Google (GOOG)

Liquidity and Capital Resources

In summary, our cash flows were as follows (in millions, unaudited):

At March 31, 2009, we had $17.8 billion of cash, cash equivalents and marketable securities. Cash equivalents and marketable securities are comprised of highly liquid debt instruments of the U.S. government and its agencies, municipalities in the U.S., time deposits, money market mutual funds, mortgage-backed securities and U.S. corporate securities. See Note 3 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a further discussion on the composition of our cash, cash equivalents and marketable securities.

Our principal sources of liquidity are our cash, cash equivalents and marketable securities, as well as the cash flow that we generate from our operations. At December 31, 2008 and March 31, 2009, we had unused letters of credit of $109.9 million and $90.2 million. We believe that our existing cash, cash equivalents, marketable securities and cash generated from operations will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months. Our liquidity could be negatively affected by a decrease in demand for our products and services, including the impact of changes in customer buying or advertiser spending behavior that may result from the general economic downturn. Also, if the banking system or the financial markets continue to deteriorate or remain volatile, our investment portfolio may be impacted and the value and liquidity of our investments could be adversely affected. In addition, we may make acquisitions or license products and technologies complementary to our business and may need to raise additional capital through future debt or equity financing to provide for greater flexibility to fund any such acquisitions and licensing activities. Additional financing may not be available at all or on terms favorable to us.

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Cash provided by operating activities consisted of net income adjusted for certain non-cash items including depreciation, amortization, stock-based compensation, excess tax benefits from stock-based award activities, and the effect of changes in working capital and other activities. Cash provided by operating activities in the three months ended March 31, 2009 was $2,249.5 million and consisted of net income of $1,422.8 million, adjustments for non-cash items of $614.6 million and cash provided by working capital and other activities of $212.1 million. Adjustments for non-cash items primarily consisted of $321.1 million of depreciation and amortization expense on property and equipment, $277.5 million of stock-based compensation and $82.1 million of amortization of intangibles and other, partially offset by $31.8 million of excess tax benefits from stock-based award activities and $12.8 million of deferred income taxes. In addition, the increase in cash from changes in working capital activities primarily consisted of a net increase in income taxes payable and deferred income taxes of $324.8 million (which includes the same $31.8 million of excess tax benefits from stock-based awards included under adjustments for non-cash items), a decrease of $97.4 million in accounts receivable due to the decrease in fees billed to our advertisers, a decrease of $77.5 million in prepaid revenue share, expenses and other assets primarily due to a decrease in the value of derivative assets and to a lesser extent by an increase in accounts payable of $21.9 million, partially offset by a decrease of $322.3 million in accrued expenses and other liabilities primarily as a result of employee bonuses for the year ended December 31, 2008 paid in the first quarter of 2009. The increase in income taxes payable and deferred income taxes was primarily a result of additional tax obligations accrued, as well as less estimated income taxes paid, in the first quarter of 2009 compared to the fourth quarter of 2008.

Cash provided by operating activities in the three months ended March 31, 2008 was $1,779.4 million and consisted of net income of $1,307.1 million, adjustments for non-cash items of $483.1 million and cash used in working capital and other activities of $10.8 million. Adjustments for non-cash items primarily consisted of $280.8 million of stock-based compensation, $280.6 million of depreciation and amortization expense on property and equipment and $56.0 million of amortization of intangibles and other, partially offset by $51.1 million of excess tax benefits from stock-based award activities. In addition, changes in working capital activities primarily consisted of a decrease of $234.3 million in accrued expenses and other liabilities primarily as a result of employee bonuses for the year ended December 31, 2007 paid in the first quarter of 2008, and an increase of $223.5 million in accounts receivable due to the growth in fees billed to our advertisers and an increase of $41.6 million in prepaid revenue share, expenses and other assets, partially offset by a net increase in income taxes payable and deferred income taxes of $438.2 million (which includes the same $51.1 million of excess tax benefits from stock-based awards included under adjustments for non-cash items) and to a lesser extent by an increase in accounts payable of $53.8 million. The increase in income taxes payable and deferred income taxes was primarily a result of additional tax obligations accrued, as well as less estimated income taxes paid, in the first quarter of 2008 compared to the fourth quarter of 2007.

As we expand our business internationally, we have offered payment terms to certain advertisers that are standard in their locales, but longer than terms we would generally offer to our domestic advertisers. This may increase our working capital requirements and may have a negative effect on cash provided by our operating activities.

Cash used in investing activities in the three months ended March 31, 2009 of $418.8 million was attributable to purchases of marketable securities of $5,244.8 million and capital expenditures of $262.8 million, partially offset by the proceeds received from the sales and maturities of marketable securities of $5,109.6 million. Cash used in investing activities in the three months ended March 31, 2008 of $1,407.0 million was attributable to cash consideration used in acquisitions of $3,125.1 million, primarily related to the DoubleClick acquisition, purchases of marketable securities of $2,819.5 million and capital expenditures of $841.6 million, partially offset by the proceeds received from the sales and maturities of marketable securities of $5,379.2 million.

Capital expenditures are mainly for the purchase of information technology assets. In order to manage expected increases in internet traffic, advertising transactions and new products and services, and to support our overall global business expansion, we will make significant investments in data center operations, technology, corporate facilities and information technology infrastructure in 2009 and thereafter.

In addition, we expect to spend a significant amount of cash on acquisitions and other investments 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. In connection with certain acquisitions, we are obligated to make additional cash payments if certain criteria are met. As of March 31, 2009, our remaining contingent obligations related to these acquisitions was approximately $37 million, which if the criteria are met, would be recorded as part of the purchase. Since these contingent payments are based on the achievement of performance targets, actual payments may be substantially lower.

