------



| |  |  | increased restructuring charges resulting from the failure to sublease excess facilities at anticipated levels and rates;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | on-going charges related to the amortization of intangibles from our merger with FreeMarkets in July 2004; and
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | charges incurred in connection with any future restructurings.
| | - |  | --------------------------------------------------------------



Our Quarterly Operating Results Are Volatile, Difficult to Predict and May Be Unreliable as Indicators of Future Performance Trends.



Our quarterly operating results have varied significantly in the past and
will likely continue to 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.



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, sales cycles and average selling price for our products and services;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | reductions in customers budgets for information technology purchases and delays in their purchasing cycles;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | fluctuations in the number of relatively larger orders for our products and services;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | increased dependence on relatively smaller orders from a larger number of customers;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | increased dependence on the number of new customer contracts in the current quarter, including follow-on contracts from existing customers, rather than on contracts entered into in
prior quarters;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increased dependence on generating revenues from new revenue sources;
| | - |  | ---------------------------------------------------------------------



| |  |  | delays in recognizing revenue from licenses of software products;
| | - |  | -----------------------------------------------------------------



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



| |  |  | changes in our product line such as our planned release of on-demand versions of our software products in fiscal year 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



Risks Related to Expenses



| |  |  | our overall ability to control costs, including managing reductions in expense levels through restructuring and severance payments;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the level of expenditures relating to ongoing legal proceedings;
| | - |  | ----------------------------------------------------------------



| |  |  | costs associated with changes in our pricing policies and business model, including increased reliance on on-demand and managed solutions offerings and the implementation of
programs to generate revenue from new sources;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | costs associated with the amortization of stock-based compensation expense; and
| | - |  | -------------------------------------------------------------------------------



| |  |  | the failure to adjust our workforce to changes in the level of our operations.
| | - |  | ------------------------------------------------------------------------------



Our Business Could Be Seriously Harmed if We Fail to Retain Our Key Personnel.



Our future performance depends on the continued service of our senior management, product development and sales personnel.
The loss of the services of one or more of these personnel could seriously harm our business. Our ability to retain key employees may be harder given the cultural and geographic aspects of combining our Sunnyvale, California and Pittsburgh,
Pennsylvania based operations following our merger with FreeMarkets. In addition, uncertainty created by turnover of key employees could result in reduced confidence in our financial performance which could cause fluctuations in our stock price and
result in further turnover of our employees.



Our License
Revenues in Any Quarter May Fluctuate Because We Depend on a Relatively Small Number of Relatively Large Orders.



Our quarterly license revenues are especially subject to fluctuation because they depend on the sale of relatively large orders for our products and
related services. For example, between three and eight individual customers represented at least 50% of our license revenues for each quarter in each of our last two fiscal years. In addition, many of these relatively large orders are realized at
the end of the quarter. As a result of this concentration and timing, 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.



Our Revenues in Any Quarter May Fluctuate Significantly
Because Our Sales Cycles Are Long and Can Be Unpredictable.



Our sales cycles are long and can be unpredictable. 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.



Our Recently Announced
On-Demand Strategy Carries a Number of Risks Which May Be Harmful to Our Business.



In November 2005, we announced a new strategy to offer on-demand versions of our software products. In part as a result of this strategy shift, we believe that in the future customers will increasingly move away from
purchasing a perpetual license for our software in favor of purchasing the software for a specified period of time through a term license or a subscription. If an increasing portion of customers choose term or subscription licenses or application
hosting services, we may experience a deferral of revenues and cash payments from customers.



In addition, our on-demand strategy carries a number of additional risks, including the following:



| |  |  | we may not be able to deliver our products in the manner we have told our customers;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | we may fail to achieve our targeted pricing;
| | - |  | --------------------------------------------



| |  |  | we may see a decrease in the demand for our implementation services;
| | - |  | --------------------------------------------------------------------



| |  |  | we may not successfully achieve market penetration in our newly targeted markets; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | we may have a short-term and/or long-term decrease in total revenues as a result of the transition.
| | - |  | ---------------------------------------------------------------------------------------------------



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Revenues in Any Quarter May Vary to the Extent Recognition of Revenue is Deferred When Contracts Are
Signed. As a Result, Revenues in Any Quarter May Be Difficult to Predict and Unreliable Indicators of Future Performance Trends.



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 both of contracts signed in such quarter and contracts signed in prior quarters. License revenues in recent and future
quarters may be more dependent on revenues from new customer contracts entered into in those quarters rather than from the amortization or recognition of license revenues deferred in prior quarters.



Revenues From Our Ariba Sourcing Solution (Which Includes the Service
Formerly Known as FullSource) Could Be Negatively Affected if Customers Elect to Purchase Our Self-Service Products Rather Than Our Technology-Enhanced Services.



Revenue from our full-service sourcing services offering (formerly known as FullSource) has been declining as existing
customers renew contracts for lower dollar volumes and/or purchase our lower-priced self-service technologies (such as Ariba QuickSource). We have several large multi-year contracts for these technology-enhanced services, some of which will come up
for renewal during fiscal year 2006 and beyond. If these customers do not renew their contracts upon expiration, or if they elect to use one of our lower-cost self-service solutions, our future revenues may decrease.



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 Are Subject to Evolving and Expensive Corporate Governance Regulations and Requirements. Our Failure to Adequately Adhere to These Requirements or the Failure or Circumvention of Our Controls and Procedures
Could Seriously Harm Our Business.



Because we are a
publicly-traded company, we are subject to certain federal, state and other rules and regulations, including those required by the Sarbanes-Oxley Act of 2002. Compliance with these evolving regulations is costly and requires a significant diversion
of management time and attention, particularly with regard to our disclosure controls and procedures and our internal control over financial reporting. 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 other than inconsequential errors 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 other than inconsequential errors or fraud could seriously harm our
business and results of operations.



We Sometimes Experience
Long Implementation Cycles, Which May Increase Our Operating Costs and Delay Recognition of Revenues.



Many of our products are complex applications that are generally deployed with many users. Implementation of these applications by enterprises is complex,
time consuming and expensive. Long implementation cycles may delay the recognition of revenue as some of our customers engage us to perform



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system implementation services, which can defer revenue recognition for the related software license revenue. In addition, when we experience long
implementation cycles, we may incur costs at a higher level than anticipated, which may reduce the anticipated profitability of a given implementation.



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



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 and other content
aggregation tools. 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. We implemented a program to begin charging select suppliers for access to the Ariba Supplier Network, which could make it less attractive for suppliers to join or maintain their participation in the network. Our
inability to access and index these catalogs and services provided by suppliers would result in our customers having fewer products and services available to them through our solutions, which would adversely affect the perceived usefulness of the
Ariba Supplier Network.



We Could Be Subject to Potential
Claims Related to the Ariba Supplier Network.



We warrant
that the Ariba Supplier Network will achieve specified performance levels to allow our 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.



Failure to Establish and Maintain Strategic Relationships
with Third Parties Could Seriously Harm Our Business.



We
have established strategic relationships with a number of other companies. These companies are entitled to resell our products, to host our products for their customers, and/or to implement our products within their customers organizations. We
cannot be assured that any existing or future resellers or hosting or implementation partners will perform to our expectations. For example, in the past we have not realized the anticipated benefits from strategic relationships with a number of
resellers. If our current or future strategic partners do not perform to expectations, or if they experience financial difficulties that impair their operating capabilities, our business, operating results and financial condition could be seriously
harmed.



We Face Intense Competition. 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. This competition 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 and in the scope and breadth of the products and services they offer. We compete with several major enterprise software companies, including SAP and Oracle. We also compete with several service
providers, including McKinsey and A.T. Kearney. In addition, we occasionally compete with other small niche providers of sourcing or procurement products and services, including Emptoris, Frictionless Commerce, Ketera Technologies, Perfect Commerce,
Procuri and Verticalnet. 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. 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. These third parties, which include IBM, Accenture, Capgemini, Deloitte Consulting, BearingPoint and
Unisys, are generally not subject to confidentiality or non-compete agreements that restrict such competitive behavior.



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Many of our current and potential competitors, such as ERP software vendors including Oracle and SAP,
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. These vendors could also introduce spend management
solutions that are included as part of broader enterprise application solutions at little or no cost. 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 increase their market
share. We also expect that competition will increase as a result of industry consolidations. As a result, we may not be able to successfully compete against our current and future competitors.



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 additional risks, including:



| |  |  | the diversion of management time and resources;
| | - |  | -----------------------------------------------



| |  |  | the difficulty of assimilating the operations and personnel of the acquired companies;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the potential disruption of our ongoing businesses;
| | - |  | ---------------------------------------------------



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



| |  |  | unanticipated expenses related to integration of the acquired company;
| | - |  | ----------------------------------------------------------------------



| |  |  | difficulties in implementing and maintaining uniform standards, controls, procedures and policies;
| | - |  | --------------------------------------------------------------------------------------------------



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



| |  |  | potential unknown liabilities associated with acquired businesses; and
| | - |  | ----------------------------------------------------------------------



| |  |  | impairment of goodwill and other assets acquired.
| | - |  | -------------------------------------------------



If We Fail to Develop Products and Services on a Timely and Cost-Effective Basis, or If Our Products Contain Defects, Our Business Could Be Seriously
Harmed.



In developing new products and services, we may:



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



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



| |  |  | fail to develop new products and services that adequately meet customer requirements or achieve market acceptance; or
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | develop products that contain undetected errors or failures when first introduced or as new versions are released.
| | - |  | ------------------------------------------------------------------------------------------------------------------



If new releases of our products or potential new products are delayed, we
could experience a delay or loss of revenues and customer dissatisfaction.



Pending Litigation Could Seriously Harm Our Business



We are subject to pending litigation that could seriously harm our business. See Note 7 to the Consolidated Financial Statements.



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We May Incur Additional Restructuring Charges that Adversely Affect Our Operating Results.



We have recorded significant restructuring charges in the
past relating to the abandonment of numerous leased facilities, including most notably our Sunnyvale, California headquarters. Moreover, we have from time to time revised our assumptions and expectations regarding lease abandonment costs, resulting
in additional charges. In addition, we have assumed abandoned leases and related costs as part of our merger with FreeMarkets.



We review these estimates each reporting period, and to the extent that our assumptions change, the ultimate restructuring expenses for these abandoned
facilities could vary significantly from current estimates. For example, 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 on our Sunnyvale, California headquarters and our other principal office in Pittsburgh, Pennsylvania by $8.0 million as of September 30, 2005. Additional lease abandonment costs, resulting from the
abandonment of additional facilities or changes in estimates and expectations about facilities already abandoned, could adversely affect our operating results.



We May Incur Additional Goodwill Impairment Charges that Adversely Affect Our Operating Results.



We review goodwill for impairment annually and more frequently if events and
circumstances indicate that the asset may be impaired and 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 the recorded amount of our net assets for a sustained period. Our stock price is highly volatile and has experienced significant declines since January 2004. In June 2005,
based on a combination of factors, particularly: (1) our current market capitalization; (2) our current and projected operating results; (3) significant trends in the enterprise software industry; and (4) our decision to reduce
our workforce and eliminate excess facility space, we concluded there were sufficient indicators to require us to assess whether any portion of our recorded goodwill balance was impaired. We determined that our estimated fair value was less than the
recorded amount of our net assets, thereby necessitating that we assess our recorded goodwill for impairment. As required by SFAS No. 142, in measuring the amount of goodwill impairment, we made a hypothetical allocation of the estimated fair
value of the Company to the tangible and intangible assets (other than goodwill) and liabilities. Based on this allocation, we concluded that goodwill was impaired in the amount of $247.8 million. The remaining balance of goodwill is $328.7 million
as of September 30, 2005, and there can be no assurances that future goodwill impairments will not occur.



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:



| |  |  | variations in our quarterly operating results;
| | - |  | ----------------------------------------------



| |  |  | announcements that our revenues or income are below analysts expectations;
| | - |  | ---------------------------------------------------------------------------



| |  |  | changes in analysts estimates of our performance or industry performance;
| | - |  | --------------------------------------------------------------------------



| |  |  | general economic slowdowns;
| | - |  | ---------------------------



| |  |  | changes in market valuations of similar companies;
| | - |  | --------------------------------------------------



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | additions or departures of key personnel; and
| | - |  | ---------------------------------------------



| |  |  | 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 companies following periods of volatility in the market price of their securities. We have experienced significant volatility in the price of our stock over the past two years. 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 twelve patents issued in the United States, but may not develop other 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. 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.



There has been a substantial amount of litigation in the software industry
and the Internet industry regarding intellectual property rights. For example, in the three months ended March 31, 2005 we paid $37.0 million to ePlus to settle a lawsuit alleging that three of our products, Ariba Buyer, Ariba Marketplace and
Ariba Category Procurement, infringed patents held by a third party. In addition, we have recently been sued by Sky Technologies, Inc. for alleged patent infringement. See Legal Proceedings. It is possible that in the future other third
parties may claim that we or our current or potential future products infringe their 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. In addition, we rely on technology that we license from third parties, including software that is integrated with internally developed software and used in our software products to perform key functions. For
example, we license integration software from TIBCO for Ariba Buyer. If we are unable to continue to license any of this software on commercially reasonable terms, or at all, we will face delays in releases of our software until equivalent
technology can be identified, licensed or developed, and integrated into our current products. These delays, if they occur, could materially adversely affect our business.



21



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



International operations have represented a significant
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:



| |  |  | currency exchange rate fluctuations, particularly as a result of the overall decline in the value of the U.S. dollar compared to other foreign currencies over the past two years;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unexpected changes in regulatory requirements;
| | - |  | ----------------------------------------------



| |  |  | tariffs, export controls and other trade barriers;
| | - |  | --------------------------------------------------



| |  |  | longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | difficulties in managing and staffing international operations;
| | - |  | ---------------------------------------------------------------



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



| |  |  | the burdens of complying with a wide variety of foreign laws; and
| | - |  | -----------------------------------------------------------------



| |  |  | political instability.
| | - |  | ----------------------



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. There can be no assurance
that our hedging strategy will be successful and that currency exchange rate fluctuations will not have a material adverse effect on our operating results.



Anti-takeover Provisions in Our Charter Documents and Delaware Law Could Discourage, Delay or Prevent a Change in Control of Our Company and May Affect
the Trading Price of Our Common Stock.



Certain anti-takeover provisions
in our certificate of incorporation and bylaws and certain provisions of Delaware law may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders, may discourage bids for our
common stock at a premium over the market price of our common stock and may adversely affect the market price of our common stock and other rights of the holders of our common stock.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------



Not applicable.



|ITEM 2. | PROPERTIES
|------- | ----------



Ariba
occupies two principal office locations in Sunnyvale, California and Pittsburgh, Pennsylvania.



Operations at our corporate headquarters in Sunnyvale, California consist principally of marketing, research and development and some administrative activities. We occupy approximately 191,200 square feet in a 716,000
square foot, five building office park. Our lease for the entire office park commenced in January 2001 and expires in January 2013. We currently sublease two and one-half buildings totaling 442,600 square feet to third parties. These subleases
expire in July 2007, May 2008 and August 2008. The remaining 82,200 square feet is available for sublease.



We also occupy 93,100 square feet of office space in Pittsburgh, Pennsylvania under a lease covering 182,000 square feet that expires in May 2010. The
remaining 88,900 square feet is available for sublease. Our operations at this location consist principally of our services organization and administrative activities.



22



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Our sales activities are headquartered in Atlanta, Georgia where we lease 11,092 square feet of office
space. We also lease several North American sales and support offices throughout the United States, Canada and Mexico. We lease international sales and support offices including offices in China, Czech Republic, France, Germany, Hong Kong, India,
Ireland, Japan, Singapore, Slovakia and the United Kingdom.



Prior to moving to our current corporate headquarters, we leased 131,560 square feet in Mountain View, California under a lease that expires in October 2006. This facility is currently fully subleased to third parties for the remaining
term. Some of our excess leased facilities located in Sunnyvale, California, Pittsburgh, Pennsylvania and Brussels, Belgium are currently available for sublease for the remaining lease terms.



We may add additional offices in the United States of America and in other
countries as growth opportunities present themselves, as well as from time to time abandon locations that are no longer required to meet the needs of our business.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------



IPO Class Action Litigation



In 2001, a number
of purported shareholder class action complaints related to our and FreeMarkets initial public offerings (the IPOs) were filed in the United States District Court for the Southern District of New York against us and FreeMarkets,
and against certain of the two companies former officers and directors. These complaints were later consolidated into single class action proceedings related to each IPO. In June 2003, a settlement was reached between plaintiffs
and us and FreeMarkets (the individual defendants having been previously dismissed). A final fairness hearing on the settlement has been scheduled for January 2006. As of September 30, 2005, no amount is accrued as a loss is not probable
or estimable.



Shareholder Derivative Litigation



In 2003, a number of purported shareholder derivative
suits alleging various claims in connection with our restatement in fiscal year 2003 were filed in the Superior Court of California for the County of Santa Clara on behalf of Ariba and against certain of our current and former officers and
directors. These complaints were later consolidated into a single purported derivative action. In June 2005, the consolidated action was dismissed by the court with prejudice. Plaintiffs have filed a notice of appeal. As of
September 30, 2005, no amount is accrued as a loss is not probable or estimable.



Litigation Relating To Our Merger with FreeMarkets



On September 16, 2004, a purported shareholder class action was filed against us and the individual board members of the FreeMarkets Board of Directors in Delaware Chancery Court by stockholders who held
FreeMarkets common stock from January 23, 2004 through July 1, 2004. The complaint alleges various breaches of fiduciary duty and a violation of the Delaware General Corporation Law on the part of the former FreeMarkets board members in
connection with the merger between us and FreeMarkets, which was consummated on July 1, 2004. The plaintiff in this action contends, among other things, that the FreeMarkets board members breached their fiduciary duties to FreeMarkets
common stockholders by negotiating the merger with us so as to provide themselves with downside protection against a decline in our market price through a beneficial option exchange formula while failing to provide the common stockholders protection
in the event of a drop in the price of our stock, by contractually obligating themselves to recommend unanimously that FreeMarkets stockholders approve the merger, by failing to disclose to FreeMarkets stockholders certain material
information before the merger closed, and by breaching their duties of loyalty to the common stockholders in various other respects. As FreeMarkets corporate successor, we are alleged to be liable for the FreeMarkets board members
violation of the Delaware General Corporation Law. Plaintiff seeks disgorgement of benefits by the individual defendants, as well as monetary and rescissory damages from all of the defendants, jointly and severally.



23



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The defendants motion to dismiss the complaint was submitted to the Delaware Chancery Court on
February 4, 2005. Plaintiff has not filed any response or opposition to the motion to dismiss. As of September 30, 2005, no amount is accrued as a loss is not probable or estimable.



Defending against these actions may require significant management time and,
regardless of the outcome, result in significant legal expenses. If our defenses are unsuccessful or if we are unable to settle on favorable terms, we could be liable for a large damages award that could seriously harm our business and results of
operations.



General



In addition, we have been subject to various claims and legal actions
arising in the ordinary course of business. For instance, in the three months ended March 31, 2005, we paid $37.0 million to settle a lawsuit brought by ePlus, Inc. alleging that three of our products, Ariba Buyer, Ariba Marketplace and Ariba
Category Procurement, infringed patents held by them.



We have
been sued in the United States District Court for the District of Massachusetts for alleged patent infringement by Sky Technologies, Inc. (Sky). Sky alleges that certain unidentified Ariba products violate three U.S. patents owned by
Sky. Sky seeks damages in an undisclosed amount, enhancement of those damages, an attorneys fee award and an injunction against further infringement. In addition, we are a defendant in a case pending in the United States District Court for the
Northern District of California wherein the plaintiff alleges various contract and tort causes of action. Plaintiff is seeking approximately $30 million in damages from us. That case has been set for trial beginning on January 17, 2006. As of
September 30, 2005, no amount has been accrued for these other actions as a loss is not probable or 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 our business, consolidated financial position, results of operations or cash flows, or that the amount of accrued losses is sufficient for any actual losses that may be incurred.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------



Not applicable.



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##### Table of Contents

PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------



Our common stock is traded on the Nasdaq Stock Market under the symbol
ARBA. The price range per share in the table below reflects the highest and lowest sale prices for our stock as reported by the Nasdaq Stock Market during the last two fiscal years. Our present policy is to retain earnings, if any, to
finance future growth. We have never paid cash dividends and have no present intention to pay cash dividends. As of November 30, 2005, there were approximately 2,500 stockholders of record, and the closing price per share of our common stock was
$8.63.



|                    |  |                      |       |     |   |      
|------------------- |  | -------------------- | ----- | --- | - | -----
|                    |  | Price RangePer Share
|Three Months Ended: |  | High                 |       | Low
|September 30, 2005  |  | $                    | 6.83  |     | $ | 5.57 
|June 30, 2005       |  | $                    | 8.20  |     | $ | 5.40 
|March 31, 2005      |  | $                    | 16.80 |     | $ | 7.57 
|December 31, 2004   |  | $                    | 17.50 |     | $ | 9.33 
|                    |  |                     
|September 30, 2004  |  | $                    | 11.44 |     | $ | 7.27 
|June 30, 2004       |  | $                    | 17.52 |     | $ | 10.50
|March 31, 2004      |  | $                    | 24.00 |     | $ | 15.66
|December 31, 2003   |  | $                    | 22.08 |     | $ | 15.60



The above information
has been adjusted to reflect the one-for-six reverse split of our outstanding common stock effected July 1, 2004.



Equity Compensation Plan Information



The following table sets forth as of September 30, 2005 certain information regarding our equity compensation plans.



|                                                               |  |                                                                                             |     |  |                                                                             |       |     |                                                                                                                                           |            |    
|-------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- | --- |  | --------------------------------------------------------------------------- | ----- | --- | ----------------------------------------------------------------------------------------------------------------------------------------- | ---------- | ---
|                                                               |  | A                                                                                           |     |  | B                                                                           |       |     | C                                                                                                                                         |           
|Plan category                                                  |  | Number of securities to be issued upon exercise of outstanding options, warrants and rights |     |  | Weighted-average exercise price of outstanding options, warrants and rights |       |     | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in Column A) |           
|Equity compensation plans approved by security holders         |  | 2,140,682                                                                                   |     |  | $                                                                           | 11.52 |     |                                                                                                                                           | 13,642,087 | (1)
|Equity compensation plans not approved by security holders (2) |  | 1,214,236                                                                                   | (3) |  | $                                                                           | 18.16 | (3) |                                                                                                                                           | 8,839,153  | (4)
|                                                               |  |                                                                                             |     |  |                                                                             |       |     |                                                                                                                                           |            |    
|Total                                                          |  | 3,354,918                                                                                   |     |  | $                                                                           | 13.92 |     |                                                                                                                                           | 22,481,240 |    
|                                                               |  |                                                                                             |     |  |                                                                             |       |     |                                                                                                                                           |            |    

---

|(1) | Includes 2,472,588 shares available for future purchase under the Ariba, Inc. Employee Stock Purchase Plan. Securities available for future issuance under the Ariba, Inc. 1999
Equity Incentive Plan (the Incentive Plan) may, in addition to stock options, include shares of restricted common stock, stock units and stock appreciation rights.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | See Note 10 of Notes to Consolidated Financial Statements for a narrative description of these plans.
|--- | -----------------------------------------------------------------------------------------------------

|(3) | Represents shares of common stock issuable pursuant to awards outstanding under equity compensation plans assumed by us in connection with our fiscal year 2000 acquisitions of
TradingDynamics, Tradex and SupplierMarket.com and our fiscal year 2004 merger with FreeMarkets (the Assumed Plans).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(4) | Represents shares available for future issuance under the Assumed Plans. Securities available for future issuance under the Tradex 1999 Employee Stock Option/Stock Issuance Plan,
which we assumed in connection with our fiscal year 2000 acquisition of Tradex, include shares of restricted common stock. Securities available for future issuance under the FreeMarkets, Inc. Amended and Restated Stock Incentive Plan and the
FreeMarkets, Inc. Broad Based Equity Incentive Plan, both of which we assumed in connection with our fiscal year 2004 merger with FreeMarkets, also include shares of restricted common stock.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Purchases of Equity Securities by the Issuer and Affiliated Purchasers



On October 22, 2002, our Board of Directors authorized the repurchase
of up to $50.0 million of our common stock. On July 23, 2004, our Board of Directors approved an extension of this stock repurchase program. Under the extended program (the Repurchase Program), we may repurchase up to $50.0 million
of our common stock from time to time, expiring after 18 months, in compliance with the SECs regulations and other legal requirements and subject to market conditions and other factors. Stock purchases under the Repurchase Program may be made
periodically in the open market based on market conditions. There were no repurchases of common stock pursuant to the Repurchase Program during the year ended September 30, 2005. We repurchased and retired 806,000 shares of common stock at an
average price of $7.97 per share for a total of $6.4 million during the year ended September 30, 2004.



ISSUER PURCHASES OF EQUITY SECURITIES



|                                       |  |                                |     |  |                              |      |                                                                               |   |                                                                                                  |   |             
|-------------------------------------- |  | ------------------------------ | --- |  | ---------------------------- | ---- | ----------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------ | - | ------------
|Period                                 |  | Total Number ofSharesPurchased |     |  | Average Price Paid per Share |      | Total Number ofSharesPurchased as Part ofPublicly Announced Plans or Programs |   | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
|July 1, 2005  July 31, 2005           |  | 17,508                         | (1) |  | $                            | 6.80 |                                                                               |  |                                                                                                  | $ | 43.6 million
|August 1, 2005  August 31, 2005       |  |                               |     |  |                              |     |                                                                               |  |                                                                                                  | $ | 43.6 million
|September 1, 2005  September 30, 2005 |  |                               |     |  |                              |     |                                                                               |  |                                                                                                  | $ | 43.6 million
|                                       |  |                                |     |  |                              |      |                                                                               |   |                                                                                                  |   |             
|Total                                  |  | 17,508                         |     |  | $                            | 6.80 |                                                                               |  |                                                                                                  | $ | 43.6 million
|                                       |  |                                |     |  |                              |      |                                                                               |   |                                                                                                  |   |             

---

|(1) | Represents shares forfeited to Ariba by employees in satisfaction of statutory tax withholding obligations incurred as a result of the vesting of restricted shares of common stock
held by those employees.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------



The following selected consolidated financial data should be read in conjunction with the consolidated financial statements, the notes to the consolidated
financial statements, and Managements Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Form 10-K. The consolidated statements of operations data for each of the five
fiscal years in the period ended September 30, 2005, and the consolidated balance sheet data as of the end of each such fiscal year, are derived from our audited consolidated financial statements (in thousands, except per share data). The
operating results for any period should not be considered indicative of results for any future period.



|                                                                                   |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  
|---------------------------------------------------------------------------------- |  | ------------------------------------- | -------- | - | ---- | - | ------- | ---- |  | - | -------- | - |  | ---- | -------- | - |  | - | ---------- | -
|                                                                                   |  | For the Years Ended September 30,     |         
|                                                                                   |  | 2005                                  |          |   | 2004 |   |         | 2003 |  |   | 2002     |   |  | 2001 |         
|                                                                                   |  | (in thousands, except per share data) |         
|Consolidated Statements of Operations Data (1):                                    |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  
|Revenues:                                                                          |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  
|License                                                                            |  | $                                     | 47,817   |   |      | $ | 63,453  |      |  | $ | 83,852   |   |  | $    | 83,099   |   |  | $ | 254,690    |  
|Licenserelated party                                                              |  |                                       |         |   |      |   | 2,201   |      |  |   | 19,214   |   |  |      | 15,341   |   |  |   | 6,372      |  
|Subscription and maintenance                                                       |  |                                       | 121,767  |   |      |   | 93,269  |      |  |   | 82,476   |   |  |      | 85,324   |   |  |   | 67,889     |  
|Subscription and maintenancerelated party                                         |  |                                       | 1,663    |   |      |   | 2,420   |      |  |   | 4,617    |   |  |      | 3,786    |   |  |   | 476        |  
|Services and other                                                                 |  |                                       | 151,796  |   |      |   | 84,455  |      |  |   | 46,539   |   |  |      | 42,253   |   |  |   | 70,383     |  
|                                                                                   |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  
|Total revenues                                                                     |  |                                       | 323,043  |   |      |   | 245,798 |      |  |   | 236,698  |   |  |      | 229,803  |   |  |   | 399,810    |  
|                                                                                   |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  
|Cost of revenues:                                                                  |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  
|License                                                                            |  |                                       | 3,576    |   |      |   | 2,673   |      |  |   | 3,562    |   |  |      | 3,741    |   |  |   | 21,585     |  
|Subscription and maintenance                                                       |  |                                       | 28,800   |   |      |   | 22,360  |      |  |   | 22,960   |   |  |      | 28,300   |   |  |   | 50,590     |  
|Services and other                                                                 |  |                                       | 121,557  |   |      |   | 69,832  |      |  |   | 37,188   |   |  |      | 28,657   |   |  |   | 64,209     |  
|Amortization of acquired technology and customer intangible assets                 |  |                                       | 19,501   |   |      |   | 5,065   |      |  |   | 4,000    |   |  |      | 6,732    |   |  |   | 6,732      |  
|                                                                                   |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  
|Total cost of revenues                                                             |  |                                       | 173,434  |   |      |   | 99,930  |      |  |   | 67,710   |   |  |      | 67,430   |   |  |   | 143,116    |  
|                                                                                   |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  
|Gross profit                                                                       |  |                                       | 149,609  |   |      |   | 145,868 |      |  |   | 168,988  |   |  |      | 162,373  |   |  |   | 256,694    |  
|                                                                                   |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  
|Operating expenses:                                                                |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  
|Sales and marketing                                                                |  |                                       | 83,276   |   |      |   | 74,291  |      |  |   | 66,484   |   |  |      | 67,451   |   |  |   | 229,814    |  
|Research and development                                                           |  |                                       | 47,212   |   |      |   | 54,091  |      |  |   | 54,014   |   |  |      | 64,365   |   |  |   | 90,657     |  
|General and administrative                                                         |  |                                       | 30,588   |   |      |   | 26,072  |      |  |   | 36,203   |   |  |      | 31,751   |   |  |   | 60,491     |  
|Other incomeSoftbank                                                              |  |                                       | (9,490   | ) |      |   |        |      |  |   |         |   |  |      |         |   |  |   |           |  
|Amortization of goodwill and other intangibleassets (2)                            |  |                                       | 798      |   |      |   | 460     |      |  |   | 113,464  |   |  |      | 559,046  |   |  |   | 920,854    |  
|Business partner warrants, net (3)                                                 |  |                                       |         |   |      |   |        |      |  |   |         |   |  |      | 5,562    |   |  |   | 27,773     |  
|In-process research and development                                                |  |                                       |         |   |      |   | 100     |      |  |   |         |   |  |      |         |   |  |   |           |  
|Stock-based compensation (4)                                                       |  |                                       | 19,604   |   |      |   | 2,788   |      |  |   | 2,161    |   |  |      | 14,767   |   |  |   | 61,082     |  
|Restructuring and integration costs                                                |  |                                       | 41,248   |   |      |   | 16,803  |      |  |   | 5,350    |   |  |      | 62,609   |   |  |   | 133,582    |  
|Impairment of goodwill, other intangible assets and equity investments (5)         |  |                                       | 247,830  |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   | 1,436,135  |  
|Litigation provision                                                               |  |                                       | 37,000   |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   |           |  
|Merger related costs                                                               |  |                                       |         |   |      |   |        |      |  |   |         |   |  |      |         |   |  |   | 3,643      |  
|                                                                                   |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  
|Total operating expenses                                                           |  |                                       | 498,066  |   |      |   | 174,605 |      |  |   | 277,676  |   |  |      | 805,551  |   |  |   | 2,964,031  |  
|                                                                                   |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  
|Loss from operations                                                               |  |                                       | (348,457 | ) |      |   | (28,737 | )    |  |   | (108,688 | ) |  |      | (643,178 | ) |  |   | (2,707,337 | )
|Interest and other income, net                                                     |  |                                       | 5,863    |   |      |   | 2,808   |      |  |   | 5,729    |   |  |      | 7,013    |   |  |   | 15,719     |  
|                                                                                   |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  
|Net loss before income taxes and minority interests                                |  |                                       | (342,594 | ) |      |   | (25,929 | )    |  |   | (102,959 | ) |  |      | (636,165 | ) |  |   | (2,691,618 | )
|Provision (benefit) for income taxes                                               |  |                                       | 7,017    |   |      |   | (160    | )    |  |   | (92      | ) |  |      | 2,784    |   |  |   | 7,708      |  
|Minority interests in net income (loss) of consolidated subsidiaries               |  |                                       | 17       |   |      |   | (539    | )    |  |   | 3,460    |   |  |      | (286     | ) |  |   | (4,631     | )
|                                                                                   |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  
|Net loss                                                                           |  | $                                     | (349,628 | ) |      | $ | (25,230 | )    |  | $ | (106,327 | ) |  | $    | (638,663 | ) |  | $ | (2,694,695 | )
|                                                                                   |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  
|Net loss per sharebasic and diluted (6)                                           |  | $                                     | (5.49    | ) |      | $ | (0.51   | )    |  | $ | (2.40    | ) |  | $    | (14.79   | ) |  | $ | (66.10     | )
|                                                                                   |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  
|Weighted average shares used in computing net loss per sharebasic and diluted (6) |  |                                       | 63,655   |   |      |   | 49,625  |      |  |   | 44,381   |   |  |      | 43,174   |   |  |   | 40,769     |  
|                                                                                   |  |                                       |          |   |      |   |         |      |  |   |          |   |  |      |          |   |  |   |            |  



