In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, statements concerning our expectations:

• regarding the growth and growth rate of our operations, business, revenues, operating margins;

• that seasonal fluctuations in internet usage and traditional advertising seasonality are likely to affect our business;

• that growth in advertising revenues from our web sites will continue to exceed that from our Google Network members' web sites;

• regarding our future stock-based compensation charges;

• that we will continue to pay most of the Google AdSense fees we receive from advertisers to our Google Network members;

• that we will continue to take steps to improve the relevance of the ads we deliver;

• that we may continue to take steps to reduce the number of accidental clicks;

• that we will continue to make investments and acquisitions;

• that our cost of revenues and traffic acquisition costs may increase in dollars and as a percentage of revenues;

• regarding the increase of research and development, sales and marketing and general and administrative expenses in the future;

• regarding the increase of costs related to hedging activity under our foreign exchange risk management program;

• regarding quarterly fluctuations in paid clicks;

• regarding the sufficiency of our existing cash, cash equivalents, marketable securities and cash generated from operations;

• regarding quarterly fluctuations in our effective tax rate;

• regarding continued investments in international markets;

as well as other statements regarding our future operations, financial condition and prospects and business strategies. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report, and in particular, the risks discussed under the heading "Risk Factors" in Part II, Item 1A of this report and those discussed in other documents we file with the Securities and Exchange Commission. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

The following discussion and analysis of our financial condition and results of operations should be read together with our Consolidated Financial Statements and related notes included elsewhere in this report.

Overview

Google is a global technology leader focused on improving the ways people connect with information. Our innovations in web search and advertising have made our web site a top internet property and our brand one of the most recognized in the world. Our mission is to organize the world's information and make it universally accessible and useful. We serve three primary constituencies:

• Users. We provide users with products and services that enable people to more quickly and easily find, create and organize information that is useful to them.

• Advertisers. We provide advertisers with cost-effective ways to deliver online ads, as well as ads on traditional media such as TV, print and radio, to customers across Google sites and through the Google Network, which is the network of online and offline third parties that use our advertising programs to deliver relevant ads with their search results and content.

How We Generate Revenue

Advertising revenues made up 97% of our revenues for the three and nine months ended September 30, 2008 and 99% for the three and nine months ended September 30, 2007. We derive most of our additional revenues from offering internet ad serving and management services to advertisers and ad agencies, the license of our web search technology and the license of our search solutions to enterprises.

Google AdWords is our automated online program that enables advertisers to place targeted text-based and display ads on our web sites and our Google Network members' web sites. Most of our AdWords customers pay us on a cost-per-click basis, which means that an advertiser pays us only when a user clicks on one of its ads. We also offer AdWords on a cost-per-impression basis that enables advertisers to pay us based on the number of times their ads appear on our web sites and our Google Network members' web sites as specified by the advertiser. For advertisers using our AdWords cost-per-click pricing, we recognize as revenue the fees charged advertisers each time a user clicks on one of the ads that appears next to the search results on our web sites or next to the search results or content on our Google Network members' web sites. For advertisers using our AdWords cost-per-impression pricing, we recognize as revenue the fees charged advertisers each time their ads are displayed on the Google Network members' web sites. Our AdWords agreements are generally terminable at any time by our advertisers.

Google AdSense refers to the online programs through which we distribute our advertisers' AdWords ads for display on the web sites of our Google Network members as well as programs to deliver audio ads on radio broadcasts, print ads for display in newspapers and magazines, and ads on television broadcasts. Our AdSense programs include AdSense for search and AdSense for content.

AdSense for search is our online service for distributing relevant ads from our advertisers for display with search results on our Google Network members' sites. To use AdSense for search, most of our AdSense for search partners add Google search functionality to their web pages in the form of customizable Google search boxes. When visitors of these web sites search either the web site or the internet using these customizable search boxes, we display relevant ads on the search results pages, targeted to match user search queries. Ads shown through AdSense for search are text ads.

AdSense for content is our online service for distributing ads from our advertisers that are relevant to content on our Google Network members' web sites. Under this program, we use automated technology to analyze the meaning of the content on the web page and serve relevant ads based on the meaning of such content. For example, a web page on an automotive blog that contains an entry about vintage cars might display ads for vintage car parts or vintage car shows. These ads are displayed in spaces that our AdSense for content partners have set aside on their web sites. AdSense for content allows a variety of ad types to be shown, including text ads, image ads, Google Video Ads, link units (which are sets of clickable links to topic pages related to page content), themed units (which are regular text ads with graphic treatments that change seasonally and by geography) and gadget ads (which are customized "mini-sites" that run as ads on AdSense publisher web sites).