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Cash used in financing activities in the three months ended March 31, 2009 of $4.9 million was primarily due to net payments related to stock-based award activities of $36.7 million, partially offset by excess tax benefits of $31.8 million from stock-based award activities during the period which represents a portion of the $65.5 million reduction to income taxes payable that we recorded in the first quarter of 2009 related to the total direct tax benefit realized from the exercise, sale or vesting of these awards. Net payments result when the tax withholding payments we make on behalf of our employees upon the net settlement of their vested restricted stock units exceeds the cash we receive upon the exercise of stock options. Cash provided by financing activities in the three months ended March 31, 2008 of $28.7 million was primarily due to excess tax benefits of $51.1 million from stock-based award activities during the period which represents a portion of the $70.3 million reduction to income taxes payable that we recorded in the first quarter of 2008 related to the total direct tax benefit realized from the exercise, sale or vesting of these awards, as well as net payments related to stock-based award activities of $22.4 million.

Liquidity and Capital Resources

In summary, our cash flows were:

At December 31, 2008 we had $15.8 billion of cash, cash equivalents and marketable securities. Cash equivalents and marketable securities are comprised of highly liquid debt instruments of the U.S. government and its agencies, municipalities in the U.S., time deposits, money market mutual funds and U.S. corporate securities. Note 3 of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K describes further the composition of our cash, cash equivalents and marketable securities.

Our principal sources of liquidity are our cash, cash equivalents and marketable securities, as well as the cash flow that we generate from our operations. At December 31, 2007 and 2008, we had unused letters of credit for approximately $20.4 million and $109.9 million. We believe that our existing cash, cash equivalents, marketable securities and cash generated from operations will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months. Our liquidity could be negatively affected by a decrease in demand for our products and services, including the impact of changes in customer buying or advertiser spending behavior that may result from the current general economic downturn. Also, if the banking system or the financial markets continue to deteriorate or remain volatile, our investment portfolio may be impacted and the values and liquidity of our investments could be adversely affected. In addition, we may make acquisitions or license products and technologies complementary to our business and may need to raise additional capital through future debt or equity financing to provide for greater flexibility to fund any such acquisitions and licensing activities. Additional financing may not be available at all or on terms favorable to us.

Cash provided by operating activities consisted of net income adjusted for certain non-cash items, including depreciation, amortization, stock-based compensation expense, excess tax benefits from stock-based award activity,

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deferred income taxes and impairment charges of equity investments, if any, as well as the effect of changes in working capital and other activities. Cash provided by operating activities in 2008 was $7,852.9 million and consisted of net income of $4,226.9 million, adjustments for non-cash items of $3,298.8 million and cash provided by working capital and other activities of $327.2 million. Adjustments for non-cash items primarily consisted of $1,212.2 million of depreciation and amortization expense on property and equipment, $1,119.8 million of stock-based compensation and $1,094.8 million of impairment charges of equity investments, partially offset by $224.6 million of deferred income taxes on earnings and $159.1 million of excess tax benefits from stock-based award activity. In addition, changes in working capital activities primarily consisted of a net increase in income taxes payable and deferred income taxes of $626.0 million (which includes the same $159.1 million of excess tax benefits from stock-based awards included under adjustments for non-cash items) and an increase in accrued expenses and other liabilities of $338.9 million. The increases in accrued expenses are a direct result of the growth of our business and increases in headcount. These increases to working capital activities were partially offset by an increase of $334.5 million in accounts receivable due to the growth in fees billed to our advertisers, a decrease of $211.5 million in accounts payable due to the timing of invoice processing and payments and an increase of $147.1 million in prepaid revenue shares, expenses and other assets.

Cash provided by operating activities in 2007 was $5,775.4 million and consisted of net income of $4,203.7 million, adjustments for non-cash items of $1,253.1 million and cash provided by working capital and other activities of $318.6 million. Adjustments for non-cash items primarily consisted of $868.6 million of stock-based compensation and $807.7 million of depreciation and amortization expense on property and equipment, partially offset by $379.2 million of excess tax benefits from stock-based award activity. In addition, changes in working capital activities primarily consisted of a net increase in income taxes payable and deferred income taxes of $744.8 million (which includes the same $379.2 million of excess tax benefits from stock-based awards included under adjustments for non-cash items), an increase in accrued expenses and other liabilities of $418.9 million, an increase in accrued revenue share of $150.3 million, an increase in accounts payable of $70.1 million and an increase in deferred revenue of $70.3 million. The increases in accounts payable and accrued expenses are a direct result of the growth of our business and increases in headcount. These increases to working capital activities were partially offset by an increase of $837.2 million in accounts receivable due to the growth in fees billed to our advertisers and an increase of $298.7 million in prepaid revenue shares, expenses and other assets.

Cash provided by operating activities in 2006 was $3,580.5 million and consisted of net income of $3,077.4 million, adjustments for non-cash items of $362.3 million and cash provided by working capital and other activities of $140.8 million. Adjustments for non-cash items primarily consisted of $494.4 million of depreciation and amortization expense on property and equipment and $458.1 million of stock-based compensation, partially offset by $581.7 million of excess tax benefits from stock-based award activity. In addition, working capital activities primarily consisted of a net increase in income taxes payable and deferred income taxes of $496.9 million primarily comprised of the same $581.7 million of excess tax benefits from stock-based award activity included under adjustments for non-cash items, an increase of $386.9 million in accounts payable and accrued expenses due to the increase in purchases of property and equipment and other general expenditures, partially offset by an increase of $624.0 million in accounts receivable due to the growth in fees billed to our advertisers, as well as a net increase of $149.9 million in prepaid revenue share, expenses and other assets and accrued revenue share primarily resulted from prepayments associated with AdSense and distribution arrangements.

As we expand our business internationally, we have offered payment terms to certain advertisers that are standard in their locales, but longer than terms we would generally offer to our domestic advertisers. This may increase our working capital requirements and may have a negative effect on cash provided by our operating activities.

Cash used in investing activities in 2008 of $5,319.4 million was attributable to cash consideration used in acquisitions and other investments of $3,367.5 million primarily related to the acquisition of DoubleClick and capital expenditures of $2,358.5 million, partially offset by net maturities and sales of marketable securities of $406.5 million including our investment in Clearwire.

Cash used in investing activities in 2007 of $3,681.6 million was attributable to capital expenditures of $2,402.8 million, cash consideration used in acquisitions and other investments of $941.2 million, primarily related to the acquisition of Postini, and net purchases of marketable securities of $337.6 million.