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|                                                                                  |  |               |         |      |   |         |  |      |         |      |   |         |  |   |          
|--------------------------------------------------------------------------------- |  | ------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ---------
|                                                                                  |  | September 30,
|                                                                                  |  | 2005          |         | 2004 |   | 2003    |  | 2002 |         | 2001
|Consolidated Balance Sheets Data (1)                                              |  |               |         |      |   |         |  |      |         |      |   |         |  |   |          
|Cash and cash equivalents, restricted cash and investments                        |  | $             | 147,435 |      | $ | 213,419 |  | $    | 235,173 |      | $ | 275,533 |  | $ | 293,582  
|Working capital                                                                   |  | $             | 29,182  |      | $ | 33,084  |  | $    | 19,275  |      | $ | 37,442  |  | $ | 74,770   
|Total assets                                                                      |  | $             | 590,644 |      | $ | 933,889 |  | $    | 459,130 |      | $ | 624,618 |  | $ | 1,270,284
|Restructuring obligations, less current portion and deferred rent obligations (7) |  | $             | 90,540  |      | $ | 62,448  |  | $    | 49,894  |      | $ | 55,048  |  | $ | 18,784   
|Minority interests                                                                |  | $             |        |      | $ | 19,547  |  | $    | 20,019  |      | $ | 15,027  |  | $ | 15,720   
|Total stockholders equity                                                        |  | $             | 329,525 |      | $ | 646,373 |  | $    | 216,857 |      | $ | 311,028 |  | $ | 919,494  

---

|(1) | The consolidated statements of operations data and the consolidated balance sheet data as of and for each of the five fiscal years in the period ended September 30, 2005
reflect the following business combinations (all of which were accounted for using the purchase method of accounting):
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | On January 28, 2003, we acquired Goodex AG. The consolidated statements of operations data includes the results of operations of Goodex AG subsequent to January 28, 2003
and the consolidated balance sheet data includes the financial position of Goodex AG subsequent to January 28, 2003.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | On January 13, 2004, we acquired Alliente. The consolidated statements of operations data includes the results of operations of Alliente subsequent to January 13, 2004 and
the consolidated balance sheet data includes the financial position of Alliente subsequent to January 13, 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | On April 15, 2004, we acquired Softface. The consolidated statements of operations data includes the results of operations of Softface subsequent to April 15, 2004 and the
consolidated balance sheet data includes the financial position of Softface subsequent to April 15, 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | On July 1, 2004, we completed our merger with FreeMarkets. The consolidated statements of operations data includes the results of operations of FreeMarkets subsequent to
July 1, 2004 and the consolidated balance sheet data includes the financial position of FreeMarkets subsequent to July 1, 2004. See Note 4 of Notes to Consolidated Financial Statements.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | As discussed in Note 1 of Notes to Consolidated Financial Statements included elsewhere in this Form 10-K, effective October 1, 2002, we adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. As a result, goodwill and other intangible assets with indefinite lives are no longer being amortized subsequent to September 30, 2002.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | For the years ended September 30, 2002 and 2001 business partner warrants expense, net, totaling $5.6 million and $27.8 million, respectively, is attributable to sales and
marketing operating expense.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | For the five fiscal years in the period ended September 30, 2005, stock-based compensation expense (benefit), net of the effects of cancellations, is attributable to various
operating expense categories as follows (in thousands):
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                           |  |                          |        |      |   |       |  |   |       |   |  |      |        |   |  |   |       
|-------------------------- |  | ------------------------ | ------ | ---- | - | ----- |  | - | ----- | - |  | ---- | ------ | - |  | - | ------
|                           |  | Year Ended September 30,
|                           |  | 2005                     |        | 2004 |   | 2003  |  |   | 2002  |   |  | 2001
|Cost of revenues           |  | $                        | 4,530  |      | $ | 280   |  | $ | (729  | ) |  | $    | 3,277  |   |  | $ | 6,125 
|Sales and marketing        |  |                          | 8,986  |      |   | 1,763 |  |   | 1,544 |   |  |      | 4,312  |   |  |   | 16,540
|Research and development   |  |                          | 2,398  |      |   | 271   |  |   | 272   |   |  |      | (264   | ) |  |   | 4,311 
|General and administrative |  |                          | 3,690  |      |   | 474   |  |   | 1,074 |   |  |      | 7,442  |   |  |   | 34,106
|                           |  |                          |        |      |   |       |  |   |       |   |  |      |        |   |  |   |       
|Total                      |  | $                        | 19,604 |      | $ | 2,788 |  | $ | 2,161 |   |  | $    | 14,767 |   |  | $ | 61,082
|                           |  |                          |        |      |   |       |  |   |       |   |  |      |        |   |  |   |       

|(5) | We recorded a $247.8 million impairment charge to reduce goodwill in the year ended September 30, 2005 and a $1.4 billion impairment charge to reduce goodwill and other
intangible assets associated with the Tradex acquisition in the year ended September 30, 2001.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | The above information has been restated to reflect the one-for-six reverse split of our outstanding common stock effected on July 1, 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(7) | We reclassified deferred rent obligations on our headquarters in Sunnyvale, California from current to long-term liabilities in the amount of $18.0 million, $15.8 million, $11.7
million and $5.8 million as of September 30, 2004, 2003, 2002 and 2001.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See Note 11 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used to compute basic and diluted net loss per share. We have paid no cash dividends during the
five-year period ended September 30, 2005.



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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



The information in this Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 elsewhere in this Form 10-K in the section entitled Risk
Factors and the risks discussed in our other Securities and Exchange Commission (SEC) filings.



Overview of Our Business



Ariba provides spend management solutions that allow enterprises to efficiently manage the purchasing of non-payroll goods and services required to run
their business. We refer to these non-payroll expenses as spend. Our solutions include software, network access, professional services and expertise. They are designed to provide enterprises with technology and business process
improvements to better manage their spend and, in turn, save money. Our software 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.



Our software is built to leverage the Internet and provide enterprises with real-time access to their business data and their business partners. They are designed to integrate with all major platforms and can be
accessed via a web browser. Our software can be deployed as an installed application or provided as a service in an on-demand model. In addition to application software, Ariba Spend Management solutions include implementation and strategic
consulting services, education and training, commodity expertise and decision support services, benchmarking services, low-cost country sourcing services and procurement outsourcing services. Ariba Spend Management solutions also integrate with and
leverage the Ariba Supplier Network. The Ariba Supplier Network is a scalable Internet infrastructure that connects our buying organizations with their suppliers to exchange product and service information as well as a broad range of business
documents, such as purchase orders and invoices. Over 120,000 registered suppliers, offering a wide array of goods and services, are connected to the Ariba Supplier Network.



Ariba Spend Management solutions are organized around six key functions: (1) spend visibility; (2) sourcing;
(3) contract management; (4) procurement and expense; (5) invoice and payment; and (6) supplier management. Through our solution offerings, we help customers develop a strategy for spend management and enable a step-by-step
approach with technology and services that work together.



Business Model



Ariba Spend Management solutions are delivered in a
flexible manner, depending upon the needs and preferences of the customer. For customers seeking self sufficiency, we offer flexible, highly configurable and easy-to-use technology and related services that can be deployed behind the firewall or
delivered as an on-demand service. For customers seeking expert assistance, we offer sourcing process and commodity expertise in over 400 categories of spend. Finally, for those customers seeking managed services, we offer tailored solutions to
outsource processes, spend categories, or entire procurement operations.



We have aligned our business model with the way we believe customers want to purchase and deploy spend management solutions. Customers may generally subscribe to our software products and services for a specified



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term, purchase a perpetual software license and/or pay for services on a time-and-materials basis, depending upon their business requirements. Our revenue is
comprised of license fees, subscription and maintenance fees, and services and other fees. License revenue consists of fees charged for the use of our software products under perpetual or term agreements. Subscription and maintenance revenue
consists of fees charged for hosted software solutions and fees for product updates and support, as well as fees paid by suppliers for access to the Ariba Supplier Network. Services and other revenue consists of fees for implementation services,
consulting services, managed services, training, education, premium support and other miscellaneous items, which are more fully described in BusinessAriba Spend Management Expertise.



Due to the different treatment of our revenue streams under applicable
accounting guidance, each type of revenue has a different impact on our consolidated financial statements. The majority of our license fees are from perpetual software license sales. Revenue from these license sales is often recognized in the
quarter that the software is delivered. Individual software license sales can be significant (greater than $1.0 million) and sales cycles are often lengthy and difficult to predict. As such, the timing of a few large software license transactions or
the recognition of license revenue from these transactions can substantially affect our quarterly operating results. By contrast, subscription fees for hosted software solutions are generally fixed for a specific period of time, and revenue is
recognized ratably over the term. Therefore, a subscription license will result in significantly lower current-period revenue than an equal-sized perpetual license, but with revenue recognized in future periods. Similarly, maintenance fees are
generally fixed for a specific period of time, and revenue is recognized ratably over the maintenance term. Maintenance contracts are typically entered into when new software licenses are purchased, at a percentage of the software license fee. In
addition, most of our customers renew their maintenance contracts annually to continue receiving product updates and product support. Given the ratable revenue recognition and historically high renewal rates of our subscription and maintenance
agreements, this revenue stream has generally been more stable over time. Finally, service revenues are driven by a contract, project or statement of work, in which the fees may be fixed for specific services to be provided over time or billed on a
time and materials basis. Like subscription and maintenance fees, service fees have generally been more stable over time as revenue has been recognized over the course of the fixed time or project period.



These different revenue streams also carry different gross margins. Revenue
from license fees tends to be high-margin revenue, and gross margins are often greater than 90%. Revenue from subscription and maintenance fees also tends to be higher-margin revenue, but not quite as high as license fees, with gross margins
typically in the 75% to 80% range. License, subscription and maintenance fees are generally based on software products developed by us, which carry minimal marginal cost to reproduce and sell. Revenue from labor-intensive services and other fees
tends to be lower-margin revenue, with gross margins typically in the 15% to 30% range. Our overall gross margins could fluctuate from period to period depending upon the mix of revenue. For example, a period with a higher mix of license revenue
versus services revenue would drive overall gross margin higher and vice versa.



Overview of Fiscal Year 2005



Several major
factors had a significant impact on our business during fiscal year 2005. Most notable was our merger with FreeMarkets on July 1, 2004 and our acquisitions of Alliente and Softface in the first half of fiscal year 2004. These business
combinations added to our software and services capabilities and increased our revenues. We also experienced organic growth in our services revenues, as our business model continues to shift from software sales to providing comprehensive solutions
including both software applications and strategic services. In summary, these and other factors caused our revenues to increase by 31% from $245.8 million in fiscal year 2004 to $323.0 million in fiscal year 2005.



While our revenues expanded significantly during fiscal year 2005, the growth
did not meet our expectations, as two primary factors limited our revenue growth. First, our software sales shifted from predominantly perpetual



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licenses, with upfront revenue recognition, to more subscription or term licenses, with revenue recognition spread out over time. This trend caused our
license revenue to decline in fiscal year 2005. However, we did increase our backlog of subscription software contracts, which we anticipate will be recognized as revenue during fiscal year 2006 and beyond. Second, our subscription services
business, formerly known as FullSource, declined throughout the year, but we believe this business stabilized in the fourth quarter of fiscal year 2005. These changes in our revenues caused us to take additional restructuring actions during the
second half of fiscal year 2005 to further reduce expenses below our merger cost synergy targets.



More specifically, license revenues of $47.8 million were down 27% compared to fiscal year 2004, primarily due to a shift from perpetual software licenses
to more subscription and hosted term licenses and a difficult selling environment, particularly for large enterprise software deals. Subscription and maintenance revenues of $123.4 million were up 29% compared to fiscal year 2004, primarily due to
the addition of software subscription revenues from FreeMarkets and growth in other subscription revenue streams such as fees for access to the Ariba Supplier Network. Maintenance revenues were relatively flat compared to fiscal year 2004. Finally,
services and other revenues of $151.8 million were up 80% compared to fiscal year 2004, primarily due to the addition of service revenues from FreeMarkets, as well as organic growth of the Ariba services organization.



As a result of these trends, we experienced a significant shift in our
revenue mix, with license revenues contributing 15% of total revenues in fiscal year 2005 compared to 27% in fiscal year 2004, subscription and maintenance revenues contributing 38% of total revenues in fiscal year 2005 compared to 39% in fiscal
year 2004 and services and other revenues contributing 47% of total revenues in fiscal year 2005 compared to 34% in fiscal year 2004. Since the cost of software license revenues is typically much lower than the cost of services revenues, the shift
in our revenue mix contributed to a decline in our gross margin for fiscal year 2005 to 46% compared to 59% in 2004. Also contributing to the decline in our gross margin was a charge of $19.5 million for the amortization of acquired technology and
customer intangible assets in fiscal year 2005, compared to $5.1 million in fiscal year 2004.



Operating expenses increased to $498.1 million in fiscal year 2005 compared to $174.6 million in fiscal year 2004. The increase in operating expenses is primarily attributable to a goodwill impairment charge of $247.8
million, a lease abandonment charge of $31.8 million resulting from revisions of our estimates for sublease rental projections and a charge of $37.0 million resulting from the settlement of a patent infringement case. The remainder of the increase
in operating expenses is primarily due to an increased charge for stock-based compensation of $16.8 million due to restricted stock grants in fiscal year 2005. These amounts were partially offset by income of $9.5 million recognized in fiscal year
2005 from our settlement with Softbank Corp., a Japanese corporation, and its subsidiaries (collectively, Softbank) in October 2004. In sum, our total expenses, including cost of revenue and other items, increased to $672.7 million
compared to $271.0 million in fiscal year 2004, which caused a net loss of $349.6 million compared to $25.2 million in fiscal year 2004.



Outlook for Fiscal Year 2006



We anticipate that the shift in our software business from license sales to subscription sales will continue during fiscal year 2006. More specifically,
we believe license revenue will decline again in fiscal year 2006, but the sequential declines in quarterly license revenue should be at a slower pace as compared to fiscal year 2005 and eventually flatten out by the end of fiscal year 2006. We
expect growth in subscription revenue over the second half of fiscal year 2006 to offset the declines in license revenue. We believe that our subscription services business has largely stabilized and services and other revenue will grow in fiscal
year 2006, led by continued expansion of our consulting services and growth in our procurement outsourcing business. In summary, we expect these trends to largely offset each other, with total revenue remaining relatively flat on a sequential basis
for the next few quarters. From an expense standpoint, our recent restructuring activities are largely complete, and we anticipate that costs and expenses over the next few quarters will remain relatively consistent with our costs and expenses in
the fourth quarter of fiscal year 2005.



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We believe that our success for fiscal year 2006 will depend largely on our ability to: (1) manage
the shift to an on-demand delivery model from both a product and a financial standpoint; (2) sell bundled solution offerings that include both technology and expert services; (3) renew our subscription or time-based revenues, including
on-demand software fees, maintenance fees, and fees for certain services; and (4) capitalize on new revenue opportunities, such as access fees for the Ariba Supplier Network, procurement outsourcing, and selling on-demand spend management
solutions to small and mid-market customers.



We believe that
key risks to our future revenues include: our ability to shift from selling perpetual license software to on-demand subscription solutions; our ability to renew ratable revenue streams without substantial declines from prior arrangements, including
subscription software, software maintenance and subscription services; our ability to generate organic growth; the market acceptance of spend management solutions as a standalone market category; the overall level of information technology spending;
and potential declines in average selling prices. We believe that key risks to our future operating profitability include: our ability to maintain or grow our revenues; a shift in our mix of revenues from higher margin license fees to lower margin
services and other fees; our ability to maintain utilization of our services organization; and the potential adverse impacts resulting from legal proceedings. Our prospects must be considered in light of the risks encountered by companies at a
relatively early stage of development, particularly given that we operate in new and rapidly evolving markets, have completed several acquisitions over the past eighteen months and face an uncertain economic environment. We may not be successful in
addressing such risks and difficulties. See Risk Factors for additional information.



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Results of Operations



The following table indicates the year over year change (on a percentage basis) and the percentage of total revenues represented by line items in our
consolidated statements of operations (certain items may not foot due to rounding). This data has been derived from the consolidated financial statements contained elsewhere in this Form 10-K. 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 elsewhere in this Form 10-K.



|                                                                     |  |                                 |    |  |                             |    |  |      |    |  |      |    |  |      |   
|-------------------------------------------------------------------- |  | ------------------------------- | -- |  | --------------------------- | -- |  | ---- | -- |  | ---- | -- |  | ---- | --
|                                                                     |  | Year Ended September 30,        |   
|                                                                     |  | Percentage ChangeYear Over Year |    |  | Percentage of TotalRevenues |   
|                                                                     |  | 2005/2004                       |    |  | 2004/2003                   |    |  | 2005 |    |  | 2004 |    |  | 2003 |   
|Revenues:                                                            |  |                                 |    |  |                             |    |  |      |    |  |      |    |  |      |   
|License (including related party)                                    |  | (27                             | )% |  | (36                         | )% |  | 15   | %  |  | 27   | %  |  | 44   | % 
|Subscription and maintenance (including related party)               |  | 29                              |    |  | 10                          |    |  | 38   |    |  | 39   |    |  | 37   |   
|Services and other                                                   |  | 80                              |    |  | 81                          |    |  | 47   |    |  | 34   |    |  | 20   |   
|                                                                     |  |                                 |    |  |                             |    |  |      |    |  |      |    |  |      |   
|Total revenues                                                       |  | 31                              |    |  | 4                           |    |  | 100  |    |  | 100  |    |  | 100  |   
|                                                                     |  |                                 |    |  |                             |    |  |      |    |  |      |    |  |      |   
|Cost of revenues:                                                    |  |                                 |    |  |                             |    |  |      |    |  |      |    |  |      |   
|License                                                              |  | 34                              |    |  | (25                         | )  |  | 1    |    |  | 1    |    |  | 2    |   
|Subscription and maintenance                                         |  | 29                              |    |  | (3                          | )  |  | 9    |    |  | 9    |    |  | 10   |   
|Services and other                                                   |  | 74                              |    |  | 88                          |    |  | 38   |    |  | 28   |    |  | 16   |   
|Amortization of acquired technology and customer intangible assets   |  | 285                             |    |  | 27                          |    |  | 6    |    |  | 2    |    |  | 2    |   
|                                                                     |  |                                 |    |  |                             |    |  |      |    |  |      |    |  |      |   
|Total cost of revenues                                               |  | 74                              |    |  | 48                          |    |  | 54   |    |  | 41   |    |  | 29   |   
|                                                                     |  |                                 |    |  |                             |    |  |      |    |  |      |    |  |      |   
|Gross profit                                                         |  | 3                               |    |  | (14                         | )  |  | 46   |    |  | 59   |    |  | 71   |   
|                                                                     |  |                                 |    |  |                             |    |  |      |    |  |      |    |  |      |   
|Operating expenses:                                                  |  |                                 |    |  |                             |    |  |      |    |  |      |    |  |      |   
|Sales and marketing                                                  |  | 12                              |    |  | 12                          |    |  | 26   |    |  | 30   |    |  | 28   |   
|Research and development                                             |  | (13                             | )  |  |                            |    |  | 15   |    |  | 22   |    |  | 23   |   
|General and administrative                                           |  | 17                              |    |  | (28                         | )  |  | 9    |    |  | 11   |    |  | 15   |   
|Other incomeSoftbank                                                |  | NM                              |    |  |                            |    |  | (3   | )  |  |     |    |  |     |   
|Amortization of other intangible assets                              |  | 73                              |    |  | (100                        | )  |  |     |    |  |     |    |  | 48   |   
|In-process research and development                                  |  |                                |    |  | NM                          |    |  |     |    |  |     |    |  |     |   
|Stock-based compensation                                             |  | 603                             |    |  | 29                          |    |  | 6    |    |  | 1    |    |  | 1    |   
|Restructuring and integration costs                                  |  | 145                             |    |  | NM                          |    |  | 13   |    |  | 7    |    |  | 2    |   
|Goodwill impairment                                                  |  | NM                              |    |  |                            |    |  | 77   |    |  |     |    |  |     |   
|Litigation provision                                                 |  | NM                              |    |  |                            |    |  | 11   |    |  |     |    |  |     |   
|                                                                     |  |                                 |    |  |                             |    |  |      |    |  |      |    |  |      |   
|Total operating expenses                                             |  | 185                             |    |  | (37                         | )  |  | 154  |    |  | 71   |    |  | 117  |   
|                                                                     |  |                                 |    |  |                             |    |  |      |    |  |      |    |  |      |   
|Loss from operations                                                 |  | (1,113                          | )  |  | 74                          |    |  | (108 | )  |  | (12  | )  |  | (46  | ) 
|Interest and other income, net                                       |  | 109                             |    |  | (51                         | )  |  | 2    |    |  | 1    |    |  | 2    |   
|                                                                     |  |                                 |    |  |                             |    |  |      |    |  |      |    |  |      |   
|Net loss before income taxes and minority interests                  |  | (1,221                          | )  |  | 75                          |    |  | (106 | )  |  | (11  | )  |  | (43  | ) 
|Provision (benefit) for income taxes                                 |  | NM                              |    |  | 74                          |    |  | 2    |    |  |     |    |  |     |   
|Minority interests in net income (loss) of consolidated subsidiaries |  | 103                             |    |  | (116                        | )  |  |     |    |  |     |    |  | 1    |   
|                                                                     |  |                                 |    |  |                             |    |  |      |    |  |      |    |  |      |   
|Net loss                                                             |  | (1,286                          | )% |  | 76                          | %  |  | (108 | )% |  | (10  | )% |  | (45  | )%
|                                                                     |  |                                 |    |  |                             |    |  |      |    |  |      |    |  |      |   

---

NM means
not meaningful



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Comparison of the Fiscal Years Ended September 30, 2005, 2004 and 2003



Revenues



Please refer to Note 1 of Notes to Consolidated Financial Statements and
Application of Critical Accounting Policies and Estimates below for a description of our accounting policy related to revenue recognition.



License



License revenues for the year ended September 30, 2005 were $47.8 million, a 27% decrease from license revenues of $65.7 million for the year ended
September 30, 2004. This decrease is primarily attributable to a shift from perpetual license sales to more subscription and hosted term license software sales and the continued difficult selling environment for enterprise software
applications. In the future, we believe that license revenues in any period will be increasingly dependent on new customer licenses entered into in that quarter rather than on revenues from licenses entered into in prior quarters.



License revenues for the year ended September 30, 2004 were $65.7
million, a 36% decrease from license revenues of $103.1 million for the year ended September 30, 2003. This decrease is primarily attributable to a decrease of $18.9 million in the recognition of previously deferred license revenues in the year
ended September 30, 2004 compared to the year ended September 30, 2003 and a decline of $17.0 million in license revenues from our Softbank relationship in the year ended September 30, 2004 compared to the year ended
September 30, 2003.



We generally ship our software
products shortly after entering into a license contract. However, product shipment may be delayed for a number of factors, including factors within our discretion. For example, delivery dates may be affected by the number of software license orders
shipped or received in the quarter, the degree to which software license orders are concentrated at the end of the quarter, and our operational ability to fulfill software license orders at the end of the quarter. Any delay in shipping software
products may have the effect of reducing revenue in the current period and increasing revenue in future periods.



Subscription and maintenance



Subscription and maintenance revenues for the year ended September 30, 2005 were $123.4 million, a 29% increase from subscription and maintenance
revenues of $95.7 million for the year ended September 30, 2004. Subscription revenues consist mainly of fees for software access subscription and hosted software services. Subscription revenues for the year ended September 30, 2005 were
$47.3 million compared to $17.9 million for the year ended September 30, 2004. The increase of $29.4 million was primarily due to an expansion of our product lines as a result of our merger with FreeMarkets, the sale of more subscription
licenses and the growth of Ariba Supplier Network revenue. Maintenance revenues consist primarily of Ariba Buyer and Ariba Sourcing product maintenance fees. Maintenance revenues for the year ended September 30, 2005 were $76.1 million
compared to $77.8 million for the year ended September 30, 2004. The decrease of $1.7 million was primarily due to decreased maintenance renewal revenue. Although license revenues decreased 27% during the same period, maintenance renewal
revenue on our installed base remains relatively consistent.



Subscription and maintenance revenues for the year ended September 30, 2004 were $95.7 million, a 10% increase from subscription and maintenance revenues of $87.1 million for the year ended September 30, 2003. Subscription
revenues for the year ended September 30, 2004 were $17.9 million compared to $10.7 million for the year ended September 30, 2003. The increase of $7.3 million was primarily due to an expansion of our product lines as a result of our
merger with FreeMarkets. Maintenance revenues for the year ended September 30, 2004 were $77.8 million compared to $76.4 million for the year ended September 30, 2003. The increase of $1.3 million was primarily due to increased
maintenance renewal revenue.



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Services and other



Services and other revenues were $151.8 million for the year ended September 30, 2005, an 80% increase from services
and other revenues of $84.5 million for the year ended September 30, 2004. This increase in services and other revenues is due to $46.7 million from services and other revenues added as a result of our merger with FreeMarkets,
$17.4 million from organic growth and $3.2 million from Ariba Managed Services added as a result of our acquisition of Alliente in fiscal year 2004.



Services and other revenues were $84.5 million for the year ended September 30, 2004, an 81% increase from services and other revenues of $46.5
million for the year ended September 30, 2003. This increase in services and other revenues is due to $16.0 million from services and other revenues added as a result of our merger with FreeMarkets, $14.4 million from organic growth and
$7.1 million from Ariba Managed Services added as a result of our acquisition of Alliente in fiscal year 2004.



Cost of Revenues



License



Cost of license revenues consists of product, delivery and royalty costs. Cost of license revenues for the year ended September 30, 2005 was
$3.6 million, a 34% increase from cost of license revenues of $2.7 million for the year ended September 30, 2004. The increase of $903,000 was principally due to an increase in warranty expense of $691,000 due to a $368,000 provision
recorded in the year ended September 30, 2005 and a warranty accrual reversal of $323,000 recorded in the year ended September 30, 2004. The increase is also due to a slight increase in royalties and co-sale and reseller fees totaling
$212,000.



Cost of license revenues for the year ended
September 30, 2004 was $2.7 million, a 25% decrease from cost of license revenues of $3.6 million for the year ended September 30, 2003. The decrease of $889,000 was principally due to a decrease in royalties and co-sale and reseller
fees totaling $3.1 million, offset by an increase in warranty expense of $2.2 million, as the reversal in the year ended September 30, 2004 was less than the warranty accrual reversal in the year ended September 30, 2003.



Subscription and maintenance



Cost of subscription and maintenance revenues consists of labor costs for
implementation and services, hosting services, technical support, training personnel, facilities and equipment costs. Cost of subscription and maintenance revenues for the year ended September 30, 2005 was $28.8 million, a 29% increase from
cost of subscription and maintenance revenues of $22.4 million for the year ended September 30, 2004. This increase of $6.4 million is primarily due to an increase in the cost of subscription services of $8.6 million, primarily due to an
increase in compensation and benefits of $2.4 million to support the shift from perpetual license sales to more subscription and hosted term license software sales and an increase in headcount related costs. This was partially offset by a decrease
of $2.2 million in maintenance costs, primarily due to a decrease in compensation and benefits of $924,000 and temporary labor of $531,000.



Cost of subscription and maintenance revenues for the year ended September 30, 2004 was $22.4 million, a 3% decrease from cost of subscription and
maintenance revenues of $23.0 million for the year ended September 30, 2003. This decrease of $600,000 is primarily due to a decrease of $822,000 in maintenance costs offset by an increase in the cost of subscription services of $200,000.



Services and other



Cost of services and other revenues consists of labor costs for consulting
services, technical support, training personnel, facilities and equipment costs. Cost of services and other revenues was $121.6 million for the year ended September 30, 2005, a 74% increase from cost of services and other revenues of $69.8
million for the



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year ended September 30, 2004. The increase is primarily a result of additional personnel costs associated with increased levels of resources needed to
support higher services revenues, due in part to our acquisition of Alliente and our merger with FreeMarkets, which resulted in increased services personnel.



Cost of services and other revenues was $69.8 million for the year ended September 30, 2004, an 88% increase from cost of services and other revenues
of $37.2 million for the year ended September 30, 2003. The increase is primarily a result of additional personnel costs associated with increased levels of resources needed to support higher services revenues, due in part to our acquisition of
Alliente and our merger with FreeMarkets, which resulted in increased services personnel.



Amortization of acquired technology and customer intangible assets



Amortization of acquired technology and customer intangible assets represents the amortization of assets associated with our fiscal year 2000 acquisitions
of TradingDynamics, Inc. (Trading Dynamics), Tradex, Inc. (Tradex), SupplierMarket.com, (SupplierMarket), and our fiscal year 2004 business combinations with Softface and FreeMarkets. This expense amounted to
$19.5 million, $5.1 million and $4.0 million for the years ended September 30, 2005, 2004 and 2003, respectively. The increase in each period is primarily due to our 2004 merger with FreeMarkets.



Operating Expenses



Sales and marketing



Sales and marketing expenses include costs associated with our sales and
marketing personnel and product 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 year ended September 30, 2005 were $83.3 million, a 12% increase from sales and marketing expenses of $74.3 million for the year ended September 30, 2004. This increase is primarily
attributable to the following: (1) an increase in compensation and benefits expense of $10.0 million due to a 23% increase in average headcount, primarily due to the merger with FreeMarkets in July 2004; and (2) an increase in bad debt
expense of $2.8 million due to a deterioration in the aging of our accounts receivable in fiscal year 2005. These items were partially offset by a decrease in legal fees of $3.8 million, primarily due to the settlement of a litigation matter
involving a marketing alliance partner in fiscal year 2004.



Sales and marketing expenses for the year ended September 30, 2004 were $74.3 million, a 12% increase from sales and marketing expenses of $66.5 million for the year ended September 30, 2003. This increase is comprised of an
increase of $7.6 million in sales and marketing expenses in the fourth quarter of fiscal year 2004, arising from increased sales and marketing activity associated with the merger with FreeMarkets, increases in marketing costs of $3.1 million
relating principally to our advertising campaign for fiscal year 2004, and doubtful accounts of $2.2 million due primarily to the net reversal of $1.4 million of the provision in the previous year. These increases are offset by decreases in
personnel related costs, primarily headcount related, of $2.5 million, and facilities and equipment expenses of $2.0 million.



Research and development



Research and development expenses primarily include compensation and benefits, as well as software development tools and equipment costs associated with
the development of new products, enhancements of existing products for which technological feasibility has not been achieved, and quality assurance activities. Research and development expenses for the year ended September 30, 2005 were $47.2
million, a 13% decrease from research and development expenses of $54.1 million for the year ended September 30, 2004. This decrease is primarily attributable to the following: (1) a decrease in compensation and benefits expense of
$3.1 million resulting from a 19% decrease in average headcount; (2) a decrease in facilities and equipment expense of $1.2



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million primarily due to a decrease in depreciation expense as office equipment reaches its maximum depreciable lives; and (3) a decrease in
professional services expenses of $1.1 million due to cost cutting efforts in fiscal year 2005.



Research and development expenses for the year ended September 30, 2004 were $54.1 million, a $77,000 increase from research and development expenses
of $54.0 million for the year ended September 30, 2003. This increase is comprised of a $1.9 million increase in research and development expenses in the fourth quarter of fiscal year 2004 arising from the merger with FreeMarkets, offset
by decreases of $1.1 million in compensation and benefits and $600,000 in facilities and equipment costs.



General and administrative



General and administrative expenses include costs for executive, finance, human resources, information technology, legal and administrative support
functions. General and administrative expenses for the year ended September 30, 2005 were $30.6 million, a 17% increase from general and administrative expenses of $26.1 million for the year ended September 30, 2004. This increase is
due to increased legal expenses of $4.6 million primarily related to a patent infringement case settled in February 2005 and an increase in audit services due to the requirements of the Sarbanes-Oxley Act of 2002 in the year ended September 30,
2005.



General and administrative expenses for the year ended
September 30, 2004 were $26.1 million, a 28% decrease from general and administrative expenses of $36.2 million for the year ended September 30, 2003. This decrease is comprised of $8.5 million less fees to outside professional
service providers, primarily attributable to a decline in expenses relating to our accounting review, $3.0 million in personnel costs, $2.0 million in office related expenses and $700,000 in facilities and equipment expenses, partially offset by an
increase of $3.9 million resulting from our merger with FreeMarkets.



Other incomeSoftbank



During fiscal year
2005, we recorded $9.5 million of income from the settlement with Softbank entered into in October 2004. The $37.0 million of deferred income recorded upon the settlement with Softbank is being recognized into income, starting in January 2005, over
the remaining term of the three-year license. For further discussion, see Note 13 to the Consolidated Financial Statements.



Amortization of other intangible assets



Amortization of goodwill and other intangible assets was $798,000, $460,000 and $113.5 million in fiscal years 2005, 2004 and 2003, respectively. In
fiscal years 2005 and 2004, this consisted of the amortization of trade name/trademark and order backlog resulting from our merger with FreeMarkets and our acquisitions of Softface and Alliente. In fiscal year 2003, the amortization related to
covenants not to compete and an intellectual property agreement.



