20060331_google_10q

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)È QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

OR

‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-50726

Google Inc.(Exact name of registrant as specified in its charter)

Delaware 77-0493581(State or other jurisdiction of

incorporation or organization)(I.R.S. Employer

Identification Number)

1600 Amphitheatre ParkwayMountain View, CA 94043

(Address of principal executive offices)(Zip Code)

(650) 253-4000(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90days. Yes È No ‘

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act. (Check one):

Large accelerated filer È Accelerated filer ‘ Non-acclerated filer ‘

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct) Yes ‘ No È

At April 30, 2006, the number of shares outstanding of Google’s Class A common stock was 214,947,093shares and the number of shares outstanding of Google’s Class B common stock was 88,138,358 shares.

GOOGLE INC.INDEX

Page No.

PART I. FINANCIAL INFORMATIONItem 1 Financial Statements

Condensed Consolidated Balance Sheets—December 31, 2005 and March 31, 2006(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Condensed Consolidated Statements of Income—Three Months Ended March 31, 2005 and2006 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Condensed Consolidated Statements of Cash Flows—Three Months Ended March 31, 2005and 2006 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Notes to Unaudited Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 6

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations . . 21

Item 3 Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Item 4 Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

PART II. OTHER INFORMATION

Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Item 6 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Exhibit Index

Certifications

2

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GOOGLE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except par value)

As ofDecember 31,

2005

As ofMarch 31,

2006

(unaudited)

AssetsCurrent assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,877,174 $ 2,935,179Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,157,073 5,493,849Accounts receivable, net of allowance of $14,852 and $15,604 . . . . . . . . . . . . . 687,976 844,378Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,341 26,317Prepaid revenue share, expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . 229,507 256,234

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,001,071 9,555,957Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 961,749 1,209,681Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194,900 318,806Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,783 160,573Prepaid revenue share, expenses and other assets, non-current . . . . . . . . . . . . . . . . . 31,310 49,853

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,271,813 $11,294,870

Liabilities and Stockholders’ EquityCurrent liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 115,575 $ 145,911Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,788 118,395Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 114,377 156,784Accrued revenue share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215,771 267,202Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,099 80,172Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,774 211,560

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 745,384 980,024Deferred revenue, long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,468 17,123Liability for stock options exercised early, long-term . . . . . . . . . . . . . . . . . . . . . . . . 2,083 1,368Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,419 —Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,502 53,087Stockholders’ equity:

Common stock, $0.001 par value: 9,000,000 shares authorized and 293,027and 295,063 shares issued and outstanding, excluding 3,303 and 2,390shares subject to repurchase at December 31, 2005 and March 31, 2006 . . . 293 295

Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,477,792 7,605,177Deferred stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (119,015) —Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . 4,019 (10,363)Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,055,868 2,648,159

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,418,957 10,243,268

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,271,813 $11,294,870

See accompanying notes.

3

GOOGLE INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME(in thousands, except per share amounts)

Three Months EndedMarch 31,

2005 2006

(unaudited)

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,256,516 $2,253,755Costs and expenses:

Cost of revenues (including stock-based compensation expense of $1,573 and$2,283)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546,781 904,119

Research and development (including stock-based compensation expense of$29,299 and $73,086) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,711 246,599

Sales and marketing (including stock-based compensation expense of $6,536 and$15,929) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,488 190,943

General and administrative (including stock-based compensation expense of$11,500 and $23,366) (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,766 169,395

Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 813,746 1,511,056

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442,770 742,699Interest income and other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,686 67,919

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456,456 810,618Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,263 218,327

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 369,193 $ 592,291

Net income per share:Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.39 $ 2.02

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.29 $ 1.95

Number of shares used in per share calculations:Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266,106 293,896

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286,612 304,123

(1) Stock-based compensation recognized in the three months ended March 31, 2005, accounted for underAccounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, has beenreclassified to these expense lines to conform with the presentation in the three months ended March 31,2006. As discussed in Note 1 of the accompanying notes, stock-based compensation for the three monthsended March 31, 2006, is presented in conformity with Financial Accounting Standards Board Statement ofFinancial Accounting Standards No. 123 (revised 2004), Share-Based Payment.