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Cash used in investing activities in 2006 of $6,899.2 million was attributable to net purchases of marketable securities of $3,574.8 million primarily driven by the additional cash raised from our follow-on public stock offering in April 2006, cash consideration used in acquisitions and other investments of $1,421.6 million primarily related to our $1.0 billion investment in AOL, and to a lesser extent, the acquisition of dMarc Broadcasting, Inc. and capital expenditures of $1,902.8 million.

Capital expenditures are mainly for the purchase of information technology assets. In order to manage expected increases in internet traffic, advertising transactions and new products and services, and to support our overall global business expansion, we will make significant investments in data center operations, technology, corporate facilities and information technology infrastructure in 2009 and thereafter.

In addition, we expect to spend a significant amount of cash on acquisitions and other investments 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. In connection with certain acquisitions, we are obligated to make additional cash payments if certain criteria are met. As of December 31, 2008, our remaining contingent obligations related to these acquisitions was approximately $37 million, which if the criteria are met, would be recorded as part of the purchase. Since these contingent payments are based on the achievement of performance targets, actual payments may be substantially lower. Also, in July 2008, we signed an agreement with Rambler Media to acquire ZAO Begun, a Russian context advertising service, for $140 million in cash, subject to customary adjustments. On October 22, 2008, the Federal Antimonopoly Service of the Russian Federation denied consent to the proposed acquisition of ZAO Begun and on January 7, 2009, the acquisition agreement was terminated.

As part of our philanthropic program, we expect to make donations as well as investments in for-profit enterprises that aim to alleviate poverty, improve the environment or achieve other socially or economically progressive objectives. We expect these payments to be made primarily in cash. We authorized up to $175 million of such payments over the three years ending December 31, 2008, with any unallocated amounts to be rolled over into the following year. The majority of this authorized amount has been spent or committed.

Cash provided by financing activities in 2008 of $87.6 million was due primarily to excess tax benefits of $159.1 million from stock-based award activity during the period which represents a portion of the $250.9 million reduction to income tax payable that we recorded in the year ended December 31, 2008 related to the total direct tax benefit realized from the exercise, sale or vesting of these awards, partially offset by net payments related to stock-based award activity of $71.5 million. Cash provided by financing activities in 2007 of $403.1 million was due primarily to excess tax benefits of $379.2 million from stock-based award activity during the period and net proceeds from the issuance of common stock pursuant to stock-based award activity of $23.9 million. Cash provided by financing activities in 2006 of $2,966.4 million was due primarily to net proceeds of $2,063.5 million raised from the follow-on stock offering, excess tax benefits of $581.7 million from stock-based award activity during the period and net proceeds from the issuance of common stock pursuant to stock-based award activity of $321.1 million.

Liquidity and Capital Resources

In summary, our cash flows were (in millions, unaudited):

At September 30, 2008, we had $14.4 billion of cash, cash equivalents and marketable securities. Cash equivalents and marketable securities are comprised of debt instruments of the U.S. government and its agencies, municipalities in the U.S., as well as time deposits. See Note 3 of Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for a further discussion on the composition of our cash, cash equivalents and marketable securities.

Our principal sources of liquidity are our cash, cash equivalents and marketable securities, as well as the cash flow that we generate from our operations. At December 31, 2007 and September 30, 2008, we had unused letters of credit for approximately $20.4 million and $112.1 million. We believe that our existing cash, cash equivalents, marketable securities and cash generated from operations will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months. Our liquidity could be negatively affected by a decrease in demand for our products and services. In addition, we may make acquisitions or license products and technologies complementary to our business and may need to raise additional capital through future debt or equity financing to provide for greater flexibility to fund any such acquisitions and licensing activities. Additional financing may not be available at all or on terms favorable to us.

Cash provided by operating activities consisted of net income adjusted for certain non-cash items including depreciation, amortization, stock-based compensation, excess tax benefits from stock-based award activity, and the effect of changes in working capital and other activities. Cash provided by operating activities in the nine months ended September 30, 2008 was $5,730.6 million and consisted of net income of $3,844.4 million, adjustments for non-cash items of $1,694.2 million and cash provided by working capital and other activities of $192.0 million. Adjustments for non-cash items primarily consisted of $898.8 million of depreciation and amortization expense on property and equipment, $833.6 million of stock-based compensation and $215.6 million of amortization of intangibles and other, partially offset by $114.8 million of excess tax benefits from stock-based award activity and $124.6 million of deferred income taxes. In addition, the increase in cash from changes in working capital activities primarily consisted of a net increase in income taxes payable and deferred income taxes of $552.7 million, which includes the same $114.8 million of excess tax benefits from stock-based awards included under adjustments for non-cash items and an increase in accrued expenses and other liabilities of $162.9 million. The increase in income taxes payable and deferred income taxes was primarily a result of additional tax obligations accrued. These increases were partially offset by a decrease of $218.3 million in accounts receivable due to the growth in fees billed to our advertisers, a decrease in accounts payable of $152.2 million primarily due to the timing of invoice processing and payments, and a decrease of $170.0 million in prepaid revenue share, expenses and other assets.

Cash provided by operating activities in the nine months ended September 30, 2007 was $4,082.2 million and consisted of net income of $2,997.3 million, adjustments for non-cash items of $870.8 million and cash provided by working capital and other activities of $214.1 million. Adjustments for non-cash items primarily consisted of $623.3 million of stock-based compensation, $565.8 million of depreciation and amortization expense on property and equipment and $111.9 million of amortization of intangibles and other, partially offset by $238.6 million of excess tax benefits from stock-based award activity. In addition, the increase in cash from working capital activities primarily consisted of a net increase in income taxes payable and deferred income taxes of $615.6 million, which includes the same $238.6 million of excess tax benefits from stock-based awards included under adjustments for non-cash items, an increase in accrued expenses and other liabilities of $206.5 million and an increase in accrued revenue share of $136.4 million. The increase in income taxes payable and deferred income taxes was primarily a result of additional tax obligations accrued. These increases were partially offset by a decrease of $559.4 million in accounts receivable due to the growth in fees billed to our advertisers and a decrease of $237.3 million in prepaid revenue share, expenses and other assets.

