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, or operating margins;

• that seasonal fluctuations in internet usage and traditional retail 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;

• that our research and development and sales and marketing expenses may increase in the future;

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

• regarding fluctuations in paid clicks and cost-per-click;

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

• regarding fluctuations in our effective tax rate;

• regarding continued investments in international markets;

• regarding the impact on our business, consolidated financial position, results of operations, or cash flows of the EPA's investigation;

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.

• Google Network Members and Other Content Providers. We provide the online and offline members of our Google Network with our Google AdSense programs. These include 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 ads on television broadcasts. We share most of the fees these ads generate with our Google Network members, thereby creating an important revenue stream for them. In addition, we have entered into arrangements with other content providers under which we distribute or license their video and other content, and we may display ads next to or as part of this content on the pages of our web sites and our Google Network members' web sites. We share most of the fees these ads generate with these content providers and our Google Network members, thereby creating an important revenue stream for these partners.

How We Generate Revenue

Advertising revenues made up 98% of our revenues for the three months ended March 31, 2008 and 97% for the three months ended March 31, 2009. We derive most of our additional revenues from offering internet ad serving and management services to advertisers and ad agencies, the license of our enterprise products, search solutions and web search technology.

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 ads on television. 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.

Google TV Ads enables advertisers, operators and programmers to buy, schedule, deliver and measure ads on television. We recognize as revenue the fees charged advertisers each time an ad is displayed on television.

DoubleClick provides us with a platform for delivering display advertising. DoubleClick 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 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 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, distribution partners and our content providers for traffic, access points and content compared to the amount of revenue we generate.

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 increasing maturity of the online advertising market in certain countries. In addition, the general economic downturn may result in fewer commercial queries by our users and may cause advertisers to reduce the amount they spend on online advertising, including the amount they are willing to pay for each click or impression, which could negatively affect the growth rate of our revenues.

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. We may also continue to take steps to reduce the number of accidental clicks by our users. 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 revenues, as well as paid click and average cost-per-click growth rates.

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 five 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 continue to invest 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 generally experienced and expect to continue to experience 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 increased over the last 12 months, growing from 19,156 at March 31, 2008 to 20,164 at March 31, 2009. 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 increase in dollars and may increase as a percentage of revenues 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 52% in the three months ended March 31, 2009 from 50% in the three months ended December 31, 2008 and from 51% in the three months ended March 31, 2008. 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. 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, in the first quarter of 2009, the

strengthening of the U.S. dollar relative to foreign currencies (primarily the British pound and the Euro) had an unfavorable impact on our revenues. We have a foreign exchange risk management 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
                                            March 31,     December 31,     March 31,
                                              2008            2008           2009
  Consolidated Statements of Income Data:
  Revenues                                      100.0 %          100.0 %       100.0 %
  Costs and expenses:
  Cost of revenues                               40.7             38.4          38.1
  Research and development                       13.0             12.9          11.6
  Sales and marketing                             8.6              8.9           7.9
  General and administrative                      7.9              7.2           8.2

  Total costs and expenses                       70.2             67.4          65.8

  Income from operations                         29.8             32.6          34.2
  Impairment of equity investments                 -             (19.2 )          -
  Interest income and other, net                  3.2              1.3           0.1

  Income before income taxes                     33.0             14.7          34.3
  Provision for income taxes                      7.8              8.0           8.5

  Net income                                     25.2 %            6.7 %        25.8 %

Revenues

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



                                                   Three Months Ended
                                        March 31,     December 31,    March 31,
                                           2008           2008           2009
         Advertising revenues:
         Google web sites               $  3,400.4   $      3,811.2   $  3,692.8
         Google Network web sites          1,686.1          1,693.4      1,638.1

         Total advertising revenues        5,086.5          5,504.6      5,330.9
         Licensing and other revenues         99.5            196.3        178.1