In-process research and development



In
connection with our merger with FreeMarkets, $100,000 was allocated to in-process research and development for the year ended September 30, 2004. This amount was determined by us, after considering, among other factors, the results of an
independent appraisal based on established valuation techniques in the software industry. The associated in-process research and development project was expensed upon acquisition because technological feasibility had not been established and no
future alternative uses existed.



No assurance can be given
that actual revenues and operating profit attributable to acquired in-process research and development will not deviate from the projections used to value such in-process research and development in connection with the merger.



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Stock-based compensation



We recognize deferred stock-based compensation associated with stock options issued to employees in conjunction with the
consummation of our acquisitions and the issuance of restricted shares of common stock to executive officers and employees. These amounts are included as a component of stockholders equity and charged to operations over the vesting period of
the options and restricted stock, consistent with the method described in Financial Accounting Standards Board (FASB) Interpretation No. 28 (FIN 28), Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans. Stock-based compensation expense is presented as a separate line item in our Consolidated Statements of Operations, net of the effects of reversals related to terminated employees for cancellation of unvested stock awards previously
amortized to expense under FIN 28.



For the years ended
September 30, 2005, 2004 and 2003, stock-based compensation expense (benefit), net of the effects of cancellations, is attributable to various operating expense categories as follows (in thousands):



|                           |  |      |        |      |   |       |  |   |       |  
|-------------------------- |  | ---- | ------ | ---- | - | ----- |  | - | ----- | -
|                           |  | 2005 |        | 2004 |   | 2003  | 
|Cost of revenues           |  | $    | 4,530  |      | $ | 280   |  | $ | (729  | )
|Sales and marketing        |  |      | 8,986  |      |   | 1,763 |  |   | 1,544 |  
|Research and development   |  |      | 2,398  |      |   | 271   |  |   | 272   |  
|General and administrative |  |      | 3,690  |      |   | 474   |  |   | 1,074 |  
|                           |  |      |        |      |   |       |  |   |       |  
|Total                      |  | $    | 19,604 |      | $ | 2,788 |  | $ | 2,161 |  
|                           |  |      |        |      |   |       |  |   |       |  



The increase in the
year ended September 2005 is primarily due to restricted stock grants in fiscal year 2005 and the stock option exchange program completed in the fourth quarter of fiscal year 2005. For further discussion, see Note 10 to the Consolidated Financial
Statements.



Restructuring and integration costs



For the year ended September 30, 2005, we recorded a
charge to operations of $41.2 million for restructuring and integration costs, which is comprised of the following: (1) in June 2005, we revised our estimates for sublease rental projections resulting in a charge of $31.8 million;
(2) severance and related benefits of $3.8 million resulting from our goal to better align expenses with our revenue levels and to enable us to invest in certain strategic growth initiatives; (3) severance and related benefits of $1.6
million for terminated employees and legal and consulting costs of $1.3 million in connection with the merger with FreeMarkets in order to improve our post-merger competitiveness, productivity and future operating results; (4) a $1.6 million
adjustment to our restructuring obligation in March 2005 that was related to a prior period (based on the guidance in SAB 99, we concluded that the amount of the prior period error was immaterial to the current and prior period); and (5) in
July 2005, we re-assessed our office space in Pittsburgh, Pennsylvania and ceased use of one of the floors we lease through 2010, which resulted in a charge of $1.2 million.



For the year ended September 30, 2004, we recorded a charge to operations of $16.8 million for restructuring and
integration costs, of which $15.8 million represented merger-related costs undertaken in connection with our merger with FreeMarkets in order to improve our post-merger competitiveness, productivity and future operating results. This charge
consisted of $3.4 million for severance and related benefits for terminated Ariba employees, $9.1 million for lease abandonment costs associated with our Sunnyvale facility, $2.9 million for the impairment of leasehold improvements and
$2.8 million for other integration costs, primarily professional fees for integration planning and implementation, partially offset by a benefit to operating expense totaling $2.4 million primarily as a result of entering into a sublease
agreement which was not anticipated in previous estimates of our restructuring obligations. The remaining charge of $1.0 million in the year ended September 30, 2004 was due to an additional charge to lease abandonment costs based on revised
estimates for sublease rental projections for our corporate headquarters and field offices disposition efforts.



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During the year ended September 30, 2003, we revised our original estimates and expectations
associated with our corporate headquarters and field offices disposition efforts and recorded an additional charge to lease abandonment costs to reflect these revisions of $5.4 million.



Goodwill impairment



In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, we perform a
test for impairment on an annual basis or as events and circumstances indicate that goodwill or other intangible assets may be impaired and that the carrying values may not be recoverable. We perform our annual assessment for impairment in the
fourth quarter of each fiscal year. In June 2005, based on a combination of factors, particularly: (1) our market capitalization; (2) our current and projected operating results; (3) significant trends in the enterprise software
industry; and (4) our decision to reduce our workforce and eliminate excess facility space, we concluded there were sufficient indicators to require us to assess whether any portion of our recorded goodwill balance was impaired. We determined
that our estimated fair value was less than the recorded amount of our net assets, thereby necessitating that we assess our recorded goodwill for impairment. As required by SFAS No. 142, in measuring the amount of goodwill impairment, we made a
hypothetical allocation of the estimated fair value of the Company to the tangible and intangible assets (other than goodwill) and liabilities. Based on this allocation, we concluded that goodwill was impaired in the amount of $247.8 million. We
performed the annual assessment in the fourth quarter of fiscal year 2005, and no further indication of goodwill impairment was noted.



Litigation provision



We recorded a $37.0 million provision related to the settlement of our patent infringement litigation during the year ended September 30, 2005. For
further discussion, see Note 7 to the Consolidated Financial Statements.



Interest and other income, net



Interest and other income, net for the year ended September 30, 2005 was $5.9 million, an increase of $3.1 million from interest and other income, net of $2.8 million for the year ended September 30, 2004. The increase is
primarily attributable to a realized net gain on a Japanese Yen cash flow hedge in the amount of $2.5 million. In December 2004, we hedged a portion of the net assets of Nihon Ariba using foreign currency forward contracts (Japanese Yen) to offset
the translation and economic exposures related to anticipated cash flows from this subsidiary. The Japanese Yen hedge minimized currency risk arising from cash held in Japanese Yen as a result of the Softbank settlement in October 2004. The increase
in interest and other income, net is also attributable to an increase in realized foreign currency transaction gains in the amount of $1.0 million on accounts receivable billed from Ariba, Inc. in foreign currencies to customers headquartered in
foreign countries. The foreign currency transaction gains are primarily due to the U.S. dollar weakening against the Euro and the British Pound in the first half of 2005.



Interest and other income, net for the year ended September 30, 2004 was $2.8 million, a 51% decrease from interest and
other income of $5.7 million for the year ended September 30, 2003. This decrease is primarily attributable to a $1.6 million decrease in interest income due to lower invested cash, cash equivalents and investment balances as well as a change
in mix to lower interest bearing accounts, and a decrease of $1.4 million attributable to realized gains and losses on investments due to international currency fluctuations.



Provision (benefit) for income taxes



We recorded an income tax provision (benefit) of $7.0 million, $(160,000) and $(92,000) for the years ended
September 30, 2005, 2004 and 2003, respectively. The income tax provision of $7.0 million recorded in the year ended September 30, 2005 is primarily attributable to the $4.8 million tax effect related to the buy-out of the minority
interests from Softbank in October 2004, $554,000 recorded for the repatriation of cash from Ariba



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Korea and a slight increase in foreign income taxes. The income tax benefit of $160,000 and $92,000 recorded in the years ended September 30, 2004 and
2003, respectively, relates to net tax refunds from various state and foreign tax jurisdictions.



Utilization of our net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change
limitations imposed by Internal Revenue Code Section 382 and similar state provisions. Such an annual limitation could result in the expiration of our federal and state net operating loss and tax credit carryforwards before utilization.



As of September 30, 2005, we had net operating loss
carryforwards for federal and state tax purposes of approximately $1.5 billion and $853.6 million, respectively, before consideration of any annual limitations as described above. These federal and state net operating loss carryforwards expire in
various years from fiscal year 2010 through fiscal year 2025 and from fiscal year 2006 through fiscal year 2025, respectively. As of September 30, 2005, we had research credit carryforwards for federal and state tax purposes of approximately
$39.0 million and $25.1 million, respectively. If not utilized, the federal research credit carryforwards will expire in various years from fiscal year 2010 through fiscal year 2023. The state research credit carryforwards will continue
indefinitely, except for $285,000, which will expire in 2018. We also had manufacturers credit carryforwards as of September 30, 2005 for state tax purposes of approximately $2.0 million, which will expire in various years from fiscal
year 2006 through fiscal year 2012. Our net operating loss and tax credit carryforwards include net operating loss and research credit carryforwards of approximately $250.3 million and $5.1 million, respectively, generated by FreeMarkets, which are
subject to annual limitations which could reduce or defer the utilization of those losses and credits.



Minority interests



In December 2000, our consolidated subsidiary, Nihon Ariba K.K. (Nihon Ariba), sold approximately 41% of its common stock for cash
consideration of approximately $40.0 million to Softbank pursuant to our strategic relationship with Softbank. In April 2001, Nihon Ariba sold an additional 2% of its common stock for cash consideration of approximately $4.0 million to third
parties. Also in April 2001, our consolidated subsidiary, Ariba Korea, Ltd. (Ariba Korea), sold approximately 42% of its common stock for cash consideration of approximately $8.0 million to Softbank. Prior to the transactions, we held
100% of the equity of Nihon Ariba and Ariba Korea in the form of common stock.



In October 2004, we purchased the 41% interest in Nihon Ariba and the 42% interest in Ariba Korea held by Softbank for $3.5 million. During the remainder of 2005, we purchased the remaining 2% minority interest in
Nihon Ariba held by minority shareholders. These transactions resulted in a $19.5 million reduction to minority interests during the year ended September 30, 2005. As of September 30, 2005 and 2004, minority interest of zero and
approximately $19.5 million, respectively, was recorded on our Consolidated Balance Sheets in order to reflect the share of the net assets of Nihon Ariba and Ariba Korea held by minority investors. For the years ended September 30, 2005 and
2003, we increased consolidated net loss by $17,000 and $3.5 million, as the minority interests share of income, respectively. For the year ended September 30, 2004, we reduced consolidated net loss by approximately $539,000 as the
minority interests share of losses.



Liquidity and
Capital Resources



As of September 30, 2005, we
had $114.2 million in cash, cash equivalents and investments and $33.3 million in restricted cash, for total cash, cash equivalents and investments of $147.4 million. Our working capital on September 30, 2005 was $29.2 million. All significant
cash, cash equivalents and investments are held in accounts in the United States except for $7.9 million held by our subsidiary in Korea. As discussed above, the repatriation of cash held in Korea will be subject to foreign withholding taxes at a
rate of 11%. As of September 30, 2004, we had $140.9 million in cash, cash equivalents and investments and $72.5 million in restricted cash, for total cash, cash equivalents and investments of $213.4 million. Our working capital on
September 30, 2004 was $33.1 million.



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The decrease in total cash, cash equivalents, investments and restricted cash of $66.0 million for the
year ended September 30, 2005 is primarily attributable to the cash outflow of $37.0 million associated with the ePlus settlement in February 2005 and the $26.5 million associated with the Softbank settlement in October 2004. The net cash
outflow to Softbank was comprised of the following: (1) repayment of $43.0 million of the interim payments received in connection with the Softbank arbitration proceedings, which represented the amounts owed to Ariba for software and support
under the strategic relationship with Softbank; (2) payment of $3.5 million to buy out Softbanks minority interests in Nihon Ariba and Ariba Korea; and (3) $20.0 million received from Softbank for a three-year software license of the
Ariba Sourcing and Ariba Analysis product lines. Excluding the ePlus and Softbank settlements, total cash and investments decreased $2.4 million.



Net cash used in operating activities was $68.7 million for the year September 30, 2005, compared to $22.3 million of net cash used in operating
activities for year ended September 30, 2004. Cash flows from operating activities decreased a total of $46.4 million primarily due to the following:



| |  |  | A decrease of $69.9 million associated with the net Softbank activity. In the year ended September 30, 2004, we received interim payments of $43.4 million from Softbank
pursuant to an arbitration proceeding in November 2003. In the year ended September 30, 2005, the net cash outflow to Softbank was $26.5 million as described above. See also the offsetting increase in investing activities noted below;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $37.0 million associated with the ePlus settlement in February 2005; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | A higher net loss, excluding non-cash charges, in the year ended September 30, 2005 as compared to the year ended September 30, 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



The above items were partially offset by the following:



| |  |  | An increase of $12.4 million relating to a payment received from a subtenant in the year ended September 30, 2005;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | An increase of $20.9 million from the decrease in deferred revenue comparing the year ended September 30, 2005 to September 30, 2004. This is primarily due to the $28.9
million decrease in deferred revenue in the year ended September 30, 2004, principally due to the recognition of more revenue from contracts entered into during prior periods than new deferrals originating in the year ended September 30,
2004; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An increase of $16.8 million from accounts receivable comparing the year ended September 30, 2005 to September 30, 2004, which represents the difference in the net change
in accounts receivable in the year ended September 30, 2005 as compared to the year ended September 30, 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Net cash provided by investing activities was $42.7 million for the year ended September 30, 2005, compared to net cash provided by investing
activities of $23.0 million for the year ended September 30, 2004. The increase in net cash provided by investing activities for the year ended September 30, 2005 is primarily attributable to the net Softbank activity of $69.9 million
described above and the $39.2 million used to acquire FreeMarkets, Alliente and Softface in the year ended September 30, 2004, partially offset by reduced proceeds of $94.3 million from sales of marketable securities, net of purchases.



Net cash provided by financing activities was $11.8 million
for the year ended September 30, 2005, compared to net cash provided by financing activities of $2.6 million for the year ended September 30, 2004. Net cash provided by financing activities is attributable to the issuance of common stock
from stock option exercises and from the employee stock purchase plan of $11.8 million and $9.1 million in the years ended September 30, 2005 and 2004, respectively. The amount in the year ended September 30, 2004 was partially offset by
$6.4 million used to repurchase shares of our outstanding common stock.



As of September 30, 2005, we did not have any commitments for capital expenditures.



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Contractual obligations



Our primary contractual obligations are under our operating leases and a letter of credit which are discussed below.



In March 2000, we entered into a facility lease agreement for
716,000 square feet in four office buildings and an amenities building in Sunnyvale, California for our headquarters. The operating lease term commenced in 2001 and ends in January 2013. We occupy 191,200 square feet in this facility, and currently
sublease two and one-half buildings totaling 442,600 square feet to third parties. These subleases expire between July 2007 and August 2008. The remaining 82,200 square feet is available for sublease. Minimum monthly lease payments are $2.8 million
and escalate annually, with the total future minimum lease payments amounting to $285.6 million over the remaining lease term. As part of this lease agreement, we are required to hold certificates of deposit, totaling $31.3 million as of
September 30, 2005, as a form of security through fiscal year 2013. Also, we are required by other lease agreements to hold an additional $2.0 million of 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 domestic and international real estate leases. The total cash collateral of $33.3 million is classified as restricted cash on our consolidated balance sheet as of
September 30, 2005.



We also occupy 93,100 square feet of
office space in Pittsburgh, Pennsylvania under a lease covering 182,000 square feet that expires in May 2010. The remaining 88,900 square feet is available for sublease. This location consists principally of our services organization and
administrative activities.



Future minimum lease payments and
sublease income under noncancelable operating leases for the next five years and thereafter are as follows as of September 30, 2005 (in thousands):



|                          |  |               |         |                           |   |         |                |  |   |        
|------------------------- |  | ------------- | ------- | ------------------------- | - | ------- | -------------- |  | - | -------
|Year Ending September 30, |  | LeasePayments |         | ContractualSubleaseIncome |   |         | NetObligations
|2006                      |  | $             | 48,088  |                           | $ | (18,317 | )              |  | $ | 29,771 
|2007                      |  |               | 43,319  |                           |   | (14,296 | )              |  |   | 29,023 
|2008                      |  |               | 43,700  |                           |   | (4,456  | )              |  |   | 39,244 
|2009                      |  |               | 44,584  |                           |   |        |                |  |   | 44,584 
|2010                      |  |               | 44,035  |                           |   |        |                |  |   | 44,035 
|Thereafter                |  |               | 100,416 |                           |   |        |                |  |   | 100,416
|                          |  |               |         |                           |   |         |                |  |   |        
|Total                     |  | $             | 324,142 |                           | $ | (37,069 | )              |  | $ | 287,073
|                          |  |               |         |                           |   |         |                |  |   |        



Of the total operating
lease commitments as of September 30, 2005 noted above, $105.8 million is for occupied properties and $218.3 million is for abandoned properties, which are a component of the restructuring obligation. In November 2004, we repaid in full an
outstanding loan with the Commonwealth of Pennsylvania for $378,000.



Other than the lease commitments and letters of credit discussed above, we do not have commercial commitments under lines of credit, standby repurchase obligations or other such debt arrangements. We do not have any material noncancelable
purchase commitments as of September 30, 2005.



Off-balance sheet arrangements



We have no
off-balance sheet arrangements or transactions with unconsolidated limited purpose entities, nor do we have any undisclosed material transactions or commitments involving related persons or entities.



Anticipated cash flows



We expect to incur significant operating costs, particularly related to
services delivery costs, sales and marketing, research and development and restructuring costs, for the foreseeable future in order to execute our



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business plan. We anticipate that such operating costs, 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, payments of restructuring and integration charges, changes in deferred revenues, our ability to manage infrastructure costs, the outcome of our subleasing activities
related to abandoned excess leased facilities, the use of cash under our stock repurchase program and ongoing regulatory and legal proceedings.



We believe our existing cash, cash equivalents and investment balances, together with anticipated cash flow from operations, should be sufficient to meet
our working capital and operating resource requirements for at least the next twelve months. However, given the significant changes in our business and results of operations in the last twelve to eighteen months, the fluctuation in cash and
investment balances may be greater than presently anticipated. See Risk Factors. After the next twelve 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.



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 obligations related to abandoned operating leases and contingencies related to the collectibility of accounts receivable and pending litigation. These policies and our
practices related to these policies are described below and in Note 1 of Notes to Consolidated Financial Statements.



Revenue recognition



Substantially all of our revenues are derived from three sources: (i) licensing software; (ii) providing hosted software solutions, technical
support and product updates, otherwise known as subscription and maintenance; and (iii) providing services, including implementation services, consulting services, managed services, training, education, premium support and other miscellaneous
services. Our standard end user license agreement provides for use of our software under either a perpetual license or a time-based license based on the number of users. We license our software in multiple element arrangements in which the customer
typically purchases a combination of some or all of the following: (i) software products, either on a standalone or hosted basis; (ii) a maintenance arrangement, which is generally priced as a percentage of the software license fees and
provides for technical support and product updates typically over a period of one year; and (iii) a services arrangement, on either a fixed fee for access to specific services over time or a time and materials basis.



We license our products through our direct sales force and indirectly through
resellers. The license agreements for our products generally do not provide for a right of return, and historically product returns have not been significant. We do not recognize revenue for refundable fees or agreements with cancellation rights
until such rights to refund or cancellation have expired. We recognize revenue on sales to resellers upon sell-through to the end-user. Collectibility of receivables is assessed based on the resellers ability to pay. Commissions or fees paid
to partners under co-sale arrangements are included as cost of license revenues at the time of sale, when the liability is incurred and is reasonably estimable. Access to certain functionality on the Ariba Supplier Network is available to Ariba
licensees as part of their maintenance agreements for certain products.



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We recognize revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, Staff Accounting Bulletin (SAB) 104, Revenue Recognition, Emerging Issues Task Force
(EITF) 00-21, Revenue Arrangements with Multiple Deliverablesand EITF 00-3, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entitys Hardware. We recognize
revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery of the product or service has occurred; the fee is fixed or determinable; and collectibility is probable. Payment terms are considered
extended when greater than 20% of an arrangement fee is due beyond twelve months from delivery. In these scenarios, fees are not fixed or determinable, and therefore revenue is recognized when fees are due and payable. In arrangements
where at least 80% of license fees are due within one year or less from delivery, the entire arrangement fee is considered fixed or determinable and revenue is recognized when the remaining basic revenue recognition criteria are met, provided that
any accompanying services are not considered essential to the functionality of the software products. If collectibility is not considered probable at the inception of the arrangement, we do not recognize revenue until the fee is collected.



We allocate and recognize revenue on contracts that include
software using the residual method pursuant to the requirements of SOP 97-2, as amended by SOP 98-9. Under the residual method, revenue is recognized in a multiple element arrangement when Company-specific objective evidence of fair value exists for
all of the undelivered elements in the arrangement, but does not exist for at least one of the delivered elements in the arrangement. We defer revenue for the fair value of the undelivered elements (e.g., maintenance and consulting services) and
recognize revenue for the remainder of the arrangement fee attributable to the delivered elements (e.g., software products) when the basic criteria in SOP 97-2 have been met. Where the contract does not include software, we allocate revenue to each
element in a multiple element arrangement based on its respective fair value. Our determination of the fair value of each element in a multiple element arrangement involving software is based on vendor-specific objective evidence (VSOE), which is
limited to the price when sold separately. For all other transactions not involving software, fair value is determined using the price when sold separately or other methods allowable under EITF 00-21.



Revenue allocated to maintenance and support is recognized ratably over the
maintenance term (typically one year). Revenue from hosting and sourcing solutions services is recognized ratably over the term of the arrangement as the access is provided over the related contract period. Revenue allocated to software
implementation, process improvement, training and other services is recognized as the services are performed. 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 our perpetual and time-based licenses include the right to unspecified additional products. We recognize revenue from perpetual and time-based
licenses that include unspecified additional software products ratably over the longer of the term of the time-based license or the period of commitment to such unspecified additional products. In addition, certain of our contracts include
performance incentive payments based on market volume and/or savings generated, as defined in the respective contracts. Revenue from such arrangements is recognized as those thresholds are achieved.



Arrangements that include consulting services, such as system implementation
and process improvement, are evaluated to determine whether the services are essential to the functionality of the software products. 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
does not have fair value for at least one of the undelivered elements in an arrangement, we defer revenue recognition until the elements are delivered, or if the undelivered elements are a subscription or time based service, recognize revenue
ratably over the longest contractual term in the arrangement. For allocation purposes, where more than one element in an arrangement does not have fair value, target pricing is used to allocate the amount remaining after allocating revenue to those
elements which have fair value.



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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 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 based on the ratio of direct labor hours incurred to date to total projected labor hours, except in limited circumstances where completion status cannot be
reasonably estimated, in which case the completed contract method is used.



Deferred revenue includes amounts received from customers for which revenue has not been recognized, and 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 under SOP 97-2, SAB 104 or EITF 00-21 are satisfied.
Deferred revenue excludes contract amounts for which payment has yet to be collected. Likewise, accounts receivable excludes amounts due from customers for which revenue has been deferred.



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. In cases where we are aware of circumstances that may impair a specific customers ability to meet its financial obligations, we record a specific allowance against amounts due, and thereby reduce the net recognized receivable to the
amount we reasonably believe will be collected. For the remaining customers, we recognize allowances for doubtful accounts based on the length of time the aggregate receivables are outstanding, the current business environment and historical
experience. 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



We review goodwill for impairment annually and more frequently if events and
circumstances indicate that the asset may be impaired and 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 the recorded amount of our net assets for a sustained period. Our stock price is highly volatile and has experienced significant declines since January 2004. In June 2005,
based on a combination of factors, particularly: (1) our current market capitalization; (2) our current and projected operating results; (3) significant trends in the enterprise software industry; and (4) our decision to reduce
our workforce and eliminate excess facility space, we concluded there were sufficient indicators to require us to assess whether any portion of our recorded goodwill balance was impaired. We determined that our estimated fair value was less than the
recorded amount of our net assets, thereby necessitating that we assess our recorded goodwill for impairment. As required by SFAS No. 142, in measuring the amount of goodwill impairment, we made a hypothetical allocation of the estimated fair
value of the Company to the tangible and intangible assets (other than goodwill) and liabilities. Based on this allocation, we concluded that goodwill was impaired in the amount of $247.8 million. We performed the annual assessment in the fourth
quarter of fiscal year 2005, and no further indication of goodwill impairment was noted. The remaining balance of goodwill is $328.7 million as of September 30, 2005, and there can be no assurances that future goodwill impairments will not
occur.



Impairment of long-lived assets



We evaluate long-lived assets, such as property and equipment and purchased
intangibles subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of



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the assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the
estimated undiscounted future cash flows expected to be generated from the use and ultimate disposition of the assets. If the carrying amount of the assets exceeds their estimated future cash flows, an impairment charge is recognized for the amount
by which the carrying amount of the assets exceeds the fair value of the assets.



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 a program to restructure our operations and related facilities. In the years ended
September 30, 2003 and 2002, we revised our original estimates and expectations for our corporate headquarters and field offices disposition efforts as a result of changed estimates of sublease rental projections.



During the year ended September 30, 2004, due to further consolidation
and abandonment of additional facilities as the result of our merger with FreeMarkets, we recorded additional restructuring costs of $12.0 million. We also (i) revised our estimates for sublease rental projections resulting in an
additional charge of $1.0 million, and (ii) recorded a benefit to operating expense totaling $2.4 million, primarily as a result of entering into a sublease agreement which was not anticipated in previous estimates of the restructuring
obligation. In addition, we assumed lease abandonment liabilities of $10.7 million as of July 1, 2004 related to the former headquarters of FreeMarkets in Pittsburgh, Pennsylvania.



During the year ended September 30, 2005, we revised our estimates for
sublease rental projections resulting in a charge of $31.8 million. We also recorded a $1.6 million adjustment to our restructuring obligation in March 2005 that was related to a prior period. Based on the guidance in SAB 99, we concluded that the
amount of the prior period error was immaterial to the current and prior period. In July 2005, we re-assessed our office space in Pittsburgh, Pennsylvania and ceased use of one of the floors we lease through 2010, which resulted in a charge of $1.2
million. Finally, we recorded a $1.2 million adjustment to the restructuring obligation due to the closure of an excess legacy FreeMarkets facility. This restructuring adjustment was considered part of purchase accounting for FreeMarkets and has
been recorded as an adjustment to goodwill.



Lease abandonment
costs for the abandoned facilities were estimated to include 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 using market trend information analyses provided by a commercial real estate brokerage firm retained by us. We review these estimates each quarterly reporting period, and to the extent
that our assumptions change, the ultimate restructuring expenses for these abandoned facilities could vary significantly from current estimates.



As of September 30, 2005, we had contractual commitments of $218.3 million for abandoned properties. Our lease abandonment accrual is net of $122.5
million of estimated sublease income. Actual sublease payments due under noncancelable subleases of excess facilities totaled $37.1 million as of September 30, 2005, and the remainder of anticipated sublease income represents managements
estimate of amounts to be received under future subleases. Actual future cash requirements and lease abandonment costs may differ materially from the accrual at September 30, 2005, 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, 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 on our Sunnyvale, California headquarters and our other principal office in Pittsburgh, Pennsylvania by approximately $8.0 million as of
September 30, 2005.



Legal contingencies



We are subject to various claims and legal actions. See
Legal Proceedings. We accrue for estimated losses in accordance with GAAP 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 properly 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.



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|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------



Foreign Currency Risk



We develop products primarily in the United States of America and India and market our products primarily in the United States of America, Europe 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 non-U.S. sales are priced in currencies other than the
U.S. dollar, a strengthening of the dollar may reduce the level of reported revenues. If any of the events described above were to occur, our net sales could be seriously impacted, since a large portion of our net sales are derived from
international operations. For the years ended September 30, 2005, 2004 and 2003, approximately 28%, 35% and 32%, 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. These 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 contracts outstanding as of September 30,
2005 (in thousands):



|                    |  |          |                 |                |     |                             |       |  |   |     |  
|------------------- |  | -------- | --------------- | -------------- | --- | --------------------------- | ----- |  | - | --- | -
|                    |  | Buy/Sell |                 | Contract Value |     | UnrealizedGain (Loss)in USD |      
|                    |  |          | ForeignCurrency |                | USD |                            
|Foreign Currency    |  |          |                 |                |     |                             |       |  |   |     |  
|Euro                |  | Sell     |                 | 3,500          |     | $                           | 4,330 |  | $ | 120 |  
|Great British Pound |  | Buy      |                 | 1,000          |     |                             | 1,770 |  |   | (12 | )
|Switzerland Franc   |  | Buy      |                 | 1,000          |     |                             | 808   |  |   | (36 | )
|Singapore Dollar    |  | Buy      |                 | 1,000          |     |                             | 593   |  |   | (2  | )
|                    |  |          |                 |                |     |                             |       |  |   |     |  
|Total               |  |          |                 |                |     | $                           | 7,501 |  | $ | 70  |  
|                    |  |          |                 |                |     |                             |       |  |   |     |  



The unrealized gain
(loss) represents the difference between the contract value and the market value of the contract based on market rates as of September 30, 2005.



Given our foreign exchange position, a ten percent change in foreign exchange rates upon which these forward exchange contracts are based would result in
unrealized exchange gains or losses of approximately $700,000. In all material aspects, these exchange gains and losses would be fully offset by exchange losses or gains on the underlying net monetary exposures. We do not expect material exchange
rate gains and losses from other foreign currency exposures.



Cash Flow Risk



In January 2005 and December
2004, we hedged anticipated cash flows from Ariba Korea and Nihon Ariba, respectively, using foreign currency forward contracts (Korean Won and Japanese Yen) to offset the translation



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and economic exposures related to those cash flows. The Korean Won and Japanese Yen hedges minimize currency risk arising from cash held in Korean Won and
Japanese Yen as a result of the Softbank settlement in October 2004. In September 2005, the cash held in Nihon Ariba was repatriated and a gain of $2.3 million was realized on these foreign currency contracts in the fourth quarter of fiscal year
2005. The change in fair value of the Korean Won forward contract attributable to the changes in forward exchange rates (the effective portion) is reported in stockholders equity. It is anticipated that the majority of the cash held in Ariba
Korea will be repatriated in the next six months. The notional amount of our hedge was 2.0 billion Korean Won ($1.9 million) as of September 30, 2005. The unrealized net gain on the Korean Won cash flow hedge reported in stockholders
equity was $27,000 as of September 30, 2005.



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. We 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 EndingSeptember 30,2006 |        |   | Year EndingSeptember 30,2007 |   |       | Year EndingSeptember 30,2008 |  |   | Year EndingSeptember 30,2009 |   | Year EndingSeptember 30,2010 |   | Thereafter |  | Total |  
|Cash equivalents            |  | $                            | 37,361 |   |                              | $ |      |                              |  | $ |                             |   |                              | $ |           |  | $     |  |  | $ |  |  | $ | 37,361  |  
|Average interest rate       |  |                              | 3.43   | % |                              |   |      |                              |  |   |                             |   |                              |   |           |  |       |  |  |   |  |  |   | 3.43    | %
|Investments                 |  | $                            | 51,854 |   |                              | $ | 3,131 |                              |  | $ | 31,602                       |   |                              |   |           |  |       |  |  |   |  |  | $ | 86,587  |  
|Average interest rate       |  |                              | 3.70   | % |                              |   | 2.85  | %                            |  |   | 3.27                         | % |                              |   |           |  |       |  |  |   |  |  |   | 3.51    | %
|                            |  |                              |        |   |                              |   |       |                              |  |   |                              |   |                              |   |            |  |       |   |  |   |   |  |   |         |  
|Total investment securities |  | $                            | 89,215 |   |                              | $ | 3,131 |                              |  | $ | 31,602                       |   |                              | $ |           |  | $     |  |  | $ |  |  | $ | 123,948 |  
|                            |  |                              |        |   |                              |   |       |                              |  |   |                              |   |                              |   |            |  |       |   |  |   |   |  |   |         |  



The table above does
not include uninvested cash of $23.5 million held as of September 30, 2005. Total cash, cash equivalents, investments and restricted cash as of September 30, 2005 was $147.4 million.



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|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------



The following consolidated financial statements, and the related notes thereto, of the Company and the Report of Independent Registered Public Accounting
Firm are filed as a part of this Form 10-K.



|                                                                                                                   |  |            
|------------------------------------------------------------------------------------------------------------------ |  | -----------
|                                                                                                                   |  | Page Number
|Report of Independent Registered Public Accounting Firm                                                            |  | 50         
|Consolidated Balance Sheets as of September 30, 2005 and 2004                                                      |  | 51         
|Consolidated Statements of Operations and Comprehensive Loss for the years ended September 30, 2005, 2004 and 2003 |  | 52         
|Consolidated Statements of Stockholders Equity for the years ended September 30, 2005, 2004 and 2003              |  | 53         
|Consolidated Statements of Cash Flows for the years ended September 30, 2005, 2004 and 2003                        |  | 54         
|Notes to Consolidated Financial Statements                                                                         |  | 55         



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Report of Independent Registered Public Accounting Firm



The Board of Directors and Stockholders

Ariba, Inc.:



We have audited the accompanying
consolidated balance sheets of Ariba, Inc. and subsidiaries (the Company) as of September 30, 2005 and 2004, and the related consolidated statements of operations and comprehensive loss, stockholders equity, and cash flows for each of the
years in the three-year period ended September 30, 2005. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.



We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ariba, Inc.
and subsidiaries as of September 30, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2005 in conformity with U.S. generally accepted accounting
principles.