As we expand our business internationally, we have offered payment terms to certain advertisers that are standard in their locales, but longer than terms we would generally offer to our domestic advertisers. This may increase our working capital requirements and may have a negative effect on cash provided by our operating activities.

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Cash used in investing activities in the nine months ended September 30, 2008 of $3,502.6 million was attributable to purchases of marketable securities of $7,814.3 million and cash consideration used in acquisitions and other investments of $3,332.6 million, primarily related to the DoubleClick acquisition, and capital expenditures of $1,990.6 million, partially offset by net proceeds received from the sales and maturities of marketable securities of $9,634.9 million. Cash used in investing activities in the nine months ended September 30, 2007 of $2,806.2 million was attributable to capital expenditures of $1,724.6 million, cash consideration used in acquisitions and other investments of $844.4 million, of which $545.7 million related to the acquisition of Postini in the third quarter of 2007, and net purchases of marketable securities of $237.2 million.

In addition, we expect to spend a significant amount of cash on acquisitions and other investments 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. In connection with certain acquisitions, we are obligated to make additional cash payments if certain criteria are met. As of September 30, 2008, our remaining contingent obligations related to these acquisitions was approximately $582.2 million, which if the criteria are met, would be recorded as part of the purchase price. Since these contingent payments are based on the achievement of performance targets, actual payments may be substantially lower. In May 2008, Clearwire Corporation and Sprint Nextel Corporation agreed to combine certain businesses to form a wireless communication company, the new Clearwire. In addition, certain other companies have collectively agreed to contribute $3.2 billion in cash to the new Clearwire or its subsidiary, including $500 million from us. We expect this transaction to close during the fourth quarter of 2008. Also, in July 2008, we signed an agreement with Rambler Media to acquire ZAO Begun, a Russian context advertising service, for $140 million in cash, subject to customary adjustments. On October 22, 2008, the Federal Antimonopoly Service of the Russian Federation denied consent to the proposed acquisition of ZAO Begun.

As part of our philanthropic program, we expect to make donations as well as investments in for-profit enterprises that aim to alleviate poverty, improve the environment or achieve other socially or economically progressive objectives. We expect these payments to be made primarily in cash. We have authorized up to $175 million of such payments over the three years ending December 31, 2008, with any unallocated amounts to be rolled over into the following year. The majority of this authorized amount has not been spent or committed.

Cash provided by financing activities in the nine months ended September 30, 2008 of $76.5 million was primarily due to excess tax benefits of $114.8 million from stock-based award activities during the period which represents a portion of the $198.8 million reduction to income taxes payable that we recorded in the nine months ended September 30, 2008 related to the total direct tax benefit realized from the exercise, sale or vesting of these awards, partially offset by net payments related to stock-based award activity of $38.3 million. Net payments result when the tax withholding payments we make on behalf of our employees upon the net settlement of their vested restricted stock units exceeds the cash we receive upon the exercise of stock options. Cash provided by financing activities in the nine months ended September 30, 2007 of $257.7 million was primarily due to excess tax benefits of $238.6 million from stock-based award activities during the period which represents a portion of the $412.4 million reduction to income taxes payable that we recorded in the nine months ended September 30, 2007 related to the total direct tax benefit realized from the exercise, sale or vesting of these awards. In addition, we received net proceeds from the issuance of common stock pursuant to stock-based award activity of $19.1 million.

Liquidity and Capital Resources

In summary, our cash flows were (in millions, unaudited):

At June 30, 2008, we had $12.7 billion of cash, cash equivalents and marketable securities. Cash equivalents and marketable securities are comprised of debt instruments of the U.S. government and its agencies, municipalities in the U.S., as well as time deposits. Note 3 of Notes to Consolidated Financial Statements which provides further discussion on the composition of our cash, cash equivalents and marketable securities.

Our principal sources of liquidity are our cash, cash equivalents and marketable securities, as well as the cash flow that we generate from our operations. At December 31, 2007 and June 30, 2008, we had unused letters of credit for approximately $20.4 million and $116.6 million. We believe that our existing cash, cash equivalents, marketable securities and cash generated from operations will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12

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months. Our liquidity could be negatively affected by a decrease in demand for our products and services. In addition, we may make acquisitions or license products and technologies complementary to our business and may need to raise additional capital through future debt or equity financing to provide for greater flexibility to fund any such acquisitions and licensing activities. Additional financing may not be available at all or on terms favorable to us.

Cash provided by operating activities consisted of net income adjusted for certain non-cash items including depreciation, amortization, stock-based compensation, excess tax benefits from stock-based award activity, and the effect of changes in working capital and other activities. Cash provided by operating activities in the six months ended June 30, 2008 was $3,545.6 million and consisted of net income of $2,554.5 million, adjustments for non-cash items of $1,056.2 million and cash used in working capital and other activities of $65.1 million. Adjustments for non-cash items primarily consisted of $589.3 million of depreciation and amortization expense on property and equipment, $553.6 million of stock-based compensation and $138.9 million of amortization of intangibles and other, partially offset by $105.9 million of deferred income taxes and $95.0 million of excess tax benefits from stock-based award activity. In addition, changes in working capital activities primarily consisted of an increase of $296.4 million in accounts receivable due to the growth in fees billed to our advertisers, an increase of $182.8 million in prepaid revenue share, expenses and other assets, and a decrease of $147.3 million in accrued expenses and other liabilities primarily as a result of employee bonuses for the year ended December 31, 2007 paid in the first quarter of 2008, partially offset by a net increase in income taxes payable and deferred income taxes of $528.4 million, which includes the same $95.0 million of excess tax benefits from stock-based awards included under adjustments for non-cash items, and to a lesser extent by an increase in accounts payable of $39.2 million. The increase in income taxes payable and deferred income taxes was primarily a result of additional tax obligations accrued.

