Welcome to the Google, Inc. conference call. This call is being recorded. At this time I would like to turn the call over to Ms. Kim Jabal, Director of Investor Relations. Please go ahead.

Hello, everyone, and welcome to our third quarter 2006 earnings call. On the call with us today are Eric Schmidt, Chief Executive Officer; George Reyes, Chief Financial Officer; Larry Page, Founder and President of Products; Sergey Brin, Founder and President of Technology; Jonathan Rosenberg, Senior Vice President of Product Management; and Omid Kordestani, Senior Vice President of Global Sales and Business Development. Eric, George, Larry and Sergey will provide some thoughts on the quarter and then we will have Jonathan and Omid join us for your questions. This call is being webcast from our Investor Relations website. Our press release, issued a few minutes ago, is now posted on the website, as well as presentation slides that will provide further details on the quarter. A replay of this call will be available within a few hours. Some of the comments we will make today are forward-looking, including statements regarding future product innovations, the prospects for growth in online advertising, traffic and users, the seasonality of our business, the accounting treatment for fees related to our distribution deals, the growth of our operating and capital expenditures, possible future compression in our margin, our hiring patterns, our expected tax rate for 2006, our planned acquisition of YouTube and expected benefits from ad quality initiatives. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. These risks and uncertainties include a variety of factors, some of which are beyond our control. These forward-looking statements speak as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. Please refer to our SEC filings, including our report on Form 10-Q for the quarter ended June 30, 2006 as well as our earnings release posted a few minutes ago on our website for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. Also, please note that certain financial measures we use on this call, such as EPS, net income, operating margin, operating income and free cash flow will be expressed on a non-GAAP basis and have been adjusted to exclude charges related to stock-based compensation, or SBC, and with respect to non-GAAP net income and non-GAAP EPS for the second quarter 2006 that gains from the sale of our investment in Baidu. We also report our GAAP results as well as provide non-GAAP results on a supplemental basis in our earnings release. Reconciliations of all non-GAAP financial measures to GAAP financial measures are also included in the earnings release, which may be obtained by visiting the Investor Relations section of our website. With that, I'd like to turn the call over to Eric.

Well, thank you very much, Kim, and thanks to all of you for spending your afternoon or evening with us. Business is very, very good here at Google, and we had an excellent quarter in all respects, especially including international. Five things came together again when I look at our quarter. We have strong user growth with improvements in search, search quality, larger information indices, all the things that end users care about. We had much better ads quality and improved advertising products across the many advertisers we serve. The diversity of our business, its international component, the multi-market component, the combination of what users, advertisers and publishers want; that diversity served us very well. Of course, the blizzard of new product launches, on precedent for our scale and confusing to almost everyone, seems to create new opportunities for us every day. Partnerships, something we talked about last quarter. Each one defining a new and important market for us; it started, of course, with the Dell deal in Q2, where we got better access for end users to Google, followed by the Adobe deal, better integration of high-quality graphics in Google. Followed then by eBay, integration with Skype and bringing international advertisers into the fold. Intuit, advertising services to medium and small businesses that we couldn't otherwise reach or could not serve as well. MTV Networks, video distribution and video ad targeting and syndication, bringing in a whole new way in which we can make money for content video publishers. Fox MySpace, a search and advertising partner with us for the fastest-growing social network. And of course, culminating last week with the YouTube acquisition, sort of the ultimate partnership, if you will, recognizing the fundamental importance of video of all types. The sum of these five things: users, ads, the diversity of our business, the blizzard of new product launches, and the partnership strategy which is in full force, has delivered great, great results and we're very, very pleased with them. George, maybe you could take us through the details and all the questions people ask.