We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Ariba, Inc.s internal control over financial reporting as of September 30, 2005, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 6, 2005 expressed an unqualified opinion on managements assessment of, and the effective
operation of, internal control over financial reporting.



/s/ KPMG LLP



Pittsburgh, Pennsylvania

December 6, 2005



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ARIBA, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)



|                                                                                                                                                            |  |                   |            |   |                   |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | - | ----------------- | - | ---------- | -
|                                                                                                                                                            |  | September 30,2005 |            |   | September 30,2004 |  
|ASSETS                                                                                                                                                      |  |                   |            |   |                   |   |            |  
|Current assets:                                                                                                                                             |  |                   |            |   |                   |   |            |  
|Cash and cash equivalents                                                                                                                                   |  | $                 | 60,909     |   |                   | $ | 74,031     |  
|Short-term investments                                                                                                                                      |  |                   | 50,520     |   |                   |   | 37,227     |  
|Restricted cash                                                                                                                                             |  |                   | 1,381      |   |                   |   | 45,623     |  
|Accounts receivable, net of allowance for doubtful accounts of $4,764 and $3,933 in 2005 and 2004, respectively                                             |  |                   | 41,890     |   |                   |   | 48,071     |  
|Prepaid expenses and other current assets                                                                                                                   |  |                   | 10,080     |   |                   |   | 10,795     |  
|                                                                                                                                                            |  |                   |            |   |                   |   |            |  
|Total current assets                                                                                                                                        |  |                   | 164,780    |   |                   |   | 215,747    |  
|Property and equipment, net                                                                                                                                 |  |                   | 17,999     |   |                   |   | 21,909     |  
|Long-term investments                                                                                                                                       |  |                   | 2,731      |   |                   |   | 29,676     |  
|Restricted cash, less current portion                                                                                                                       |  |                   | 31,894     |   |                   |   | 26,862     |  
|Goodwill                                                                                                                                                    |  |                   | 328,692    |   |                   |   | 574,679    |  
|Other intangible assets, net                                                                                                                                |  |                   | 41,562     |   |                   |   | 62,249     |  
|Other assets                                                                                                                                                |  |                   | 2,986      |   |                   |   | 2,767      |  
|                                                                                                                                                            |  |                   |            |   |                   |   |            |  
|Total assets                                                                                                                                                |  | $                 | 590,644    |   |                   | $ | 933,889    |  
|                                                                                                                                                            |  |                   |            |   |                   |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                        |  |                   |            |   |                   |   |            |  
|Current liabilities:                                                                                                                                        |  |                   |            |   |                   |   |            |  
|Accounts payable                                                                                                                                            |  | $                 | 11,031     |   |                   | $ | 15,433     |  
|Accrued compensation and related liabilities                                                                                                                |  |                   | 30,046     |   |                   |   | 31,171     |  
|Accrued liabilities                                                                                                                                         |  |                   | 23,461     |   |                   |   | 69,570     |  
|Restructuring obligations                                                                                                                                   |  |                   | 18,144     |   |                   |   | 16,825     |  
|Deferred revenue                                                                                                                                            |  |                   | 39,548     |   |                   |   | 49,664     |  
|Deferred incomeSoftbank                                                                                                                                    |  |                   | 13,368     |   |                   |   |           |  
|                                                                                                                                                            |  |                   |            |   |                   |   |            |  
|Total current liabilities                                                                                                                                   |  |                   | 135,598    |   |                   |   | 182,663    |  
|Deferred rent obligations                                                                                                                                   |  |                   | 22,184     |   |                   |   | 21,406     |  
|Restructuring obligations, less current portion                                                                                                             |  |                   | 68,356     |   |                   |   | 41,042     |  
|Deferred revenue, less current portion                                                                                                                      |  |                   | 21,056     |   |                   |   | 22,858     |  
|Deferred incomeSoftbank, less current portion                                                                                                              |  |                   | 13,925     |   |                   |   |           |  
|                                                                                                                                                            |  |                   |            |   |                   |   |            |  
|Total liabilities                                                                                                                                           |  |                   | 261,119    |   |                   |   | 267,969    |  
|                                                                                                                                                            |  |                   |            |   |                   |   |            |  
|Minority interests                                                                                                                                          |  |                   |           |   |                   |   | 19,547     |  
|Commitments and contingencies (Note 7)                                                                                                                      |  |                   |            |   |                   |   |            |  
|Stockholders equity:                                                                                                                                       |  |                   |            |   |                   |   |            |  
|Convertible preferred stock, $.002 par value; 20,000 shares authorized; no shares issued and outstanding as of September 30, 2005 and
2004                  |  |                   |           |   |                   |   |           |  
|Common stock, $.002 par value; 1,500,000 shares authorized; 71,737 and 62,572 shares issued and outstanding as of September 30, 2005 and
2004, respectively |  |                   | 143        |   |                   |   | 125        |  
|Additional paid-in capital                                                                                                                                  |  |                   | 5,023,965  |   |                   |   | 4,963,002  |  
|Deferred stock-based compensation                                                                                                                           |  |                   | (35,537    | ) |                   |   | (5,959     | )
|Accumulated other comprehensive income                                                                                                                      |  |                   | 3,011      |   |                   |   | 1,634      |  
|Accumulated deficit                                                                                                                                         |  |                   | (4,662,057 | ) |                   |   | (4,312,429 | )
|                                                                                                                                                            |  |                   |            |   |                   |   |            |  
|Total stockholders equity                                                                                                                                  |  |                   | 329,525    |   |                   |   | 646,373    |  
|                                                                                                                                                            |  |                   |            |   |                   |   |            |  
|Total liabilities and stockholders equity                                                                                                                  |  | $                 | 590,644    |   |                   | $ | 933,889    |  
|                                                                                                                                                            |  |                   |            |   |                   |   |            |  



See accompanying notes
to consolidated financial statements.



51



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##### Table of Contents

ARIBA, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(in thousands, except per share amounts)



|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  
|---------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                   |  | Year Ended September 30, |         
|                                                                                   |  | 2005                     |          |   | 2004 |   |         | 2003 | 
|Revenues:                                                                          |  |                          |          |   |      |   |         |      |  |   |          |  
|License                                                                            |  | $                        | 47,817   |   |      | $ | 63,453  |      |  | $ | 83,852   |  
|Licenserelated party                                                              |  |                          |         |   |      |   | 2,201   |      |  |   | 19,214   |  
|Subscription and maintenance                                                       |  |                          | 121,767  |   |      |   | 93,269  |      |  |   | 82,476   |  
|Subscription and maintenancerelated party                                         |  |                          | 1,663    |   |      |   | 2,420   |      |  |   | 4,617    |  
|Services and other                                                                 |  |                          | 151,796  |   |      |   | 84,455  |      |  |   | 46,539   |  
|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  
|Total revenues                                                                     |  |                          | 323,043  |   |      |   | 245,798 |      |  |   | 236,698  |  
|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  
|Cost of revenues:                                                                  |  |                          |          |   |      |   |         |      |  |   |          |  
|License                                                                            |  |                          | 3,576    |   |      |   | 2,673   |      |  |   | 3,562    |  
|Subscription and maintenance                                                       |  |                          | 28,800   |   |      |   | 22,360  |      |  |   | 22,960   |  
|Services and other                                                                 |  |                          | 121,557  |   |      |   | 69,832  |      |  |   | 37,188   |  
|Amortization of acquired technology and customer intangible assets                 |  |                          | 19,501   |   |      |   | 5,065   |      |  |   | 4,000    |  
|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  
|Total cost of revenues                                                             |  |                          | 173,434  |   |      |   | 99,930  |      |  |   | 67,710   |  
|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  
|Gross profit                                                                       |  |                          | 149,609  |   |      |   | 145,868 |      |  |   | 168,988  |  
|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  
|Operating expenses:                                                                |  |                          |          |   |      |   |         |      |  |   |          |  
|Sales and marketing                                                                |  |                          | 83,276   |   |      |   | 74,291  |      |  |   | 66,484   |  
|Research and development                                                           |  |                          | 47,212   |   |      |   | 54,091  |      |  |   | 54,014   |  
|General and administrative                                                         |  |                          | 30,588   |   |      |   | 26,072  |      |  |   | 36,203   |  
|Other incomeSoftbank                                                              |  |                          | (9,490   | ) |      |   |        |      |  |   |         |  
|Amortization of other intangible assets                                            |  |                          | 798      |   |      |   | 460     |      |  |   | 113,464  |  
|In-process research and development                                                |  |                          |         |   |      |   | 100     |      |  |   |         |  
|Stock-based compensation (1)                                                       |  |                          | 19,604   |   |      |   | 2,788   |      |  |   | 2,161    |  
|Restructuring and integration costs                                                |  |                          | 41,248   |   |      |   | 16,803  |      |  |   | 5,350    |  
|Goodwill impairment                                                                |  |                          | 247,830  |   |      |   |        |      |  |   |         |  
|Litigation provision                                                               |  |                          | 37,000   |   |      |   |        |      |  |   |         |  
|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  
|Total operating expenses                                                           |  |                          | 498,066  |   |      |   | 174,605 |      |  |   | 277,676  |  
|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  
|Loss from operations                                                               |  |                          | (348,457 | ) |      |   | (28,737 | )    |  |   | (108,688 | )
|Interest and other income, net                                                     |  |                          | 5,863    |   |      |   | 2,808   |      |  |   | 5,729    |  
|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  
|Net loss before income taxes and minority interests                                |  |                          | (342,594 | ) |      |   | (25,929 | )    |  |   | (102,959 | )
|Provision (benefit) for income taxes                                               |  |                          | 7,017    |   |      |   | (160    | )    |  |   | (92      | )
|Minority interests in net income (loss) of consolidated subsidiaries               |  |                          | 17       |   |      |   | (539    | )    |  |   | 3,460    |  
|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  
|Net loss                                                                           |  | $                        | (349,628 | ) |      | $ | (25,230 | )    |  | $ | (106,327 | )
|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  
|Net loss per sharebasic and diluted (2)                                           |  | $                        | (5.49    | ) |      | $ | (0.51   | )    |  | $ | (2.40    | )
|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  
|Weighted average shares used in computing net loss per sharebasic and diluted (2) |  |                          | 63,655   |   |      |   | 49,625  |      |  |   | 44,381   |  
|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  
|Comprehensive loss:                                                                |  |                          |          |   |      |   |         |      |  |   |          |  
|Net loss                                                                           |  | $                        | (349,628 | ) |      | $ | (25,230 | )    |  | $ | (106,327 | )
|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  
|Unrealized loss on investments                                                     |  |                          | (159     | ) |      |   | (1,029  | )    |  |   | (842     | )
|Foreign currency translation adjustment                                            |  |                          | 1,509    |   |      |   | (193    | )    |  |   | 1,834    |  
|Cash flow hedge                                                                    |  |                          | 27       |   |      |   |        |      |  |   |         |  
|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  
|Other comprehensive income (loss)                                                  |  |                          | 1,377    |   |      |   | (1,222  | )    |  |   | 992      |  
|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  
|Comprehensive loss                                                                 |  | $                        | (348,251 | ) |      | $ | (26,452 | )    |  | $ | (105,335 | )
|                                                                                   |  |                          |          |   |      |   |         |      |  |   |          |  

---

|(1) | For the years ended September 30, 2005, 2004 and 2003, stock-based compensation expense (benefit), net of the effects of cancellations, is attributable to various operating
expense categories as follows (in thousands):
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                           |  |                          |        |      |   |       |  |   |       |  
|-------------------------- |  | ------------------------ | ------ | ---- | - | ----- |  | - | ----- | -
|                           |  | Year Ended September 30, |       
|                           |  | 2005                     |        | 2004 |   | 2003  | 
|Cost of revenues           |  | $                        | 4,530  |      | $ | 280   |  | $ | (729  | )
|Sales and marketing        |  |                          | 8,986  |      |   | 1,763 |  |   | 1,544 |  
|Research and development   |  |                          | 2,398  |      |   | 271   |  |   | 272   |  
|General and administrative |  |                          | 3,690  |      |   | 474   |  |   | 1,074 |  
|                           |  |                          |        |      |   |       |  |   |       |  
|Total                      |  | $                        | 19,604 |      | $ | 2,788 |  | $ | 2,161 |  
|                           |  |                          |        |      |   |       |  |   |       |  



|(2) | Reflects the one-for-six reverse split of the Companys outstanding common stock effected on July 1, 2004.
|--- | ----------------------------------------------------------------------------------------------------------



See accompanying notes to consolidated financial statements.



52



---

##### Table of Contents

ARIBA, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except share amounts)



|                                                                         |  |                 |   |  |                             |     |   |                                 |   |           |                                     |  |   |                    |   |  |                          |        |   |  |   |            |   |  |   |          |  
|------------------------------------------------------------------------ |  | --------------- | - |  | --------------------------- | --- | - | ------------------------------- | - | --------- | ----------------------------------- |  | - | ------------------ | - |  | ------------------------ | ------ | - |  | - | ---------- | - |  | - | -------- | -
|                                                                         |  | Common Stock(1) |   |  | AdditionalPaid-InCapital(1) |     |   | DeferredStock-BasedCompensation |   |           | AccumulatedOtherComprehensiveIncome |  |   | AccumulatedDeficit |   |  | TotalStockholdersEquity |       
|                                                                         |  | Shares          |   |  | Amount                      |     |   |                                 |   |           |                                    
|Balances at September 30, 2002                                           |  | 44,278,142      |   |  | $                           | 89  |   |                                 | $ | 4,494,454 |                                     |  | $ | (4,507             | ) |  | $                        | 1,864  |   |  | $ | (4,180,872 | ) |  | $ | 311,028  |  
|Exercise of stock options                                                |  | 369,375         |   |  |                             |    |   |                                 |   | 3,326     |                                     |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 3,326    |  
|Issuance of common stock                                                 |  | 462,001         |   |  |                             | 1   |   |                                 |   | 5,677     |                                     |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 5,678    |  
|Repurchase and retirement of common stock                                |  | (2,503          | ) |  |                             |    |   |                                 |   |          |                                     |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   |         |  
|Issuance of restricted stock                                             |  | 8,999           |   |  |                             |    |   |                                 |   |          |                                     |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   |         |  
|Forfeiture of restricted stock                                           |  | (75,403         | ) |  |                             |    |   |                                 |   | (1        | )                                   |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | (1       | )
|Deferred stock-based compensation, net of cancellations                  |  |                |   |  |                             |    |   |                                 |   | (2,513    | )                                   |  |   | 2,513              |   |  |                          |       |   |  |   |           |   |  |   |         |  
|Amortization of stock-based compensation                                 |  |                |   |  |                             |    |   |                                 |   | 481       |                                     |  |   | 1,680              |   |  |                          |       |   |  |   |           |   |  |   | 2,161    |  
|Unrealized investment loss, net                                          |  |                |   |  |                             |    |   |                                 |   |          |                                     |  |   |                   |   |  |                          | (842   | ) |  |   |           |   |  |   | (842     | )
|Foreign currency translation adjustment                                  |  |                |   |  |                             |    |   |                                 |   |          |                                     |  |   |                   |   |  |                          | 1,834  |   |  |   |           |   |  |   | 1,834    |  
|Net loss                                                                 |  |                |   |  |                             |    |   |                                 |   |          |                                     |  |   |                   |   |  |                          |       |   |  |   | (106,327   | ) |  |   | (106,327 | )
|                                                                         |  |                 |   |  |                             |     |   |                                 |   |           |                                     |  |   |                    |   |  |                          |        |   |  |   |            |   |  |   |          |  
|Balances at September 30, 2003                                           |  | 45,040,611      |   |  |                             | 90  |   |                                 |   | 4,501,424 |                                     |  |   | (314               | ) |  |                          | 2,856  |   |  |   | (4,287,199 | ) |  |   | 216,857  |  
|Exercise of stock options                                                |  | 466,296         |   |  |                             | 1   |   |                                 |   | 1,997     |                                     |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 1,998    |  
|Issuance of common stock                                                 |  | 744,708         |   |  |                             | 1   |   |                                 |   | 7,125     |                                     |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 7,126    |  
|Issuance of common stock and assumed stock options related to the merger |  | 16,794,573      |   |  |                             | 34  |   |                                 |   | 453,215   |                                     |  |   | (2,366             | ) |  |                          |       |   |  |   |           |   |  |   | 450,883  |  
|Repurchase and retirement of common stock                                |  | (806,000        | ) |  |                             | (2  | ) |                                 |   | (6,445    | )                                   |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | (6,447   | )
|Issuance of restricted stock, net of cancellations                       |  | 342,080         |   |  |                             | 1   |   |                                 |   | 5,766     |                                     |  |   | (5,767             | ) |  |                          |       |   |  |   |           |   |  |   |         |  
|Exchange and retirement of employee-owned mature stock for taxes         |  | (10,521         | ) |  |                             |    |   |                                 |   | (380      | )                                   |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | (380     | )
|Modification of employee stock options                                   |  |                |   |  |                             |    |   |                                 |   | 300       |                                     |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 300      |  
|Amortization of stock-based compensation                                 |  |                |   |  |                             |    |   |                                 |   |          |                                     |  |   | 2,488              |   |  |                          |       |   |  |   |           |   |  |   | 2,488    |  
|Unrealized investment loss, net                                          |  |                |   |  |                             |    |   |                                 |   |          |                                     |  |   |                   |   |  |                          | (1,029 | ) |  |   |           |   |  |   | (1,029   | )
|Foreign currency translation adjustment                                  |  |                |   |  |                             |    |   |                                 |   |          |                                     |  |   |                   |   |  |                          | (193   | ) |  |   |           |   |  |   | (193     | )
|Net loss                                                                 |  |                |   |  |                             |    |   |                                 |   |          |                                     |  |   |                   |   |  |                          |       |   |  |   | (25,230    | ) |  |   | (25,230  | )
|                                                                         |  |                 |   |  |                             |     |   |                                 |   |           |                                     |  |   |                    |   |  |                          |        |   |  |   |            |   |  |   |          |  
|Balances at September 30, 2004                                           |  | 62,571,747      |   |  |                             | 125 |   |                                 |   | 4,963,002 |                                     |  |   | (5,959             | ) |  |                          | 1,634  |   |  |   | (4,312,429 | ) |  |   | 646,373  |  
|Exercise of stock options                                                |  | 983,041         |   |  |                             | 2   |   |                                 |   | 5,269     |                                     |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 5,271    |  
|Issuance of common stock                                                 |  | 1,037,607       |   |  |                             | 2   |   |                                 |   | 6,645     |                                     |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | 6,647    |  
|Issuance of restricted stock, net of cancellations                       |  | 7,161,794       |   |  |                             | 14  |   |                                 |   | 49,059    |                                     |  |   | (49,073            | ) |  |                          |       |   |  |   |           |   |  |   |         |  
|Exchange and retirement of employee-owned mature stock for taxes         |  | (17,508         | ) |  |                             |    |   |                                 |   | (119      | )                                   |  |   |                   |   |  |                          |       |   |  |   |           |   |  |   | (119     | )
|Modification of employee stock options                                   |  |                |   |  |                             |    |   |                                 |   | 109       |                                     |  |   | 171                |   |  |                          |       |   |  |   |           |   |  |   | 280      |  
|Amortization of stock-based compensation                                 |  |                |   |  |                             |    |   |                                 |   |          |                                     |  |   | 19,324             |   |  |                          |       |   |  |   |           |   |  |   | 19,324   |  
|Unrealized investment loss, net                                          |  |                |   |  |                             |    |   |                                 |   |          |                                     |  |   |                   |   |  |                          | (159   | ) |  |   |           |   |  |   | (159     | )
|Foreign currency translation adjustment                                  |  |                |   |  |                             |    |   |                                 |   |          |                                     |  |   |                   |   |  |                          | 1,509  |   |  |   |           |   |  |   | 1,509    |  
|Cash flow hedge                                                          |  |                |   |  |                             |    |   |                                 |   |          |                                     |  |   |                   |   |  |                          | 27     |   |  |   |           |   |  |   | 27       |  
|Net loss                                                                 |  |                |   |  |                             |    |   |                                 |   |          |                                     |  |   |                   |   |  |                          |       |   |  |   | (349,628   | ) |  |   | (349,628 | )
|                                                                         |  |                 |   |  |                             |     |   |                                 |   |           |                                     |  |   |                    |   |  |                          |        |   |  |   |            |   |  |   |          |  
|Balances at September 30, 2005                                           |  | 71,736,681      |   |  | $                           | 143 |   |                                 | $ | 5,023,965 |                                     |  | $ | (35,537            | ) |  | $                        | 3,011  |   |  | $ | (4,662,057 | ) |  | $ | 329,525  |  
|                                                                         |  |                 |   |  |                             |     |   |                                 |   |           |                                     |  |   |                    |   |  |                          |        |   |  |   |            |   |  |   |          |  

---

|The | above information has been restated to reflect the one-for-six reverse split of the Companys common stock effected on July 1, 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------------------



See accompanying notes to consolidated financial statements.



53



---

##### Table of Contents

ARIBA, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                            |  |                          |          |   |      |   |         |      |  |   |          |  
|--------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                            |  | Year Ended September 30, |         
|                                                                            |  | 2005                     |          |   | 2004 |   |         | 2003 | 
|Operating activities:                                                       |  |                          |          |   |      |   |         |      |  |   |          |  
|Net loss                                                                    |  | $                        | (349,628 | ) |      | $ | (25,230 | )    |  | $ | (106,327 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                          |          |   |      |   |         |      |  |   |          |  
|Provisions for (recovery of) doubtful accounts                              |  |                          | 3,592    |   |      |   | 837     |      |  |   | (1,400   | )
|In-process research and development                                         |  |                          |         |   |      |   | 100     |      |  |   |         |  
|Depreciation and amortization                                               |  |                          | 30,371   |   |      |   | 13,698  |      |  |   | 128,484  |  
|Goodwill impairment                                                         |  |                          | 247,830  |   |      |   |        |      |  |   |         |  
|Stock-based compensation                                                    |  |                          | 19,604   |   |      |   | 2,788   |      |  |   | 2,161    |  
|Impairment of leasehold improvements                                        |  |                          |         |   |      |   | 2,885   |      |  |   |         |  
|Impairment of equity investments                                            |  |                          |         |   |      |   | 1,062   |      |  |   |         |  
|Minority interests in net income (loss) of consolidated subsidiaries        |  |                          | 17       |   |      |   | (539    | )    |  |   | 3,460    |  
|Changes in operating assets and liabilities, net of effect of acquisitions: |  |                          |          |   |      |   |         |      |  |   |          |  
|Accounts receivable                                                         |  |                          | 2,563    |   |      |   | (14,231 | )    |  |   | 715      |  
|Prepaid expenses and other assets                                           |  |                          | 523      |   |      |   | 1,770   |      |  |   | 5,530    |  
|Accounts payable                                                            |  |                          | (4,402   | ) |      |   | 1,542   |      |  |   | (4,420   | )
|Accrued compensation and related liabilities                                |  |                          | (1,518   | ) |      |   | (2,355  | )    |  |   | (3,737   | )
|Accrued liabilities                                                         |  |                          | (45,557  | ) |      |   | 31,652  |      |  |   | (3,969   | )
|Restructuring obligations                                                   |  |                          | 27,448   |   |      |   | (5,491  | )    |  |   | (14,193  | )
|Deferred revenue                                                            |  |                          | (9,861   | ) |      |   | (30,783 | )    |  |   | (50,337  | )
|Deferred incomeSoftbank                                                    |  |                          | 10,341   |   |      |   |        |      |  |   |         |  
|                                                                            |  |                          |          |   |      |   |         |      |  |   |          |  
|Net cash used in operating activities                                       |  |                          | (68,677  | ) |      |   | (22,295 | )    |  |   | (44,033  | )
|                                                                            |  |                          |          |   |      |   |         |      |  |   |          |  
|Investing activities:                                                       |  |                          |          |   |      |   |         |      |  |   |          |  
|Purchases of property and equipment                                         |  |                          | (5,621   | ) |      |   | (2,829  | )    |  |   | (3,154   | )
|Proceeds from the sales of investments                                      |  |                          | 107,362  |   |      |   | 161,135 |      |  |   | 150,106  |  
|Purchase of investments                                                     |  |                          | (93,868  | ) |      |   | (53,342 | )    |  |   | (127,284 | )
|Cash paid for acquisitions, net of cash acquired                            |  |                          |         |   |      |   | (39,180 | )    |  |   | (3,272   | )
|Purchase of minority interest                                               |  |                          | (4,376   | ) |      |   |        |      |  |   |         |  
|Allocation from (to) restricted cash, net                                   |  |                          | 39,210   |   |      |   | (42,783 | )    |  |   | 580      |  
|                                                                            |  |                          |          |   |      |   |         |      |  |   |          |  
|Net cash provided by investing activities                                   |  |                          | 42,707   |   |      |   | 23,001  |      |  |   | 16,976   |  
|                                                                            |  |                          |          |   |      |   |         |      |  |   |          |  
|Financing activities:                                                       |  |                          |          |   |      |   |         |      |  |   |          |  
|Principal payments on debt obligations                                      |  |                          |         |   |      |   | (45     | )    |  |   | (1,429   | )
|Proceeds from issuance of common stock                                      |  |                          | 11,799   |   |      |   | 9,124   |      |  |   | 9,004    |  
|Repurchase of common stock                                                  |  |                          |         |   |      |   | (6,447  | )    |  |   |         |  
|                                                                            |  |                          |          |   |      |   |         |      |  |   |          |  
|Cash provided by financing activities                                       |  |                          | 11,799   |   |      |   | 2,632   |      |  |   | 7,575    |  
|                                                                            |  |                          |          |   |      |   |         |      |  |   |          |  
|Effect of exchange rate changes on cash and cash equivalents                |  |                          | 1,049    |   |      |   | (126    | )    |  |   | 3,366    |  
|Net (decrease) increase in cash and cash equivalents                        |  |                          | (13,122  | ) |      |   | 3,212   |      |  |   | (16,116  | )
|Cash and cash equivalents at beginning of year                              |  |                          | 74,031   |   |      |   | 70,819  |      |  |   | 86,935   |  
|                                                                            |  |                          |          |   |      |   |         |      |  |   |          |  
|Cash and cash equivalents at end of year                                    |  | $                        | 60,909   |   |      | $ | 74,031  |      |  | $ | 70,819   |  
|                                                                            |  |                          |          |   |      |   |         |      |  |   |          |  
|Supplemental disclosures of cash flow information:                          |  |                          |          |   |      |   |         |      |  |   |          |  
|Cash paid for interest                                                      |  | $                        | 11       |   |      | $ | 93      |      |  | $ | 105      |  
|                                                                            |  |                          |          |   |      |   |         |      |  |   |          |  
|Net cash paid (refunded) for taxes                                          |  | $                        | 1,322    |   |      | $ | (489    | )    |  | $ | 2,351    |  
|                                                                            |  |                          |          |   |      |   |         |      |  |   |          |  



See accompanying notes
to consolidated financial statements.



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ARIBA, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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 spend management solutions that allow enterprises to efficiently manage the purchasing of non-payroll goods and services
required to run their business. The Company refers to these non-payroll expenses as spend. The Companys solutions include software, network access, professional services and expertise. They are designed to provide enterprises with
technology and business process improvements to better manage their corporate spend and, in turn, save money. The Companys software 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.



The Company was incorporated in Delaware 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 globally, primarily through its direct sales force and indirect sales channels.



Basis of presentation



The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. As of September 30, 2004, the Company had two subsidiaries with less than 100% ownership, Nihon Ariba K.K. (Nihon
Ariba) and Ariba Korea, Ltd. (Ariba Korea). In October 2004, the Company purchased the 41% interest in Nihon Ariba and the 42% interest in Ariba Korea held by Softbank Corp., a Japanese corporation, and its subsidiaries
(collectively, Softbank). During the remainder of 2005, the Company purchased the remaining 2% minority interest in Nihon Ariba held by minority shareholders.



On July 1, 2004, the Company completed its merger with FreeMarkets, Inc. (FreeMarkets). This merger was
accounted for using the purchase method of accounting. The consolidated statements of operations include the results of operations of FreeMarkets subsequent to July 1, 2004 (see Note 4).



The Companys net loss per share and the weighted average shares used to
determine net loss per share for all periods presented reflects the one-for-six reverse split of the Companys outstanding common stock effected on July 1, 2004.



Reclassifications



The Company reclassified deferred rent obligations on its headquarters in Sunnyvale, California from current to long-term liabilities in the amount of
$18.0 million as of September 30, 2004, in order to conform to the current year presentation.



Use of estimates



The preparation of 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. The items that are significantly impacted by estimates include revenue recognition, the assessment of recoverability of goodwill and other intangible assets, restructuring
obligations related to abandoned operating leases and contingencies related to the collectibility of accounts receivable and pending litigation.



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Cash, cash equivalents and restricted cash



The Company considers all highly liquid investments with maturity dates of
90 days or less at the date of acquisition to be cash equivalents. Cash equivalents consist of money market funds, commercial paper, government/federal notes and bonds and certificates of deposit. Restricted cash consists primarily of amounts held
in deposits that are required as collateral under the Companys facilities operating lease agreements.



Investments



The Companys marketable securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses recorded in
stockholders equity. Realized gains or losses and other than temporary declines in value, if any, on available-for-sale securities are reported as other income or expense as incurred. The Company periodically reviews these investments for
other-than-temporary impairment.



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 accounts payable 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, cash equivalents and investments with high quality financial institutions and limits its investment in individual securities
based on the type and credit quality of each such security. The Companys customer base consists of international businesses, and 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.



No single customer accounted for 10% or more of the Companys revenues for the years ended September 30, 2005 or 2004. For the year ended September 30, 2003, Softbank accounted for 10% of the
Companys revenues. As of September 30, 2004, accounts receivable from Visteon Corporation represented 12% of the Companys total accounts receivable.



Allowance for doubtful accounts



The Company evaluates the collectibility of accounts receivable based on a combination of factors. In cases where the
Company is aware of circumstances that may impair a specific customers ability to meet its financial obligations, the Company records a specific allowance against amounts due, and thereby reduces the net recognized receivable to the amount the
Company reasonably believes will be collected. For the remaining customers, the Company recognizes allowances for doubtful accounts based on the length of time the aggregate receivables are outstanding, the current business environment and
historical experience.



Derivative financial instruments and
foreign currency management



The Company considers the
functional currency of its foreign subsidiaries to be the local currency, and accordingly, the foreign subsidiaries financial statements are translated into U.S. dollars using exchange rates in effect at period end for assets and liabilities
and average exchange rates during each reporting period for the results of operations. Adjustments resulting from translations of foreign subsidiary financial statements are reported in accumulated other comprehensive income. Gains or losses on
foreign currency transactions are recognized in current operations and have not been significant to the Companys operating results in any period presented.



The Company uses derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in
foreign exchange rates. While these hedging instruments are subject to fluctuations in value, such fluctuations are generally offset by the value of the underlying exposures being hedged. The Company is not a party to leveraged derivatives and does
not hold or issue financial instruments for speculative purposes.



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The Company routinely uses forward exchange contracts to hedge its net exposures, by currency, related to
the monetary assets and liabilities of its operations denominated in non-functional currency. The Company utilizes forward exchange contracts to hedge trade and intercompany receivables and payables. In addition, from time to time, the Company 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 primary business objective of this hedging program is to minimize the gains and losses
resulting from exchange rate changes.



The forward foreign
exchange contracts require the Company to exchange foreign currencies for U.S. dollars or vice versa and such contracts generally mature in six months or less. These contracts are marked to market through operations each period. As of
September 30, 2005, the Companys outstanding foreign exchange contracts in Euros (EUR), British Pounds (GBP), Swiss Francs (SWF) and Singapore Dollars (SGD) had a notional amount of $7.5 million, and these contracts had remaining
maturities of three months or less. As of September 30, 2004, the Companys outstanding foreign exchange contracts in Australian Dollars (AUD), Brazilian Real (BRL), Euros (EUR), Singapore Dollars (SGD) and Japanese Yen (JPY) had a
notional amount of $6.0 million, and these contracts had remaining maturities of three months or less.



In January 2005 and December 2004, the Company hedged a portion of the net assets of Ariba Korea and Nihon Ariba, respectively, using foreign currency
forward contracts (Korean Won and Japanese Yen) to offset the translation and economic exposures related to anticipated cash flows from these subsidiaries. The Korean Won and Japanese Yen hedges minimize currency risk arising from cash held in
Korean Won and Japanese Yen as a result of the Softbank settlement in October 2004. In September 2005, the cash held in Nihon Ariba was repatriated and a gain of $2.3 million was realized on these foreign currency contracts in the fourth quarter of
fiscal year 2005. The change in fair value of the Korean Won forward contract attributable to the changes in forward exchange rates (the effective portion) is reported in stockholders equity. It is anticipated that the majority of the cash
held in Ariba Korea will be repatriated in the next six months. The notional amount of the Companys hedge was 2.0 billion Korean Won ($1.9 million) as of September 30, 2005. The unrealized net gain on the Korean Won cash flow hedge
reported in stockholders equity was $27,000 as of September 30, 2005.



Property and equipment



Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the shorter of the estimated useful lives of the assets, generally two to five years
based on asset classification, or the lease term, if applicable. Gains and losses on disposals are included in results of operations at amounts equal to the difference between the net book value of the disposed assets and the proceeds received upon
disposal. Costs for replacements and betterments are capitalized, while the costs of maintenance and repairs are charged against earnings as incurred.