Cash provided by operating activities in the six months ended June 30, 2007 was $2,449.5 million and consisted of net income of $1,927.3 million, adjustments for non-cash items of $491.4 million and cash provided by working capital and other activities of $30.8 million. Adjustments for non-cash items primarily consisted of $425.4 million of stock-based compensation and $358.4 million of depreciation expense on property and equipment, partially offset by $182.4 million of deferred income taxes and $179.8 million of excess tax benefits from stock-based award activity. In addition, working capital activities primarily consisted of an increase of $325.0 million in accounts receivable due to the growth in fees billed to our advertisers and an increase of $207.5 million in prepaid revenue share, expenses and other assets, partially offset by net increase in income taxes payable and deferred income taxes of $515.8 million, which includes the same $179.8 million of excess tax benefits from stock-based awards included under adjustments for non-cash items, and an increase in accrued revenue share of $82.2 million. The increase in income taxes payable and deferred income taxes was primarily a result of additional tax obligations accrued.

As we expand our business internationally, we have offered payment terms to certain advertisers that are standard in their locales, but longer than terms we would generally offer to our domestic advertisers. This may increase our working capital requirements and may have a negative effect on cash provided by our operating activities.

Cash used in investing activities in the six months ended June 30, 2008 of $2,365.6 million was attributable to purchases of marketable securities of $4,921.3 million and cash consideration used in acquisitions and other investments of $3,321.8 million, primarily related to the DoubleClick acquisition, and capital expenditures of $1,539.1 million, partially offset by net proceeds received from the sales and maturities of marketable securities of $7,416.6 million. Cash used in investing activities in the six months ended June 30, 2007 of $1,716.5 million was attributable to net purchases of marketable securities of $326.7 million, capital expenditures of $1,172.0 million and cash consideration used in acquisitions and other investments of $217.8 million. Capital expenditures are mainly for the purchase of information technology assets. In order to manage expected increases in internet traffic, advertising transactions and new products and services, and to support our overall global business expansion, we will continue to invest heavily in data center operations, technology, corporate facilities and information technology infrastructure in 2008 and thereafter.

In addition, we expect to spend a significant amount of cash on acquisitions and other investments 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. In connection with certain acquisitions, we are obligated to make additional cash payments if certain criteria are met. As of June 30, 2008, our remaining contingent obligations related to these acquisitions was approximately $581 million, which if the criteria are met, would be recorded as part of the purchase price. Since these contingent payments are based on the achievement of performance targets, actual payments may be substantially lower. In May 2008, Clearwire Corporation and Sprint Nextel Corporation agreed to combine certain businesses to form a wireless communication company, the new Clearwire. In addition, certain other companies have collectively agreed to contribute $3.2 billion in cash to the new Clearwire or its subsidiary, including $500 million from us. Also, in July 2008, we signed an agreement with Rambler Media to acquire ZAO Begun, a Russian context advertising service, for $140 million in cash, subject to customary adjustments. The completion of these transactions is subject to customary closing conditions. We expect these transactions to close during the second half of 2008.

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As part of our philanthropic program, we expect to make donations as well as investments in for-profit enterprises that aim to alleviate poverty, improve the environment or achieve other socially or economically progressive objectives. We expect these payments to be made primarily in cash. We have authorized up to $175 million of such payments over the three years ending December 31, 2008, with any unallocated amounts to be rolled over into the following year. The majority of this authorized amount has not been spent or committed.

Cash provided by financing activities in the six months ended June 30, 2008 of $72.2 million was primarily due to excess tax benefits of $95.0 million from stock-based award activities during the period which represents a portion of the $150.2 million reduction to income taxes payable that we recorded in the first half of 2008 related to the total direct tax benefit realized from the exercise, sale or vesting of these awards, as well as net payments related to stock-based award activity of $22.7 million. Net payments result when the tax withholding payments we make on behalf of our employees upon the net settlement of their vested restricted stock units exceeds the cash we receive upon the exercise of stock options. Cash provided by financing activities in the six months ended June 30, 2007 of $208.6 million was due primarily to excess tax benefits of $179.8 million from stock-based award activity during the period which represents a portion of the $199.2 million reduction to income taxes payable that we recorded in the first half of 2007 related to the total direct tax benefit realized from the exercise, sale or vesting of these awards. In addition, we received net proceeds from the issuance of common stock pursuant to stock-based award activity of $28.8 million.

Liquidity and Capital Resources

In summary, our cash flows were (in millions, unaudited):

At March 31, 2008, we had $12.1 billion of cash, cash equivalents and marketable securities. Cash equivalents and marketable securities are comprised of debt instruments of the U.S. government and its agencies, municipalities in the U.S., time deposits as well as U.S. corporate securities. Marketable securities also include auction rate securities (“ARS”) of $259.6 million. The related auctions began to fail in February 2008. As a result, these securities are currently illiquid. Note 3 of Notes to Consolidated Financial Statements included as part of this report provides further discussion on ARS and the composition of our cash, cash equivalents and marketable securities.

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Our principal sources of liquidity are our cash, cash equivalents and marketable securities, as well as the cash flow that we generate from our operations. At December 31, 2007 and March 31, 2008, we had unused letters of credit for approximately $20.4 million and $54.8 million. We believe that our existing cash, cash equivalents, marketable securities and cash generated from operations will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months. Our liquidity could be negatively affected by a decrease in demand for our products and services. In addition, we may make acquisitions or license products and technologies complementary to our business and may need to raise additional capital through future debt or equity financing to provide for greater flexibility to fund any such acquisitions and licensing activities. Additional financing may not be available at all or on terms favorable to us.

Cash provided by operating activities consisted of net income adjusted for certain non-cash items including depreciation, amortization, in-process research and development, stock-based compensation, excess tax benefits from stock-based award activity, and the effect of changes in working capital and other activities. Cash provided by operating activities in the three months ended March 31, 2008 was $1,779.4 million and consisted of net income of $1,307.1 million, adjustments for non-cash items of $483.1 million and cash used in working capital and other activities of $10.8 million. Adjustments for non-cash items primarily consisted of $280.8 million of stock-based compensation, $280.6 million of depreciation and amortization expense on property and equipment and $56.0 million of amortization of intangibles and other, partially offset by $51.1 million of excess tax benefits from stock-based award activity. In addition, changes in working capital activities primarily consisted of a decrease of $234.3 million in accrued expenses and other liabilities primarily as a result of employee bonuses for the year ended December 31, 2007 paid in the first quarter of 2008, and an increase of $223.5 million in accounts receivable due to the growth in fees billed to our advertisers and an increase of $41.6 million in prepaid revenue share, expenses and other assets, partially offset by a net increase in income taxes payable and deferred income taxes of $438.2 million (which includes the same $51.1 million of excess tax benefits from stock-based awards included under adjustments for non-cash items) and to a lesser extent by an increase in accounts payable of $53.8 million. The increase in income taxes payable and deferred income taxes was primarily a result of additional tax obligations accrued, as well as less estimated income taxes paid, in the first quarter of 2008 compared to the fourth quarter of 2007.