Sure. Good afternoon, everybody and thanks, Eric. I will be brief today, as I'd like to really get into the details of our quarter. Gross revenue the quarter was $2.7 billion, reflecting growth of 70% over Q3 of last year. Google.com revenue was $1.6 billion, representing an increasing percentage of our total revenue at 60% and growth of 84% year-over-year. As we have previously discussed, Q2 and Q3 are typically seasonal quarters for us, with somewhat weaker traffic growth offset by higher monetization. This year, the seasonal trend was slightly dampened in Q3 with stronger than anticipated traffic on Google.com. As with previous years, however, monetization gains were the primary driver of sequential revenue growth. In our AdSense businesses, where we experienced a more typical seasonal growth trend, revenue growth was driven primarily by monetization gains and search and traffic gains and content, and by the addition of new partners across the board, particularly internationally. Revenue from the U.S. was $1.5 billion, driven by higher than expected traffic growth and continued monetization gains. International growth was very strong in Q3 as well. Our largest European markets, the UK and Germany, performed very well, as did many other countries throughout the world, including the Netherlands, Spain, France, Italy, Canada, and Australia. While still a small percentage of our overall revenues, many of our emerging markets, most notably India and Brazil, are growing at very high rates as well. We do expect historic seasonal trends in Q4 to continue, where the growth in the U.S. has typically been greater than internationally. This is largely attributable to more pronounced effects of the holiday season in the U.S. Turning to traffic acquisition costs, or TAC, they were $825 million. The majority of TAC expenses is related to the amounts ultimately paid to our AdSense partners, which totaled $780 million in the quarter. TAC also consists of amounts ultimately paid to certain distribution partners, which totaled $45 million in the third quarter. We expect that in the future, substantially all fees related to distribution partnerships will be recognized as TAC, as we are better able to estimate the useful life of access points and better able to match costs to revenues earned. Turning to operating expenses, operating expenses included $98 million in stock-based compensation and totaled $710 million. These expenses included $382 million in payroll-related and facilities expense and $50 million in advertising and promotional expenses, which includes $14 million related to certain distribution deals. We expect operating expenses to increase in the future as we continue to hire aggressively and invest in marketing programs. Non-GAAP operating profit, which excludes stock-based compensation, grew to over $1 billion with non-GAAP operating margins of 38%, up slightly from Q2. However, as we have previously discussed, margins may decline as we continue to hire aggressively and make significant investments in the business. In Q3, CapEx totaled $492 million, the majority of which was related to IT infrastructure investments, including data centers, servers, and networking equipment. As usual, we carefully and prudently evaluate capital expenditures and believe that the long-term benefits justify these upfront investments. As we have noted previously, CapEx growth would be substantially greater than the annual rate of revenue growth in 2006, and we continue to anticipate this going into Q4. Now turning to cash, we continue to generate strong cash flow from operations at $1 billion. Free cash flow, a non-GAAP measure, which we define as cash flow from operations, less CapEx, increased to $512 million. Our effective tax rate was 29% for the third quarter. We currently anticipate that our effective tax rate for the full year will be at or below 30%. Our headcount at September 30 was 9,378 employees, an increase of 1,436 employees over Q2 levels. We expect to continue to hire aggressively around the world in Q4 across all functions. In closing, we are delighted to report a very strong quarter with very healthy growth across the board. Now I will turn it over to Larry for more comments on our accomplishments in the quarter.

This is Sergey here, we just juggled things with Larry. Sorry to surprise you. Anyhow, we have been working hard to improve our search experience over the past quarter, as we do all quarters and in this past quarter, I am proud to say we have made them significantly fresher and more comprehensive. This has been a combination of both core infrastructure work as well as some of the visible features that you can see. With Webmaster Central, webmasters can submit information to us about their site. They can tell us when things get updated. They get information back from us about some of our crawling patterns and so forth. The upshot is that this improves their sites as well as our coverage, a great win-win. On the subject of coverage, there has been a really significant change on Google News, where now you can search not just the current news, but archives going back 200 years. I encourage you to give it a try. You can see lots of fantastic historical times, as reported by the news right there and then. When I perform a search, I often find that the best answer is not necessarily a web page. I know that sounds like heresy from Google, but in fact, if you are learning a sport, if you want to build a house, if you want to study a science, often videos are the best medium to learn about those things, to learn how to do those things. This has obviously been a significant initiative for us. I am speaking about both Google Video, which we have developed over the past few quarters or so, as well as obviously you have heard about YouTube, which we announced our intent to acquire. Both of those together are going to really help get more video to more users and providing them with better information to large classes of their kinds of search queries. Over the past quarter, we also have worked to better integrate our products together and we want to make them more useful to organizations such as businesses, universities, families even. I am speaking primarily, of course, about Google Apps for Your Domain. That combines Gmail, which is the number one used portion of that, but also Google Talk and Calendar, in that they all work together on your own particular domain, whether it is a .com, .org, .edu. That's gotten great uptake, and people are really happy about it. Now it is also going to soon include a couple more products, which the two of them have together been integrated now, and I'm talking about docs and spreadsheets. These are apps that allow users to create, store, share and publish both documents as well as spreadsheets online. We have been using these in-house internally for a while ourselves, and we have been really using them a lot. It is pretty amazing. If you are sitting there, you're either reading or even editing a document and you can see as your colleagues edit them right before your eyes simultaneously. It is really a powerful feature, and it is really an easy way to collaborate. Anyhow, these are just a few highlights of what we've done over the past quarter. And for some more highlights, let me turn it over to Larry.