Impairment of long-lived assets



In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, long-lived assets, such as property 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 the assets to the estimated undiscounted future cash flows expected to be generated from the use and ultimate disposition of the assets.
If the carrying amount of the assets exceed its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of would be 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 consolidated balance sheet.



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Goodwill and other intangible assets



Purchased other intangible assets with finite lives are amortized over the
estimated economic lives of the assets, generally ranging from one to five years, and reviewed for impairment in accordance with SFAS No. 144. Goodwill and purchased other intangible assets determined to have indefinite useful lives are not
amortized but are reviewed for impairment annually and more frequently if events and circumstances indicate the assets may be impaired and the carrying value may not be recoverable. The Company has no identifiable intangible assets with indefinite
lives as of September 30, 2005.



Factors the Company
considers important that could trigger an impairment review of goodwill 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 the Companys overall business, significant negative industry or economic trends, a significant decline in the Companys stock price for a sustained period, and decreases in the Companys market
capitalization below the recorded amount of the Companys net assets for a sustained period. The Companys stock price is highly volatile and has experienced significant declines since January 2004. In June 2005, based on a combination of
factors, particularly: (1) the Companys market capitalization; (2) the Companys current and projected operating results; (3) significant trends in the enterprise software industry; and (4) the Companys decision
to reduce its workforce and eliminate excess facility space, the Company concluded there were sufficient indicators to require it to assess whether any portion of the Companys recorded goodwill balance was impaired. The Company determined that
its estimated fair value was less than the recorded amount of the Companys net assets, thereby necessitating that it assess the recorded goodwill for impairment. As required by SFAS No. 142, in measuring the amount of goodwill impairment,
the Company made a hypothetical allocation of the estimated fair value of the Company to the tangible and intangible assets (other than goodwill) and liabilities. Based on this allocation, the Company concluded that goodwill was impaired in the
amount of $247.8 million. The remaining balance of goodwill is $328.7 million as of September 30, 2005, and there can be no assurances that future goodwill impairments will not occur.



Revenue recognition



Substantially all of the Companys revenues are derived from three
sources: (i) licensing software; (ii) providing hosted software solutions, technical support and product updates, otherwise known as subscription and maintenance; and (iii) providing services, including implementation services,
consulting services, managed services, training, education, premium support and other miscellaneous services. The Companys standard end user license agreement provides for use of the Companys software under either a perpetual license or
a time-based license based on the number of users. The Company licenses its software in multiple element arrangements in which the customer typically purchases a combination of some or all of the following: (i) software products, either on a
standalone or hosted basis; (ii) a maintenance arrangement, which is generally priced as a percentage of the software license fees and provides for technical support and product updates typically over a period of one year; and (iii) a
services arrangement, on either a fixed fee for access to specific services over time or a time and materials basis.



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 Company recognizes revenue on sales to resellers upon sell-through to the end-user. Collectibility of receivables is assessed based on the resellers ability to pay. Commissions or fees paid to partners under co-sale
arrangements are included as cost of license revenues at the time of sale, when the liability is incurred and is reasonably estimable. Access to certain functionality on the Ariba Supplier Network is available to Ariba licensees 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 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect



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to Certain Transactions, Staff Accounting Bulletin (SAB) 104, Revenue Recognition, EITF 00-21, Revenue Arrangements with Multiple
Deliverables and EITF 00-3, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entitys Hardware. The Company recognizes revenue when all of the following
criteria are met: persuasive evidence of an arrangement exists; delivery of the product or service has occurred; the fee is fixed or determinable; and collectibility is probable. Payment terms are considered extended when greater than 20% of an
arrangement fee is due beyond twelve months from delivery. In these scenarios, fees are not fixed or determinable, and therefore revenue is recognized when fees are due and payable. In arrangements where at least 80% of license fees are
due within one year or less from delivery, the entire arrangement fee is considered fixed or determinable and revenue is recognized when the remaining basic revenue recognition criteria are met, provided that any accompanying services are not
considered essential to the functionality of the software products. If collectibility is not considered probable at the inception of the arrangement, the Company does not recognize revenue until the fee is collected.



The Company allocates and recognizes revenue on contracts that include
software using the residual method pursuant to the requirements of SOP 97-2, as amended by SOP 98-9. Under the residual method, revenue is recognized in a multiple element arrangement when Company-specific objective evidence of fair value exists for
all of the undelivered elements in the arrangement, but does not exist for at least one of the delivered elements in the arrangement. The Company defers revenue for the fair value of the undelivered elements (e.g., maintenance and consulting
services) and recognizes revenue for the remainder of the arrangement fee attributable to the delivered elements (e.g., software products) when the basic criteria in SOP 97-2 have been met. Where the contract does not include software, the Company
allocates revenue to each element in a multiple element arrangement based on its respective fair value. The Companys determination of the fair value of each element in a multiple element arrangement involving software is based on
vendor-specific objective evidence (VSOE), which is limited to the price when sold separately. For all other transactions not involving software, fair value is determined using the price when sold separately or other methods allowable under EITF
00-21.



Revenue allocated to maintenance and support is
recognized ratably over the maintenance term (typically one year). Revenue from hosting and sourcing solutions services is recognized ratably over the term of the arrangement as the access is provided over the related contract period. Revenue
allocated to software implementation, process improvement, training and other services is recognized as the services are performed. 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. The Company recognizes revenue from
perpetual and time-based licenses that include unspecified additional software products ratably over the longer of the term of the time-based license or the period of commitment to such unspecified additional products. In addition, certain of the
Companys contracts include performance incentive payments based on market volume and/or savings generated, as defined in the respective contracts. Revenue from such arrangements is recognized as those thresholds are achieved.



Arrangements that include consulting services, such as system implementation
and process improvement, are evaluated to determine whether the services are essential to the functionality of the software products. 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
does not have fair value for at least one of the undelivered elements in an arrangement, the Company defers revenue recognition until the elements are delivered, or if the undelivered elements are a subscription or time based service, recognizes
revenue ratably over the longest contractual term in the arrangement. For allocation purposes, where more than one element in an arrangement does not have fair value, target pricing is used to allocate the amount remaining after allocating revenue
to those elements which have fair value.



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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 based on the ratio of direct labor hours incurred to date to total projected labor hours, except in limited circumstances where completion
status cannot be reasonably estimated, in which case the completed contract method is used.



Deferred revenue includes amounts received from customers for which revenue has not been recognized, and 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 the Companys product, as services are rendered, or as other requirements under SOP 97-2, SAB 104 or EITF 00-21
are satisfied. Deferred revenue excludes contract amounts for which payment has yet to be collected. Likewise, accounts receivable excludes amounts due from customers for which revenue has been deferred.



Software development costs



In accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed, software development costs are expensed as incurred until technological feasibility, defined as a working prototype, has been established, at which time such costs are capitalized until the
product is available for general release to customers. To date, the Companys software has been available for general release shortly after the establishment of technological feasibility and, accordingly, capitalized development costs have not
been material.



Advertising expense



Advertising costs are expensed as incurred and totaled $3.2 million, $4.0
million and $354,000 during the years ended September 30, 2005, 2004 and 2003, respectively.



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 FASB Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation, and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as
amended by SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. 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 market 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 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 FASB Interpretation No. 28 (FIN 28), Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans.



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Had compensation cost been recognized based on the fair value method during fiscal years 2005, 2004 and
2003, the pro forma amounts of the Companys net loss and net loss per share would have been as follows (in thousands, except per share amounts):



|                                                                                                            |  |                          |          |   |      |   |         |      |  |   |          |  
|----------------------------------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                                            |  | Year Ended September 30, |         
|                                                                                                            |  | 2005                     |          |   | 2004 |   |         | 2003 | 
|Reported net loss, net of tax                                                                               |  | $                        | (349,628 | ) |      | $ | (25,230 | )    |  | $ | (106,327 | )
|Add back employee stock-based compensation expense included in reported net loss                            |  |                          | 19,604   |   |      |   | 2,788   |      |  |   | 2,161    |  
|Less employee stock-based compensation expense for restricted stock                                         |  |                          | (18,481  | ) |      |   | (2,032  | )    |  |   | (1,614   | )
|Deduct employee stock-based compensation expense for stock options determined under fair value based method |  |                          | (14,466  | ) |      |   | (32,797 | )    |  |   | (35,203  | )
|                                                                                                            |  |                          |          |   |      |   |         |      |  |   |          |  
|Pro forma net loss                                                                                          |  | $                        | (362,971 | ) |      | $ | (57,271 | )    |  | $ | (140,983 | )
|                                                                                                            |  |                          |          |   |      |   |         |      |  |   |          |  
|Reported basic and diluted net loss per share                                                               |  | $                        | (5.49    | ) |      | $ | (0.51   | )    |  | $ | (2.40    | )
|                                                                                                            |  |                          |          |   |      |   |         |      |  |   |          |  
|Pro forma basic and diluted net loss per share                                                              |  | $                        | (5.70    | ) |      | $ | (1.15   | )    |  | $ | (3.18    | )
|                                                                                                            |  |                          |          |   |      |   |         |      |  |   |          |  



The fair value for the
options granted during the years ended September 30, 2005, 2004 and 2003 was estimated at the date of grant using the Black-Scholes option pricing model and the following assumptions:



|                          |  |                          |   |  |      |   |  |      |  
|------------------------- |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                          |  | Year Ended September 30, |  
|                          |  | 2005                     |   |  | 2004 |   |  | 2003 |  
|Risk-free interest rate   |  | 3.88                     | % |  | 2.76 | % |  | 1.90 | %
|Expected lives (in years) |  | 3.3                      |   |  | 2.7  |   |  | 2.5  |  
|Dividend yield            |  | 0.0                      | % |  | 0.0  | % |  | 0.0  | %
|Expected volatility       |  | 92                       | % |  | 95   | % |  | 105  | %



To comply with the pro
forma reporting requirements of SFAS No. 123, compensation cost is also estimated for the fair value of future employee stock purchase plan issuances, which is included in the pro forma totals above. The fair value of purchase rights granted
under the purchase plan is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions and resulting in the weighted-average fair value:



|                          |  |                          |   |  |      |   |  |      |  
|------------------------- |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                          |  | Year Ended September 30, |  
|                          |  | 2005                     |   |  | 2004 |   |  | 2003 |  
|Risk-free interest rate   |  | 3.89                     | % |  | 2.00 | % |  | 1.01 | %
|Expected lives (in years) |  | 0.5                      |   |  | 0.5  |   |  | 0.5  |  
|Dividend yield            |  | 0.0                      | % |  | 0.0  | % |  | 0.0  | %
|Expected volatility       |  | 45                       | % |  | 58   | % |  | 74   | %



Income taxes



Income taxes are computed using an asset and liability
approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Companys consolidated financial
statements or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. 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.



Net loss per share



Net loss per share is calculated in accordance with SFAS No. 128, Earnings per Share. Under the provisions of SFAS No. 128, basic net
loss per share is computed by dividing the net loss for the period by the weighted



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average number of common shares outstanding during the period, excluding restricted common stock subject to forfeiture and shares in escrow related to
acquisitions. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and potential common shares outstanding during the period if their effect is dilutive. Potential common shares are
comprised of shares of restricted common stock subject to forfeiture, shares held in escrow related to acquisitions, and incremental common shares issuable upon the exercise of stock options and warrants and employee stock purchase plans shares.



Comprehensive income (loss)



Comprehensive income or loss includes all changes in equity (net assets)
during a period from non-owner sources, including unrealized gains and losses on marketable securities and changes in the cumulative translation adjustment.



Recent accounting pronouncements



In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
No. 123R). SFAS No. 123R will require the Company to measure all employee stock-based compensation awards using a fair value method and record such expense in the consolidated financial statements. In addition, the adoption of SFAS
No. 123R will require additional accounting related to the income tax effects and disclosure regarding the cash flow effects resulting from share-based payment arrangements. In January 2005, the United States Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 107, which provides supplemental guidance for SFAS No. 123R. SFAS No. 123R is effective beginning in the Companys first quarter of fiscal year 2006. The Company has selected
the Black-Scholes option-pricing model as the most appropriate fair-value method for its awards. The adoption of SFAS No. 123R will have a material impact on the Companys consolidated results of operations. If the Company had applied the
provisions of SFAS No. 123R for the year ending September 30, 2005, the pro forma impact would have approximated the amounts disclosed above in Stock-based compensation.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and
Error Corrections. SFAS No. 154 is a replacement of Accounting Principles Board (APB) Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Periods. SFAS No. 154
provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. SFAS No. 154 provides guidance
for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously
issued financial statements is also addressed by SFAS No. 154. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will early adopt this
pronouncement beginning October 1, 2005.



In June 2005,
the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 05-06, Determining the Amortization Period for Leasehold Improvements (EITF 05-06). EITF 05-06 provides guidance for determining the amortization period
used for leasehold improvements acquired in a business combination or purchased after the inception of a lease, collectively referred to as subsequently acquired leasehold improvements. EITF 05-06 provides that the amortization period used for the
subsequently acquired leasehold improvements to be the lesser of (a) the subsequently acquired leasehold improvements useful lives, or (b) a period that reflects renewals that are reasonably assured upon the acquisition or the
purchase. EITF 05-06 is effective on a prospective basis for subsequently acquired leasehold improvements purchased or acquired in periods beginning after the date of the FASBs ratification, which was on June 29, 2005. The adoption of
EITF 05-06 did not have a material impact on the Companys results of operations and financial condition.



Note 2Balance Sheet Components



The Company evaluates the collectibility of accounts receivable based on a combination of factors. In cases where the Company is aware of circumstances that may impair a specific customers ability to meet its
financial obligations, the Company records a specific allowance against amounts due, and thereby reduces the net



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recognized receivable to the amount the Company reasonably believes will be collected. For the remaining customers, the Company recognizes allowances for
doubtful accounts based on the length of time the aggregate receivables are outstanding, the current business environment and historical experience.



During fiscal year 2003, the Company determined that some of these reserves were no longer warranted due to improvements in the financial condition of
certain customers and its ability to settle a number of at-risk accounts. As a result, the Company recorded a net credit to the provision for doubtful accounts of $1.4 million in fiscal year 2003. The provision for (recovery of) doubtful accounts is
included in sales and marketing expense in the Companys consolidated statements of operations.



Changes in the allowance for doubtful accounts for the years ended September 30, 2005, 2004 and 2003 are as follows (in thousands):



|                                |  |                              |       |           |                           |        |                                            |  |                        |        |   |  |   |       |  |   |      
|------------------------------- |  | ---------------------------- | ----- | --------- | ------------------------- | ------ | ------------------------------------------ |  | ---------------------- | ------ | - |  | - | ----- |  | - | -----
|Classification                  |  | Balance atBeginning ofPeriod |       | Additions |                           |        | AllowanceAssumed inBusinessCombination (b) |  | Balance atEnd ofPeriod
|                                |  | CostsandExpenses             |       |           | Deductions/Write-offs (a) |        |                                            | 
|Year ended September 30, 2005   |  |                              |       |           |                           |        |                                            |  |                        |        |   |  |   |       |  |   |      
|Allowance for doubtful accounts |  | $                            | 3,933 |           | $                         | 3,592  |                                            |  | $                      | (2,761 | ) |  | $ |      |  | $ | 4,764
|Year ended September 30, 2004   |  |                              |       |           |                           |        |                                            |  |                        |        |   |  |   |       |  |   |      
|Allowance for doubtful accounts |  | $                            | 1,356 |           | $                         | 837    |                                            |  | $                      | (425   | ) |  | $ | 2,165 |  | $ | 3,933
|Year ended September 30, 2003   |  |                              |       |           |                           |        |                                            |  |                        |        |   |  |   |       |  |   |      
|Allowance for doubtful accounts |  | $                            | 5,171 |           | $                         | (1,400 | )                                          |  | $                      | (2,415 | ) |  | $ |      |  | $ | 1,356

---

|(a) | Amounts written off as uncollectible or recovered by payment.
|--- | -------------------------------------------------------------

|(b) | Amount reflects allowance for doubtful accounts assumed as part of the Companys merger with FreeMarkets.
|--- | ---------------------------------------------------------------------------------------------------------



Prepaid expenses and other current assets consisted of the following as of
September 30, 2005 and 2004 (in thousands):



|                                                |  |               |        |      |   |       
|----------------------------------------------- |  | ------------- | ------ | ---- | - | ------
|                                                |  | September 30,
|                                                |  | 2005          |        | 2004
|Other receivables                               |  | $             | 2,497  |      | $ | 1,583 
|Prepaid rent                                    |  |               | 3,550  |      |   | 3,960 
|Other prepaid expenses                          |  |               | 4,033  |      |   | 5,252 
|                                                |  |               |        |      |   |       
|Total prepaid expenses and other current assets |  | $             | 10,080 |      | $ | 10,795
|                                                |  |               |        |      |   |       



Other receivables
primarily consist of tax receivable and employee advances. Other prepaid expenses consist of prepaid software licenses and maintenance for software for internal use and prepaid royalties.



Property and equipment and their related useful lives consisted of the following as of September 30, 2005 and 2004 (in
thousands):



|                                                               |  |               |         |   |      |   |         |  
|-------------------------------------------------------------- |  | ------------- | ------- | - | ---- | - | ------- | -
|                                                               |  | September 30, |        
|                                                               |  | 2005          |         |   | 2004 |  
|Computer equipment and software (2 to 3 years)                 |  | $             | 49,825  |   |      | $ | 47,380  |  
|Office equipment (2 years)                                     |  |               | 7,430   |   |      |   | 7,002   |  
|Furniture and fixtures (5 years)                               |  |               | 17,268  |   |      |   | 17,426  |  
|Leasehold improvements (lesser of lease term or economic life) |  |               | 23,019  |   |      |   | 22,194  |  
|                                                               |  |               |         |   |      |   |         |  
|                                                               |  |               | 97,542  |   |      |   | 94,002  |  
|Less accumulated depreciation and amortization                 |  |               | (79,543 | ) |      |   | (72,093 | )
|                                                               |  |               |         |   |      |   |         |  
|Total property and equipment, net                              |  | $             | 17,999  |   |      | $ | 21,909  |  
|                                                               |  |               |         |   |      |   |         |  



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Depreciation and amortization expense of property and equipment totaled $9.5 million, $7.6 million and
$11.0 million for the years ended September 30, 2005, 2004 and 2003, respectively.



Accrued liabilities consisted of the following as of September 30, 2005 and 2004 (in thousands):



|                                 |  |               |        |      |   |       
|-------------------------------- |  | ------------- | ------ | ---- | - | ------
|                                 |  | September 30,
|                                 |  | 2005          |        | 2004
|Professional and consulting fees |  | $             | 1,412  |      | $ | 1,153 
|Accrued marketing expenses       |  |               | 1,363  |      |   | 1,346 
|Customer deposits                |  |               | 589    |      |   | 44,171
|Accrued taxes                    |  |               | 13,988 |      |   | 10,590
|Other accrued liabilities        |  |               | 6,110  |      |   | 12,310
|                                 |  |               |        |      |   |       
|Accrued liabilities              |  | $             | 23,461 |      | $ | 69,570
|                                 |  |               |        |      |   |       



Note 3Investments



The following is a summary of cash equivalents and
available-for-sale securities as of September 30, 2005 and 2004 (in thousands):



|                                      |  |                    |        |                        |   |                         |  |   |            |   |  |   |       
|------------------------------------- |  | ------------------ | ------ | ---------------------- | - | ----------------------- |  | - | ---------- | - |  | - | ------
|                                      |  | September 30, 2005
|                                      |  | Amortized Cost     |        | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Fair Value
|Money market funds                    |  | $                  | 21,868 |                        | $ |                        |  | $ |           |   |  | $ | 21,868
|Government notes and bonds            |  |                    | 2,008  |                        |   |                        |  |   | (15        | ) |  |   | 1,993 
|Corporate notes and bonds             |  |                    | 51,371 |                        |   |                        |  |   | (113       | ) |  |   | 51,258
|                                      |  |                    |        |                        |   |                         |  |   |            |   |  |   |       
|                                      |  | $                  | 75,247 |                        | $ |                        |  | $ | (128       | ) |  | $ | 75,119
|                                      |  |                    |        |                        |   |                         |  |   |            |   |  |   |       
|Included in cash and cash equivalents |  | $                  | 21,868 |                        | $ |                        |  | $ |           |   |  |   | 21,868
|Included in short-term investments    |  |                    | 50,588 |                        |   |                        |  |   | (68        | ) |  |   | 50,520
|Included in long-term investments     |  |                    | 2,791  |                        |   |                        |  |   | (60        | ) |  |   | 2,731 
|                                      |  |                    |        |                        |   |                         |  |   |            |   |  |   |       
|                                      |  | $                  | 75,247 |                        | $ |                        |  | $ | (128       | ) |  | $ | 75,119
|                                      |  |                    |        |                        |   |                         |  |   |            |   |  |   |       
|                                      | 
|                                      |  | September 30, 2004
|                                      |  | Amortized Cost     |        | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Fair Value
|Money market funds                    |  | $                  | 3,632  |                        | $ |                        |  | $ |           |   |  | $ | 3,632 
|Government notes and bonds            |  |                    | 50,109 |                        |   | 185                     |  |   | (68        | ) |  |   | 50,226
|Corporate notes and bonds             |  |                    | 16,763 |                        |   |                        |  |   | (86        | ) |  |   | 16,677
|                                      |  |                    |        |                        |   |                         |  |   |            |   |  |   |       
|                                      |  | $                  | 70,504 |                        | $ | 185                     |  | $ | (154       | ) |  | $ | 70,535
|                                      |  |                    |        |                        |   |                         |  |   |            |   |  |   |       
|Included in cash and cash equivalents |  | $                  | 3,632  |                        | $ |                        |  | $ |           |   |  | $ | 3,632 
|Included in short-term investments    |  |                    | 37,191 |                        |   | 66                      |  |   | (30        | ) |  |   | 37,227
|Included in long-term investments     |  |                    | 29,681 |                        |   | 119                     |  |   | (124       | ) |  |   | 29,676
|                                      |  |                    |        |                        |   |                         |  |   |            |   |  |   |       
|                                      |  | $                  | 70,504 |                        | $ | 185                     |  | $ | (154       | ) |  | $ | 70,535
|                                      |  |                    |        |                        |   |                         |  |   |            |   |  |   |       



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The following is a summary of the Companys available-for-sale securities based on contractual
maturities (in thousands):



|                                        |  |               |        |      |   |       
|--------------------------------------- |  | ------------- | ------ | ---- | - | ------
|                                        |  | September 30,
|                                        |  | 2005          |        | 2004
|Due in one year or less                 |  | $             | 50,520 |      | $ | 37,227
|Due after one year through two years    |  |               | 2,731  |      |   | 18,987
|Due after two years through three years |  |               |       |      |   | 10,689
|                                        |  |               |        |      |   |       
|                                        |  | $             | 53,251 |      | $ | 66,903
|                                        |  |               |        |      |   |       



The Company has gross
unrealized losses on securities as of September 30, 2005 comprised of $8,000 on U.S. Treasury obligations, $7,000 on Federal agency non-mortgage-backed securities and $113,000 on corporate bonds. Because the Company has the ability and intent
to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2005. During the year ended September 30, 2004, the
Company determined that its investments in privately held companies in the technology sector acquired in fiscal year 2000 had incurred a decline in value that was other-than-temporary. Recognition of the impairment resulted in a charge to other
expense for the year ended September 30, 2004 totaling $1.1 million. As of September 30, 2005 and 2004, the fair value of remaining strategic investments is approximately $596,000, which is classified as a long-term asset.



Note 4Business Combinations



On July 1, 2004, the Company completed its merger with FreeMarkets, a
publicly held company headquartered in Pittsburgh, Pennsylvania. FreeMarkets provided companies with software, services and information for global supply management. Pursuant to the merger, former stockholders of FreeMarkets received 0.375 shares of
the Companys common stock (after giving effect to the one-for-six reverse stock split effected on July 1, 2004) and $2.00 in cash for each outstanding share of FreeMarkets common stock held by them.



The primary reason for the merger and the factors that contributed to the
recognition of goodwill is that the Company expects to reduce costs, through economies of scale, by approximately $35 million per annum, have product cross selling opportunities to each entitys respective customer base and create a
comprehensive Spend Management company by bringing together the Companys Spend Management technology with FreeMarkets sourcing and services expertise.



The total purchase price of approximately $549.5 million consisted of (i) $89.6 million of cash, (ii) $364.4
million of the Companys common stock (based on the issuance of approximately 16.8 million shares of Ariba common stock), (iii) the assumption of approximately 13.2 million FreeMarkets stock options with a fair value of $88.9
million, and (iv) other estimated acquisition related expenses of approximately $6.7 million, consisting primarily of payments to financial advisors and other professional fees. For the purposes of this purchase price calculation, the deemed
fair value of the Ariba common stock issued in the merger was $21.70 per share, which is equal to Aribas average closing price per share as reported on The Nasdaq National Market for each trading day during the period beginning two days before
and ending two days after January 23, 2004, the merger announcement date, as adjusted for the one-for-six reverse split of the Companys outstanding common stock effected on July 1, 2004. For purposes of computing the estimated fair
value of the options, the Black-Scholes pricing model was used with the following assumptions: expected life of 4.5 years, risk free rate of 3.53%, expected dividend yield of 0% and volatility of 110%.



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The merger was accounted for using the purchase method of accounting, and accordingly the purchase price
was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. Since July 1, 2004, the results of operations of FreeMarkets have been included in the Companys consolidated
statements of operations. The purchase price allocation related to the FreeMarkets merger was final as of September 30, 2004, except for the resolution of certain tax related pre-acquisition contingencies which will result in an adjustment to
goodwill in the period the contingency is resolved. The following is a summary of the allocation of purchase price (in thousands):



|                                          |  |   |        
|----------------------------------------- |  | - | -------
|Allocation of total purchase price:       |  |   |        
|Cash, cash equivalents and investments    |  | $ | 108,989
|Accounts receivable                       |  |   | 24,158 
|Prepaid expenses and other current assets |  |   | 1,989  
|Property and equipment                    |  |   | 7,444  
|Other assets                              |  |   | 1,471  
|                                          |  |   |        
|Total tangible assets acquired            |  |   | 144,051
|                                          | 
|Accounts payable and accrued liabilities  |  |   | 19,785 
|Accrued compensation                      |  |   | 5,825  
|Deferred revenue                          |  |   | 1,576  
|Restructuring obligations                 |  |   | 15,482 
|Other liabilities                         |  |   | 437    
|                                          |  |   |        
|Total liabilities assumed                 |  |   | 43,105 
|                                          | 
|Net tangible assets assumed               |  |   | 100,946
|Deferred stock-based compensation         |  |   | 2,366  
|In-process research and development       |  |   | 100    
|Goodwill                                  |  |   | 383,969
|Identified intangible assets              |  |   | 62,100 
|                                          |  |   |        
|Total purchase price allocation           |  | $ | 549,481
|                                          |  |   |        



Restructuring
obligations include $4.8 million in employee severance costs, primarily consisting of research and development and corporate infrastructure personnel, and $2.1 million in lease abandonment costs arising from the merger. The remaining balance relates
to restructuring obligations incurred by FreeMarkets prior to the merger date. See Note 7 for additional information on restructuring accruals. Accrued liabilities includes $4.0 million for leases assumed in the merger with rents greater than
current market rates and $1.0 million in directors and officers liability insurance costs incurred to cover FreeMarkets former officers and Board of Directors as required by the merger agreement.



The amount allocated to in-process research and development and identified
intangible assets was determined by management, after considering, among other factors, the results of an independent appraisal based on established valuation techniques in the high-technology software industry. The associated in-process research
and development project was expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed. The income approach, which includes an analysis of the markets, cash flows and risks associated
with achieving such cash flows, was the primary technique utilized in valuing the identified intangible assets and in-process research and development. The estimated net free cash flows generated by the in-process research and development projects
was discounted at 22 percent in relation to the stage of completion and the technical risks associated with achieving technological feasibility. It is reasonably possible that the development of this technology could fail because of either
prohibitive cost, inability to perform the required efforts to complete the technology or other factors outside of the Companys control, such as a change in the market for the resulting developed products. In addition, at such time that the
project is completed it is reasonably possible that the completed products would not receive market acceptance or that the Company would be unable to produce and market the product effectively. None of the goodwill resulting from the merger with
FreeMarkets will be deductible for tax purposes.



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The following unaudited pro forma financial information is presented to reflect the results of operations
for the years ended September 30, 2004 and 2003 as if the merger with FreeMarkets had occurred on October 1, 2003 and 2002, respectively. The pro forma results exclude purchased in-process research and development arising from the merger
of $100,000 due to its nonrecurring nature. The pro forma financial information includes $16.0 million and $7.9 million of nonrecurring charges incurred by FreeMarkets for the years ended September 30, 2004 and 2003, respectively.



These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of what operating results would have been had the acquisition actually taken place on October 1, 2003 and 2002, respectively, and may not be indicative of future operating results (in thousands, except per
share amounts):



|                                                            |  |                               |         |   |                               |   |          |  
|----------------------------------------------------------- |  | ----------------------------- | ------- | - | ----------------------------- | - | -------- | -
|                                                            |  | Year Ended September 30, 2004 |         |   | Year Ended September 30, 2003 |  
|Total net revenues                                          |  | $                             | 347,838 |   |                               | $ | 393,126  |  
|Loss from continuing operations                             |  | $                             | (57,906 | ) |                               | $ | (135,869 | )
|Loss per share from continuing operationsbasic and diluted |  | $                             | (0.93   | ) |                               | $ | (2.22    | )
|Weighted average sharesbasic and diluted                   |  |                               | 62,221  |   |                               |   | 61,175   |  



Softface, Inc.



On April 15, 2004, the Company completed the
acquisition of Softface, Inc. (Softface), a privately held company headquartered in Walnut Creek, California. Softface was a spending performance management company offering data enrichment solutions complementary to Aribas
products. The total purchase price was $6.9 million, consisting of upfront cash payments of $3.3 million, payments of $3.4 million deferred for up to twelve months due to delayed payment terms or general representations and warranties and $169,000
of acquisition costs. Of the total purchase price, $722,000 was allocated to net tangible assets acquired, $7.4 million was allocated to other intangible assets, including existing software technology ($4.9 million), customer relationships
($100,000), order backlog ($100,000), and goodwill ($2.3 million), and $1.2 million was allocated to assumed liabilities. Other intangible assets are being amortized over their estimated useful lives of six months to three years. None of the
goodwill will be deductible for tax purposes. Pro forma financial information has been excluded as the information is considered immaterial.



Alliente, Inc.



On January 13, 2004, the Company completed the acquisition of Alliente, Inc. (Alliente), a privately held company headquartered in
Colorado Springs, Colorado. Alliente provided procurement outsourcing services to companies based on Ariba technology. The total purchase price was approximately $9.2 million, consisting of cash payments of $9.0 million and $183,000 of acquisition
costs. Of the total purchase price, $1.5 million was allocated to net tangible assets acquired, $8.5 million was allocated to other intangible assets, including customer relationships ($1.0 million), trade name/trademark ($100,000), and goodwill
($7.4 million) and $790,000 was allocated to assumed liabilities. Other intangible assets are being amortized over their estimated useful lives of three years. None of the goodwill will be deductible for tax purposes. Pro forma financial information
has been excluded as the information is considered immaterial.



Goodex AG



On January 28, 2003, the
Company acquired Goodex AG (Goodex), a privately-held European sourcing services provider. The acquisition was made to allow the Company to expand its sourcing services and to implement customers strategic sourcing business
processes. The purchase price of approximately $2.6 million consisted of a net cash payment totaling $2.2 million and $350,000 of direct transaction costs. Of the total



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purchase price, $465,000 was allocated to property and equipment, $1.0 million was allocated to current assets, $4.6 million was allocated to goodwill and
$3.5 million was allocated to assumed liabilities. Pro forma financial information has been excluded as the information is considered immaterial. For U.S. federal income tax purposes, the goodwill related to Goodex totaling $4.8 million is not
currently deductible, however, it may be amortized to the extent of Earnings and Profits (as defined for U.S. federal income tax purposes) of Goodex AG and its subsidiaries over a period of 15 years.



Note 5Goodwill and Other Intangible Assets



The table below reflects changes or activity in the balances related to
goodwill for the two years ended September 30, 2005 (in thousands):



|                                          |  |                   |          |  
|----------------------------------------- |  | ----------------- | -------- | -
|                                          |  | Netcarryingamount |         
|Goodwill balance as of September 30, 2003 |  | $                 | 181,033  |  
|Add: goodwill related to Alliente         |  |                   | 7,355    |  
|Add: goodwill related to Softface         |  |                   | 2,322    |  
|Add: goodwill related to FreeMarkets      |  |                   | 383,969  |  
|                                          |  |                   |          |  
|Goodwill balance as of September 30, 2004 |  |                   | 574,679  |  
|Add: goodwill adjustments                 |  |                   | 1,843    |  
|Less: impairment charge                   |  |                   | (247,830 | )
|                                          |  |                   |          |  
|Goodwill balance as of September 30, 2005 |  | $                 | 328,692  |  
|                                          |  |                   |          |  



In accordance with
SFAS No. 142, Goodwill and Other Intangible Assets, the Company performs a test for impairment on an annual basis or as events and circumstances indicate that goodwill or other intangible assets may be impaired and that the carrying
values may not be recoverable. The Company performs its annual assessment for impairment in the fourth quarter of each fiscal year. In June 2005, based on a combination of factors, particularly: (1) the Companys current market
capitalization; (2) the Companys current and projected operating results; (3) significant trends in the enterprise software industry; and (4) the Companys decision to reduce its workforce and eliminate excess facility
space, the Company concluded there were sufficient indicators to require it to assess whether any portion of its recorded goodwill balance was impaired. The Company determined that its estimated fair value was less than the recorded amount of its
net assets, thereby necessitating that the Company assess its recorded goodwill for impairment. As required by SFAS No. 142, in measuring the amount of goodwill impairment, the Company made a hypothetical allocation of the estimated fair value
of the Company to the tangible and intangible assets (other than goodwill) and liabilities. Based on this allocation, the Company concluded that goodwill was impaired in the amount of $247.8 million, which was recorded in the quarter ended
June 30, 2005. The Company performed the annual assessment as of September 30, 2005, and no further indication of goodwill impairment was noted.