4

GOOGLE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)


2005 2006

(unaudited)

Operating activitiesNet income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 369,193 $ 592,291Adjustments:

Depreciation of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,478 95,868Amortization of intangibles and warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,715 15,290In-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 4,000Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,908 114,664Excess tax benefits from stock-based award activity . . . . . . . . . . . . . . . . . . . . . 77,377 —Changes in assets and liabilities, net of effects of acquisitions:

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (60,069) (155,221)Income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,044 139,242Prepaid revenue share, expenses and other assets . . . . . . . . . . . . . . . . . . . (29,571) (26,525)Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,694 30,232Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,767) (39,295)Accrued revenue share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,085 51,216Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,535 3,042

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 529,622 824,804

Investing activitiesPurchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (142,391) (344,938)Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,160,160) (13,111,471)Maturities and sales of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 835,223 11,755,756Acquisitions, net of cash acquired, and purchases of intangible and other assets . . . (5,000) (187,964)

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (472,328) (1,888,617)

Financing activitiesProceeds from exercise of stock options, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,097 42,611Excess tax benefits from stock-based award activity . . . . . . . . . . . . . . . . . . . . . . . . . — 77,285Payments of principal on capital leases and equipment loans . . . . . . . . . . . . . . . . . . (592) —

Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,505 119,896

Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . (5,100) 1,922

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 55,699 (941,995)Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426,873 3,877,174

Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 482,572 $ 2,935,179

Supplemental disclosures of cash flow informationCash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93 $ 8

Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 396 $ 1,126

Acquisition related activities:Issuance of equity in connection with acquisitions, net of deferred stock-based

compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,011 $ —


5

GOOGLE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

Note 1. Google Inc. and Summary of Accounting Policies

Nature of Operations

We were incorporated in California in September 1998. We were re-incorporated in the State of Delaware inAugust 2003. We provide highly targeted advertising and global Internet search solutions as well as intranetsolutions via an enterprise search appliance.

Basis of Consolidation

The condensed consolidated financial statements include the accounts of Google and our wholly-ownedsubsidiaries. All intercompany balances and transactions have been eliminated.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of March 31, 2006, the condensed consolidatedstatements of income for the three months ended March 31, 2005 and 2006, and the condensed consolidatedstatements of cash flows for the three months ended March 31, 2005 and 2006 are unaudited. These unauditedinterim condensed consolidated financial statements have been prepared in accordance with U.S. generallyaccepted accounting principles. In our opinion, the unaudited interim condensed consolidated financialstatements include all adjustments of a normal recurring nature necessary for the fair presentation of our financialposition as of March 31, 2006, our results of operations for the three months ended March 31, 2005 and 2006,and our cash flows for the three months ended March 31, 2005 and 2006. The results of operations for the threemonths ended March 31, 2006 are not necessarily indicative of the results to be expected for the year endingDecember 31, 2006.

These unaudited interim condensed consolidated financial statements should be read in conjunction with theconsolidated financial statements and related notes included in our 2005 Annual Report on Form 10-K filed onMarch 16, 2006.

Use of Estimates

The preparation of interim condensed consolidated financial statements in conformity with accountingprinciples generally accepted in the United States requires us to make estimates and assumptions that affect theamounts reported and disclosed in the financial statements and the accompanying notes. Actual results coulddiffer materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related tothe accounts receivable and sales allowances, fair values of marketable securities and investments, fair values ofacquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair valuesof options to purchase our common stock, and income taxes, among others. We base our estimates on historicalexperience and on various other assumptions that are believed to be reasonable, the results of which form thebasis for making judgments about the carrying values of assets and liabilities.

6

GOOGLE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Revenue Recognition

The following table presents our revenues (in thousands):


2005 2006

(Unaudited)

Advertising revenues:Google web sites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 656,997 $1,297,317Google Network web sites . . . . . . . . . . . . . . . . . . . . . . . . . 584,115 928,376

Total advertising revenues . . . . . . . . . . . . . . . . . . . . . 1,241,112 2,225,693Licensing and other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,404 28,062

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,256,516 $2,253,755

In the first quarter of 2000, we introduced our first advertising program through which we offeredadvertisers the ability to place text-based ads on Google web sites targeted to users’ search queries. Advertiserspaid us based on the number of times their ads were displayed on users’ search results pages and we recognizedrevenue at the time these ads appeared. In the fourth quarter of 2000, we launched Google AdWords, an onlineself-service program that enables advertisers to place text-based ads on Google web sites. AdWords is alsoavailable through our direct sales force. AdWords advertisers originally paid us based on the number of timestheir ads appeared on users’ search results pages. In the first quarter of 2002, we began offering AdWordsexclusively on a cost-per-click basis, so that an advertiser pays us only when a user clicks on one of its ads. Werecognize as revenue the fees charged advertisers each time a user clicks on one of the text-based ads that aredisplayed next to the search results on Google web sites. From January 1, 2004 until the end of the first quarter of2005, the AdWords cost-per-click pricing structure was the only structure available to our advertisers. However,during the second quarter of 2005, we launched an AdWords program that enables advertisers to pay us based onthe number of times their ads appear on Google Network member sites specified by the advertiser. We recognizeas revenue the fees charged advertisers each time their ads are displayed on the Google Network member sites.