Thank you, Sergey. Well, I am very excited about our results this quarter too, and I would like to talk to you briefly about our advertising base, both its breadth and depth and growth. Google's business strengths really lies in the breadth of our advertiser base. We arguably have the greatest diversity of advertisers of any company in the world, from small to medium to large, across almost every vertical and across hundreds of countries. We want to be the easiest company in the world for advertisers to do business with. We are making it easier for small customers to get started, while working with larger customers to develop more complex, integrated advertising campaigns across search, display, video, and soon audio. We see tremendous opportunities for innovation here. This quarter, we partnered with Intuit to make AdWords Starter Edition Maps and Base easily available to Intuit's millions of QuickBooks users. We wanted to make it easier for them to advertise and find customers online, as well as make their information and products and services available on the Internet. We also launched coupons on Google Maps, and we hope it will be an appealing genre for our smaller and mid-sized advertisers. We teamed up with Valpak to provide coupons from current Valpak advertisers. Over half of local businesses don't have websites yet, based on the estimates we see and our local business center helps those businesses easily create a web presence so they can advertise online. Let me switch gears for a second and talk about larger advertisers. For those larger advertisers, we offer an integrated solution for direct response and branding. This solution provides an always-on platform that allows them to efficiently market all of their products and services, not just a select few. Google has always been about intelligent targeting, that's probably what you know about from our Search app., and putting ads in front of users when they're most interested in a certain product or service. We apply this philosophy across all of our advertising format. We started with our text-based ads, and then contextual ads, and now we are working on mobile local video, radio, and prints products. Our increasing penetration of the Ad Age 100 and continually growing advertiser budgets confirm that our approach here is working. Let me tell you a little bit about Google Checkout. We launched Google Checkout and our goal is really to improve the purchasing experience for users and deliver higher conversion rates for advertisers. We are making steady progress here with strong growth in the number of both buyers and sellers and we continue to penetrate the top 500 U.S. online retailers. You can now search in Froogle for Checkout-enabled merchants, and this is a feature I find really useful when I buy things online. In seconds, really anyone can purchase from a wide variety of online retailers with Google Checkout. Now Sergey mentioned earlier all the things we do to satisfy users and our commitment to help them extend their lives online. The economic success we continue to enjoy is the direct result of our ability to marry our user experience to the information that advertisers want to communicate. By delivering comprehensive advertising solutions for small and large advertisers and continually improving ad quality, we create a better user experience and a more effective advertising result. Together, these results have really led to the outstanding results that we are extremely happy to report this quarter. And now, I will pass it back to Eric.

Thanks very much, Larry. A couple of final points to make. We are very much in the search business. We understand and we believe that people’s information and the information they want to receive will be consistent and needs to be accessible when and where they want it for them, in a very personalized way. That information will deliver them across many different devices, in any way they want to consume it. The content or information will always be the same, consistent for the user or the person. The interesting thing is that this approach to having your information personalized is a benefit not only for the user who can continue to refine and target information, which is what we are working on, to people in a very personalized way; but also for businesses who want to know they are spending their money in an effective and targeted way. We also believe at Google that we are more effective when we partner. Partnerships are a huge benefit, not just for Google but also for whoever the partner is, as we highlighted earlier. We see impressive growth in the area of partnering with existing and new companies from content technology and advertising perspectives; we’ve laid the groundwork for many more coming. This industry is clearly poised for growth, and this is still the early stages of something which is likely to be a very major transformational industry. As we continue to innovate and bring out these new products, we'll also continue to take our feedback from end users and customers and improve the experiences, bringing the most personalized and targeted information to people, which is ultimately our mission. These new partnerships and as we explore these new ways of working, our learning and feedback from users and customers continue, this allows us to constantly and consistently innovate and to improve organizing the world's information. Sharing that innovation and expertise with our users and customers will continue to provide access to the world's information while we organize it in a very personalized and targeted way. That benefit drives the entire cycle of Google, and it's fundamental. With that, let's add Omid Kordestani, Senior Vice President, Worldwide Business Operations and Sales; and Jonathan Rosenberg, Senior Vice President, Products.

Operator, could we go to questions, please?

Absolutely. (Operator Instructions) Your first question comes from Mark Mahaney - Citigroup.

Great, thank you very much. Eric, at the beginning, you talked about the blizzard of new launches, product launches and you mentioned some of the confusion around that. Can you just talk about whether you need to realign or if you are trying to realign the product strategy somewhat in order to whittle down some of that confusion? A really quick cash question: can you use cash in the future to make acquisitions? You are using your stock for the YouTube deal. Clearly, the stock seems to be undervalued. Wouldn't it be more ideal if you could give cash for those deals? Thank you.

On the cash side, I will have George discuss that as a strategy. From the standpoint of products, our innovation engine is producing products at a rate that I have never seen before. We run under the 70/20/10 principle that we have talked about for a long time. Sergey has been leading an initiative which he calls features, not products. Sergey, maybe you want to talk a little bit about that?