For the year ended September 30, 2005, foreign currency translation resulted in a $524,000 increase in the goodwill related to the January 2003
acquisition of Goodex, a foreign-based entity. Also, the Company recorded a $1.2 million increase to goodwill due to the closure of an excess legacy FreeMarkets facility in March 2005. In addition, other adjustments aggregating to $134,000 were
recorded as an increase to goodwill.



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The table below reflects changes or activity in the balances related to other intangible assets for the
years ended September 30, 2005 and 2004 (in thousands):



|                                                                       |  |                 |  |                     |        |                         |   |         |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       
|---------------------------------------------------------------------- |  | --------------- |  | ------------------- | ------ | ----------------------- | - | ------- | ----------------- |  | ------------------- | ------ | ----------------------- | - | ------ | ----------------- | - | ------ | - |  | - | ------
|                                                                       |  |                 |  | September 30, 2005  |        | September 30, 2004     
|                                                                       |  | Useful Life     |  | Grosscarryingamount |        | Accumulatedamortization |   |         | Netcarryingamount |  | Grosscarryingamount |        | Accumulatedamortization |   |        | Netcarryingamount
|Other Intangible Assets                                                |  |                 |  |                     |        |                         |   |         |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       
|Existing software technology                                           |  | 18 to 36 months |  | $                   | 10,400 |                         | $ | (6,965  | )                 |  | $                   | 3,435  |                         | $ | 10,400 |                   | $ | (1,665 | ) |  | $ | 8,735 
|Order backlog                                                          |  | 6 months        |  |                     | 100    |                         |   | (100    | )                 |  |                     |       |                         |   | 100    |                   |   | (100   | ) |  |   |      
|Trade name/trademark                                                   |  | 60 months       |  |                     | 1,800  |                         |   | (474    | )                 |  |                     | 1,326  |                         |   | 1,800  |                   |   | (108   | ) |  |   | 1,692 
|Excess fair value of Visteon in-place contract over current fair value |  | 10 months       |  |                     | 1,894  |                         |   | (1,894  | )                 |  |                     |       |                         |   | 1,894  |                   |   | (568   | ) |  |   | 1,326 
|Visteon contract and related customer relationship                     |  | 48 months       |  |                     | 3,206  |                         |   | (1,002  | )                 |  |                     | 2,204  |                         |   | 3,206  |                   |   | (200   | ) |  |   | 3,006 
|Other contracts and related customer relationships                     |  | 12 to 48 months |  |                     | 51,081 |                         |   | (16,484 | )                 |  |                     | 34,597 |                         |   | 50,900 |                   |   | (3,410 | ) |  |   | 47,490
|                                                                       |  |                 |  |                     |        |                         |   |         |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       
|Total                                                                  |  |                 |  | $                   | 68,481 |                         | $ | (26,919 | )                 |  | $                   | 41,562 |                         | $ | 68,300 |                   | $ | (6,051 | ) |  | $ | 62,249
|                                                                       |  |                 |  |                     |        |                         |   |         |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       



Amortization of other
intangible assets for the year ended September 30, 2005 totaled $20.9 million. Of the total, amortization of $19.5 million related to the excess fair value of the Visteon in-place contract over current fair value, the Visteon contract and
related customer relationship, other contracts and related customer relationships and existing software technology was recorded as cost of revenues in the year ended September 30, 2005. Amortization of $798,000 related to trade name/trademark
and other contracts and related customer relationships was recorded as operating expense in the year ended September 30, 2005. Amortization of $568,000 related to the excess fair value of the Visteon in-place contract over current fair value
was recorded as a reduction of revenues in the year ended September 30, 2005.



Amortization of other intangible assets for the year ended September 30, 2004 was $6.1 million. Of the total, amortization of $5.1 million related to the Visteon contract and related customer relationship, other
contracts and related customer relationships and existing software technology was recorded as cost of revenues in the year ended September 30, 2004. Amortization of $460,000 related to trade name/trademark, other contracts and related customer
relationships and order backlog was recorded as operating expense in the year ended September 30, 2004. Amortization of $568,000 related to the excess fair value of the Visteon in-place contract over current fair value was recorded as a
reduction of revenues in the year ended September 30, 2004.



Amortization of other intangible assets for the year ended September 30, 2003 totaled $117.5 million, of which $4.0 million of amortization of acquired technology was classified as cost of revenues and $113.5 million was recorded as
operating expenses. The Company anticipates amortization of other intangible assets to total $16.5 million, $14.6 million, $10.2 million and $255,000 for fiscal years 2006, 2007, 2008 and 2009, respectively.



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Note 6Income Taxes



Provision (benefit) for income taxes for the years ended September 30, 2005, 2004 and 2003 were comprised of the following (in thousands):



|        |  |         |       |   |          |   |       |  |   |       |  
|------- |  | ------- | ----- | - | -------- | - | ----- |  | - | ----- | -
|        |  | Current |       |   | Deferred |   | Total | 
|2005:   |  |         |       |   |          |   |       |  |   |       |  
|Federal |  | $       |      |   |          | $ |      |  | $ |      |  
|State   |  |         | 388   |   |          |   |      |  |   | 388   |  
|Foreign |  |         | 6,629 |   |          |   |      |  |   | 6,629 |  
|        |  |         |       |   |          |   |       |  |   |       |  
|Total   |  | $       | 7,017 |   |          | $ |      |  | $ | 7,017 |  
|        |  |         |       |   |          |   |       |  |   |       |  
|2004:   |  |         |       |   |          |   |       |  |   |       |  
|Federal |  | $       |      |   |          | $ |      |  | $ |      |  
|State   |  |         | 166   |   |          |   |      |  |   | 166   |  
|Foreign |  |         | (326  | ) |          |   |      |  |   | (326  | )
|        |  |         |       |   |          |   |       |  |   |       |  
|Total   |  | $       | (160  | ) |          | $ |      |  | $ | (160  | )
|        |  |         |       |   |          |   |       |  |   |       |  
|2003:   |  |         |       |   |          |   |       |  |   |       |  
|Federal |  | $       |      |   |          | $ |      |  | $ |      |  
|State   |  |         | 76    |   |          |   |      |  |   | 76    |  
|Foreign |  |         | (168  | ) |          |   |      |  |   | (168  | )
|        |  |         |       |   |          |   |       |  |   |       |  
|Total   |  | $       | (92   | ) |          | $ |      |  | $ | (92   | )
|        |  |         |       |   |          |   |       |  |   |       |  



The Companys
loss before income taxes for the fiscal years ended September 30, 2005, 2004 and 2003 consisted of the following components (in thousands):



|                  |  |      |          |   |      |   |         |      |  |   |          |  
|----------------- |  | ---- | -------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                  |  | 2005 |          |   | 2004 |   |         | 2003 | 
|Domestic          |  | $    | (356,503 | ) |      | $ | (21,383 | )    |  | $ | (164,850 | )
|Foreign           |  |      | 13,892   |   |      |   | (4,007  | )    |  |   | 58,431   |  
|                  |  |      |          |   |      |   |         |      |  |   |          |  
|Total pretax loss |  | $    | (342,611 | ) |      | $ | (25,390 | )    |  | $ | (106,419 | )
|                  |  |      |          |   |      |   |         |      |  |   |          |  



The reconciliation
between the amount computed by applying the U.S. federal statutory tax rate of 35% to the loss before income taxes and actual income tax expense (benefit) for the years ended September 30, 2005, 2004 and 2003 is as follows (in thousands):



|                                                       |  |      |          |   |      |   |        |      |  |   |         |  
|------------------------------------------------------ |  | ---- | -------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                       |  | 2005 |          |   | 2004 |   |        | 2003 | 
|Computed tax benefit                                   |  | $    | (119,914 | ) |      | $ | (8,887 | )    |  | $ | (37,247 | )
|State taxes                                            |  |      | 388      |   |      |   | 166    |      |  |   | 76      |  
|Nondeductible goodwill impairment                      |  |      | 86,741   |   |      |   |       |      |  |   |        |  
|Nondeductible expenses                                 |  |      | 3,368    |   |      |   | 3,908  |      |  |   | 18,232  |  
|Foreign taxes                                          |  |      | 6,629    |   |      |   | (326   | )    |  |   | (168    | )
|Liquidation of foreign subsidiaries                    |  |      | (935     | ) |      |   | (579   | )    |  |   | 16,121  |  
|Net operating loss for which no benefit was recognized |  |      | 30,740   |   |      |   | 5,558  |      |  |   | 2,894   |  
|                                                       |  |      |          |   |      |   |        |      |  |   |         |  
|Total                                                  |  | $    | 7,017    |   |      | $ | (160   | )    |  | $ | (92     | )
|                                                       |  |      |          |   |      |   |        |      |  |   |         |  



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The amounts reported in the year ended September 30, 2003 were adjusted to correct a permanent
difference between the book basis and the tax basis of an intangible asset that had been shown as a temporary difference. The tax effects of temporary differences that give rise to significant portions of net deferred tax assets as of
September 30, 2005 and 2004 are as follows (in thousands):



|                                                |  |      |          |   |      |   |          |  
|----------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                |  | 2005 |          |   | 2004 |  
|Deferred Tax Assets                             |  |      |          |   |      |   |          |  
|Accruals and allowances                         |  | $    | 123,623  |   |      | $ | 144,276  |  
|Capitalized research and experimentation costs  |  |      | 104,050  |   |      |   | 29,796   |  
|Depreciation and amortization                   |  |      | 12,068   |   |      |   | 34,111   |  
|Credit carryforwards                            |  |      | 66,141   |   |      |   | 71,198   |  
|Net operating loss carryforwards                |  |      | 576,329  |   |      |   | 656,909  |  
|                                                |  |      |          |   |      |   |          |  
|Deferred tax assets                             |  |      | 882,211  |   |      |   | 936,290  |  
|Valuation allowance                             |  |      | (865,493 | ) |      |   | (910,942 | )
|                                                |  |      |          |   |      |   |          |  
|Deferred tax assets, net of valuation allowance |  |      | 16,718   |   |      |   | 25,348   |  
|Deferred Tax Liabilities                        |  |      |          |   |      |   |          |  
|Acquired intangibles                            |  |      | (16,718  | ) |      |   | (25,348  | )
|                                                |  |      |          |   |      |   |          |  
|Net deferred tax assets (liabilities)           |  | $    |         |   |      | $ |         |  
|                                                |  |      |          |   |      |   |          |  
|Recorded As:                                    |  |      |          |   |      |   |          |  
|Current deferred tax asset                      |  | $    | 49,875   |   |      | $ | 51,003   |  
|Valuation allowance                             |  |      | (49,875  | ) |      |   | (51,003  | )
|                                                |  |      |          |   |      |   |          |  
|Net current deferred tax asset                  |  |      |         |   |      |   |         |  
|Non-current deferred tax asset                  |  |      | 832,336  |   |      |   | 885,287  |  
|Valuation allowance                             |  |      | (815,618 | ) |      |   | (859,939 | )
|                                                |  |      |          |   |      |   |          |  
|Net non-current deferred tax asset              |  |      | 16,718   |   |      |   | 25,348   |  
|Non-current deferred tax liability              |  |      | (16,718  | ) |      |   | (25,348  | )
|                                                |  |      |          |   |      |   |          |  
|Net deferred tax assets (liabilities)           |  | $    |         |   |      | $ |         |  
|                                                |  |      |          |   |      |   |          |  



The amounts reported
in the year ended September 30, 2004 were adjusted to correct an overstatement of the deferred tax asset and valuation allowance by the tax-effected difference between the book basis and the tax basis of an intangible asset and to conform with
the current year presentation.



The Company has provided a
valuation allowance due to the uncertainty of generating future profits that would allow for the realization of such deferred tax assets. The net (decrease) increase in the total valuation allowance for the years ended September 30, 2005, 2004
and 2003 was approximately $(45.4) million, $101.6 million, and $62.0 million, respectively. Included in the net operating loss carryforwards is a tax benefit attributable to noncompensatory stock options of $326.2 million at September 30, 2005
which, when and if realized, will be recorded as a credit to additional paid-in capital.



Utilization of the Companys net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations imposed by Internal Revenue Code
Section 382 and similar state provisions. Such an annual limitation could result in the expiration of the Companys federal and state net operating loss and tax credit carryforwards before utilization.



As of September 30, 2005, the Company had net operating loss
carryforwards for federal and state tax purposes of approximately $1.5 billion and $853.6 million, respectively, before consideration of any annual limitation as described above. These federal and state net operating loss carryforwards expire in
various years from fiscal year 2010 through fiscal year 2025 and from fiscal year 2006 through fiscal year 2025, respectively. As of September 30, 2005, the Company had research credit carryforwards for federal and state tax purpose of



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approximately $39.0 million and $25.1 million, respectively. If not utilized, the federal research credit carryforwards will expire in various years from
fiscal year 2010 through fiscal year 2023. The state research credit carryforwards will continue indefinitely, except for $285,000 which will expire in 2018. The Company also had manufacturers credit carryforwards as of September 30, 2005
for state tax purposes of approximately $2.0 million, which will expire in various years from fiscal year 2006 through fiscal year 2012. The Companys net operating loss and tax credit carryforwards include net operating loss and research
credit carryforwards of approximately $250.3 million and $5.1 million, respectively, generated by FreeMarkets, which are subject to annual limitations which could reduce or defer the utilization of those losses and credits.



Undistributed earnings of the Companys foreign subsidiaries are
considered to be permanently reinvested with the exception of the Ariba Korea subsidiary, which the Company plans to dissolve in the next three to six months.



Note 7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 its headquarters. The operating lease term commenced in January 2001 through April 2001 and ends in January 2013. The Company occupies approximately 191,200 square feet in this facility. The Company currently
subleases two and one-half buildings, totaling 442,600 square feet, to third parties. These subleases expire in July 2007, May 2008 and August 2008, respectively. The remaining 82,200 square feet is available for sublease. Minimum monthly lease
payments are approximately $2.8 million and escalate annually, with the total future minimum lease payments amounting to $285.6 million over the remaining lease term. As part of this lease agreement, the Company is required to hold certificates of
deposit, totaling $31.3 million as of September 30, 2005, as a form of security through fiscal year 2013. Also, the Company is required by other lease agreements to hold an additional $2.0 million of standby letters of credit, which are cash
collateralized. These instruments are issued by its banks in lieu of a cash security deposit required by landlords for domestic and international real estate leases. The total cash collateral of $33.3 million is classified as restricted cash on the
Companys consolidated balance sheet as of September 30, 2005.



The Company also occupies 93,100 square feet of office space in Pittsburgh, Pennsylvania under a lease covering 182,000 square feet that expires in May 2010. The remaining 88,900 square feet is available for sublease.
This location consists principally of the Companys services organization and administrative activities.



The Company leases certain equipment, software and its facilities under various noncancelable operating and immaterial capital leases with various
expiration dates through 2013. Gross operating rental expense was approximately $50.3 million, $48.7 million and $44.7 million for the years ended September 30, 2005, 2004 and 2003, respectively. Gross operating rental expense was reduced by
sublease income of $17.5 million, $22.7 million and $13.7 million for the years ended September 30, 2005, 2004 and 2003, respectively.



Future minimum lease payments and sublease income under noncancelable operating leases for the next five years and thereafter are as follows as of
September 30, 2005 (in thousands):



|                          |  |               |         |                           |   |       
|------------------------- |  | ------------- | ------- | ------------------------- | - | ------
|Year Ending September 30, |  | LeasePayments |         | ContractualSubleaseIncome
|2006                      |  | $             | 48,088  |                           | $ | 18,317
|2007                      |  |               | 43,319  |                           |   | 14,296
|2008                      |  |               | 43,700  |                           |   | 4,456 
|2009                      |  |               | 44,584  |                           |   |      
|2010                      |  |               | 44,035  |                           |   |      
|Thereafter                |  |               | 100,416 |                           |   |      
|                          |  |               |         |                           |   |       
|Total                     |  | $             | 324,142 |                           | $ | 37,069
|                          |  |               |         |                           |   |       



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Of the total operating lease commitments as of September 30, 2005 noted above, $105.8 million is for
occupied properties and $218.3 million is for abandoned properties, which are a component of the restructuring obligation.



Restructuring and integration costs



The Company recorded a charge to operations for restructuring and integration costs of $41.2 million, $16.8 million and $5.4 million for the years ended
September 30, 2005, 2004 and 2003, respectively. See disclosure below for a detailed discussion of these amounts.



The following table details accrued restructuring and integration obligations and related activity for the three years ended September 30, 2005 (in
thousands):



|                                                            |  |                      |        |   |                       |   |         |                      |  |   |                       |   |  |                                       |        |   |  |   |         |  
|----------------------------------------------------------- |  | -------------------- | ------ | - | --------------------- | - | ------- | -------------------- |  | - | --------------------- | - |  | ------------------------------------- | ------ | - |  | - | ------- | -
|                                                            |  | Severanceandbenefits |        |   | Leaseabandonmentcosts |   |         | Leaseholdimpairments |  |   | Otherintegrationcosts |   |  | Totalrestructuringandintegrationcosts |       
|Accrued restructuring obligations as of September 30, 2002  |  | $                    | 103    |   |                       | $ | 61,966  |                      |  | $ |                      |   |  | $                                     |       |   |  | $ | 62,069  |  
|Cash paid                                                   |  |                      | (36    | ) |                       |   | (19,507 | )                    |  |   |                      |   |  |                                       |       |   |  |   | (19,543 | )
|Total charge to operating expense                           |  |                      |       |   |                       |   | 5,350   |                      |  |   |                      |   |  |                                       |       |   |  |   | 5,350   |  
|                                                            |  |                      |        |   |                       |   |         |                      |  |   |                       |   |  |                                       |        |   |  |   |         |  
|Accrued restructuring obligations as of September 30, 2003  |  |                      | 67     |   |                       |   | 47,809  |                      |  |   |                      |   |  |                                       |       |   |  |   | 47,876  |  
|Cash paid                                                   |  |                      | (5,153 | ) |                       |   | (11,696 | )                    |  |   |                      |   |  |                                       | (2,560 | ) |  |   | (19,409 | )
|Total charge to operating expense                           |  |                      | 3,402  |   |                       |   | 7,710   |                      |  |   | 2,885                 |   |  |                                       | 2,806  |   |  |   | 16,803  |  
|Asset impairment applied to asset balances                  |  |                      |       |   |                       |   |        |                      |  |   | (2,885                | ) |  |                                       |       |   |  |   | (2,885  | )
|Restructuring obligation assumed under purchase acquisition |  |                      | 4,813  |   |                       |   | 10,669  |                      |  |   |                      |   |  |                                       |       |   |  |   | 15,482  |  
|                                                            |  |                      |        |   |                       |   |         |                      |  |   |                       |   |  |                                       |        |   |  |   |         |  
|Accrued restructuring obligations as of September 30, 2004  |  |                      | 3,129  |   |                       |   | 54,492  |                      |  |   |                      |   |  |                                       | 246    |   |  |   | 57,867  |  
|Cash paid                                                   |  |                      | (6,830 | ) |                       |   | (17,764 | )                    |  |   |                      |   |  |                                       | (1,593 | ) |  |   | (26,187 | )
|Total charge to operating expense                           |  |                      | 5,385  |   |                       |   | 34,516  |                      |  |   |                      |   |  |                                       | 1,347  |   |  |   | 41,248  |  
|Purchase accounting adjustment                              |  |                      |       |   |                       |   | 1,185   |                      |  |   |                      |   |  |                                       |       |   |  |   | 1,185   |  
|Sublease early payment from tenant                          |  |                      |       |   |                       |   | 12,387  |                      |  |   |                      |   |  |                                       |       |   |  |   | 12,387  |  
|                                                            |  |                      |        |   |                       |   |         |                      |  |   |                       |   |  |                                       |        |   |  |   |         |  
|Accrued restructuring obligations as of September 30, 2005  |  | $                    | 1,684  |   |                       | $ | 84,816  |                      |  | $ |                      |   |  | $                                     |       |   |  |   | 86,500  |  
|                                                            |  |                      |        |   |                       |   |         |                      |  |   |                       |   |  |                                       |        |   |  |   |         |  
|Less: current portion                                       |  |                      |        |   |                       |   |         |                      |  |   |                       |   |  |                                       |        |   |  |   | 18,144  |  
|                                                            |  |                      |        |   |                       |   |         |                      |  |   |                       |   |  |                                       |        |   |  |   |         |  
|Accrued restructuring obligations, less current portion     |  |                      |        |   |                       |   |         |                      |  |   |                       |   |  |                                       |        |   |  | $ | 68,356  |  
|                                                            |  |                      |        |   |                       |   |         |                      |  |   |                       |   |  |                                       |        |   |  |   |         |  



Severance and
benefits costs



Severance and benefits costs primarily
include involuntary termination and health benefits, outplacement costs and payroll taxes for terminated personnel. During the year ended September 30, 2005, an additional $3.8 million of severance and benefits was recorded due to the continued
reduction of the Companys workforce, by approximately 115 employees in all business areas, primarily to better align its expenses with its revenue levels and to enable the Company to invest in certain growth initiatives. The remaining amount
in the year ended September 30, 2005 of $1.6 million related to severance and related benefits as a result of the merger with FreeMarkets.



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The Company recorded a charge of $3.4 million related to severance benefit costs for the reduction of its
workforce, by approximately 95 employees in all business areas, in connection with its merger with FreeMarkets for the year ended September 30, 2004. In addition, the Company assumed liabilities related to the severance of former FreeMarkets
employees (primarily related to engineering and general and administrative personnel) of $4.8 million as of July 1, 2004.



Lease abandonment and leasehold impairment costs



Lease abandonment costs incurred to date relate primarily to the abandonment of leased facilities in Mountain View and Sunnyvale, California and
Pittsburgh, Pennsylvania. Total lease abandonment costs include lease liabilities offset by estimated sublease income, and were based on market trend information analyses. As of September 30, 2005, $84.8 million of lease abandonment costs
remain accrued and are expected to be paid by fiscal year 2013. During the year ended September 30, 2005, the Company revised its estimates for sublease rental projections resulting in a charge of $31.8 million. The Company also recorded a $1.6
million adjustment to its restructuring obligation in March 2005 that was related to a prior period. Based on the guidance in SAB 99, the Company concluded that the amount of the prior period error was immaterial to the current and prior period. In
July 2005, the Company re-assessed its office space in Pittsburgh, Pennsylvania and ceased use of one of the floors it leases through 2010, which resulted in a charge of $1.2 million. Finally, the Company also recorded a $1.2 million adjustment to
the restructuring obligation due to the closure of an excess legacy FreeMarkets facility. This restructuring adjustment was considered part of purchase accounting for FreeMarkets and has been recorded as an adjustment to goodwill.



During the year ended September 30, 2004, due to further consolidation
and abandonment of additional facilities as the result of the Companys merger with FreeMarkets, the Company recorded additional lease abandonment costs of $9.1 million and leasehold impairments of $2.9 million associated with the
Companys Sunnyvale facility. The Company also revised its estimates for sublease rental projections resulting in an additional charge of $1.0 million, and recorded a benefit to operating expense totaling $2.4 million, primarily as a result of
entering into a sublease agreement which was not anticipated in previous estimates of the restructuring obligation. In addition, the Company assumed lease abandonment liabilities of $10.7 million as of July 1, 2004 related to the former
headquarters of FreeMarkets in Pittsburgh, Pennsylvania.



During the year ended September 30, 2003, the Company revised its original estimates and expectations for Aribas corporate headquarters and field offices disposition efforts. This revision was a result of changed estimates of
sublease rental projections. Based on these factors and consultations with an independent appraisal firm, the Company recorded an additional charge to lease abandonment costs of $5.4 million in the year ended September 30, 2003.



The Companys lease abandonment accrual is net of $122.5 million of
estimated sublease income. Actual sublease payments due under noncancelable subleases of excess facilities totaled $37.1 million as of September 30, 2005, 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 September 30, 2005, 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, 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 on the Companys Sunnyvale, California headquarters and its other principal office in Pittsburgh, Pennsylvania by
approximately $8.0 million as of September 30, 2005.



Other integration costs



Other integration
costs for the years ended September 30, 2005 and 2004 totaled $1.3 million and $2.8 million, respectively, and consist primarily of legal and consulting fees incurred in connection with integration activity related to the Companys merger
with FreeMarkets.



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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 the normal course under maintenance agreements. To the extent that warranty claims require resources beyond those
provided under maintenance agreements, the estimated costs of such claims are accrued as cost of sales in the period such claims are deemed probable and reasonably estimable. During the year ended September 30, 2005, the Company recorded
$368,000 of warranty costs.



Other arrangements



Other than the obligations identified above, the Company
does not have commercial commitments under lines of credit, standby repurchase obligations or other such debt arrangements. The Company has no other off-balance sheet arrangements or transactions with unconsolidated limited purpose entities, nor
does it have any undisclosed material transactions or commitments involving related persons or entities. The Company does not have any material noncancelable purchase commitments as of September 30, 2005.



Litigation



IPO Class Action Litigation



In 2001, a number of purported shareholder class action complaints related
to the Companys and FreeMarkets initial public offerings (the IPOs) were filed in the United States District Court for the Southern District of New York against the Company and FreeMarkets, and against certain of the two
companies former officers and directors. These complaints were later consolidated into single class action proceedings related to each IPO. In June 2003, a settlement was reached between plaintiffs and the Company and
FreeMarkets (the individual defendants having been previously dismissed). A final fairness hearing on the settlement has been scheduled for January 2006. As of September 30, 2005, no amount is accrued as a loss is not probable or
estimable.



Shareholder Derivative Litigation



In 2003, a number of purported shareholder derivative
suits alleging various claims in connection with the Companys restatement in fiscal year 2003 were filed in the Superior Court of California for the County of Santa Clara on behalf of Ariba and against certain of its current and former
officers and directors. These complaints were later consolidated into a single purported derivative action. In June 2005, the consolidated action was dismissed by the court with prejudice. Plaintiffs have filed a notice of
appeal. As of September 30, 2005, no amount is accrued as a loss is not probable or estimable.



Litigation Relating To the Companys Merger with FreeMarkets



On September 16, 2004, a purported shareholder class action was filed against the Company and the individual board
members of the FreeMarkets Board of Directors in Delaware Chancery Court by stockholders who held FreeMarkets common stock from January 23, 2004 through July 1, 2004. The complaint alleges various breaches of fiduciary duty and a violation
of the Delaware General Corporation Law on the part of the former FreeMarkets board members in connection with the merger between the Company and FreeMarkets, which was consummated on July 1, 2004. The plaintiff in this action contends, among
other things, that the FreeMarkets board members breached their fiduciary duties to FreeMarkets common stockholders by negotiating the merger with the Company so as to provide themselves with downside protection against a decline in the
Companys market price through a beneficial option exchange formula while failing to provide the common stockholders protection in the event of a drop in the price of the Companys stock, by contractually obligating themselves to recommend
unanimously that FreeMarkets stockholders approve the merger, by failing to disclose to FreeMarkets stockholders certain material information before the merger closed, and by breaching their duties



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of loyalty to the common stockholders in various other respects. As FreeMarkets corporate successor, the Company is alleged to be liable for the
FreeMarkets board members violation of the Delaware General Corporation Law. Plaintiff seeks disgorgement of benefits by the individual defendants, as well as monetary and rescissory damages from all of the defendants, jointly and severally.



The defendants motion to dismiss the complaint was
submitted to the Delaware Chancery Court on February 4, 2005. Plaintiff has not filed any response or opposition to the motion to dismiss. As of September 30, 2005, no amount is accrued as a loss is not probable or estimable.



Defending against these actions may require significant management time
and, regardless of the outcome, result in significant legal expenses. If the Companys defenses are unsuccessful or if it is unable to settle on favorable terms, the Company could be liable for a large damages award that could seriously harm
its business and results of operations.



General



In addition, the Company has been subject to various
claims and legal actions arising in the ordinary course of business. For instance, in the three months ended March 31, 2005, the Company paid $37.0 million to settle a lawsuit brought by ePlus, Inc. alleging that three of the Companys
products, Ariba Buyer, Ariba Marketplace and Ariba Category Procurement, infringed patents held by them.



The Company has been sued in the United States District Court for the District of Massachusetts for alleged patent infringement by Sky Technologies, Inc
(Sky). Sky alleges that certain unidentified Company products violate three U.S. patents owned by Sky. Sky seeks damages in an undisclosed amount, enhancement of those damages, an attorneys fee award and an injunction against further
infringement. In addition, the Company is a defendant in a case pending in the United States District Court for the Northern District of California wherein the plaintiff alleges various contract and tort causes of action. Plaintiff is seeking
approximately $30 million in damages from the Company. That case has been set for trial beginning January 17, 2006. As of September 30, 2005, no amount has been accrued for these other actions as a loss is not probable or 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, consolidated financial position, results of operations or cash
flows, 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 that the Company refers to as Software License and Service Agreements
(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 also 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 September 30, 2005. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain



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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, consolidated financial position, results of operations or cash flows.



Note 8Minority Interests in Subsidiaries



In December 2000, the Companys consolidated subsidiary, Nihon Ariba,
issued and sold 38,000 shares, or approximately 41% of its common stock, for cash consideration of approximately $40.0 million to Softbank pursuant to its strategic relationship with Softbank. In April 2001, Nihon Ariba 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, the Company held 100% of the equity of Nihon Ariba in the form of common stock.



In April 2001, the Companys consolidated subsidiary, Ariba Korea,
issued and sold 3,800 shares, or approximately 42% of its common stock, for cash consideration of approximately $8.0 million to Softbank. Prior to the transaction, the Company held 100% of the equity of Ariba Korea in the form of common stock.



In October 2004, the Company purchased the 41% interest in
Nihon Ariba and the 42% interest in Ariba Korea held by Softbank for $3.5 million. See Note 13 for a discussion of the Softbank settlement. The Company subsequently purchased an additional 2% interest in Nihon Ariba held by various
shareholders. These transactions resulted in a $19.5 million reduction to minority interests during the year ended September 30, 2005.



As of September 30, 2004, minority interests of $19.5 million are recorded on the consolidated balance sheet in order to reflect the share of the net
assets of Nihon Ariba and Ariba Korea held by minority investors. For the years ended September 30, 2005 and 2003, the Company increased consolidated net loss by $17,000 and $3.5 million, which represented the minority interests share of
income of the two subsidiaries, respectively. For the year ended September 30, 2004, the Company reduced consolidated net loss by approximately $539,000, which represented the minority interests share of losses of the two subsidiaries.



Note 9Segment Information



The Company follows SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which 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
regularly evaluated 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 sales 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.



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The Companys license revenues are derived from a similar group of software applications that are
sold individually or in combination. Subscription revenues consist mainly of fees for software access subscription and hosted software services. Maintenance revenues consist primarily of Ariba Buyer and Ariba Sourcing product maintenance fees.
Services and other revenues consist of fees for implementation services, consulting services, managed services, training, education, premium support and other miscellaneous items. Revenues by similar product and service groups for the years ended
September 30, 2005, 2004, and 2003 are as follows (in thousands):



|                            |  |                          |         |      |   |         |  |   |        
|--------------------------- |  | ------------------------ | ------- | ---- | - | ------- |  | - | -------
|                            |  | Year Ended September 30,
|                            |  | 2005                     |         | 2004 |   | 2003   
|License revenues            |  | $                        | 47,817  |      | $ | 65,654  |  | $ | 103,066
|Subscription revenues       |  |                          | 47,285  |      |   | 17,918  |  |   | 10,666 
|Maintenance revenues        |  |                          | 76,145  |      |   | 77,771  |  |   | 76,427 
|Services and other revenues |  |                          | 151,796 |      |   | 84,455  |  |   | 46,539 
|                            |  |                          |         |      |   |         |  |   |        
|Total                       |  | $                        | 323,043 |      | $ | 245,798 |  | $ | 236,698
|                            |  |                          |         |      |   |         |  |   |        



Information regarding
revenue for the years ended September 30, 2005, 2004 and 2003, and long-lived assets in geographic areas as of September 30, 2005 and 2004, is as follows (in thousands):



|                   |  |                          |         |               |   |         |  |   |        
|------------------ |  | ------------------------ | ------- | ------------- | - | ------- |  | - | -------
|                   |  | Year Ended September 30,
|                   |  | 2005                     |         | 2004          |   | 2003   
|Revenues:          |  |                          |         |               |   |         |  |   |        
|United States      |  | $                        | 232,493 |               | $ | 160,843 |  | $ | 161,337
|International      |  |                          | 90,550  |               |   | 84,955  |  |   | 75,361 
|                   |  |                          |         |               |   |         |  |   |        
|Total              |  | $                        | 323,043 |               | $ | 245,798 |  | $ | 236,698
|                   |  |                          |         |               |   |         |  |   |        
|                   |  |                         
|                   |  |                          |         | September 30,
|                   |  |                          |         | 2005          |   | 2004   
|Long-Lived Assets: |  |                          |         |               |   |        
|United States      |  | $                        | 16,563  |               | $ | 20,202 
|International      |  |                          | 1,436   |               |   | 1,707  
|                   |  |                          |         |               |   |         |  |   |        
|Total              |  | $                        | 17,999  |               | $ | 21,909 
|                   |  |                          |         |               |   |         |  |   |        



Revenues are
attributed to countries based on the location of the Companys customers. The Companys international revenues were derived primarily from sales in Europe and Asia. The Company had net assets of $9.4 million and $40.7 million related to
its international locations as of September 30, 2005 and 2004, respectively.