For our online AdSense program, our advertisers pay us a fee each time a user clicks on one of our advertisers' ads displayed on our Google Network members' web sites or, for those advertisers who choose our cost-per-impression pricing, as their ads are displayed. To date, we have paid most of these advertiser fees to our Google Network members, and we expect to continue doing so for the foreseeable future. We recognize these advertiser fees as revenue and the portion of the advertiser fee we pay to our Google Network members as traffic acquisition costs under cost of revenues. In some cases, we guarantee our Google Network members minimum revenue share payments based on their achieving defined performance terms, such as number of search queries or advertisements displayed. Google Network members do not pay any fees associated with the use of our AdSense program on their web sites.

Our agreements with Google Network members consist largely of uniform online "click-wrap" agreements that members enter into by interacting with our registration web sites. The standard agreements have no stated term and are terminable at will. Agreements with our larger members are individually negotiated. Both the standard agreements and the negotiated agreements contain provisions requiring us to share with the Google Network member most of the advertiser fees generated by users clicking on ads on the Google Network member's web site or, for advertisers who choose our cost-per-impression pricing, as the ads are displayed on the Google Network member's web site.

We have entered into arrangements with certain content providers under which we distribute or license their video and other content. Our agreements with content providers are typically standard agreements with no stated term and are terminable at will. Agreements with our larger members are individually negotiated. Both the standard agreements and the negotiated agreements contain provisions requiring us to pay the content providers for the content we license. In a number of these arrangements we display ads on the pages of our web sites and our Google Network members' web sites from which the content is viewed and share most of the fees these ads generate with the content providers and Google Network members. We recognize these advertiser fees as revenue. We recognize the portion of the advertiser fees we pay to our content providers as content acquisition costs under cost of revenues and the portion we pay to our Google Network members as traffic acquisition costs. In some cases, we guarantee our content providers minimum revenue share or other payments.

We also distribute our advertisers' ads for publication in print media through our Google Print Ads program, and we recognize as revenue the fees charged advertisers when their ads are published in print media. Additionally, we distribute advertisers' audio ads for broadcast in radio programs through our Google Audio Ads program, and we recognize as revenue the fees charged advertisers each time an ad is broadcasted or a listener responds to that ad.

In the fourth quarter of 2006, we acquired YouTube, a consumer media company for people to watch and share videos worldwide through the web. We recognize as revenue the fees charged advertisers each time an ad or a promoted video is displayed on the YouTube site.

In the second quarter of 2007, we began delivering Google TV ads to viewers and helping advertisers, operators and programmers buy, schedule, deliver and measure ads on television. We recognize as revenue the fees charged advertisers each time an ad is displayed on TV in accordance with the terms of the related agreements.

In the third quarter of 2007, we acquired Postini, a provider of electronic communications security, compliance, and productivity software. We recognize as licensing and other revenue the fees we charge customers for hosting enterprise applications and services ratably over the term of the service arrangement.

In the first quarter of 2008, we acquired DoubleClick, a company that offers online ad serving and management services to advertisers, ad agencies and web site publishers. Fees derived from hosted, or web-based applications are recognized as licensing and other revenues in the period the advertising impressions are delivered.

We believe the factors that influence the success of our advertising programs include the following:

• The relevance, objectivity and quality of our search results and the relevance and quality of ads displayed with each search results page.

• The number of searches initiated at our web sites and our Google Network members' web sites and the underlying purpose of these searches (for instance, whether they are for academic research, to find a news article, or to find a product or service).

• The number and prominence of ads displayed on our web sites and our Google Network members' web sites.

• The number of visits to, and the content of, our Google Network members' web sites and certain of our web sites and the relevance and quality of the ads we display next to this content.

• The advertisers' return on investment from advertising campaigns on our web sites or our Google Network members' web sites compared to other forms of advertising.

• The total advertising spending budgets of each advertiser.

• The number of advertisers and the breadth of items advertised.

• The amount we ultimately pay our Google Network members and our content providers for traffic and content compared to the amount of revenue we generate.

• Our minimum fee per click.