Cash provided by operating activities in the three months ended March 31, 2007 was $1,219.6 million and consisted of net income of $1,002.2 million, adjustments for non-cash items of $247.0 million and cash used in working capital and other activities of $29.6 million. Adjustments for non-cash items primarily consisted of $183.9 million of stock-based compensation and $170.3 million of depreciation expense on property and equipment, partially offset by $74.1 million of excess tax benefits from stock-based award activity. In addition, working capital activities primarily consisted of an increase of $185.5 million in prepaid revenue share, expenses and other assets, an increase of $153.6 million in accounts receivable due to the growth in fees billed to our advertisers, a decrease of $169.1 million in accrued expenses and other liabilities and accounts payable primarily as a result of employee bonuses for the year ended December 31, 2006 paid in the first quarter of 2007, partially offset by a net increase in income taxes payable and deferred income taxes of $399.1 million which includes the same $74.1 million of excess tax benefits from stock-based award included under adjustments for non-cash items. The increase in income taxes payable and deferred income taxes was primarily a result of additional tax obligations accrued, as well as less estimated income taxes paid, in the first quarter of 2007 compared to the fourth quarter of 2006.

As we expand our business internationally, we have offered payment terms to certain advertisers that are standard in their locales, but longer than terms we would generally offer to our domestic advertisers. This may increase our working capital requirements and may have a negative effect on cash provided by our operating activities. In addition, since we have become a public company our cash-based compensation per employee has increased and will likely continue to increase in order to attract and retain employees.

Cash used in investing activities in the three months ended March 31, 2008 of $1,407.0 million was attributable to cash consideration used in acquisitions of $3,125.1 million, primarily related to the DoubleClick acquisition and capital expenditures of $841.6 million, partially offset by net proceeds received from the sales and maturities of marketable securities of $2,559.7 million. Cash used in investing activities in the three months ended March 31, 2007 of $777.1 million was attributable to net purchases of marketable securities of $145.8 million, capital expenditures of $596.9 million and cash consideration used in acquisitions and other investments of $34.4 million. Capital expenditures are mainly for the purchase of information technology assets. In order to manage expected increases in internet traffic, advertising transactions and new products and services, and to support our overall global business expansion, we will continue to invest heavily in data center operations, technology, corporate facilities and information technology infrastructure in 2008 and thereafter.

In addition, we expect to spend a significant amount of cash on acquisitions and other investments 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. In connection with certain acquisitions, we are obligated to make additional cash payments if certain criteria are met. As of March 31, 2008, our remaining contingent obligations related to these acquisitions was approximately $591 million. Since these contingent payments are based on the achievement of performance targets, actual payments may be substantially lower. In May 2008, Clearwire Corporation and Sprint Nextel Corporation agreed to combine certain businesses to form a wireless communication company,

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the new Clearwire. In addition, certain other companies have collectively agreed to contribute $3.2 billion in cash to the new Clearwire or its subsidiary, including $500 million from us. The completion of this transaction is subject to customary closing conditions. We expect the transaction to close during the second half of 2008.

Also, as part of our philanthropic program, we expect to make donations as well as investments in for-profit enterprises that aim to alleviate poverty, improve the environment or achieve other socially or economically progressive objectives. We expect these payments to be made primarily in cash. We have authorized up to $175 million of such payments over the three years ending December 31, 2008, with any unallocated amounts to be rolled over into the following year. The majority of this authorized amount has not been spent or committed.

Cash provided by financing activities in the three months ended March 31, 2008 of $28.7 million was primarily due to excess tax benefits of $51.1 million from stock-based award activities during the period which represents a portion of the $70.3 million reduction to income taxes payable that we recorded in the first quarter of 2008 related to the total direct tax benefit realized from the exercise, sale or vesting of these awards, as well as net payments related to stock-based award activity of $22.4 million. Net payments result when the tax withholding payments we make on behalf of our employees upon the net settlement of their vested restricted stock units exceeds the cash we receive upon the exercise of stock options. Cash provided by financing activities in the three months ended March 31, 2007 of $88.5 million was primarily due to excess tax benefits of $74.1 million from stock-based award activity during the period which represents a portion of the $107.1 million reduction to income taxes payable that we recorded in the first quarter of 2007 related to the total direct tax benefit realized from the exercise, sale or vesting of these awards. In addition, we received net proceeds from the issuance of common stock pursuant to stock-based award activity of $14.4 million.

Liquidity and Capital Resources

In summary, our cash flows were (in millions, unaudited):

As a result of our initial public offering in August 2004 and our follow-on public stock offerings in September 2005 and April 2006, we raised approximately $7.6 billion of net proceeds. At September 30, 2007, we had $13.1 billion of cash, cash equivalents and marketable securities. Cash equivalents and marketable securities are comprised of highly liquid debt instruments of the U.S. government and its agencies, municipalities in the U.S., time deposits as well as U.S. corporate securities. Note 3 of Notes to Consolidated Financial Statements included as part of this report describes further the composition of our cash, cash equivalents and marketable securities.

Our principal sources of liquidity are our cash, cash equivalents and marketable securities, as well as the cash flow that we generate from our operations. At December 31, 2006 and September 30, 2007, we had unused letters of credit for approximately $17.7 million and $15.5 million. We believe that our existing cash, cash equivalents, marketable securities and cash generated from operations will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months. Our liquidity could be negatively affected by a decrease in demand for our products and services. In addition, we may make acquisitions or license products and technologies complementary to our business and may need to raise additional capital through future debt or equity financing to provide for greater flexibility to fund any such acquisitions and licensing activities. Additional financing may not be available at all or on terms favorable to us.

