You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission on May 18, 2012 (Prospectus). In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II. Item 1A. "Risk Factors." For a discussion of limitations in the measurement of certain of our user metrics, see the section entitled "-Limitations of Key Metrics."

Overview

Our mission is to make the world more open and connected. Facebook enables you to express yourself and connect with the world around you instantly and freely.

We build products that support our mission by creating utility for users, developers, and advertisers:

Users. We enable people who use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about.

Developers. We enable developers to use the Facebook Platform to build applications (apps) and websites that integrate with Facebook to reach our global network of users and to build products that are more personalized, social, and engaging.

Advertisers. We enable advertisers to engage with more than 950 million monthly active users (MAUs) on Facebook or subsets of our users based on information they have chosen to share with us such as their age, location, gender, or interests. We offer advertisers a unique combination of reach, relevance, social context, and engagement to enhance the value of their ads.

We generate substantially all of our revenue from advertising and from fees associated with our Payments infrastructure that enables users to purchase virtual and digital goods from our Platform developers. In the second quarter of 2012, we recorded revenue of $1,184 million, incurred loss from operations of $743 million and net loss of $157 million. In the first six months of 2012, we recorded revenue of $2,242 million, incurred loss from operations of $362 million and net income of $48 million. Total costs and expenses grew more than revenue, due in particular to significant increases in share-based compensation and related payroll tax expenses for restricted stock units (RSUs) during the second quarter and the first six months of 2012. During the second quarter and the first six months of 2012, we recognized $1,258 million and $1,362 million of share-based compensation and related payroll tax expenses, respectively. Of these amounts, $1,101 million was due to the recognition of share-based compensation and related payroll tax expenses related to RSUs granted prior to January 1, 2011 (Pre-2011 RSUs) triggered by the completion of our initial public offering (IPO) in May 2012.

Trends in Our User Metrics

• Monthly Active Users (MAUs). We define a monthly active user as a registered Facebook user who logged in and visited Facebook through our website or a mobile device, or took an action to share content or activity with his or her Facebook friends or connections via a third-party website that is integrated with Facebook, in the last 30 days as of the date of measurement. MAUs are a measure of the size of our global active user community, which has grown substantially in the past several years. In June 2012, we discovered an error in the algorithm we used to estimate the geographic location of our users that affected our attribution of certain user locations for the first quarter of 2012. While this issue did not affect our overall worldwide MAU number, it did affect our attribution of users to different geographic regions. The first quarter of 2012 user metrics below reflect the reclassification to more correctly attribute users by geographic region.

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Note: For purposes of reporting MAUs, DAUs, and ARPU by geographic region, Europe includes all users in Russia and Turkey, Asia includes all users in Australia and New Zealand, and Rest of World includes Africa, Latin America, and the Middle East.

As of June 30, 2012, we had 955 million MAUs, an increase of 29% from June 30, 2011. Users in Brazil, India, and Indonesia represented key sources of growth in the second quarter of 2012 relative to the prior year. We had 54 million MAUs in Brazil as of June 30, 2012, an increase of 146% compared to the same period in 2011; we had 59 million MAUs in India as of June 30, 2012, an increase of 84% compared to the same period in 2011; and we had 55 million MAUs in Indonesia as of June 30, 2012, an increase of 24% compared to the same period in 2011. Additionally, we had 168 million MAUs in the United States as of June 30, 2012, an increase of 10% compared to the same period in 2011.

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Note: For non-worldwide DAU user numbers presented for the periods marked March 31, 2012 and June 30, 2012, the figures represent an average of the first 25 days of the period and the last 27 days of the period, respectively, in order to avoid using data subject to the algorithm error described in the MAU section above. These average numbers do not meaningfully differ from the average numbers when calculated over a full month.

Worldwide DAUs increased 32% to 552 million on average during June 2012 from 417 million during June 2011. We experienced growth in DAUs across major markets including Brazil, the United States, and India. Overall growth in DAUs was driven largely by increased mobile usage of Facebook. Relative to March 31, 2012, DAUs increased from 526 million to 552 million, due to an increase in mobile users. During the second quarter of 2012, the number of DAUs using personal computers was essentially flat, and declined modestly in certain key markets such as the United States and Europe, while mobile DAUs continued to increase.

• Mobile MAUs. We define a mobile MAU as a user who accessed Facebook via a mobile app or via mobile-optimized versions of our website such as
m.facebook.com, whether on a mobile phone or tablet such as the iPad, during the period of measurement.