Trends in Our Business

Our business has grown rapidly since inception, resulting in substantially increased revenues, and we expect that our business will continue to grow. However, our revenue growth rate has generally declined over time, and we expect it will continue to do so as a result of a number of factors including increasing competition, the difficulty of maintaining growth rates as our revenues increase to higher levels and the increasing maturity of the online advertising market in certain countries. In addition, the main focus of our advertising programs is to provide relevant and useful advertising to our users, reflecting our commitment to constantly improve their overall web experience. As a result, we expect to continue to take steps to improve the relevance of the ads displayed on our web sites and our Google Network members' web sites. These steps include not displaying ads that generate low click-through rates or that send users to irrelevant or otherwise low quality sites and terminating our relationships with those Google Network members whose web sites do not meet our quality requirements. In addition, we may continue to take steps to reduce the number of accidental clicks. These steps could negatively affect the growth rate of our revenues.

Both seasonal fluctuations in internet usage and traditional retail seasonality have affected, and are likely to continue to affect, our business. Internet usage generally slows during the summer months, and commercial queries typically increase significantly in the fourth quarter of each year. These seasonal trends have caused and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue and paid click growth rates. In addition, the current general economic downturn will likely affect these seasonal trends, especially the increase in commercial queries that we typically experience in the fourth quarter of each year.

The operating margin we realize on revenues generated from ads placed on our Google Network members' web sites through our AdSense program is significantly lower than the operating margin we realize from revenues generated from ads placed on our web sites because most of the advertiser fees from ads served on Google Network members' web sites are shared with our Google Network members. For the past four years, growth in advertising revenues from our web sites has exceeded that from our Google Network members' web sites. This trend has had a positive impact on our operating margins, and we expect that this will continue for the foreseeable future, although the relative rate of growth in revenues from our web sites compared to the rate of growth in revenues from our Google Network members' web sites may vary over time.

We are heavily investing in building the necessary employee and systems infrastructures required to manage our growth and develop and promote our products and services, and this may cause our operating margins to decrease. We have experienced and expect to continue to experience substantial growth in our operations as we build our research and development programs, expand our base of users, advertisers, Google Network members, and content providers, and increase our presence in international markets. Also, we have acquired and expect to continue to acquire businesses and other assets from time to time. These acquisitions generally enhance the breadth and depth of our expertise in engineering and other functional areas, our technologies and our product offerings. Our full-time employee headcount has significantly increased over the last 12 months, growing from 15,916 at September 30, 2007 to 20,123 at September 30, 2008. We have recently made efforts to improve the discipline of our hiring process and to focus on better managing our expense growth. However, we expect to continue to invest in our business, and this may cause our operating margins to decrease.

We expect our cost of revenues to continue to increase in dollars and may increase as a percentage of revenues in 2008 and in future periods, primarily as a result of forecasted increases in traffic acquisition costs, data center costs and credit card and other transaction fees, as well as content acquisition costs. In particular, traffic acquisition costs as a percentage of advertising revenues may increase in the future if we are unable to continue to improve the monetization or generation of revenue from traffic on our web sites and our Google Network members' web sites, particularly with those members to whom we have guaranteed minimum revenue share payments.

Our international revenues have grown as a percentage of our total revenues to 51% and 52% in the three and nine months ended September 30, 2008, from 48% and 47% in the three and nine months ended September 30, 2007. This increase in the portion of our revenues derived from international markets results largely from increased acceptance of our advertising programs, increases in our direct sales resources and customer support operations and our continued progress in developing localized versions of our products in these international markets, as well as an increase in the value of the Euro, the Japanese yen and other foreign currencies compared to the U.S. dollar over these periods. The increase in the proportion of international revenues derived from international markets increases our exposure to fluctuations in foreign currency to U.S. dollar exchange rates. For example, over the last few months, the strengthening of the U.S. dollar relative to other foreign currencies (primarily the Euro and the British pound) had an unfavorable impact on our international revenues. We have a foreign exchange hedging program that is designed to reduce our exposure to fluctuations in foreign currencies, however this program will not fully offset the effect of fluctuations on our revenues and earnings.

