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 one billion 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 third quarter of 2012, we recorded revenue of $1,262 million, income from operations of $377 million and net loss of $59 million. In the first nine months of 2012, we recorded revenue of $3,504 million, income from operations of $15 million and net loss of $11 million. Total costs and expenses grew more than revenue, due to increased headcount and significant increases in share-based compensation and related payroll tax expenses for restricted stock units (RSUs) during the third quarter and the first nine months of 2012. During the third quarter and the first nine months of 2012, we recognized $148 million and $1,510 million, respectively, of share-based compensation and related payroll tax expenses. Of these amounts, $1,098 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. For the third quarter of 2012, we incurred a net loss despite generating income before provision for income taxes due to our effective tax rate exceeding 100%. Our effective tax rate has exceeded the U.S. statutory rate primarily due to the impact of non-deductible share-based compensation and losses arising outside the United States in jurisdictions where we do not receive a tax benefit.

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.
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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. 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 reflect the reclassification to more correctly attribute users by geographic region.
As of September 30, 2012, we had 1.01 billion MAUs, an increase of 26% from September 30, 2011. Users in Brazil, India, and Japan represented key sources of growth in the third quarter of 2012 relative to the prior year. We had 61 million MAUs in Brazil as of September 30, 2012, an increase of 109% compared to the same period in 2011; we had 65 million MAUs in India as of September 30, 2012, an increase of 62% compared to the same period in 2011; and we had 18 million MAUs in Japan as of September 30, 2012, an increase of 218% compared to the same period in 2011. Additionally, we had 171 million MAUs in the United States as of September 30, 2012, an increase of 8% compared to the same period in 2011.

• Daily Active Users (DAUs). We define a daily 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, on a given day. We view DAUs, and DAUs as a percentage of MAUs, as measures of user engagement. [[Image Removed]]

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 28% to 584 million on average during September 2012 from 457 million during September 2011. We experienced growth in DAUs across major markets including Brazil, India and Japan. Overall growth in DAUs was driven largely by increased mobile usage of Facebook. Relative to June 30, 2012, DAUs increased from 552 million to 584 million, primarily due to an increase in mobile users. During the third quarter of 2012, the number of DAUs using personal computers increased modestly compared to the second quarter of 2012, but in certain key markets such as the United States and Europe the number of DAUs using personal computers was essentially flat quarter-over-quarter after having decreased modestly during the second quarter of 2012.

• 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 61% from 376 million as of September 30, 2011 to 604 million as of September 30, 2012. In all regions, an increasing number of our MAUs are accessing Facebook through mobile devices, with users in India, Brazil and the United States representing key sources of mobile growth over this period. Approximately 126 million mobile MAUs accessed Facebook solely through mobile apps or our mobile website during the month ended September 30, 2012, increasing 24% from 102 million during the month ended June 30, 2012. The remaining 478 million mobile MAUs accessed Facebook from both personal computers and mobile devices during that month. While most of our mobile users also access Facebook through personal computers, we anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future and that the usage through personal computers may be flat or continue to decline in certain markets, including key developed markets such as the United States, in part due to our focus on developing mobile products to encourage mobile usage of Facebook.

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.

During the third quarter of 2012, worldwide ARPU was $1.29, an increase of 4% from the third quarter of 2011. Over this period, ARPU increased by approximately 20% in the United States and Canada and Rest of World, and by 4% and 2% in Asia and Europe, respectively. ARPU in Europe declined compared to the second quarter of 2012 due primarily to a decline in Payments and other fees revenue and Advertising revenue being flat due, we believe, to seasonality traditionally experienced in the third quarter. User growth was more rapid in geographies with relatively lower ARPU, such as Asia and Rest of World. 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, for example, 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, for example, 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 are not able to accurately measure mobile users or do not count mobile users for certain user groups or at all in their analyses.