Worldwide mobile MAUs increased by 67% from 325 million as of June 30, 2011 to 543 million as of June 30, 2012. In all regions, an increasing number of our MAUs are accessing Facebook through mobile devices, with users in the United States, India, and Brazil representing key sources of mobile growth over this period. Approximately 102 million mobile MAUs accessed Facebook solely through mobile apps or our mobile website during the month ended June 30, 2012, increasing 23% from 83 million during the month ended March 31, 2012. The remaining 441 million mobile MAUs accessed Facebook from both personal computers and mobile devices during that month.

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Trends in Our Monetization by User Geography

We calculate our revenue by user geography based on our estimate of the geography in which ad impressions are delivered or virtual goods are purchased. We define average revenue per user (ARPU) as our total revenue in a given geography during a given period, divided by the average of the number of MAUs in the geography at the beginning and end of the period. Our revenue and ARPU in markets such as the United States, Canada, and Europe are relatively higher due to the size and maturity of those advertising markets as well as our greater sales presence and the number of payment methods that we make available to advertisers and users.

In June 2012, we discovered an error in the algorithm we used to estimate the geographic location of our users that affected our attribution of certain user locations for the first quarter of 2012. The first quarter of 2012 ARPU amount for the United States & Canada region below reflects an adjustment based on the reclassification to more correctly attribute users by geographic region.

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Note: Our revenue by user geography in the charts above is geographically apportioned based on our estimation of the geographic location of our users when they perform a revenue-generating activity. This allocation differs from our revenue by geography disclosure in our consolidated financial statements where revenue is geographically apportioned based on the location of the advertiser or developer.

During the second quarter of 2012, worldwide ARPU was $1.28, an increase of 2% from the second quarter of 2011. Over this period, ARPU increased by over 10% in the United States and Canada, Asia, and Rest of World, and by 8% in Europe. User growth was more rapid in geographies with relatively lower ARPU, such as Asia and Rest of World. These user growth dynamics resulted in worldwide ARPU increasing at a slower rate than the rate experienced in any geographic region. We expect that user growth in the future will continue to be higher in those regions where ARPU is relatively lower, such as Asia and Rest of World, such that worldwide ARPU may continue to increase at a slower rate relative to ARPU in any geographic region, or potentially decrease even if ARPU increases in each geographic region.

Limitations of Key Metrics

The numbers of our MAUs and DAUs and ARPU are calculated using internal company data based on the activity of user accounts. While these numbers are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring usage of our products across large online and mobile populations around the world. For example, there may be individuals who maintain one or more Facebook accounts in violation of our terms of service, despite our efforts to detect and suppress such behavior. We estimate that "duplicate" accounts (an account that a user maintains in addition to his or her principal account) may have represented approximately 4.8% of our worldwide MAUs as of June 30, 2012. We also seek to identify "false" accounts, which we divide into two categories:
(1) user-misclassified accounts, where users have created personal profiles for a business, organization, or non-human entity such as a pet (such entities are permitted on Facebook using a Page rather than a personal profile under our terms of service); and (2) undesirable accounts, which represent user profiles that we determine are intended to be used for purposes that violate our terms of service, such as spamming. As of June 30, 2012, we estimate user-misclassified accounts may have represented approximately 2.4% of our worldwide MAUs and undesirable accounts may have represented approximately 1.5% of our worldwide MAUs. We believe the percentage of accounts that are duplicate or false is meaningfully lower in developed markets such as the United States or Australia and higher in developing markets such as Indonesia and Turkey. However, these estimates are based on an internal review of a limited sample of accounts and we apply significant judgment in making this determination, such as identifying names that appear to be fake or other behavior that appears inauthentic to the reviewers. As such, our estimation of duplicate or false accounts may not accurately represent the actual number of such accounts. We are continually seeking to improve our ability to identify duplicate or false accounts and estimate the total number of such accounts, and such estimates may be affected by improvements or changes in our methodology.