Results of Operations

The following table presents our historical operating results as a percentage of
revenues for the periods indicated (unaudited):



                                                Three Months Ended                              Nine Months Ended
                                 September 30,       June 30,       September 30,       September 30,       September 30,
                                     2007              2008             2008                2007                2008
Consolidated Statements of
Income Data:
Revenues                                 100.0 %        100.0 %             100.0 %             100.0 %             100.0 %
Costs and expenses:
Cost of revenues                          39.3           40.0                39.2                39.9                40.0
Research and development                  13.0           12.7                12.7                12.7                12.8
Sales and marketing                        9.0            9.0                 9.2                 8.8                 8.9
General and administrative                 7.6            8.9                 9.2                 7.7                 8.7

Total costs and expenses                  68.9           70.6                70.3                69.1                70.4

Income from operations                    31.1           29.4                29.7                30.9                29.6
Interest income and other,
net                                        3.6            1.1                 0.4                 3.7                 1.6

Income before income taxes                34.7           30.5                30.1                34.6                31.2
Provision for income taxes                 9.5            7.3                 6.8                 9.1                 7.3

Net income                                25.2 %         23.2 %              23.3 %              25.5 %              23.9 %

Revenues

The following table presents our revenues, by revenue source, for the periods
presented (in millions, unaudited):



                                              Three Months Ended                           Nine Months Ended
                                 September 30,     June 30,      September 30,      September 30,      September 30,
                                     2007            2008            2008               2007               2008
Advertising revenues:
Google web sites                $       2,734.8    $ 3,530.1    $       3,672.1    $       7,503.2    $      10,602.6
Google Network web sites                1,454.7      1,655.3            1,679.9            4,152.1            5,021.3

Total advertising revenues              4,189.5      5,185.4            5,352.0           11,655.3           15,623.9
Licensing and other revenues               41.9        181.8              189.4              112.0              470.7

Revenues                        $       4,231.4    $ 5,367.2    $       5,541.4    $      11,767.3    $      16,094.6

The following table presents our revenues, by revenue source, as a percentage of total revenues for the periods presented (unaudited):

                                                                     Three Months Ended                         Nine Months Ended
                                                        September 30,     June 30,     September 30,     September 30,     September 30,
                                                            2007            2008           2008              2007              2008
Advertising revenues:
Google web sites                                                   65 %         66 %              67 %              64 %              66 %
Google Network web sites                                           34           31                30                35                31

Total advertising revenues                                         99           97                97                99                97
Google web sites as % of advertising revenues                      65           68                69                64                68
Google Network web sites as % of advertising revenues              35           32                31                36                32
Licensing and other revenues                                        1 %          3 %               3 %               1 %               3 %

Growth in our revenues in the three months ended September 30, 2008 compared to the three months ended June 30, 2008 resulted primarily from growth in advertising revenues from our web sites, and to a lesser extent, Google Network web sites. Advertising revenue growth for Google web sites and Google Network web sites resulted primarily from an increase in the number of paid clicks and ads displayed through our programs, partially offset by a decrease in the average fees paid by our advertisers. The increase in the number of paid clicks and ads displayed through our programs was due to an increase in aggregate traffic on our web sites and our partners' web sites, certain monetization improvements and the continued global expansion of our products, our advertiser base and our user base, as well as an increase in the number of Google Network members and distribution partners. The decrease in the average fees paid by our advertisers was affected by the increase in the value of the U.S. dollar compared to other foreign currencies.

Growth in our revenues in the three months ended September 30, 2008 compared to the three months ended September 30, 2007 and in the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 resulted primarily from growth in advertising revenues from our web sites and Google Network web sites. Advertising revenue growth for Google web sites and Google Network web sites resulted primarily from an increase in the number of paid clicks and ads displayed through our programs. The increase in the number of paid clicks and ads displayed through our programs was due to an increase in aggregate traffic on our web sites and our partners' web sites, certain monetization improvements, the continued global expansion of our products, our advertiser base and our user base, as well as an increase in the number of Google Network members and distribution partners.

Improvements in our ability to ultimately monetize increased traffic primarily relate to enhancing the end user experience, including providing end users with ads that are more relevant to their search queries or to the content on the Google Network members' web sites they visit. These improvements have included, for instance, a change to the formula used to determine which ads appear at the top of our search results pages, a change to consider not only a user's current search query, but also their immediately preceding query to determine the ads displayed on our search results pages, a change to the clickable area around our AdSense for content text-based ads to only the title and URL to reduce the number of accidental clicks, a change to further enhance the accuracy of our quality scoring, which is our measurement of an ad's quality, as well as a change to replace minimum bids with first-page bids which is an estimate of the bid it would take for an ad to reach the first page of our search results pages.

Our sequential quarterly revenue growth rate decreased from 3.5% for the three months ended June 30, 2008, to 3.2% for the three months ended September 30, 2008.

The sequential quarterly revenue growth rate from Google web sites increased from 3.8% for the three months ended June 30, 2008, to 4.0% for the three months ended September 30, 2008. The sequential quarterly revenue growth rate from our Google Network members' web sites increased from a decline of 1.8% for the three . . .