Yes, exactly. What we are concerned about is that if we continue to develop so many new individual products that are all their assorted silos, you will have to essentially search for our products before you can even use them. And then you will have to search before you can do a search, in many cases. Instead what we're doing now is we are trying to create the horizontal functionality across a range of products, across media types and so forth. For example, I mentioned already Google Apps for Your Domain, and that in a sense is a product, but really it just combines a whole bunch of other offerings together, seamlessly integrated together so they can work well for an organization. Another example which we haven't gotten quite up and running yet, but when you want to share your documents or your pictures or your videos, it would be nice to have the exact same way to share all those things, to have all that functionality available across all of those media types in the identical way, rather than developing sort of one-offs for each of those products. There's a whole set of initiatives that's now going on in the Company to make our product offerings simpler and more consistent for all of our users. Finally, let me just touch on search. You may have noticed more and more now when you do search you will see, for example, images and news stories and products across the top that you can click to. There are increasingly many ways that we are integrating together all of our search offerings so you don't have to pick where you're going to search first. But we are going to give you the best possible information from all of our corpora.

Mark, with respect to the stock transaction, I think you should think of this as a one-off, one-time that we did. And going forward we're going to use cash.

Thank you very much.

Your next question comes from Robert Peck - Bear Stearns.

Hi everybody, congratulations. Two quick questions for you here. One is, Eric, could you comment a little bit on the content deal that you signed right before the YouTube deal? Any pending litigation? Did any of the content providers take stakes in either Google or YouTube as part of those deals? Secondly, bigger picture, back at Analyst Day you talked about $100 billion revenue goal for the Company. It's clear you probably can't get there on just advertising dollars alone. Could you maybe talk to us about what are the sources of revenue that you see developing over the coming years? Thanks.

With respect to the content deals and the ones we did most recently, speaking for Google, we were able to do some very interesting deals using a combination of financial prepayments, revenue shares, other ways in which the money flows. We saw that in our partnerships the best partnerships come when both partners have a share in the revenue success of the deal and that is typically the deal structure we have been doing. I'd rather not go into the specifics of those deals. With respect to the YouTube part, as you know, we've entered into an agreement to purchase YouTube, but we are not actually closed with them, so they are still today a separate company. We did, as part of the due diligence of YouTube, go through all of their details under the normal due diligence and we were satisfied with what we saw. With respect to your second question about the $100 billion, I actually left the question of $100 billion as an ambiguous question in my comments in the spring. But nevertheless, it is important that we develop other good sources of revenue going forward. We think that advertising and in particular, search advertising, will be the majority of our advertising revenue for many, many years. We have a number of very interesting successes; the enterprise business continues to churn along. It would be an enormous success on its own merits. I think if you look at, for example, Google Apps for Your Domain, you can see that product as it becomes more successful could become, for example, a very significant source of revenue. In addition to that, the Checkout by Google product offers a tremendous revenue potential as well. Of course it is in the early stages. Do we have the next question?

Your next question comes from Mary Meeker - Morgan Stanley.

Thanks. We had a question, just to drill down a little bit on some of the video deals. The traditional content providers to-date have been somewhat hesitant to really figure out how to monetize their video content on the Internet. It feels like the deal and the deals that you struck around with YouTube and around the YouTube day, were things that will prove with a little bit of hindsight to be things that have really moved the monetization ball forward. So the question there is how critical were some of the deals that you talked about, number one, that you just alluded to in the last question? Two, do you feel that we are going to start to see real progress in monetization of video over the next six months, in large part because of what you have done? A third question relates to, do you think we will see any changes in traffic acquisition costs as a percent of revenue related to your video efforts? Thanks.

Hi Mary, this is Omid Kordestani. So in regard to your questions --

You are the only one who could remember all the questions?

I am going to do my best, and then you can remind me if I didn't cover them. So first of all, I think we are very excited to see that not only Google has had a great momentum in talking to all the content partnerships; in fact, the majority of the executive team has been busy meeting with as many companies as possible and would like to touch many of them in the coming weeks and are actively talking about ways that we can bring a lot of revenue and search capability, and basically all the Google capabilities that can improve the way these products can be offered to users and generate a lot of revenue for the content owners. We also were very pleased that we saw that same philosophy at YouTube, that they were very actively striking these relationships. They are complex, it is a new space. We are all trying to understand each other. We think ultimately the answer lies with the fact that there is a lot of usage here, a lot of interest from our users, and that we believe that there is also a great monetization engine that Google can provide here to make this all work for all the parties. The other thing I would like to say is that we are having a great success with the video ads format. A lot of this actually has been led by our U.S. advertising sales organization and our great products, which Jonathan can address in a few minutes. There are lots of examples from our work with Goodby, Silverstein and Saturn to even the tail of this. We are finding advertisers that are finding the video format very complementary. It is user-initiated action, which very much means that the user is interested in seeing these ads and creates great response rates. So ultimately we really believe that there's a lot of momentum here, there's a lot of learning here and that there's a lot of revenue here for everyone to share. Jonathan can add a few points.