         Revenues                       $  5,186.0   $      5,700.9   $  5,509.0

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

                                                                Three Months Ended
                                                  March 31,        December 31,        March 31,
                                                    2008               2008              2009
Advertising revenues:
Google web sites                                         66 %                67 %             67 %
Google Network web sites                                 32                  30               30

Total advertising revenues                               98                  97               97
Google web sites as % of advertising
revenues                                                 67                  69               69
Google Network web sites as % of advertising
revenues                                                 33                  31               31
Licensing and other revenues                              2 %                 3 %              3 %

The growth in our advertising revenues in the three months ended March 31, 2009 compared to the three months ended March 31, 2008 resulted from an increase in the number of paid clicks generated through our advertising programs, partially offset by a decrease in the average cost-per-click paid by our advertisers. The increase in the number of paid clicks generated through our advertising programs was due to an increase in aggregate traffic, certain monetization improvements and the continued global expansion of our products, our advertiser base and our user base. The decrease in the average cost-per-click paid by our advertisers was primarily the result of the strengthening of the U.S. dollar relative to foreign currencies (primarily the British pound and the Euro). In addition, the decrease in the average cost-per-click was due to how we believe advertisers managed their advertising costs in response to the general economic downturn. Specifically, we believe that as a result of the general economic downturn, advertisers, in aggregate, have lowered their bids for keywords in response to a decrease in the sales they are able to make per paid click.

During this period, advertising revenue growth for Google web sites resulted primarily from an increase in aggregate traffic, certain monetization improvements and the continued global expansion of our products, our advertiser base and our user base. The decrease in advertising revenue from Google Network members' sites resulted primarily from the termination of certain Google Network member relationships whose web sites did not meet our quality requirements, as well as certain other quality improvements, which adversely affected our revenues.

The decline in our advertising revenues in the three months ended March 31, 2009 compared to the three months ended December 31, 2008 resulted from the traditional retail seasonality trends affecting our business as well as a decrease in the average cost-per-click paid by our advertisers, partially offset by the increase in the number of paid clicks generated through our advertising programs. The decrease in the average cost-per-click paid by our advertisers was, in addition to the seasonality trend noted above, the result of how we believe advertisers managed their advertising costs in response to the general economic downturn. The increase in the number of paid clicks through our advertising programs was due to an increase in aggregate traffic both on our web sites and the web sites of our Google Network members, certain monetization improvements and the continued global expansion of our products, our advertiser base and our user base.

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 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 report 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, as well as changes to further enhance the accuracy of our quality scoring, which is our measurement of an ad's click-through rate and other relevancy factors.

Aggregate paid clicks on Google web sites and our Google Network members' web sites increased 17% from the three months ended March 31, 2008 to the three months ended March 31, 2009 and 3% from the three months ended December 31, 2008 to the three months ended March 31, 2009. Average cost-per-click on Google web sites and our Google Network members' web sites decreased 14% from the three months ended March 31, 2008 to the three months ended March 31, 2009 and 6% from the three months ended December 31, 2008 to the three months ended March 31, 2009. The rate of change in aggregate paid clicks and average cost-per-click, and their correlation with the rate of change in revenues, has fluctuated or may in the future fluctuate because of various factors including the revenue growth rates on our web sites compared to those of our Google Network members, advertiser competition for keywords, changes in foreign currency exchange rates, seasonality, the fees advertisers are willing to pay based on how they manage their advertising costs, and the general economic downturn. In addition, traffic growth in emerging markets compared to more mature markets and across various advertising verticals also contributes to these fluctuations. Changes in aggregate paid clicks and average cost-per-click may not be indicative of our performance or advertiser experiences in any specific geographic market, vertical, or industry.

Revenues by Geography

Domestic and international revenues as a percentage of consolidated revenues,
determined based on the billing addresses of our advertisers are set forth below
(unaudited):



                                            Three Months Ended
                                 March 31,     December 31,     March 31,
                                   2008            2008           2009
                                               (unaudited)
. . .