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, in general, 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. Cumulatively to date, games from Zynga have generated the majority of our payments and other fees revenue. However, Zynga's contribution to our payments and other fees revenue has decreased over time and this trend may continue. Our other fees revenue has been immaterial in recent periods.
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.
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 all of our research and development costs as they are incurred.
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.
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, income from operations, or net (loss) income.

Results of Operations
The following table summarizes our historical condensed consolidated statements
of operations data (in millions):

                                      Three Months Ended September 30,           Nine Months Ended September 30,
                                           2012                2011                2012                    2011
Revenue                              $      1,262         $        954     $          3,504         $          2,580
Costs and expenses:
Cost of revenue                               322                  236                  967                      613
Research and development                      244                  108                1,102                      264
Marketing and sales                           168                  114                  703                      272
General and administrative                    151                   82                  717                      222
Total costs and expenses                      885                  540                3,489                    1,371
Income from operations                        377                  414                   15                    1,209
Net (loss) income                    $        (59 )       $        227     $            (11 )       $            698
Share-based compensation expense
included in costs and expenses:
Cost of revenue                                 8                    3                   79                        6
Research and development                      114                   33                  719                       72
Marketing and sales                            28                   13                  279                       24
General and administrative                     29                   21                  311                       39
Total share-based compensation
expense                              $        179         $         70     $          1,388         $            141

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

                                       Three Months Ended September 30,       Nine Months Ended September 30,
                                            2012                 2011             2012                2011
Revenue                                     100  %                  100 %           100 %                 100 %
Costs and expenses:
Cost of revenue                              26  %                   25 %            28 %                  24 %
Research and development                     19  %                   11 %            31 %                  10 %
Marketing and sales                          13  %                   12 %            20 %                  11 %
General and administrative                   12  %                    9 %            20 %                   9 %
Total costs and expenses                     70  %                   57 %           100 %                  53 %
Income from operations                       30  %                   43 %             - %                  47 %

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

Cost of revenue                         1 %   - %    2 %   - %
Research and development                9     3     21     3
Marketing and sales                     2     1      8     1
General and administrative              2     2      9     2

Three and Nine Months Ended September 30, 2012 and 2011

Revenue

                         Three Months Ended September 30,                   Nine Months Ended September 30,
                                                                   %                                                %
                                2012               2011         change             2012             2011         change
                                                      (in millions, except for percentages)
Revenue:
Advertising             $       1,086           $     798           36 %    $          2,950     $   2,211           33 %
Payments and other fees           176                 156           13 %                 554           369           50 %
Total revenue           $       1,262           $     954           32 %    $          3,504     $   2,580           36 %

Revenue in the third quarter and the first nine months of 2012 increased $308 million, or 32%, and $924 million, or 36%, respectively, as compared to the same periods in 2011. The increase was due primarily to a 36% and 33% increase in advertising revenue during the third quarter and the first nine months of 2012, respectively, as compared to the same periods in 2011. In the third quarter and the first nine months of 2012, mobile advertising revenue as a percentage of adverting revenue was 14% and 6%, respectively. As mobile advertising was not offered prior to the first quarter of 2012, comparisons to prior year are not meaningful. Advertising revenue grew primarily due to a 27% increase in the number of ads delivered during both the third quarter and the first nine months of 2012 and to a lesser extent, due to a 7% and 5% increase in the average price per ad in those same periods.
The increase in ads delivered was driven primarily by user growth. MAUs grew 26% from September 30, 2011 to September 30, 2012 and average DAUs grew 28% from September 2011 to September 2012. Various product changes and changes in user engagement generally offset in their impact on the average number of ads per user. For example, the shift to greater mobile use generally reduced ads per user, while the introduction of Sponsored Stories in News Feed increased the number of ads per user. The rate of change in number of ads delivered also differs by geography, driven by factors such as mobile penetration. For example, Europe and Rest of World increased at a faster rate than the United States and Asia.
Growth in the average price per ad for the third quarter and the first nine 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 and third quarters of 2012. Sponsored Stories in News Feed have a significantly higher average price per ad due to factors which include the . . .