Note 10Stockholders Equity



Reverse Stock Split



On July 1, 2004, the
Company effected a one-for-six reverse split of its outstanding common stock. The information contained herein gives retroactive effect to the reverse stock split for all periods presented.



Common Stock Repurchase Program



On October 22, 2002, the Companys Board of Directors authorized
the repurchase of up to $50.0 million of its common stock. On July 23, 2004, the Board of Directors approved an extension of this stock repurchase program. Under the extended program, the Company may repurchase up to $50.0 million of its common
stock from time to time, expiring after eighteen months, in compliance with the Securities and Exchange



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Commissions regulations and other legal requirements and subject to market conditions and other factors. Stock purchases under the common stock
repurchase program may be made periodically in the open market based on market conditions. During the year ended September 30, 2004, the Company repurchased and retired 806,000 shares of common stock at an average price of $7.97 per share for a
total of $6.4 million.



Warrants



In connection with the purchase of Goodex AG in January 2003, the Company
issued a warrant to purchase 83,333 shares of Company common stock at an exercise price of $18.78 per share, with vesting contingent upon achievement of certain revenue milestones through December 31, 2003. The warrant expired unexercised in
July 2004.



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 571,429 shares of the Companys common stock at an exercise price of $525.00 per share. The business partner could partially vest in this
warrant each quarter upon attainment of certain periodic milestones related to revenue targets. The warrant generally expired as to any earned or earnable portion when the milestone period expires or eighteen months after the specific milestone is
met. The warrant expired unexercised in March 2005. During the years ended September 30, 2005, 2004 and 2003, the business partner did not vest in any shares of this warrant and no business partner warrant expense was recorded for these fiscal
years. No amounts related to the unvested warrants are reflected in the accompanying consolidated financial statements.



Deferred Stock-Based Compensation



The Company recorded deferred stock-based compensation totaling approximately $325.0 million from inception through September 30, 2005. 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, $124.6 million and $2.4 million related to the Companys acquisitions of TradingDynamics, Inc.
and SupplierMarket.com, Inc. and its merger with FreeMarkets consummated on July 1, 2004, respectively.



During the year ended September 30, 2005, the Company granted 4.7 million shares of restricted common stock to executive officers and certain
employees, of which 387,300 shares were subsequently cancelled upon termination of employment, resulting in additional net deferred stock-based compensation of $34.1 million during fiscal year 2005. These amounts are amortized in accordance with FIN
28 over the vesting periods of the individual restricted common stock grants, which are between two to three years.



Also during the year ended September 30, 2005, the Company offered its employees the opportunity to exchange outstanding stock options having an
exercise price of $10.00 or more per share for restricted shares of its common stock. The Company granted 2.6 million shares of restricted common stock, of which 40,308 shares were subsequently cancelled upon termination of employment,
resulting in additional net deferred stock-based compensation of $15.0 million during fiscal year 2005. These amounts are amortized in accordance with FIN 28 over the three-year vesting period of the individual restricted common stock grants.



During the year ended September 30, 2004, the Company
granted 365,038 shares of restricted common stock to executive officers and certain employees, of which 22,958 shares were subsequently cancelled upon termination of employment, resulting in additional net deferred stock-based compensation of $5.8
million during fiscal year 2004. These amounts are being amortized in accordance with FIN 28 over the vesting periods of the individual restricted common stock grants, which are between eighteen months to five years.



During the year ended September 30, 2005, the Company recorded
stock-based compensation expense of $19.6 million, of which $280,000 was related to the modification of stock options to accelerate vesting, as required under employee severance agreements, as a result of executive terminations. During the year
ended September 30, 2004, the Company recorded stock-based compensation expense of $2.8 million, of which



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$300,000 was related to the modification of stock options to accelerate vesting, as required under a severance agreement, as a result of an executive
termination. During the year ended September 30, 2003, the Company recorded stock-based compensation expense of $2.2 million. As of September 30, 2005, the Company had an aggregate of approximately $35.5 million of deferred stock-based
compensation remaining to be amortized.



1999 Equity
Incentive Plan



The Companys Board of Directors
approved the 1999 Equity Incentive Plan (the Incentive Plan) on April 20, 1999. The Incentive Plan was amended on October 4, 2001. Any shares not issued under the Companys 1996 Stock Plan (the 1996 Stock Plan)
and any shares repurchased pursuant to the 1996 Stock Plan will also be available for grant under the Incentive Plan. The number of shares reserved under the Incentive Plan automatically increased on January 1 of each year until 2005 by the
lesser of 3.3 million shares or 5% of the total number of shares of common stock outstanding on that date. Under the Incentive Plan, eligible employees, outside directors and consultants may be granted stock options, stock appreciation rights,
restricted shares or stock units. The exercise price for incentive stock options and nonstatutory options may not be less than 100% and 85%, respectively, of the fair value of common stock at the option grant date. As of September 30, 2005,
19.0 million shares of common stock have been reserved for issuance (including shares transferred from the 1996 Stock Plan since June 22, 1999) and 10.9 million shares are available for grant under the Incentive Plan.



1999 Directors Stock Option Plan



The Companys Board of Directors adopted the 1999 Directors Stock
Option Plan (the Directors Plan) on April 20, 1999. The Directors Plan was amended effective May 19, 2000 and October 1, 2002. Each non-employee director received an option to purchase 12,500 shares of common
stock upon joining the Board of Directors (the Initial Grant). In addition, each non-employee director received an option to purchase 2,500 shares of common stock (the Annual Grant) upon the conclusion of each regular annual
meeting of the Companys stockholders, provided the director continued serving as a member of the Board thereafter. However, a non-employee director did not receive an Annual Grant in the same calendar year in which he or she received an
Initial Grant. Each option had an exercise price equal to the fair value of the common stock on the grant date. As of September 30, 2005, options to purchase 101,657 shares of common stock have been granted under the Directors Plan. The
Directors Plan was terminated in April 2005.



Employee
Stock Purchase Plan



The Companys Board of Directors
adopted the Employee Stock Purchase Plan (the Purchase Plan) on April 20, 1999. The number of shares reserved under the Purchase Plan automatically increases on January 31 of each year by the lesser of 500,000 shares or 2% of
the total number of shares of common stock outstanding on that date. Under the Purchase Plan, eligible employees may purchase common stock in an amount not to exceed 15% of the employees cash compensation. The purchase price per share equals
the lower of 85% of the common stocks fair value at certain defined dates. As of September 30, 2005, there have been 3.2 million shares issued under the Purchase Plan and 2.5 million shares are available for future issuance.



The Company has, in connection with the acquisitions of
TradingDynamics, Tradex, SupplierMarket and FreeMarkets, assumed the stock option plans of each acquired company.



TradingDynamics Stock Plans



On January 20, 2000, the Company assumed the TradingDynamics 1998 Stock Plan and 1999 Stock Plan (the TradingDynamics Plans). The
TradingDynamics Plans were not approved by the Companys stockholders. The TradingDynamics Plans provide for the grant of incentive stock options to employees at prices not less than 100% of the fair market value of the common stock on the date
of grant, as determined by the Board of Directors, and for the grant of nonstatutory stock options to employees and consultants at not less than par value. Generally, options were immediately exercisable, and the resulting shares issued to optionees
were subject to certain



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repurchase rights, which were also assumed by the Company. As of September 30, 2005, no shares of the Companys common stock issued pursuant to the
TradingDynamics Plans were subject to repurchase by the Company. Options expire not later than ten years from the date of grant. As of September 30, 2005, a total of 273,103 shares of the Companys common stock are reserved for issuance
upon the exercise of stock options assumed in connection with the acquisition of TradingDynamics or granted by the Company after the acquisition of TradingDynamics under the TradingDynamics Plans.



Tradex Stock Plans



On March 8, 2000, the Company assumed the Tradex 1997 Employee Stock
Option Plan and 1999 Employee Stock Option/Stock Issuance Plan (the Tradex Plans). The Tradex Plans were not approved by the Companys stockholders. The Tradex Plans provide for the grant of incentive stock options to employees and
the grant of nonstatutory stock options or shares of common stock to employees, board members and consultants at prices less than, equal to, or greater than the fair market value of the common stock on the date of grant, as determined by the Board
of Directors. Generally, options were immediately exercisable, and the resulting shares issued to optionees were subject to certain repurchase rights, which were also assumed by the Company. As of September 30, 2005, no shares of the
Companys common stock issued pursuant to the Tradex Plans were subject to repurchase by the Company. Options expire not later than ten years from the date of grant. As of September 30, 2005 a total of 314,862 shares of the Companys
common stock are reserved for issuance upon the exercise of stock options assumed in connection with the acquisition of Tradex or granted by the Company after the acquisition of Tradex under the Tradex Plans.



SupplierMarket Stock Plan



On August 28, 2000, the Company assumed the SupplierMarket 1999 Stock
Option Plan (the SupplierMarket Plan). The SupplierMarket Plan was not approved by the Companys stockholders. The SupplierMarket Plan provides for the grant of incentive stock options to employees at prices not less than 100% of
the fair market value of the common stock on the date of grant, as determined by the Board of Directors, and the grant of nonstatutory stock options to employees and consultants at prices not less than the par value of the common stock. Under the
SupplierMarket Plan, options generally vest over a 48-month period at the rate of 12.5% of the grant after six months of service and 1/48thof the grant per month thereafter. Options expire not later than ten years from the date of grant. As of September 30, 2005, a total of 338,695 shares of the Companys common stock are reserved for issuance upon
the exercise of stock options assumed in connection with the acquisition of SupplierMarket or granted by the Company after the acquisition of SupplierMarket under the SupplierMarket Plan.



FreeMarkets Stock Plans



On July 1, 2004, the Company assumed the FreeMarkets, Inc. Second Amended and Restated Stock Incentive Plan and Broad Based Equity Incentive Plan
(the FreeMarkets Plans). The FreeMarkets Plans were not approved by the Companys stockholders. The Second Amended and Restated Stock Incentive Plan provides for the grant of incentive stock options to employees at prices not less
than 100% of the fair market value of the common stock on the date of grant and for the grant of nonstatutory stock options to employees, consultants, advisers and outside directors at a price determined by the Board of Directors. The Broad Based
Equity Incentive Plan provides for the grant of nonstatutory stock options to employees (other than officers), consultants and advisers at a price determined by the Board of Directors. Options expire not later than ten years from the date of grant.
As of September 30, 2005, a total of 7.9 million shares of the Companys common stock are reserved for issuance upon the exercise of stock options assumed in connection with the acquisition of FreeMarkets or granted by the Company
after the acquisition of FreeMarkets under the FreeMarkets Plans. The number of shares reserved under the Second Amended and Restated Stock Incentive Plan automatically increases on October 1 of each year until 2007 by the lesser of 817,750
shares or 3% of the total number of shares of common stock outstanding on that date. The number of shares reserved under the Broad Based Equity Incentive Plan automatically increases on October 1 of each year until 2009 by the lesser of 136,291
shares or 1% of the total number of shares of common stock outstanding on that date.



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A summary of the status of the Companys stock options as of September 30, 2005, 2004 and 2003
and changes during the years ended on those dates is presented below:



|                                        |  |                           |   |      |                               |       |                  |            |   |                               |   |                  |  |            |                               |  |   |      
|--------------------------------------- |  | ------------------------- | - | ---- | ----------------------------- | ----- | ---------------- | ---------- | - | ----------------------------- | - | ---------------- |  | ---------- | ----------------------------- |  | - | -----
|                                        |  | Years Ended September 30,
|                                        |  | 2005                      |   | 2004 |                               | 2003 
|                                        |  | Number ofOptions          |   |      | Weighted-AverageExercisePrice |       | Number ofOptions |            |   | Weighted-AverageExercisePrice |   | Number ofOptions |  |            | Weighted-AverageExercisePrice
|Outstanding at beginning of year        |  | 13,103,476                |   |      | $                             | 20.03 |                  | 7,951,783  |   |                               | $ | 20.76            |  | 7,293,195  |                               |  | $ | 23.22
|Options assumed in business combination |  |                          |   |      | $                             |      |                  | 7,183,432  |   |                               | $ | 19.19            |  |           |                               |  | $ |     
|Granted                                 |  | 1,578,081                 |   |      | $                             | 9.71  |                  | 2,220,173  |   |                               | $ | 14.04            |  | 2,139,708  |                               |  | $ | 16.56
|Exercised                               |  | (983,041                  | ) |      | $                             | 5.36  |                  | (466,296   | ) |                               | $ | 4.29             |  | (369,375   | )                             |  | $ | 9.06 
|Forfeited                               |  | (10,343,598               | ) |      | $                             | 21.73 |                  | (3,785,616 | ) |                               | $ | 25.56            |  | (1,111,745 | )                             |  | $ | 31.44
|                                        |  |                           |   |      |                               |       |                  |            |   |                               |   |                  |  |            |                               |  |   |      
|Outstanding at end of year              |  | 3,354,918                 |   |      | $                             | 14.27 |                  | 13,103,476 |   |                               | $ | 20.03            |  | 7,951,783  |                               |  | $ | 20.76
|                                        |  |                           |   |      |                               |       |                  |            |   |                               |   |                  |  |            |                               |  |   |      
|Exercisable at end of year              |  | 2,284,957                 |   |      | $                             | 16.28 |                  | 11,021,812 |   |                               | $ | 20.62            |  | 4,239,300  |                               |  | $ | 22.26
|                                        |  |                           |   |      |                               |       |                  |            |   |                               |   |                  |  |            |                               |  |   |      



The following table
summarizes information about stock options outstanding as of September 30, 2005:



|                         |  |                     |  |                                                    |  |                                  |  |                  |  |                                 
|------------------------ |  | ------------------- |  | -------------------------------------------------- |  | -------------------------------- |  | ---------------- |  | --------------------------------
|                         |  | Options Outstanding |  | Options Exercisable                               
|Range of Exercise Prices |  | Number ofOptions    |  | Weighted- AverageRemainingContractual Life (years) |  | Weighted- Average Exercise Price |  | Number ofOptions |  | Weighted- Average Exercise Price
|$  0.01$    5.83        |  | 791,892             |  | 4.78                                               |  | $  4.01                          |  | 756,300          |  | $  3.93                         
|$  5.84$    7.39        |  | 756,048             |  | 7.82                                               |  | $  7.16                          |  | 399,928          |  | $  7.39                         
|$  7.44$  11.96         |  | 678,659             |  | 8.14                                               |  | $  9.96                          |  | 299,308          |  | $10.44                          
|$11.99$  24.12          |  | 723,366             |  | 7.48                                               |  | $16.62                           |  | 435,132          |  | $18.34                          
|$24.32$733.50           |  | 404,953             |  | 5.25                                               |  | $50.65                           |  | 394,289          |  | $51.17                          
|                         |  |                     |  |                                                    |  |                                  |  |                  |  |                                 
|$  0.01$733.50          |  | 3,354,918           |  | 6.79                                               |  | $14.27                           |  | 2,284,957        |  | $16.28                          
|                         |  |                     |  |                                                    |  |                                  |  |                  |  |                                 



As discussed above in
Deferred Stock-Based Compensation, the Company offered its employees the opportunity to exchange outstanding stock options having an exercise price of $10.00 or more per share for restricted shares of its common stock. The number of
newly issued restricted shares issued in exchange for the options was determined by application of various exchange ratios based upon the exercise price of the options. The offer expired in August 2005 and resulted in the voluntary forfeiture of
employee stock options to purchase 6.8 million shares of common stock in exchange for 2.6 million shares of restricted common stock, of which 40,308 shares were subsequently cancelled upon termination of employment, resulting in additional
net deferred stock-based compensation of $15.0 million during fiscal year 2005. These amounts are amortized in accordance with FIN 28 over the three-year vesting period of the individual restricted common stock grants.



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Note 11Net Loss Per Share



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



|                                                                                    |  |                          |          |   |      |   |         |      |  |   |          |  
|----------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                    |  | Year Ended September 30, |         
|                                                                                    |  | 2005                     |          |   | 2004 |   |         | 2003 | 
|Net loss                                                                            |  | $                        | (349,628 | ) |      | $ | (25,230 | )    |  | $ | (106,327 | )
|                                                                                    |  |                          |          |   |      |   |         |      |  |   |          |  
|Weighted average shares outstanding                                                 |  |                          | 66,787   |   |      |   | 49,853  |      |  |   | 44,626   |  
|Weighted average common shares issued subject to repurchase agreement               |  |                          | (3,132   | ) |      |   | (228    | )    |  |   | (245     | )
|                                                                                    |  |                          |          |   |      |   |         |      |  |   |          |  
|Weighted average shares used in computation of net loss per sharebasic and diluted |  |                          | 63,655   |   |      |   | 49,625  |      |  |   | 44,381   |  
|                                                                                    |  |                          |          |   |      |   |         |      |  |   |          |  
|Basic and diluted loss per share                                                    |  | $                        | (5.49    | ) |      | $ | (0.51   | )    |  | $ | (2.40    | )
|                                                                                    |  |                          |          |   |      |   |         |      |  |   |          |  



At September 30,
2005, 2004 and 2003, 2.5 million, 9.7 million and 8.1 million potential common shares, respectively, consisting almost entirely of outstanding options, are excluded from the determination of diluted net loss per share, as the effect
of such shares is anti-dilutive. Further, the potential common shares for the years ended September 30, 2004 and 2003 exclude 28,571 and 183,333 shares, respectively, which would be issuable under certain warrants whose vesting was contingent
upon completion of certain milestones.



The weighted average
repurchase price of unvested stock was $0.00, $0.13 and $0.00 for the years ended September 30, 2005, 2004 and 2003, respectively. The weighted average exercise price of warrants outstanding was $525.00 for each of the years ended
September 30, 2004 and 2003.



Note 12401(k) Savings Plan



Company employees in the United States can participate in
the Ariba, Inc. Employees 401(k) Savings Plan (the 401(k) Plan). Participants can generally contribute up to 100% of their eligible compensation annually as defined by the plan document, subject to the section 402(g) limit as defined by
the Internal Revenue Service. The Company made a discretionary contribution of $2.6 million to the 401(k) Plan during the year ended September 30, 2005.



Note 13Related Party Transactions



Executive Agreements



In fiscal year 2001, the Company entered into an agreement with Robert Calderoni, its CEO, pursuant to which he was entitled to receive annual cash
payments from the Company to compensate him for income tax incurred as a result of loan forgiveness and cash payments. As a result, the Company incurred additional compensation expense averaging $267,000 per quarter through the quarter ended
December 31, 2004, at which time the loans were fully forgiven.



The Company entered into an agreement with another executive officer in October 2001 which provided for an unsecured loan in the amount of $1.5 million. The principal amount of the loan was to become payable in full immediately after
termination of the individuals employment for any reason other than a termination by the Company without cause. Further, the agreement provided that the loan would be forgiven over three years based on continued service. This loan was fully
forgiven in October 2004.



The Company entered into an
agreement with a third executive officer in April 2002 which provided for two unsecured loans totaling $1.0 million. The principal amounts of the loans were to become immediately payable in full if the individuals employment terminated. These
loans were fully forgiven in December 2004.



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The Company recorded the principal amounts of these loans as an operating expense in fiscal year 2002
based upon its assessment at that time that recoverability of the loans in the event of the employees termination prior to the expiration of the related forgiveness periods was remote.



Softbank Agreements



In fiscal year 2001, the Company sold 41% of its consolidated subsidiary,
Nihon Ariba, and 42% of its consolidated subsidiary, Ariba Korea, to Softbank. A subsidiary of Softbank also received the right to distribute the Companys products from these subsidiaries in their respective jurisdictions. The Company recorded
license and maintenance revenues of $1.7 million, $4.6 million and $23.8 million in the years ended September 30, 2005, 2004 and 2003, respectively, related to transactions with Softbank, including license and maintenance revenues recognized
pursuant to their long-term revenue commitment.



In June 2003,
the Company commenced an arbitration proceeding against Softbank for failing to meet its contractual revenue commitments. In response to Aribas arbitration demand, Softbank filed a counterdemand alleging breach of fiduciary duty, breach of the
implied covenant of good faith and fair dealing and fraud related to Nihon Ariba and Ariba Korea.



The Companys agreements with Softbank required Softbank to be current with its revenue commitments before arbitration could proceed. Pursuant to the
arbitration proceeding, Softbank made three interim payments totaling $43.4 million from October 2003 through April 2004, representing the aggregate quarterly payments owed to Nihon Ariba plus interest. The arbitration panel stipulated that the
payments were subject to possible return to Softbank depending on the outcome of the arbitration. These funds were recorded in the period received as an increase to restricted cash and current accrued liabilities.



In October 2004, the Company entered into a definitive agreement with
Softbank settling their dispute. Under the terms of the settlement, the Company acquired Softbanks 41% interest in Nihon Ariba and its 42% interest in Ariba Korea for $3.5 million, as well as returned to Softbank $43.0 million of the interim
payments made by Softbank pursuant to the arbitration proceeding. In addition, Softbank paid $20.0 million for a new three-year term license of certain Ariba software products for use by Softbank and its affiliates and for the benefit of
unaffiliated third-party customers in Japan. The net cash outflow from these transactions was $26.5 million.



The settlement resulted in the elimination of Softbanks minority interests of $18.8 million from the Companys consolidated balance sheet. A
total of $37.0 million was recorded as Deferred incomeSoftbank. As the Company was unable to determine the respective fair value of the amounts that related to Softbanks software license, related maintenance and the
Companys prior agreements with Softbank, the $37.0 million will be recognized ratably as Other incomeSoftbank over the three-year software license term. The $37.0 million of deferred income is comprised of the following:
$20.0 million from the software license; the $15.3 million difference between the $18.8 million in carrying value of the minority interests and the $3.5 million paid to acquire those interests; and $1.7 million in fair value adjustments, primarily
related to deferred revenue, from the acquisition of Softbanks minority interests. The Company also made a provision for taxes of $4.8 million in the year ended September 30, 2005 as a result of the settlement. The Company recorded $9.5
million in income related to the Softbank agreement in the year ended September 30, 2005. As of September 30, 2005, deferred income related to the Softbank settlement was $27.3 million.



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CONSOLIDATED INTERIM FINANCIAL INFORMATION

UNAUDITED SELECTED QUARTERLY FINANCIAL DATA

(in thousands, except per share
amounts)



|                                                                                   |  |                                       |        |   |              |   |          |               |  |   |              |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------ | - | -------- | ------------- |  | - | ------------ | - |  | - | ------- | -
|                                                                                   |  | Fiscal Year 2005For the Quarter Ended |       
|                                                                                   |  | Sept. 30,2005                         |        |   | June 30,2005 |   |          | March 31,2005 |  |   | Dec. 31,2004 |  
|Revenues:                                                                          |  |                                       |        |   |              |   |          |               |  |   |              |   |  |   |         |  
|License                                                                            |  | $                                     | 8,010  |   |              | $ | 10,070   |               |  | $ | 12,615       |   |  | $ | 17,122  |  
|Subscription and maintenance                                                       |  |                                       | 30,394 |   |              |   | 29,901   |               |  |   | 30,969       |   |  |   | 30,503  |  
|Subscription and maintenancerelated party                                         |  |                                       | 171    |   |              |   | 312      |               |  |   | 255          |   |  |   | 925     |  
|Services and other                                                                 |  |                                       | 38,556 |   |              |   | 37,432   |               |  |   | 37,429       |   |  |   | 38,379  |  
|                                                                                   |  |                                       |        |   |              |   |          |               |  |   |              |   |  |   |         |  
|Total revenues                                                                     |  |                                       | 77,131 |   |              |   | 77,715   |               |  |   | 81,268       |   |  |   | 86,929  |  
|                                                                                   |  |                                       |        |   |              |   |          |               |  |   |              |   |  |   |         |  
|Cost of revenues:                                                                  |  |                                       |        |   |              |   |          |               |  |   |              |   |  |   |         |  
|License                                                                            |  |                                       | 830    |   |              |   | 998      |               |  |   | 1,054        |   |  |   | 694     |  
|Subscription and maintenance                                                       |  |                                       | 7,409  |   |              |   | 7,039    |               |  |   | 7,116        |   |  |   | 7,236   |  
|Services and other                                                                 |  |                                       | 29,689 |   |              |   | 30,483   |               |  |   | 31,617       |   |  |   | 29,768  |  
|Amortization of acquired technology and customer intangible assets                 |  |                                       | 4,613  |   |              |   | 4,907    |               |  |   | 5,281        |   |  |   | 4,700   |  
|                                                                                   |  |                                       |        |   |              |   |          |               |  |   |              |   |  |   |         |  
|Total cost of revenues                                                             |  |                                       | 42,541 |   |              |   | 43,427   |               |  |   | 45,068       |   |  |   | 41,757  |  
|                                                                                   |  |                                       |        |   |              |   |          |               |  |   |              |   |  |   |         |  
|Gross profit                                                                       |  |                                       | 34,590 |   |              |   | 34,288   |               |  |   | 36,200       |   |  |   | 45,172  |  
|                                                                                   |  |                                       |        |   |              |   |          |               |  |   |              |   |  |   |         |  
|Operating expenses:                                                                |  |                                       |        |   |              |   |          |               |  |   |              |   |  |   |         |  
|Sales and marketing                                                                |  |                                       | 17,714 |   |              |   | 21,540   |               |  |   | 19,349       |   |  |   | 24,673  |  
|Research and development                                                           |  |                                       | 10,778 |   |              |   | 11,772   |               |  |   | 12,260       |   |  |   | 12,402  |  
|General and administrative                                                         |  |                                       | 7,726  |   |              |   | 6,330    |               |  |   | 7,918        |   |  |   | 8,614   |  
|Other incomeSoftbank                                                              |  |                                       | (3,345 | ) |              |   | (3,350   | )             |  |   | (2,795       | ) |  |   |        |  
|Amortization of other intangible assets                                            |  |                                       | 200    |   |              |   | 200      |               |  |   | 213          |   |  |   | 185     |  
|Stock-based compensation (1)                                                       |  |                                       | 7,526  |   |              |   | 3,422    |               |  |   | 4,278        |   |  |   | 4,378   |  
|Restructuring and integration costs                                                |  |                                       | 2,579  |   |              |   | 34,570   |               |  |   | 2,282        |   |  |   | 1,817   |  
|Goodwill impairment                                                                |  |                                       |       |   |              |   | 247,830  |               |  |   |             |   |  |   |        |  
|Litigation provision                                                               |  |                                       |       |   |              |   |         |               |  |   |             |   |  |   | 37,000  |  
|                                                                                   |  |                                       |        |   |              |   |          |               |  |   |              |   |  |   |         |  
|Total operating expenses                                                           |  |                                       | 43,178 |   |              |   | 322,314  |               |  |   | 43,505       |   |  |   | 89,710  |  
|                                                                                   |  |                                       |        |   |              |   |          |               |  |   |              |   |  |   |         |  
|Loss from operations                                                               |  |                                       | (8,588 | ) |              |   | (288,026 | )             |  |   | (7,305       | ) |  |   | (44,538 | )
|Interest and other income, net                                                     |  |                                       | 2,259  |   |              |   | 349      |               |  |   | 640          |   |  |   | 2,615   |  
|                                                                                   |  |                                       |        |   |              |   |          |               |  |   |              |   |  |   |         |  
|Net loss before income taxes and minority interests                                |  |                                       | (6,329 | ) |              |   | (287,677 | )             |  |   | (6,665       | ) |  |   | (41,923 | )
|Provision for income taxes                                                         |  |                                       | 941    |   |              |   | 1,039    |               |  |   | 224          |   |  |   | 4,813   |  
|Minority interests in net income (loss) of consolidated subsidiaries               |  |                                       |       |   |              |   | (1       | )             |  |   | 2            |   |  |   | 16      |  
|                                                                                   |  |                                       |        |   |              |   |          |               |  |   |              |   |  |   |         |  
|Net loss                                                                           |  | $                                     | (7,270 | ) |              | $ | (288,715 | )             |  | $ | (6,891       | ) |  | $ | (46,752 | )
|                                                                                   |  |                                       |        |   |              |   |          |               |  |   |              |   |  |   |         |  
|Net loss per sharebasic and diluted (2)                                           |  | $                                     | (0.11  | ) |              | $ | (4.52    | )             |  | $ | (0.11        | ) |  | $ | (0.75   | )
|                                                                                   |  |                                       |        |   |              |   |          |               |  |   |              |   |  |   |         |  
|Weighted average shares used in computing net loss per sharebasic and diluted (2) |  |                                       | 64,554 |   |              |   | 63,839   |               |  |   | 63,518       |   |  |   | 62,707  |  
|                                                                                   |  |                                       |        |   |              |   |          |               |  |   |              |   |  |   |         |  

---

|(1) | For the four quarters in the year ended September 30, 2005, stock-based compensation expense, net of the effects of cancellations, is attributable to various operating expense
categories as follows (in thousands):
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                           |  |                                       |       |              |   |               |  |              |       |  |   |      
|-------------------------- |  | ------------------------------------- | ----- | ------------ | - | ------------- |  | ------------ | ----- |  | - | -----
|                           |  | Fiscal Year 2005For the Quarter Ended
|                           |  | Sept. 30,2005                         |       | June 30,2005 |   | March 31,2005 |  | Dec. 31,2004
|Cost of revenues           |  | $                                     | 888   |              | $ | 1,129         |  | $            | 1,360 |  | $ | 1,153
|Sales and marketing        |  |                                       | 3,858 |              |   | 1,284         |  |              | 1,731 |  |   | 2,113
|Research and development   |  |                                       | 1,149 |              |   | 329           |  |              | 475   |  |   | 445  
|General and administrative |  |                                       | 1,631 |              |   | 680           |  |              | 712   |  |   | 667  
|                           |  |                                       |       |              |   |               |  |              |       |  |   |      
|Total                      |  | $                                     | 7,526 |              | $ | 3,422         |  | $            | 4,278 |  | $ | 4,378
|                           |  |                                       |       |              |   |               |  |              |       |  |   |      



|(2) | Reflects the one-for-six reverse split of the Companys outstanding common stock effected on July 1, 2004.
|--- | ----------------------------------------------------------------------------------------------------------