Our metrics are also affected by applications on certain mobile devices that automatically contact our servers for regular updates with no user action involved, and this activity can cause our system to count the user associated with such a device as an active user on the day such contact occurs. For example, we estimate that less than 5% of our estimated worldwide DAUs as of December 31, 2011 and 2010 resulted from this type of automatic mobile activity, and that this type of activity had a substantially smaller effect on our estimate of worldwide MAUs and mobile MAUs. The impact of this automatic activity on our metrics varies by geography because mobile usage varies in different regions of the world. In addition, our data regarding the geographic location of our users is estimated based on a number of factors, such as the user's IP address and self-disclosed location. These factors may not always accurately reflect the user's actual location. For example, a mobile-only user may appear to be accessing Facebook from the location of the proxy server that the user connects to rather than from the user's actual location. The methodologies used to measure user metrics may also be susceptible to algorithm or other technical errors. For example, in early June 2012, we discovered an error in the algorithm we used to estimate the geographic location of our users that affected our attribution of certain user locations for the period ended March 31, 2012. While this issue did not affect our overall worldwide MAU number, it did affect our attribution of users to different geographic regions. We estimate that the number of MAUs as of March 31, 2012 for the United States and Canada region was overstated as a result of the error by approximately 3% and these overstatements were offset by understatements in other regions. In addition, our estimates for revenue by user location are also affected by these factors. We regularly review and may adjust our processes for calculating these metrics to improve their accuracy. In addition, our MAU and DAU estimates will differ from estimates published by third parties due to differences in methodology. For example, some third parties do not count mobile users.

Components of Results of Operations

Revenue

We generate substantially all of our revenue from advertising and from fees associated with our Payments infrastructure that enables users to purchase virtual and digital goods from our Platform developers.

Advertising. Our advertising revenue is generated by displaying ad products on the Facebook website or mobile app and third-party affiliated websites. Advertisers pay for ad products which include Sponsored Stories in News Feed, either directly or through their relationships with advertising agencies, based on the number of impressions delivered or the number of clicks made by our users. We recognize revenue from the delivery of click-based ads or Sponsored Stories in the period in which a user clicks on the content. We recognize revenue from the display of impression-based ads or Sponsored Stories in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad or Sponsored Story is displayed to users. An individual Sponsored Story in News Feed that is purchased on an impression basis may be displayed to users more than once during a day, however only the initial display of the Sponsored Story is considered an impression, regardless of how many times the ad is actually displayed within the News Feed.

Payments and other fees. We enable Payments from our users to our Platform developers. Our users can transact and make payments on the Facebook Platform by using credit cards, PayPal or other payment methods available on our website. We receive a fee from our Platform developers when users make purchases from our Platform developers using our Payments infrastructure. We recognize revenue net of amounts remitted to our Platform developers. We have mandated the use of our Payments infrastructure for game apps on Facebook, and fees related to Payments are generated almost exclusively from games. To date, games from Zynga have generated the majority of our payments and other fees revenue. In addition, we generate other fees revenue in connection with arrangements related to business development transactions and fees from various mobile providers; in recent periods, other fees revenue has been immaterial.

Cost of Revenue and Operating Expenses

Cost of revenue. Our cost of revenue consists primarily of expenses associated with the delivery and distribution of our products. These include expenses related to the operation of our data centers such as facility and server equipment depreciation, facility and server equipment rent expense, energy and bandwidth costs, support and maintenance costs, and salaries, benefits, and share-based compensation for employees on our operations teams. Cost of revenue also includes credit card and other transaction fees related to processing customer transactions.

Marketing and sales. Our marketing and sales expenses consist primarily of salaries, benefits, and share-based compensation for our employees engaged in sales, sales support, marketing, business development, and customer service functions. Our marketing and sales expenses also include user-, developer-, and advertiser-facing marketing and promotional expenditures.

Research and development. Research and development expenses consist primarily of salaries, benefits, and share-based compensation for employees on our engineering and technical teams who are responsible for building new products as well as improving existing products. We expense substantially all of our research and development costs as they are incurred.

General and administrative. Our general and administrative expenses consist primarily of salaries, benefits, and share-based compensation for our executives as well as our legal, finance, human resources, corporate communications and policy, and other administrative employees. In addition, general and administrative expenses include outside consulting fees, legal and accounting services, and facilities and other supporting overhead costs. General and administrative expenses also include legal settlements.

We have reclassified certain prior period expense amounts from marketing and sales to general and administrative within our condensed consolidated statements of operations to conform to our current period presentation. These reclassifications did not affect revenue, total costs and expenses, (loss) income from operations, or net (loss) income.