In the third quarter of 2005, we launched the Google Publication Ads Program through which we distributeour advertisers’ ads for publication in magazines. We recognize as revenue the fees charged advertisers when adsare published in magazines. Also in the first quarter of 2006, we acquired dMarc Broadcasting, Inc. (dMarc), adigital solutions provider for the radio broadcast industry. dMarc, now one of our wholly-owned subsidiaries,distributes our advertisers’ ads for broadcast by radio stations. We recognize as revenue the fees chargedadvertisers each time an ad is broadcasted or a listener responds to that ad. We consider the magazines and radiostations that participate in these programs to be members of our Google Network.

Google AdSense is the program through which we distribute our advertisers’ ads for display on the websites of our Google Network members. In accordance with Emerging Issues Task Force (“EITF”) IssueNo. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent (EITF 99-19), we recognize asrevenues the fees charged advertisers each time a user clicks on one of the text-based ads that are displayed nextto the search results or on the content pages of our Google Network members’ web sites and, for thoseadvertisers who use our cost-per impression pricing, the fees charged advertisers each time an ad is displayed onour members’ sites. Finally, we recognize as revenues the fees charged advertisers for ads published in themagazines or broadcasted by the radio stations of our Google Network members. These revenues are reported ona gross basis primarily because we are the primary obligor to our advertisers.

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GOOGLE INC.


We generate fees from search services through a variety of contractual arrangements, which includeper-query search fees and search service hosting fees. Revenues from set-up and support fees and search servicehosting fees are recognized on a straight-line basis over the term of the contract, which is the expected periodduring which these services will be provided. Our policy is to recognize revenues from per-query search fees inthe period queries are made and results are delivered.

We provide search services pursuant to certain AdSense agreements. We believe that search services andrevenue share arrangements represent separate units of accounting pursuant to EITF 00-21 RevenueArrangements with Multiple Deliverables. These separate services are provided simultaneously to the GoogleNetwork member and are recognized as revenues in the periods provided.

In the first quarter of 2006, we launched Google Video through which we make video owned by othersavailable for download and purchase by end users. We recognize as revenue the fees we receive from end usersto the extent we are the primary obligor to them; however, to the extent we are not, we recognize as revenues thefees we receive from end users net of the amounts we pay to our video content providers in accordance withEITF 99-19.

We also generate fees from the sale and license of our Search Appliance, which includes hardware, softwareand 12 to 24 months of post-contract support. We recognize revenue in accordance with Statement of Position97-2, Software Revenue Recognition, as amended. For transactions in which the elements are not sold separately,sufficient vendor-specific objective evidence does not exist for the allocation of revenue. As a result, the entirefee is recognized ratably over the term of the post-contract support arrangement.

Deferred revenue is recorded when payments are received in advance of our performance in the underlyingagreement on the accompanying condensed consolidated balance sheets.

Cost of Revenues

Cost of revenues consists primarily of traffic acquisition costs. Traffic acquisition costs consist of amountsultimately paid to Google Network members, as well as to partners who direct search queries to our web site.These amounts are primarily based on revenue share arrangements under which we pay our Google Networkmembers and other partners a portion of the fees we receive from our advertisers. In addition, certain AdSenseagreements obligate us to make guaranteed minimum revenue share payments to Google Network membersbased on their achieving defined performance terms, such as number of search queries or advertisementsdisplayed. We amortize guaranteed minimum revenue share prepayments (or accrete an amount payable to aGoogle Network member if the payment is due in arrears) based on the number of search queries oradvertisements displayed on the Google Network member’s web site or the actual revenue share amounts,whichever is greater. In addition, concurrent with the commencement of a small number of AdSense and otheragreements, we have purchased certain items from, or provided other consideration to, our Google Networkmembers and partners. We have determined that certain of these amounts are prepaid traffic acquisition costs andare amortized on a straight-line basis over the terms of the related agreements. Traffic acquisition costs were$461.8 million and $722.7 million in the three months ended March 31, 2005 and 2006.