I think there's been a lot of success, if you look at just some of the early stages in the last quarter. In Q3, we launched the video ads product globally, and they were implemented by hundreds of advertisers, I think in over 30 countries. Office Max, Paramount, GM, Nike, Renault, British Airways; Omid mentioned Saturn. We are having success in a number of areas. For starters, just in terms of getting reach, a good example is what Paramount Classics did with 'An Inconvenient Truth', where they used site targeting to select a bunch of environmentally-focused sites that they knew would reach the right demographic. They actually did exit polls that showed that 30% of the people who saw that movie on the opening weekend were exposed to their ad. There's also a number of other examples, the Silverstein campaign that Omid mentioned with Saturn -- which I think was for Aura, which is the mid-size sedan -- is doing all sorts of great different kinds of targeting. They have a campaign there where they ran it in six markets and users in Raleigh, North Carolina would get a Google Earth powered view of the world that would zoom down into the Saturn dealership. So there's all sorts of examples there. One last example that I would give you is there are products for small advertisers as well. This product isn't just for large advertisers. There are products like a String Master robotic guitar, if you look at some of the guitar tuning sites. It's the kind of thing that you would never understand it if you saw a text ad that said amazing guitar tuner. But when you actually see this thing and its little video work, you really understand the value. They are having a great deal of success.

Thanks. George, any thoughts on TAC?

So TAC is actually moving in the right direction for us. I think if you have had a chance to look at the slides that we have put up, Mary, you will see that.

Well, the question related to TAC and video in the future.

Way too early to go there, Mary.

Let's go to our next question.

Your next question comes from Anthony Noto - Goldman Sachs.

Thank you very much. I was wondering if you could comment, on the Analyst Day you talked about revenue per search being very difficult different domestically than internationally. I think the exact quote was 60% of your queries came international, but 40% of your revenue. How has that mix changed over time, just so we kind of assess the opportunity? A second question, display advertising and video, what percent of the queries that are done on the site today, broadly, would be appropriate for a video response? Is there a way to assess that? When do you think that your percentage of revenue for display advertising could reach 10%? Is that a couple years away? Is that a year away? Five years away? Just a broad picture. Thanks.

Well I guess I could start with the display versus video in terms of percentage. I think that that dynamic is really going to be a function of the breadth of the inventory getting built out, and the experiments that people are doing today where we are seeing when these type of video efforts work. I think they have to be one of the kind of models that I was describing earlier. So something that is explanatory in value like the guitar, where you really understand the value of it when you actually see it. Or with other examples of the kind of branded type efforts that studios want to do when they are trying to build critical mass for different movies. So I think it could get to something like 10%, but we're basically going to have to make it much, much easier to create the videos, submit them and then figure out in the context of a bunch of these sites within the network where they will actually work. I think we are only just beginning to understand that. On the domestic versus international question, it is the case that there's some international markets that are very, very strong, particularly some of the Western European markets. I'm not sure specifically what kind of color I can give you beyond that other than to reinforce what George said, which is in Western Europe, particularly in the UK, Germany, Italy, many of those countries, we are doing extremely well.

Great, thank you.

The only other thing I would like to add is that in terms of overall success, we are going to see that here is first we have the very powerful Google network, made up of both search sites and content sites. And then we are doing partnerships like the MySpace partnership with Fox and News Corp., where significant amounts of inventory and growth opportunity represent ways for us to try new ad formats. So we are going to basically try everything from our traditional text ads here to the display advertising and we see a lot of potential here.

Let's go to our next question, thanks.

Your next question comes from Imran Khan - JP Morgan.

Yes, hi. Thank you very much. Two questions. Eric, you talked about partnership. I think in the past, portal players made some great partnership with telco guys. Now with your Fusion product and your partnership with AOL, do you think that you see some opportunity to do some partnership with the telco side on the broadband deals? Secondly, going back to the international side, George, could you give us some sense of what percentage of the revenue came from UK? Give us some color in terms of breadth of advertisers in the France, Spain and Italy market. If I look at Germany, France, Spain, and Italy, it's like 2.5 times bigger than UK, but I think less than 10% of your revenue each of those countries represent. So can you give us some color? What do you think in terms of advertisers take rate? Thank you.

Clearly, the UK is a very, very strong market for us. We have very substantial market share there and it is a very healthy business. What was your second question that was tied to that?

The question was what percentage of revenue came from UK?

Roughly 16% or 15% to 16%, something like that.

The follow-up question related to UK was, if I look at Germany, France, Spain, and Italy and combined those four countries are 2.5 times bigger than UK, but none of those countries are not more than 10% of your revenue countries. So I was wondering, are you seeing any resentment from advertisers that they're not taking the search advertisement? Or what is the reason that you're not seeing a big take rate? You know, commerce is going very strongly in those countries.

Omid is going to take that one.