Cash provided by operating activities consisted of net income adjusted for certain non-cash items including depreciation, amortization, in-process research and development, stock-based compensation, excess tax benefits from stock-based award activity, and the effect of changes in working capital and other activities. Cash provided by operating activities in the nine months ended September 30, 2007 was $4,082.2 million and consisted of net income of $2,997.3 million, adjustments for non-cash items of $1,055.3 million and cash provided by working capital and other activities of $29.6 million. Adjustments for non-cash items primarily consisted of $623.3 million of stock-based compensation, $565.8 million of depreciation and amortization expense on property and equipment and $111.9 million of amortization of intangibles and other, partially offset by $238.6 million of excess tax benefits from stock-based award activity. In addition, changes in working capital activities primarily consisted of an increase of $559.4 million in accounts receivable due to the growth in fees billed to our advertisers and an increase of $237.3 million in prepaid revenue share, expenses and other assets, partially offset by a net increase in income taxes payable and deferred income taxes of $431.0 million (which includes the same $238.6 million of excess tax benefits from stock-based awards included under adjustments for non-cash items), an increase in accrued expenses and other liabilities of $206.5 million and an increase in accrued revenue share of $136.4 million. The increase in income taxes payable and deferred income taxes was primarily a result of additional tax obligations accrued.

Cash provided by operating activities in the nine months ended September 30, 2006 was $2,669.7 million and consisted of net income of $2,046.7 million, adjustments for non-cash items of $388.1 million and cash provided by working capital and other activities of $234.9 million. Adjustments for non-cash items primarily consisted of $335.6 million of depreciation and amortization expense on property and equipment and $323.7 million of stock-based compensation, partially offset by $329.1 million of excess tax benefits from stock-based award activity. In addition, changes in working capital activities primarily consisted of a net increase in income taxes payable and deferred income taxes of $528.5 million (which includes the same $329.1 million of excess tax benefits from stock-based awards included under adjustments for non-cash items), partially offset by an increase of $343.4 million in accounts receivable due to the growth in fees billed to our advertisers.

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As we expand our business internationally, we have offered payment terms to certain advertisers that are standard in their locales, but longer than terms we would generally offer to our domestic advertisers. This may increase our working capital requirements and may have a negative effect on cash provided by our operating activities. In addition, since we have become a public company our cash-based compensation per employee has increased and will likely continue to increase in order to attract and retain employees.

Cash used in investing activities in the nine months ended September 30, 2007 of $2,806.2 million was attributable to capital expenditures of $1,724.6 million, cash consideration used in acquisitions and other investments of $844.4 million, of which $545.7 million related to the acquisition of Postini in the third quarter of 2007, and net purchases of marketable securities of $237.2 million.

Cash used in investing activities in the nine months ended September 30, 2006 of $6,070.6 million was attributable to net purchases of marketable securities of $3,262.4 million primarily driven by the additional cash raised from our follow-on public stock offering in April 2006, cash consideration used in acquisitions and other investments of $1,272.0 million primarily related to our $1.0 billion investment in America Online, Inc. and to a lesser extent, the acquisition of dMarc Broadcasting, Inc. and capital expenditures of $1,536.2 million.

In addition, we expect to spend a significant amount of cash on acquisitions and other investments from time to time. Through these acquisitions and investments, we acquire engineering teams, technologies and other assets. In April 2007, we entered into an Agreement and Plan of Merger to acquire DoubleClick, a privately held company, for approximately $3.1 billion in cash. We also announced that we would likely participate in the federal government’s upcoming auction of wireless spectrum in the 700 megahertz (MHz) band. The date for submitting applications to the FCC to participate in the auction is December 3, 2007, with a material refundable deposit due several weeks later. This auction is expected to take place in January 2008.

In connection with certain acquisitions, we are obligated to make additional cash payments if certain criteria are met. For example, with respect to the acquisition of dMarc, we are obligated to make additional cash payments of up to $1.1 billion if certain performance targets are met through December 31, 2008. Since these contingent payments are based on the achievement of performance targets, actual payments may be substantially lower.

Also, as part of our philanthropic program, we expect to make equity and other investments in for-profit enterprises that aim to alleviate poverty, improve the environment or achieve other socially or economically progressive objectives. We expect these investments to be made primarily in cash and to be approximately $175 million over the three years ended December 31, 2008.

Cash provided by financing activities in the nine months ended September 30, 2007 of $257.7 million was primarily due to excess tax benefits of $238.6 million from stock-based award activities during the period which represents a portion of the $412.4 million reduction to income taxes payable that we recorded in the nine months ended September 30, 2007 related to the total direct tax benefit realized from the exercise, sale or vesting of these awards. In addition, we received net proceeds from the issuance of common stock pursuant to stock-based award activity of $19.1 million. As a result of our TSO program, proceeds from the exercise of stock options will be deferred and may be less than we would have received had we not adopted the TSO program. This is because the financial institutions that purchase TSOs will likely not exercise the related warrants until the expiration of the contractual term from the date of purchase (generally, two years), and then only if the market value exceeds the exercise price on the expiration date. Cash provided by financing activities in the nine months ended September 30, 2006 of $2,548.4 million was due primarily to (i) net proceeds of $2,063.8 million raised from the follow-on stock offering , (ii) excess tax benefits of $329.1 million from stock-based award activity during the period, which also represents a portion of the $393.5 million reduction to our income taxes payable related to the exercise, sale or vesting of these stock-based awards and (iii) net proceeds from the issuance of common stock pursuant to stock-based award activity of $155.6 million.

Liquidity and Capital Resources

In summary, our cash flows were (in millions, unaudited):

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As a result of our initial public offering in August 2004 and our follow-on public stock offerings in September 2005 and April 2006, we raised approximately $7.6 billion of net proceeds. At June 30, 2007, we had $12.5 billion of cash, cash equivalents and marketable securities. Cash equivalents and marketable securities are comprised of highly liquid debt instruments of the U.S. government and its agencies, municipalities in the U.S., time deposits as well as U.S. corporate securities. Note 3 of Notes to Condensed Consolidated Financial Statements included as part of this report describes further the composition of our cash, cash equivalents and marketable securities.