Results of Operations

The following table summarizes our historical condensed consolidated statements
of operations data (in millions, except per share amounts):



                                                        Three Months             Six Months Ended
                                                       Ended June 30,                June 30,
                                                      2012         2011         2012          2011
Revenue                                             $  1,184       $ 895      $  2,242       $ 1,626
Costs and expenses
Cost of revenue                                          367         210           644           377
Marketing and sales                                      392          96           535           158
Research and development                                 705          99           858           156
General and administrative                               463          83           567           140

Total costs and expenses                               1,927         488         2,604           831

(Loss) income from operations                           (743 )       407          (362 )         795

Net (loss) income                                   $   (157 )     $ 240      $     48       $   471

Share-based compensation expense included in
costs and expenses:
Cost of revenue                                           66           3            71             3
Marketing and sales                                      232          11           251            11
Research and development                                 545          35           605            39
General and administrative                               263          15           282            18

Total share-based compensation expense              $  1,106       $  64      $  1,209       $    71

The following table summarizes our historical condensed consolidated statements of operations data as a percentage of revenue for the periods shown:

                                           Three Months              Six Months
                                          Ended June 30,           Ended June 30,
                                         2012         2011        2012         2011
        Revenue                             100 %       100 %        100 %       100 %
        Costs and expenses
        Cost of revenue                      31          23           29          23
        Marketing and sales                  33          11           24          10
        Research and development             60          11           38          10
        General and administrative           39           9           25           9

        Total costs and expenses            163          55          116          51

        (Loss) income from operations       (63 )        45          (16 )        49

        Net (loss) income                   (13 %)       27 %          2 %        29 %

Share-based compensation expense included in costs and expenses (as a percentage of total revenue):

         Cost of revenue                             6 %      -  %       3 %      -  %
         Marketing and sales                        20         1        11         1
         Research and development                   46         4        27         2
         General and administrative                 22         2        13         1

Total share-based compensation expense 93 % 7 % 54 % 4 %

Three and Six Months Ended June 30, 2012 and 2011

Revenue



                                       Three Months Ended June 30,                        Six Months Ended June 30,
                                                                             %                                                %
                                           2012                2011       change           2012               2011         change
                                                                 (in millions, except for percentages)
Revenue:
Advertising                          $            992         $   776          28 %    $      1,864       $      1,413          32 %
Payments and other fees                           192             119          61 %             378                213          77 %

Total revenue                        $          1,184         $   895          32 %    $      2,242       $      1,626          38 %

Revenue in the second quarter and the first six months of 2012 increased $289 million, or 32%, and $616 million, or 38%, respectively, as compared to the same periods in 2011. The increase was due primarily to a 28% and 32% increase in advertising revenue during the second quarter and the first six months of 2012, respectively, as compared to the same periods in 2011. Advertising revenue grew primarily due to an 18% and 26% increase in the number of ads delivered during the second quarter and the first six months of 2012, respectively, and to a lesser extent, due to a 9% and 4% increase in the average price per ad in those same periods.

The increase in ads delivered was driven primarily by user growth and, to a lesser extent, the net effect of product changes that increased the average number of ads per page relative to last year. MAUs grew 29% from June 30, 2011 to June 30, 2012 and average DAUs grew 32% from June 2011 to June 2012 . The increase in the number of ads was lower than our increase in users, driven primarily by the increase in user engagement on mobile devices, where the number of ads shown per user is substantially lower. In the United States where smartphone use continues to grow, the overall number of ads delivered decreased 2% year-over-year despite a 10% increase in DAUs and despite an increase in ads per page resulting from product changes, as DAUs on personal computers in the United States declined. We expect that the trend of ads not growing at the same pace as user growth will continue as web usage grows more slowly than mobile usage and declines in certain markets where smartphone adoption is occurring most rapidly.

Growth in the average price per ad for the second quarter and the first six months of 2012 compared to the same periods in 2011 was driven primarily by an increase in price per ad in the United States, which benefited from growth in Sponsored Stories in News Feed across desktop and mobile devices during the second quarter of 2012. Sponsored Stories in News Feed, which currently represent a small percentage of our advertising revenue, have a significantly higher average price per ad due to factors which include the prominent position of the Sponsored Stories. The increase in price per ad in the United States was partially offset by an increased percentage of our worldwide ads being delivered in the Asia and Rest of World geographies where the average price per ad, while growing on a year-over-year basis, is relatively lower. The average price per ad was also affected by a decline in the average price per ad in Europe in the second quarter and the first six months of 2012 compared to the same periods in 2011 due in part, we believe, to continuing weak economic conditions in that region affecting advertiser demand.

Payments and other fees revenue in the second quarter and the first six months of 2012 increased to $192 million, or 61% and $378 million or 77%, respectively as compared to the same periods in 2011. Payments revenue has been relatively flat over the last three sequential quarters, we believe due primarily to the fact that gaming in general has been growing faster on mobile devices where our Payments system is generally not utilized. Facebook Payments became mandatory for all game developers accepting payments on the Facebook Platform with limited exceptions on July 1, 2011. Accordingly, comparisons of Payments and other fees revenue to periods before this date may not be meaningful. Our Payments terms and conditions provide for a 30-day claim period subsequent to a Payments . . .