In addition, cost of revenues includes the expenses associated with the operation of our data centers,including depreciation, labor, energy and bandwidth costs, as well as credit card and other transaction feesrelated to processing customer transactions.

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GOOGLE INC.


Stock-based Compensation

In December 2004, the Financial Accounting Standards Board issued Statement of Financial AccountingStandards No. 123 (revised 2004), Share-Based Payment (SFAS 123R) that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for equity instruments ofthe enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may besettled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for share-basedcompensation transactions using the intrinsic value method under Accounting Principles Board Opinion No. 25(“APB 25”), Accounting for Stock Issued to Employees, and generally requires instead that such transactions beaccounted for using a fair-value-based method. We adopted SFAS 123R beginning January 1, 2006.

SFAS 123R requires the use of a valuation model to calculate the fair value of stock-based awards. We haveelected to use the Black-Scholes-Merton (“BSM”) option-pricing model to determine the fair value of stock-based awards on the dates of grant, consistent with that used for pro forma disclosures under SFAS No. 123,Accounting for Stock-Based Compensation. Restricted Stock Units (“RSUs”) are measured based on the fairmarket values of the underlying stock on the dates of grant. Shares are issued on the dates of vest net of thestatutory withholding requirements to be paid by us on behalf of our employees. As a result, the actual number ofshares issued will be less than the actual number of RSUs outstanding. Furthermore, in accordance withSFAS 123R, the liability for withholding amounts to be paid by us will be recorded as a reduction to additionalpaid-in capital when paid.

We have elected the modified prospective transition method as permitted by SFAS 123R and accordinglyprior periods have not been restated to reflect the impact of SFAS 123R. Under this method, we are required torecognize stock-based compensation for all new and unvested stock-based awards that are ultimately expected tovest as the requisite service is rendered beginning January 1, 2006. Stock-based compensation is measured basedon the fair values of all stock-based awards on the dates of grant.

We will recognize stock-based compensation using the straight-line method for all stock awards issued afterJanuary 1, 2006. For stock awards issued prior to January 1, 2006, we continue to recognize stock-basedcompensation using the accelerated method, other than RSUs issued to new employees that vest based on theemployee’s performance for which we use the straight-line method in accordance with FASB InterpretationNo. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.

SFAS 123R requires that the deferred stock-based compensation on our balance sheet on the date ofadoption be netted against additional paid-in capital. At December 31, 2005, we had $119.0 million of deferredstock-based compensation which was netted against additional paid-in capital on January 1, 2006, as reflected inthe accompanying Condensed Consolidated Balance Sheet at March 31, 2006.

Also, in accordance with SFAS 123R, beginning in the first quarter of 2006 we have presented the benefitsof tax deductions in excess of recognized compensation expense as a cash flow from financing activities in theaccompanying Condensed Consolidated Statement of Cash Flows, rather than as a cash flow from operatingactivities, as was prescribed under accounting rules applicable through December 31, 2005. This requirementreduces and increases the amounts we record as net cash provided by operating activities and net cash providedby financing activities, respectively. Total cash flow remains unchanged from what would have been reportedunder prior accounting rules.

In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SABNo. 107”). In accordance with this Bulletin, beginning in the first quarter of 2006, we no longer present stock-based compensation separately on our statements of income. Instead we present stock-based compensation in the

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same lines as cash compensation paid to the same individuals. Stock-based compensation in the first quarter of2005 has been reclassified to conform to the presentation in the first quarter of 2006.

We account for stock awards issued to non-employees in accordance with the provisions of SFAS 123R andEITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services (EITF 96-18). Under SFAS 123R and EITF 96-18, we use the BSMmethod to measure the value of options granted to non-employees at each vesting date to determine theappropriate charge to stock-based compensation.