Our principal sources of liquidity are our cash, cash equivalents and marketable securities, as well as the cash flow that we generate from our operations. At December 31, 2006 and June 30, 2007, we had unused letters of credit for approximately $17.7 million and $14.7 million. We believe that our existing cash, cash equivalents, marketable securities and cash generated from operations will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months. Our liquidity could be negatively affected by a decrease in demand for our products and services. In addition, we may make acquisitions or license products and technologies complementary to our business and may need to raise additional capital through future debt or equity financing to provide for greater flexibility to fund any such acquisitions and licensing activities. Additional financing may not be available at all or on terms favorable to us.

Cash provided by operating activities consisted of net income adjusted for certain non-cash items including depreciation, amortization, in-process research and development, stock-based compensation, excess tax benefits from stock-based award activity, and the effect of changes in working capital and other activities. Cash provided by operating activities in the six months ended June 30, 2007 was $2,449.5 million and consisted of net income of $1,927.3 million, adjustments for non-cash items of $673.9 million and cash used in working capital and other activities of $151.7 million. Adjustments for non-cash items primarily consisted of $425.4 million of stock-based compensation and $358.4 million of depreciation expense on property and equipment, partially offset by $179.8 million of excess tax benefits from stock-based award activity. In addition, working capital activities primarily consisted of an increase of $325.0 million in accounts receivable due to the growth in fees billed to our advertisers and an increase of $207.5 million in prepaid revenue share, expenses and other assets, partially offset by net increase in income taxes payable and deferred income taxes of $333.4 million, which includes the same $179.8 million of excess tax benefits from stock-based awards included under adjustments for non-cash items, and an increase in accrued revenue share of $82.2 million. The increase in income taxes payable and deferred income taxes was primarily a result of additional tax obligations accrued.

Cash provided by operating activities in the six months ended June 30, 2006 was $1,665.4 million and consisted of net income of $1,313.4 million, adjustments for non-cash items of $207.1 million and cash used in working capital and other activities of $144.9 million. Adjustments for non-cash items primarily consisted of $223.8 million of stock-based compensation and $206.1 million of depreciation expense on property and equipment, partially offset by $258.1 million of excess tax benefits from stock-based award activity. In addition, working capital activities primarily consisted of a net increase of $265.4 million in income taxes payable and deferred income taxes primarily a result of additional tax obligations accrued and an increase of $78.7 million in accounts payable and accrued expenses due to the increase in purchases of property and equipment and other general expenditures, partially offset by an increase of $193.2 million in accounts receivable due to the growth in fees billed to our advertisers partially.

As we expand our business internationally, we have offered payment terms to certain advertisers that are standard in their locales, but longer than terms we would generally offer to our domestic advertisers. This may increase our working capital requirements and may have a negative effect on cash flow provided by our operating activities. In addition, since we have become a public company our cash-based compensation per employee has increased and will likely continue to increase in order to retain and attract employees.

Cash used in investing activities in the six months ended June 30, 2007 of $1,716.5 million was attributable to net purchases of marketable securities of $326.7 million, capital expenditures of $1,172.0 million and cash consideration used in acquisitions and other investments of $217.8 million. Cash used in investing activities in the six months ended June 30, 2006 of $3,956.3 million was attributable to net purchases of marketable securities of $1,719.6 million primarily driven by the additional cash raised from our follow-on public stock offering in April 2006, cash consideration used in acquisitions and other investments of $1,192.7 million primarily related to our $1.0 billion investment in America Online, Inc. and to a lesser extent, the acquisition of dMarc Broadcasting, Inc., and capital expenditures of $1,043.9 million including $319.0 million related to real estate purchases in Mountain View, California. Approximately half of the dollar amount of these real estate purchases were related to a facility we had been renting under an operating lease.

In addition, we expect to spend a significant amount of cash on acquisitions and other investments from time to time. Through these acquisitions and investments, we acquire engineering teams, technologies and other assets. As noted under “Recent Developments” above, in April 2007, we entered into an Agreement and Plan of Merger to acquire DoubleClick, a privately held company, for approximately $3.1 billion in cash. In July 2007, we entered into an Agreement and Plan of Merger to acquire Postini, a privately held company, for approximately $625 million in cash. We also recently announced that we may participate in the federal government’s upcoming auction of wireless spectrum in the 700 megahertz (MHz) band. This auction is expected to take place no later than January 2008. We are currently waiting for the final text of the Federal Communications Commission’s rules governing bidding before we make any definitive decisions about our possible participation in the auction.

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In connection with the acquisition of dMarc, we are obligated to make additional cash payments of up to $1.1 billion if certain performance targets are met through December 31, 2008. Since these contingent payments are based on the achievement of performance targets, actual payments may be substantially lower.

Also, as part of our philanthropic program, we expect to make equity and other investments in for-profit enterprises that aim to alleviate poverty, improve the environment or achieve other socially or economically progressive objectives. We expect these investments to be made primarily in cash and to be approximately $175 million over the three years ended December 31, 2008.

Cash provided by financing activities in the six months ended June 30, 2007 of $208.6 million was due primarily to excess tax benefits of $179.8 million from stock-based award activity during the period which represents a portion of the $199.2 million reduction to income taxes payable that we recorded in the first half of 2007 related to the total direct tax benefit realized from the exercise, sale or vesting of these awards. In addition, we received net proceeds from the issuance of common stock pursuant to stock-based award activity of $28.8 million. As a result of our TSO program, proceeds from the exercise of stock options will be deferred and may be less than we would have received had we not adopted the TSO program. This is because the financial institutions that purchase TSOs will likely not exercise the related warrants until the expiration of the contractual term from the date of purchase (generally, two years), and then only if the market value exceeds the exercise price on the expiration date. Cash provided by financing activities in the six months ended June 30, 2006 of $2,419.0 million was due primarily to (i) net proceeds of $2,063.8 million raised from the follow-on stock offering, (ii) excess tax benefits of $258.1 million from stock-based award activity during the period, which also represents a portion of the $275.2 million reduction to our income taxes payable related to the exercise, sale or vesting of these stock-based awards and (iii) net proceeds from the issuance of common stock pursuant to stock option exercises of $97.1 million.