Hi. We are actually having great success in Europe in all of those countries. What is really happening is there are just local dynamics that are very different. As an example, traditionally in some of these markets we realize that the websites of, for example, financial institutions were more information-oriented than transaction-oriented. Whereas in the U.S. you can complete a loan transaction or a credit card transaction right away, instantly. So we have taken a lot of care and time to basically move advertisers that are capable of using our systems to our online channel, as well as then having our sales force on the ground in the field, really spent a lot of time working directly with major companies in each of these reasons regions. We are actually very, very optimistic about the results we are seeing and the growth we're seeing in Germany, France and Italy, as well as the emerging markets. Across the board, we are seeing, off a very small base, but significant growth rates that are actually ahead of U.S. and Europe in some of the emerging markets. Again, they are small bases and we think though that they have the potential as we get the core search products and advertising products working well there, and the future of the newer monetization products extending to these markets. Eric, do you want to answer that too?

No, that's fine. Go ahead. Let's go to our next question.

Your next question comes from Christa Quarles - Thomas Weisel.

Just a couple of questions on video and YouTube. First, how heavily are you relying on maybe a liberal interpretation of the Digital Millennium Copyright Act? I guess, how are you going to be responding to some of the copyright commentary out there? And then I know you don't give guidance, but just a binary response is fine. Will YouTube be profitable or not profitable as you see it? I'll stop there. Thanks.

The second question is easily answered; we don't give guidance. The first question is, we are definitely not relying on a liberal or a conservative interpretation of the DMCA. We are relying on the Digital Millennium Copyright Act as it is being imposed by law and there are not a lot of shades of gray in how it works. There's a set of procedures for take down. If you operate under this, companies have a Safe Harbor. We do our very, very best to implement it exactly as prescribed, as does everyone else in the industry. So whether people like it or not, it is the law of the land and we absolutely operate by it.

Your next question comes from Jordan Rohan - RBC Capital Markets.

I was curious about two things related to video and YouTube. The first is on the CapEx side, have you already started to ramp your CapEx in anticipation of adding a major, major source of video streaming and, therefore, necessary capacity to your system in YouTube? Second, if not, can you talk about the demands that you might see or the incremental CapEx that you might see as the web shifts from a largely text-based web to a largely video-based web over some period of time?

Thanks, Jordan. This is Larry. I think we are very lucky at Google to have a huge amount of computer resources, which you have seen reflected. It turns out search is a pretty hard problem. So we've had a lot of resources both planned and underway to deal with that. Video is actually mostly, I think, more of a bandwidth-intensive application. We have already had a lot of success also on our own sites with Google Video and some experience in building that up. I don't think that we think that will be hugely material to our capital spending versus all the other things that we are doing.

Thank you very much.

This is Eric. Let me just add, we are the beneficiaries of huge economies of scale around Moore's Law, our capital spending. We apply those across the entire breadth of our products. It works very well for us. Let's go ahead to our next question.

Your next question comes from Ben Schachter - UBS.

Congratulations on a fantastic quarter. Could you define how you determine what revenue is Google.com revenue, particularly as it relates to revenue paid for through TAC or distribution partners, as well as AdSense for domains? Secondly, the AdWords Starter Edition, I was wondering if you could talk about how that is performing, particularly for local businesses? And then for George, will TAC related to distribution partners increase at about the same pace as Google.com revenue? And then finally an update just on the investment income and some of the issues you have been working through with the SEC on where you can invest that? Thanks.

Jonathan, do you want to start the first part of the questions and George can handle the second ones?

So basically the AdWords Starter Edition is an alternative version of AdWords, and it's a lot easier for novices to get into search advertising. It's got a much simpler UI. I'm not sure in terms of color how much I can offer you. We have been using it extensively. We have been tracking the percentage of advertisers who start with AdWords Starter Edition who then actually are successful in getting their work to manifest itself in the form of a working campaign; and who then continue to opt into our ad systems. We are doing much, much better there on a percentage basis in terms of getting the advertiser signed up. So in that sense, it has been successful. We are also then getting a number of those advertisers using AdWords itself. So the take rates are strong.

And then how you define revenue for Google.com on AdSense for Domains and TAC?

The way that we think about that is we have a very thriving Google.com business and there is a negligible, very negligible portion of that Google.com business that gets rev shared. So, that fundamentally is the model we use on that. And then on the AdSense side, as you know, the rev shares are substantially larger as we split our rev shares with our network partners. Is that what you were getting at, Ben?

I'm looking at AdSense for Domains. I was wondering if that was counted as Google.com revenue or partner revenue?

It is partner revenue. Let's go to our next question.

Your next question comes from Bill Morrison - JMP Securities.

A couple of questions. One, just on the CapEx. George, you are pretty clear that this year CapEx has grown faster than revenue. I was wondering if you could just maybe frame next year or the next few years, is that something we should continue to expect beyond 2006? On MySpace, I was curious, you have obviously announced the deal and talked a lot about it. Curious if you have actually signed the deal, and their response to your planned acquisition of YouTube?

First, we made a decision strategically to invest capital. Part of the reason that our results have been so strong in the last year is because a year or two years ago, we “overinvested” in capital. In our model, the capital investment we are making gives us differentially better service quality, better scale, better leverage and we intend to continue that. George?