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CONSOLIDATED INTERIM FINANCIAL INFORMATION

UNAUDITED SELECTED QUARTERLY FINANCIAL DATA

(in thousands, except per share
amounts)



|                                                                                 |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|-------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ------------ | - | ------ | ------------- |  | - | ------------ | - |  | - | ------ | -
|                                                                                 |  | Fiscal Year 2004For the Quarter Ended |        
|                                                                                 |  | Sept. 30,2004                         |         |   | June 30,2004 |   |        | March 31,2004 |  |   | Dec. 31,2003 |  
|Revenues:                                                                        |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|License                                                                          |  | $                                     | 15,563  |   |              | $ | 15,148 |               |  | $ | 15,940       |   |  | $ | 16,802 |  
|Licenserelated party                                                            |  |                                       |        |   |              |   | 327    |               |  |   |             |   |  |   | 1,874  |  
|Subscription and maintenance                                                     |  |                                       | 30,754  |   |              |   | 20,350 |               |  |   | 21,121       |   |  |   | 21,044 |  
|Subscription and maintenancerelated party                                       |  |                                       | 351     |   |              |   | 638    |               |  |   | 408          |   |  |   | 1,023  |  
|Services and other                                                               |  |                                       | 37,408  |   |              |   | 16,520 |               |  |   | 18,539       |   |  |   | 11,988 |  
|                                                                                 |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|Total revenues                                                                   |  |                                       | 84,076  |   |              |   | 52,983 |               |  |   | 56,008       |   |  |   | 52,731 |  
|                                                                                 |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|Cost of revenues:                                                                |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|License                                                                          |  |                                       | 562     |   |              |   | 527    |               |  |   | 217          |   |  |   | 1,367  |  
|Subscription and maintenance                                                     |  |                                       | 6,354   |   |              |   | 5,226  |               |  |   | 5,396        |   |  |   | 5,384  |  
|Services and other                                                               |  |                                       | 28,911  |   |              |   | 15,128 |               |  |   | 15,632       |   |  |   | 10,161 |  
|Amortization of acquired technology and customer intangible assets               |  |                                       | 4,725   |   |              |   | 340    |               |  |   |             |   |  |   |       |  
|                                                                                 |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|Total cost of revenues                                                           |  |                                       | 40,552  |   |              |   | 21,221 |               |  |   | 21,245       |   |  |   | 16,912 |  
|                                                                                 |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|Gross profit                                                                     |  |                                       | 43,524  |   |              |   | 31,762 |               |  |   | 34,763       |   |  |   | 35,819 |  
|                                                                                 |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|Operating expenses:                                                              |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|Sales and marketing                                                              |  |                                       | 23,346  |   |              |   | 17,037 |               |  |   | 20,353       |   |  |   | 13,555 |  
|Research and development                                                         |  |                                       | 15,219  |   |              |   | 13,811 |               |  |   | 12,784       |   |  |   | 12,277 |  
|General and administrative                                                       |  |                                       | 9,958   |   |              |   | 6,650  |               |  |   | 4,921        |   |  |   | 4,543  |  
|Amortization of other intangible assets                                          |  |                                       | 235     |   |              |   | 149    |               |  |   | 76           |   |  |   |       |  
|In-process research and development                                              |  |                                       | 100     |   |              |   |       |               |  |   |             |   |  |   |       |  
|Stock-based compensation (1)                                                     |  |                                       | 1,149   |   |              |   | 771    |               |  |   | 838          |   |  |   | 30     |  
|Restructuring and integration costs                                              |  |                                       | 16,900  |   |              |   | 1,820  |               |  |   | (1,917       | ) |  |   |       |  
|                                                                                 |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|Total operating expenses                                                         |  |                                       | 66,907  |   |              |   | 40,238 |               |  |   | 37,055       |   |  |   | 30,405 |  
|                                                                                 |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|Income (loss) from operations                                                    |  |                                       | (23,383 | ) |              |   | (8,476 | )             |  |   | (2,292       | ) |  |   | 5,414  |  
|Interest and other income, net                                                   |  |                                       | 314     |   |              |   | 723    |               |  |   | 953          |   |  |   | 818    |  
|                                                                                 |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|Net income (loss) before income taxes and minority interests                     |  |                                       | (23,069 | ) |              |   | (7,753 | )             |  |   | (1,339       | ) |  |   | 6,232  |  
|Provision (benefit) for income taxes                                             |  |                                       | 193     |   |              |   | 174    |               |  |   | (255         | ) |  |   | (272   | )
|Minority interests in net income (loss) of consolidated subsidiaries             |  |                                       | (403    | ) |              |   | (296   | )             |  |   | (253         | ) |  |   | 413    |  
|                                                                                 |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|Net income (loss)                                                                |  | $                                     | (22,859 | ) |              | $ | (7,631 | )             |  | $ | (831         | ) |  | $ | 6,091  |  
|                                                                                 |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|Net income (loss) per sharebasic (2)                                            |  | $                                     | (0.36   | ) |              | $ | (0.17  | )             |  | $ | (0.02        | ) |  | $ | 0.14   |  
|                                                                                 |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|Net income (loss) per sharediluted (2)                                          |  | $                                     | (0.36   | ) |              | $ | (0.17  | )             |  | $ | (0.02        | ) |  | $ | 0.13   |  
|                                                                                 |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|Weighted average shares used in computing net income (loss) persharebasic (2)   |  |                                       | 62,734  |   |              |   | 45,454 |               |  |   | 45,313       |   |  |   | 45,000 |  
|                                                                                 |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  
|Weighted average shares used in computing net income (loss) persharediluted (2) |  |                                       | 62,734  |   |              |   | 45,454 |               |  |   | 45,313       |   |  |   | 46,280 |  
|                                                                                 |  |                                       |         |   |              |   |        |               |  |   |              |   |  |   |        |  

---

|(1) | For the four quarters in the year ended September 30, 2004, stock-based compensation expense (benefit), net of the effects of cancellations, is attributable to various
operating expense categories as follows (in thousands):
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                           |  |                                       |       |              |   |               |  |              |     |  |   |     |  
|-------------------------- |  | ------------------------------------- | ----- | ------------ | - | ------------- |  | ------------ | --- |  | - | --- | -
|                           |  | Fiscal Year 2004For the Quarter Ended |      
|                           |  | Sept. 30,2004                         |       | June 30,2004 |   | March 31,2004 |  | Dec. 31,2003 |    
|Cost of revenues           |  | $                                     | 55    |              | $ | 71            |  | $            | 115 |  | $ | 39  |  
|Sales and marketing        |  |                                       | 686   |              |   | 478           |  |              | 619 |  |   | (20 | )
|Research and development   |  |                                       | 144   |              |   | 98            |  |              | 28  |  |   | 1   |  
|General and administrative |  |                                       | 264   |              |   | 124           |  |              | 76  |  |   | 10  |  
|                           |  |                                       |       |              |   |               |  |              |     |  |   |     |  
|Total                      |  | $                                     | 1,149 |              | $ | 771           |  | $            | 838 |  | $ | 30  |  
|                           |  |                                       |       |              |   |               |  |              |     |  |   |     |  



|(2) | Reflects the one-for-six reverse split of the Companys outstanding common stock effected on July 1, 2004.
|--- | ----------------------------------------------------------------------------------------------------------



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|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------



Not applicable.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



Evaluation of Disclosure Controls and Procedures



As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation under the supervision and with the participation of
our Disclosure Committee and our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e).
Disclosure controls are procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), such as this Annual Report on Form
10-K, is recorded, processed, summarized and reported within the time periods specified by the SEC. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.



The evaluation of our disclosure controls included a review of their objectives and design, the Companys implementation of the controls and the
effect of the controls on the information generated for use in this Annual Report on Form 10-K. In the course of the controls evaluation, we reviewed data errors or control problems identified and sought to confirm that appropriate corrective
actions, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including our Chief Executive Officer and Chief Financial Officer, concerning the
effectiveness of the disclosure controls can be reported in our periodic reports on Form 10-Q and Form 10-K. Many of the components of our disclosure controls are also evaluated on an ongoing basis by both our internal audit and finance
organizations. The overall goals of these various evaluation activities are to monitor our disclosure controls and to modify them as necessary. We intend to maintain the disclosure controls as dynamic systems that we adjust as circumstances merit.



Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.



Managements Report on Internal Control over Financial Reporting



Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting
as of September 30, 2005 based on the guidelines established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our internal control over financial
reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted
accounting principles.



Based on the results of our evaluation,
our management concluded that our internal control over financial reporting was effective as of September 30, 2005. We reviewed the results of managements assessment with our Audit Committee.



Managements assessment of the effectiveness of our internal control
over financial reporting as of September 30, 2005 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is presented below.



87



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Changes in Internal Control over Financial Reporting



There were no changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.



Inherent Limitations on Effectiveness of
Controls



The Companys management, including our
Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors 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 a 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 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.



Report of Independent Registered Public Accounting Firm



The Board of Directors and Stockholders

Ariba, Inc.:



We have audited
managements assessment, included in the accompanying Managements Report on Internal Control over Financial Reporting, that Ariba, Inc. maintained effective internal control over financial reporting as of September 30, 2005, based on
criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Ariba, Inc.s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys
internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable



88



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assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, managements assessment that Ariba, Inc. maintained
effective internal control over financial reporting as of September 30, 2005, is fairly stated, in all material respects, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, Ariba, Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2005, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets
of Ariba, Inc. and subsidiaries as of September 30, 2005 and 2004, and the related consolidated statements of operations and comprehensive loss, stockholders equity, and cash flows for each of the years in the three-year period ended
September 30, 2005, and our report dated December 6, 2005 expressed an unqualified opinion on those consolidated financial statements.



/s/ KPMG LLP



Pittsburgh, Pennsylvania

December 6, 2005



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------



Not applicable.



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PART III



|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|-------- | --------------------------------------------------



See the information set forth in the section entitled Executive Officers of the Registrant in Part I, Item 1 of this Form 10-K. See the
information set forth in the section entitled Proposal No. 1Election of Directors in the Proxy Statement for our 2006 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year
ended September 30, 2005 (the 2006 Proxy Statement), which is incorporated herein by reference.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------



See the information set forth in the section entitled Executive Compensation and Related Information in the 2006 Proxy Statement, which is
incorporated herein by reference.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------



See the information set forth in the section entitled Security Ownership of Certain Beneficial Owners and
Management in the 2006 Proxy Statement, which is incorporated herein by reference.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------



See the information set forth in the section entitled Certain Relationships and Related Transactions in the 2006 Proxy Statement, which is
incorporated herein by reference.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------



See the information set forth in the section entitled Proposal No. 2Ratification of Independent Accountants in the 2006 Proxy
Statement, which is incorporated herein by reference.



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PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------



|(a) | 1.     FINANCIAL STATEMENTS
|--- | ---------------------------



See Item 8 of this Form 10-K.



| | 2. | FINANCIAL STATEMENT SCHEDULES
| | -- | -----------------------------



Schedules have been omitted since they are either not required, not applicable, or the information has otherwise been included.



| | 3. | EXHIBITS
| | -- | --------



The exhibits listed on the accompanying index to exhibits immediately following the financial statement schedule are filed as part of, or incorporated by reference into, this Form 10-K.



|            |  |                                                                                                                                                                                                                                    
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                        
|3.1         |  | Amended and Restated Certificate of Incorporation of the Registrant including all amendments to date (which is incorporated herein by reference to Exhibit 3.1 to the Registrants Form
10-K dated December 29, 2000).             
|            | 
|3.2         |  | Amended and Restated Bylaws of the Registrant (which are incorporated herein by reference to Exhibit 3.4 to the Registrants Form S-1 Registration No. 333-76953).                                                                 
|            | 
|4.1         |  | Amended and Restated Investors Rights Agreement dated April 17, 1998 (which is incorporated herein by reference to Exhibit 4.1 to the Registrants Form S-1 Registration No.
333-76953).                                          
|            | 
|4.2         |  | Specimen Certificate of the Registrants common stock (which is incorporated herein by reference to Exhibit 4.2 to the Registrants Form S-1 Registration No.
333-76953).                                                          
|            | 
|4.3         |  | Amended and Restated Investors Rights Agreement dated June 7, 1999 (which is incorporated herein by reference to Exhibit 4.3 to the Registrants Form S-1 Registration No.
333-76953).                                            
|            | 
|10.1        |  | Form of Indemnification Agreement entered into between the Registrant and its directors and executive officers (which is incorporated herein by reference to Exhibit 10.1 to the
Registrants Form S-1 Registration No. 333-76953).
|            | 
|10.2       |  | 1996 Stock Plan, as amended (which is incorporated herein by reference to Exhibit 10.2 to the Registrants Form S-1 Registration No. 333-76953).                                                                                   
|            | 
|10.3       |  | 1999 Equity Incentive Plan, as amended (which is incorporated herein by reference to Exhibit 10.3 to the Registrants Form 10-K/A dated December 31, 2001).                                                                        
|            | 
|10.4       |  | Employee Stock Purchase Plan (which is incorporated herein by reference to Exhibit 10.5 to the Registrants Form S-1 Registration No. 333-76953).                                                                                  
|            | 
|10.5       |  | SupplierMarket.com 1999 Stock Option Plan, as amended (which is incorporated herein by reference to Exhibit 10.30 to the Registrants Form 10-K dated April 10, 2003).                                                             
|            | 
|10.6       |  | TradingDynamics 1999 Stock Plan, as amended (which is incorporated herein by reference to Exhibit 10.31 to the Registrants Form 10-K dated April 10, 2003).                                                                       
|            | 
|10.7       |  | TradingDynamics 1998 Stock Plan, as amended (which is incorporated herein by reference to Exhibit 10.32 to the Registrants Form 10-K dated April 10, 2003).                                                                       
|            | 
|10.8       |  | Tradex Technologies, Inc. 1999 Stock Option/Stock Issuance Plan, as amended (which is incorporated herein by reference to Exhibit 10.33 to the Registrants Form 10-K dated April 10,
2003).                                       



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|            |  |                                                                                                                                                                                                                                                                                         
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                             
|10.9       |  | Tradex Electronic Commerce Systems, Inc. 1997 Employee Stock Option Plan, as amended (which is incorporated herein by reference to Exhibit 10.31 to the Registrants Form 10-K dated April
10, 2003).                                                                                   
|            | 
|10.10      |  | Second Amended and Restated Stock Incentive Plan of FreeMarkets, Inc. (which is incorporated herein by reference to Exhibit 10.5 to FreeMarkets Registration Statement on Form S-4 dated
February 23, 2001).                                                                           
|            | 
|10.11      |  | 2001 Broad Based Equity Incentive Plan of FreeMarkets, Inc. (which is incorporated herein by reference to Exhibit 10.12 to FreeMarkets Form 10-K dated March 14, 2003).                                                                                                                
|            | 
|10.12       |  | Lease Agreement, dated June 12, 1996, by and between Charleston Place Associates and U.S. Robotics Access Corp., as amended (which is incorporated herein by reference to Exhibit 10.7 to the
Registrants Form S-1 Registration No. 333-76953).                                        
|            | 
|10.13       |  | Sublease, dated February 1999, by and between 3Com Corporation, successor in interest to U.S. Robotics Access Corp., and the Registrant (which is incorporated herein by reference to Exhibit
10.8 to the Registrants Form S-1 Registration No. 333-76953).                            
|            | 
|10.14       |  | Lease Agreement, dated March 15, 2000, by and between Moffett Park Drive LLC and the Registrant (which is incorporated herein by reference to Exhibit 10.10 to the Registrants Form 10-Q
dated May 15, 2000).                                                                          
|            | 
|10.15       |  | Amended and Restated Sublease dated August 6, 2001, by and between Interwoven, Inc. and the Registrant (which is incorporated herein by reference to Exhibit 10.11 to the Registrants
Form 10-K/A dated December 31, 2001).                                                            
|            | 
|10.16       |  | Sublease, dated October 18, 2002, by and between Netscreen Technologies, Inc. and the Registrant (which is incorporated herein by reference to Exhibit 10.35 to the Registrants Form
10-Q dated April 10, 2003).                                                                       
|            | 
|10.17       |  | Sub-sublease Agreement, dated March 3, 2004, by and between Google, Inc. and the Registrant (which is incorporated herein by reference to Exhibit 10.43 to Registrants Form 8-K dated May
17, 2004)                                                                                    
|            | 
|10.18       |  | Lease Agreement, dated October 21, 1998, by and between FreeMarkets, Inc. and One Oliver Associates Limited Partnership (which is incorporated herein by reference to Exhibit 10.3(a) to
FreeMarkets Registration Statement on Form S-1 dated September 8, 1999).                      
|            | 
|10.19       |  | First Amendment to Lease, dated March 30, 1999, by and between FreeMarkets, Inc. and One Oliver Associates Limited Partnership (which is incorporated herein by reference to Exhibit 10.3(b) to
FreeMarkets Registration Statement on Form S-1 dated September 8, 1999).               
|            | 
|10.20       |  | Second Amendment to Lease, dated June 1999, by and between FreeMarkets, Inc. and One Oliver Associates Limited Partnership (which is incorporated herein by reference to Exhibit 10.3(c) to
FreeMarkets Amendment No. 1 to Registration Statement on Form S-1 dated November 11, 1999).
|            | 
|10.21       |  | Third Amendment to Lease, dated March 2000, by and between FreeMarkets, Inc. and One Oliver Associates Limited Partnership (which is incorporated herein by reference to Exhibit 10.2(d) to
FreeMarkets Form 10-K dated March 14, 2003).                                               
|            | 
|10.22      |  | Offer Letter, dated November 22, 2000, by and between the Registrant and Robert M. Calderoni (which is incorporated herein by reference to Exhibit 10.17 to Registrants Form 10-Q dated
February 14, 2001).                                                                            
|            | 
|10.23+     |  | Amendment to Offer Letter, dated July 18, 2001, by and between Registrant and Robert M. Calderoni (which is incorporated herein by reference to Exhibit 10.18 to the Registrants Form
10-K/A dated December 31, 2001).                                                                 



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|            |  |                                                                                                                                                                                                                                                                           
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                               
|10.24      |  | Offer Letter, dated October 16, 2001, by and between the Registrant and James W. Frankola (which is incorporated herein by reference to Exhibit 10.23 to the Registrants Form 10-Q dated
February 14, 2002).                                                             
|            | 
|10.25      |  | Offer Letter, dated April 10, 2002, by and between the Registrant and Kevin Costello (which is incorporated herein by reference to Exhibit 10.29 to the Registrants Form 10-Q dated
August 14, 2002).                                                                    
|            | 
|10.26+     |  | Employment Agreement, dated January 23, 2004, by and between the Registrant and David H. McCormick (which is incorporated herein by reference to Exhibit 10.37 of the Registrants
Amendment No. 3 to Registration Statement on Form S-4 dated May 13, 2004).             
|            | 
|10.27+     |  | Loan Agreement, dated February 1, 2001, by Robert M. Calderoni (which is incorporated herein by reference to Exhibit 10.20 to the Registrants Form 10-K/A dated December 31,
2001).                                                                                      
|            | 
|10.28+     |  | Promissory Note, dated February 1, 2001, by Robert M. Calderoni (which is incorporated herein by reference to Exhibit 10.21 to the Registrants Form 10-K/A dated December 31,
2001).                                                                                     
|            | 
|10.29+     |  | Severance Agreement, dated December 23, 2003, by and between the Registrant and Kevin Costello (which is incorporated herein by reference to Exhibit 10.38 to the Registrants Form 10-Q/A
dated May 14, 2004).                                                           
|            | 
|10.30+     |  | Severance Agreement, dated December 31, 2003, by and between the Registrant and Robert M. Calderoni (which is incorporated herein by reference to Exhibit 10.39 to the Registrants Form
10-Q/A dated May 14, 2004).                                                      
|            | 
|10.31+     |  | Severance Agreement, dated December 31, 2003, by and between the Registrant and James W. Frankola (which is incorporated herein by reference to Exhibit 10.40 to the Registrants Form
10-Q/A dated May 14, 2004).                                                        
|            | 
|10.32      |  | Severance Agreement, dated August 26, 2004, by and between the Registrant and Tayloe Stansbury (which is incorporated herein by reference to Exhibit 10.36 to the Registrants Form 10-K
dated December 14, 2004).                                                        
|            | 
|10.33       |  | Third Amendment to Lease, dated as of October 25, 2004, by and between Moffett Park Drive LLC and the Registrant (which is incorporated herein by reference to Exhibit 10.7 to the
Registrants Form 10-Q dated February 9, 2005).                                        
|            | 
|10.34       |  | Consent to Sublease, dated as of October 25, 2004, by and between Moffett Park Drive LLC, Motorola, Inc. and the Registrant (which is incorporated herein by reference to Exhibit 10.8 to the
Registrants Form 10-Q dated February 9, 2005).                             
|            | 
|10.35       |  | Amended and Restated First Amendment to Amended and Restated Sublease, dated as of September 9, 2004, by and between Interwoven, Inc. and the Registrant (which is incorporated herein by
reference to Exhibit 10.9 to the Registrants Form 10-Q dated February 9, 2005).
|            | 
|10.36       |  | First Amendment to Sublease, dated as of October 7, 2004, by and between Motorola, Inc. and the Registrant (which is incorporated herein by reference to Exhibit 10.10 to the Registrants
Form 10-Q dated February 9, 2005).                                             
|            | 
|10.37       |  | Second Amendment to and Restatement of Sublease, dated as of October 21, 2004, by and between Motorola, Inc. and the Registrant (which is incorporated herein by reference to Exhibit 10.11 to
the Registrants Form 10-Q dated February 9, 2005).                        
|            | 
|10.38      |  | Registrants Revised Bonus Plan for North America for the Fiscal Year ending September 30, 2005 (which is incorporated by reference to Exhibit 10.12 to the Registrants Form 10-Q
dated February 9, 2005).                                                               



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|            |  |                                                                                                                        
|----------- |  | -----------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                            
|10.39      |  | Release Agreement, dated September 30, 2005, by and between the Registrant and David H. McCormick                      
|            | 
|10.40+     |  | Employment Agreement, dated January 23, 2004, by and between the Registrant and Kent Parker                            
|            | 
|21.1        |  | Subsidiaries.                                                                                                          
|            | 
|23.1        |  | Consent of Independent Registered Public Accounting Firm.                                                              
|            | 
|31.1        |  | Certification of Chief Executive Officer.                                                                              
|            | 
|31.2        |  | Certification of Chief Financial Officer.                                                                              
|            | 
|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 granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, who is duly authorized, in the City of Sunnyvale, State of California
on this 6thday of December, 2005.



ARIBA, INC.By:

/s/    ROBERT M.
CALDERONIRobert M. CalderoniChief Executive Officer and a Director (Principal Executive Officer)By:

/s/    JAMES W. FRANKOLAJames W. FrankolaExecutive Vice President and Chief Financial Officer (Principal Financial and Accounting
Officer)




KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert M. Calderoni and James W. Frankola, and each of them, his true and lawful attorneys-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with Exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.



Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:



|                                                      |  |                                                                                                   |  |                   
|----------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | ------------------
|Signature                                             |  | Title                                                                                             |  | Date              
|                                                      |  |                                                                                                  
|/s/    ROBERT M.
CALDERONIRobert M.
Calderoni         |  | Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)      |  | December 6, 2005  
|                                                      |  |                                                                                                  
|/s/    JAMES W.
FRANKOLAJames W.
Frankola             |  | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |  | December 6, 2005  
|                                                      |  |                                                                                                  
|/s/    ROBERT D.
JOHNSONRobert D.
Johnson             |  | Director                                                                                          |  | December 6, 2005  
|                                                      |  |                                                                                                  
|/s/    RICHARD KASHNOWRichard Kashnow                 |  | Director                                                                                          |  | December 6, 2005  
|                                                      |  |                                                                                                  
|/s/    ROBERT E. KNOWLING,
JR.Robert E. Knowling,
Jr. |  | Director                                                                                          |  | December 6  , 2005
|                                                      |  |                                                                                                  
|/s/    THOMAS MONAHANThomas Monahan                   |  | Director                                                                                          |  | December 6, 2005  
|                                                      |  |                                                                                                  
|/s/    KARL E. NEWKIRKKarl E. Newkirk                 |  | Director                                                                                          |  | December 6, 2005  
|                                                      |  |                                                                                                  
|/s/    RICHARD F.
WALLMANRichard F.
Wallman           |  | Director                                                                                          |  | December 6, 2005  



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                 
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                     
|3.1         |  | Amended and Restated Certificate of Incorporation of the Registrant including all amendments to date (which is incorporated herein by reference to Exhibit 3.1 to the Registrants Form
10-K dated December 29, 2000).                          
|            | 
|3.2         |  | Amended and Restated Bylaws of the Registrant (which are incorporated herein by reference to Exhibit 3.4 to the Registrants Form S-1 Registration No. 333-76953).                                                                              
|            | 
|4.1         |  | Amended and Restated Investors Rights Agreement dated April 17, 1998 (which is incorporated herein by reference to Exhibit 4.1 to the Registrants Form S-1 Registration No.
333-76953).                                                       
|            | 
|4.2         |  | Specimen Certificate of the Registrants common stock (which is incorporated herein by reference to Exhibit 4.2 to the Registrants Form S-1 Registration No.
333-76953).                                                                       
|            | 
|4.3         |  | Amended and Restated Investors Rights Agreement dated June 7, 1999 (which is incorporated herein by reference to Exhibit 4.3 to the Registrants Form S-1 Registration No.
333-76953).                                                         
|            | 
|10.1        |  | Form of Indemnification Agreement entered into between the Registrant and its directors and executive officers (which is incorporated herein by reference to Exhibit 10.1 to the
Registrants Form S-1 Registration No. 333-76953).             
|            | 
|10.2       |  | 1996 Stock Plan, as amended (which is incorporated herein by reference to Exhibit 10.2 to the Registrants Form S-1 Registration No. 333-76953).                                                                                                
|            | 
|10.3       |  | 1999 Equity Incentive Plan, as amended (which is incorporated herein by reference to Exhibit 10.3 to the Registrants Form 10-K/A dated December 31, 2001).                                                                                     
|            | 
|10.4       |  | Employee Stock Purchase Plan (which is incorporated herein by reference to Exhibit 10.5 to the Registrants Form S-1 Registration No. 333-76953).                                                                                               
|            | 
|10.5       |  | SupplierMarket.com 1999 Stock Option Plan, as amended (which is incorporated herein by reference to Exhibit 10.30 to the Registrants Form 10-K dated April 10, 2003).                                                                          
|            | 
|10.6       |  | TradingDynamics 1999 Stock Plan, as amended (which is incorporated herein by reference to Exhibit 10.31 to the Registrants Form 10-K dated April 10, 2003).                                                                                    
|            | 
|10.7       |  | TradingDynamics 1998 Stock Plan, as amended (which is incorporated herein by reference to Exhibit 10.32 to the Registrants Form 10-K dated April 10, 2003).                                                                                    
|            | 
|10.8       |  | Tradex Technologies, Inc. 1999 Stock Option/Stock Issuance Plan, as amended (which is incorporated herein by reference to Exhibit 10.33 to the Registrants Form 10-K dated April 10,
2003).                                                    
|            | 
|10.9       |  | Tradex Electronic Commerce Systems, Inc. 1997 Employee Stock Option Plan, as amended (which is incorporated herein by reference to Exhibit 10.31 to the Registrants Form 10-K dated April
10, 2003).                                           
|            | 
|10.10      |  | Second Amended and Restated Stock Incentive Plan of FreeMarkets, Inc. (which is incorporated herein by reference to Exhibit 10.5 to FreeMarkets Registration Statement on Form S-4 dated
February 23, 2001).                                   
|            | 
|10.11      |  | 2001 Broad Based Equity Incentive Plan of FreeMarkets, Inc. (which is incorporated herein by reference to Exhibit 10.12 to FreeMarkets Form 10-K dated March 14, 2003).                                                                        
|            | 
|10.12       |  | Lease Agreement, dated June 12, 1996, by and between Charleston Place Associates and U.S. Robotics Access Corp., as amended (which is incorporated herein by reference to Exhibit 10.7 to the
Registrants Form S-1 Registration No. 333-76953).



96



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|            |  |                                                                                                                                                                                                                                                                                         
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                             
|10.13       |  | Sublease, dated February 1999, by and between 3Com Corporation, successor in interest to U.S. Robotics Access Corp., and the Registrant (which is incorporated herein by reference to Exhibit
10.8 to the Registrants Form S-1 Registration No. 333-76953).                            
|            | 
|10.14       |  | Lease Agreement, dated March 15, 2000, by and between Moffett Park Drive LLC and the Registrant (which is incorporated herein by reference to Exhibit 10.10 to the Registrants Form 10-Q
dated May 15, 2000).                                                                          
|            | 
|10.15       |  | Amended and Restated Sublease dated August 6, 2001, by and between Interwoven, Inc. and the Registrant (which is incorporated herein by reference to Exhibit 10.11 to the Registrants
Form 10-K/A dated December 31, 2001).                                                            
|            | 
|10.16       |  | Sublease, dated October 18, 2002, by and between Netscreen Technologies, Inc. and the Registrant (which is incorporated herein by reference to Exhibit 10.35 to the Registrants Form 10-Q
dated April 10, 2003).                                                                       
|            | 
|10.17       |  | Sub-sublease Agreement, dated March 3, 2004, by and between Google, Inc. and the Registrant (which is incorporated herein by reference to Exhibit 10.43 to Registrants Form 8-K dated May
17, 2004).                                                                                   
|            | 
|10.18       |  | Lease Agreement, dated October 21, 1998, by and between FreeMarkets, Inc. and One Oliver Associates Limited Partnership (which is incorporated herein by reference to Exhibit 10.3(a) to
FreeMarkets Registration Statement on Form S-1 dated September 8, 1999).                      
|            | 
|10.19       |  | First Amendment to Lease, dated March 30, 1999, by and between FreeMarkets, Inc. and One Oliver Associates Limited Partnership (which is incorporated herein by reference to Exhibit 10.3(b) to
FreeMarkets Registration Statement on Form S-1 dated September 8, 1999).               
|            | 
|10.20       |  | Second Amendment to Lease, dated June 1999, by and between FreeMarkets, Inc. and One Oliver Associates Limited Partnership (which is incorporated herein by reference to Exhibit 10.3(c) to
FreeMarkets Amendment No. 1 to Registration Statement on Form S-1 dated November 11, 1999).
|            | 
|10.21       |  | Third Amendment to Lease, dated March 2000, by and between FreeMarkets, Inc. and One Oliver Associates Limited Partnership (which is incorporated herein by reference to Exhibit 10.2(d) to
FreeMarkets Form 10-K dated March 14, 2003).                                               
|            | 
|10.22      |  | Offer Letter, dated November 22, 2000, by and between the Registrant and Robert M. Calderoni (which is incorporated herein by reference to Exhibit 10.17 to Registrants Form 10-Q dated
February 14, 2001).                                                                            
|            | 
|10.23+     |  | Amendment to Offer Letter, dated July 18, 2001, by and between Registrant and Robert M. Calderoni (which is incorporated herein by reference to Exhibit 10.18 to the Registrants Form
10-K/A dated December 31, 2001).                                                                 
|            | 
|10.24      |  | Offer Letter, dated October 16, 2001, by and between the Registrant and James W. Frankola (which is incorporated herein by reference to Exhibit 10.23 to the Registrants Form 10-Q dated
February 14, 2002).                                                                           
|            | 
|10.25      |  | Offer Letter, dated April 10, 2002, by and between the Registrant and Kevin Costello (which is incorporated herein by reference to Exhibit 10.29 to the Registrants Form 10-Q dated
August 14, 2002).                                                                                  
|            | 
|10.26+     |  | Employment Agreement, dated January 23, 2004, by and between the Registrant and David H. McCormick (which is incorporated herein by reference to Exhibit 10.37 of the Registrants
Amendment No. 3 to Registration Statement on Form S-4 dated May 13, 2004).                           
|            | 
|10.27+     |  | Loan Agreement, dated February 1, 2001, by Robert M. Calderoni (which is incorporated herein by reference to Exhibit 10.20 to the Registrants Form 10-K/A dated December 31,
2001).                                                                                                    



97



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##### Table of Contents

|            |  |                                                                                                                                                                                                                                                                           
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                               
|10.28+     |  | Promissory Note, dated February 1, 2001, by Robert M. Calderoni (which is incorporated herein by reference to Exhibit 10.21 to the Registrants Form 10-K/A dated December 31,
2001).                                                                                     
|            | 
|10.29+     |  | Severance Agreement, dated December 23, 2003, by and between the Registrant and Kevin Costello (which is incorporated herein by reference to Exhibit 10.38 to the Registrants Form 10-Q/A
dated May 14, 2004).                                                           
|            | 
|10.30+     |  | Severance Agreement, dated December 31, 2003, by and between the Registrant and Robert M. Calderoni (which is incorporated herein by reference to Exhibit 10.39 to the Registrants Form
10-Q/A dated May 14, 2004).                                                      
|            | 
|10.31+     |  | Severance Agreement, dated December 31, 2003, by and between the Registrant and James W. Frankola (which is incorporated herein by reference to Exhibit 10.40 to the Registrants Form
10-Q/A dated May 14, 2004).                                                        
|            | 
|10.32      |  | Severance Agreement, dated August 26, 2004, by and between the Registrant and Tayloe Stansbury (which is incorporated herein by reference to Exhibit 10.36 to the Registrants Form 10-K
dated December 14, 2004).                                                        
|            | 
|10.33       |  | Third Amendment to Lease, dated as of October 25, 2004, by and between Moffett Park Drive LLC and the Registrant (which is incorporated herein by reference to Exhibit 10.7 to the
Registrants Form 10-Q dated February 9, 2005).                                        
|            | 
|10.34       |  | Consent to Sublease, dated as of October 25, 2004, by and between Moffett Park Drive LLC, Motorola, Inc. and the Registrant (which is incorporated herein by reference to Exhibit 10.8 to the
Registrants Form 10-Q dated February 9, 2005).                             
|            | 
|10.35       |  | Amended and Restated First Amendment to Amended and Restated Sublease, dated as of September 9, 2004, by and between Interwoven, Inc. and the Registrant (which is incorporated herein by
reference to Exhibit 10.9 to the Registrants Form 10-Q dated February 9, 2005).
|            | 
|10.36       |  | First Amendment to Sublease, dated as of October 7, 2004, by and between Motorola, Inc. and the Registrant (which is incorporated herein by reference to Exhibit 10.10 to the Registrants
Form 10-Q dated February 9, 2005).                                             
|            | 
|10.37       |  | Second Amendment to and Restatement of Sublease, dated as of October 21, 2004, by and between Motorola, Inc. and the Registrant (which is incorporated herein by reference to Exhibit 10.11 to
the Registrants Form 10-Q dated February 9, 2005).                        
|            | 
|10.38      |  | Registrants Revised Bonus Plan for North America for the Fiscal Year ending September 30, 2005 (which is incorporated by reference to Exhibit 10.12 to the Registrants Form 10-Q
dated February 9, 2005).                                                               
|            | 
|10.39      |  | Release Agreement, dated September 30, 2005, by and between the Registrant and David H. McCormick                                                                                                                                                                         
|            | 
|10.40+     |  | Employment Agreement, dated January 23, 2004, by and between the Registrant and Kent Parker                                                                                                                                                                               
|            | 
|21.1        |  | Subsidiaries.                                                                                                                                                                                                                                                             
|            | 
|23.1        |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                 
|            | 
|31.1        |  | Certification of Chief Executive Officer.                                                                                                                                                                                                                                 
|            | 
|31.2        |  | Certification of Chief Financial Officer.                                                                                                                                                                                                                                 
|            | 
|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 granted with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------



98