Besides that, Ben, I am sitting here looking at the free cash flow for this quarter alone. It is $512 million. So the CapEx investments that we need to make we can easily afford and drive them to build more value for the Company.

With respect to your question on MySpace, we signed a binding letter of agreement which we are operating under. We will come to final contract terms, I think, very quickly on that.

Your next question comes from Justin Post - Merrill Lynch.

Thanks. The U.S. growth, I think, was 57% in the quarter, and I think you said in your prepared remarks that monetization was faster than traffic growth. Is that safe to assume that if you had to break that down, monetization was a bigger percent, more than half of the growth there? Were there other traffic areas of the Google websites that helped drive some revenue growth that were kind of interesting in the quarter?

George may be able to speak to some of the specific revenue issues. Just in terms of the monetization and traffic dynamic, this is seasonally, from a traffic perspective, usually a less robust quarter. From a monetization standpoint, I think what was different this quarter relative to previous quarters when you look at the seasonality is that in both Q3 of '04 and '05 we talked about a lot of monetization improvements that occurred intra quarter. Those then manifested themselves in forms of a very strong Q3 from a monetization perspective. The story this quarter is a little different in that we did a lot of monetization improvements in Q2. So RPN was impacted positively by those improvements at the beginning of the quarter carrying over from Q2. So there were actually relatively fewer monetization improvements this Q3 than there were in previous Q3s, but we started the quarter with very strong RPN that continued all the way through the quarter as a function of the improvements that were done in Q2. Other than that, in terms of the questions about other properties, many of the other properties are experiencing strong traffic, news, images and much of that comes back to Google.com.

Let’s go ahead and go to our next question.

Your next question comes from Safa Rashtchy - Piper Jaffray.

Good afternoon, thank you and congratulations.

Thanks, Safa.

My question is really about the components of your operation that help you grow about 84% according to my calculation, on Google sites. I want to focus on Google sites because you have control. Eric, you outlined the five features or five characteristics that have been helping you grow. But we have been lumping all of these as search revenues. Is it fair to say that 84% growth didn't really come from what we would traditionally consider search revenues? Your competitors are reporting anywhere between a mid-teens growth. So there is a huge discrepancy here. I wonder if you can help us understand where this growth is coming from beyond the traditional search clicks?

Well in fact, the vast majority of our revenue is from search and search revenues, advertising revenues, so indeed it is that. So Omid, maybe you can take us through that.

Hi, Safa. I think it is going back to something that Jonathan mentioned, is that some of the product improvements that we're making and just really the incredible innovation by the products and engineering team. And then our sales folks are really feeding the system and have a cascading impact, which is these improvements that are made over the quarters build on each other. The other thing that is really driving this is a number of factors: the geographic expansion of our products and our advertiser base and our user base across the globe; again, domestic growth we are experiencing in users and number of advertisers. Better search quality improvements we're making there, again, and the way the targeting of ads go hand-in-hand with that really help ultimately improve the response rates on these ads. More inventory from the different properties, again a lot of the network is built off great search inventory and renewal of those partnerships continue to fuel the growth. We're also seeing growth in advertiser spend . There's more of the flow from offline to online happening. We are introducing the new ad formats and offering new ways for these advertisers to work with us. So it is really a cascading effect of how these product improvements build on each other and then the natural growth rates we are experiencing throughout from the geographic expansion and the products I mentioned.

Do you feel that you are gaining any market share, either in U.S. or internationally? And has it contributed to this growth at all?

Market share appears to be strong. We saw some discussion in terms of the summer slowdown where we are, I think, a little disproportionately impacted by having a high share of academics. But as I think many of you had noted, that recovered very quickly and is strong across the world.

Let’s go to our next question.

Your next question comes from Doug Anmuth - Lehman Brothers.

Thank you. It looks like your network grew about 4% sequentially. Can you talk a little bit about to what degree you might be cleaning up the network? If you are, how far along you are in that process and what kind of affiliate partners might be coming out? Thank you.

I think we've always had a very strong stance with regards to maintaining the quality of our network, especially as compared to the other companies in the space. We've had very tough policies about monetization and things like spyware and adware and all these kinds of things that people do, kind of on the margin. I have actually been very happy with the quality we have in our ad network and also we released some improvements just very recently of landing page quality, even for all ads really which push for higher quality advertisements. So I think we have been really innovating in that space and we will continue to do that.

Your next question comes from Mark Rowen - Prudential.

Thanks. Eric and Jonathan, back at Analyst Day you talked about monetization gains and you said that there was lots of room to increase monetization for a long time to come. But it seems that as you get better and better in the search business and providing search results to people, that every quarter it's going to get a little bit harder to top what you did and that the growth from monetization is going to start to slow. Can you just give us a sense of, do you think that most of the low-hanging fruit has been picked and it gets harder and harder from this point? Or do you still see lots of opportunities the same as what you did back at Analyst Day? Second, can you give us an update on local? Back at Analyst Day, you were very excited about that. I was wondering if you could just help us understand where you are at product-wise on that and on the monetization front. Thanks.

I want to talk a little bit about monetization. In a sense, you might imagine that the low-hanging fruit have been picked. But in fact, we have at the same time built ladders and are reaching for perhaps even larger, higher-hanging fruit. Because we have reached a certain kind of scale, the tools and resources we have at our disposal now to really do an even better job of bringing the right advertisements to the right users at the right time is far greater. There are new kinds of things that we couldn't have even contemplated doing in the past. When we look at the question, for example, of video advertising you know, imagining, as Jonathan said, video advertisement as an informative ad, not talking about as even a branding or entertainment kind of ad, but you can imagine a local advertiser having a video advertisement for their local bakery, showing you how they bake the things, and showing you around the store and whatnot. I think there are just many new opportunities that we have, given the evolution of both our ability to analyze advertising very well, the traffic and user base that we have, the huge advertiser base. You know, we can choose among far more advertisements these days and we can get them to adopt new technologies. I think all of those things are really coming together and we seem to be able to produce new ways to monetize all the time. So I don't see an obvious ceiling; obviously, nobody can 100% predict the future.

I was just gong to add to Sergey's excellent comments, that even if you do searches now just on normal web search, and you look for things, you click on the ads for things to buy on the searches you do, I find very often the ads, some of the ads are good, some of them aren't. We have a huge ways to go just on the basic things that we do to making it really relevant 100% of the time, and giving you all the right advertisers that are available in that space. There's very obvious growth there still. Checkout also, making the process of buying things really seamless and fast and usually people buy a lot more things online. So I see very huge advances possible there even in the very basic things we do, and I'm also very excited about the new types of formats and new types of things that we can do in advertising.

Jonathan, do you want to answer that local question as well?

Sure. I think Larry and Sergey did a great job of answering the first question, which I did talk about at Analyst Day. I completely agree with them. On the local side, I think we have seen very strong organic growth in local searches. A lot of this is particularly fueled by Maps usage and the growth in the Maps' API and Google Earth downloads. I think there is a very, very strong ecosystem that has developed there around our API. When you think about that, Larry mentioned in his prepared remarks, I think, that 50% of small businesses believe they can use the Internet for their marketing and sales, but 50% of them don't have websites. So the real big win there I think may come from some of the work that we're doing with Intuit with the QuickBooks 2007 integration. That will make it very, very easy for businesses to host pages, create them, set up a site, and then generate ads. But if you want to check some out, type polo store, New York City. You can also a look at some of the printable coupons that Larry mentioned if you type in “carwashes in Mountainview”.

And how are some of the monetization efforts in local going? I know you were doing some testing with some retailers, putting their names in the bullets on the Maps and things. Can you talk about that at all?

It is a real portion of our revenue. I can't give you specifics in terms of percentages, but it is one of the things that we are tracking very, very carefully and that is reasonably significant at this point.

Let's have our last question.

Your final question comes from Marianne Wolk - Susquehanna.

Thanks. You signed a lot of distribution deals with Adobe, Dell and others. Can you let us know whether that has become a significant contributor to Google.com revenue yet? Would you say that's 5% of the Google.com revenue? 2%? Is there any way to characterize that? And thus far, can you talk about the monetization trends from that source? How do they compare with what you generate from traditional search portals?

Each of the deals that I highlighted is at the beginning stages. Each of them amplifies the revenue production, if you will, of our advertising network. They deepen it, they bring in more advertisers, increase the coverage. So the economics compound quarter-over-quarter as they begin to flow. The Dell deal, for example, is already shipping and doing well for us, et cetera. So it is hard to characterize a particular percentage, but understand that the partnerships are much more than just revenue partnerships. They really are a way of doing business for us going forward. For example, there are a lot of folks on the call asked questions about legal concerns over video. But the strategy with video was to partner, not to focus on the legal aspects, but to focus on the business partnership aspects. Because the folks who, we certainly want to respect everybody's copyrights, and they need us, we need them. The combination should produce some very interesting new partnerships, which we are hopefully going to work on, especially after the integration with YouTube is complete. What I wanted to do is to finish by saying that we are in many ways crossing into another era here of what it will be possible to do with the Internet. We have gone from web search, various other forms of applications to now literally being able to do business, life, entertainment, especially with the integration of video, on the net. This is a very, very powerful, powerful way in which many, many companies, many, many users, many, many advertisers will use. The diversity of our approach is one of our strengths, and we intend to keep going and to focus on both more partnerships, more great products, integrated as general features, growing the Company, investing in our capital, and we hope to continue to do very well. So with that, thank you very much. Thank you for spending so much time. And I do want to finish the call by saying, happy birthday to Omid. Thank you, all.

Thank you, Eric.

Thank you. That does conclude today's conference.