Prior to the adoption of SFAS 123R, we accounted for our employee stock-based compensation using theintrinsic value method prescribed by APB 25. We applied below the disclosure provisions of SFAS 123, asamended by SFAS 148, Accounting for Stock-Based Compensation – Transition and Disclosure as if the fairvalue method had been applied. If this method had been used, our net income and net income per share for thethree months ended March 31, 2005 would have been adjusted to the pro forma amounts below (in thousandsexcept per share data):

Three Months EndedMarch 31, 2005

(unaudited)

Net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $369,193Add: Stock-based employee compensation expense included in

reported net income, net of related tax effects . . . . . . . . . . . . . . . . . . . 29,322Deduct: Total stock-based employee compensation expense under the

fair value based method for all awards, net of related tax effects . . . . (46,280)

Net income, pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $352,235

Net income per share:As reported for prior period—basic . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.39Pro forma—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.32As reported for prior period—diluted . . . . . . . . . . . . . . . . . . . . . . . $ 1.29Pro forma—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.23

In the three months ended March 31, 2006, we recognized stock-based compensation and related taxbenefits of $114.7 million and $27.4 million respectively.

As a result of adopting SFAS 123R, our income before income taxes and net income for the quarter endedMarch 31, 2006, were $61.4 million and $46.7 million less than if we had continued to account for share-basedcompensation under APB 25. Furthermore, basic and diluted earnings per share for the quarter ended March 31,2006 would have been $2.17 and $2.10 if we had not adopted SFAS 123R, compared to reported basic anddiluted earnings per share of $2.02 and $1.95.

Net Income per Share

We compute net income per share in accordance with SFAS 128, Earnings per Share. Under the provisionsof SFAS 128, basic net income per share is computed using the weighted average number of common sharesoutstanding during the period except that it does not include unvested common shares subject to repurchase orcancellation. Diluted net income per share is computed using the weighted average number of common sharesand, if dilutive, potential common shares outstanding during the period. Potential common shares consist of theincremental common shares issuable upon the exercise of stock options, restricted shares, restricted stock unitsand unvested common shares subject to repurchase or cancellation. The dilutive effect of outstanding stock

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options, restricted shares and restricted stock units is reflected in diluted earnings per share by application of thetreasury stock method.

The following table sets forth the computation of basic and diluted net income per share (in thousands,except per share amounts):


2005 2006

(unaudited)

Basic and diluted net income per share:Numerator:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $369,193 $592,291

Denominator:Weighted average common shares outstanding . . . . . . . . 275,816 296,957Less: Weighted average unvested common shares subject

to repurchase or cancellation . . . . . . . . . . . . . . . . . . . . . (9,710) (3,061)

Denominator for basic calculation . . . . . . . . . . . . . . 266,106 293,896Effect of dilutive securities:Add:

Weighted average stock options, restricted shares,restricted stock units and unvested commonshares subject to repurchase or cancellation . . . . . 20,506 10,227

Denominator for diluted calculation . . . . . . . . . . . . . 286,612 304,123

Net income per share, basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.39 $ 2.02

Net income per share, diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.29 $ 1.95

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation iscomputed using the straight-line method over the estimated useful lives of the assets, generally two to five years.Buildings are depreciated over periods up to 25 years. Equipment under capital leases and leaseholdimprovements are amortized over the shorter of the lease term or the estimated useful lives of the assets.Construction in process is primarily related to the building of production equipment servers and leaseholdimprovements. Depreciation for these assets commences once they are placed in service.

Cash and Cash Equivalents and Marketable Securities

We invest our excess cash in money market funds and in highly liquid debt instruments of U.S.municipalities, corporations and the U.S. government and its agencies. All highly liquid investments with statedmaturities of three months or less from date of purchase are classified as cash equivalents; all highly liquidinvestments with stated maturities of greater than three months are classified as marketable securities.

We determine the appropriate classification of our investments in marketable debt and equity securities atthe time of purchase and reevaluate such designation at each balance sheet date. Our marketable debt and equitysecurities have been classified and accounted for as available for sale. We may or may not hold securities withstated maturities greater than twelve months until maturity. In response to changes in the availability of and the

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yield on alternative investments as well as liquidity requirements, we occasionally sell these securities prior totheir stated maturities. As these debt and equity securities are viewed by us as available to support currentoperations, based on the provisions of Accounting Research Bulletin No. 43, Chapter 3A, Working Capital-Current Assets and Liabilities, equity securities, as well as debt securities with maturities beyond 12 months(such as our auction rate securities) are classified as current assets in the accompanying Condensed ConsolidatedBalance Sheets. These securities are carried at fair value, with the unrealized gains and losses, net of taxes,reported as a component of stockholders’ equity, except for unrealized losses determined to be other thantemporary which are recorded as interest income and other, net, in accordance with our policy and FASB StaffPosition (FSP) Nos. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and itsApplication to Certain Investments. Any realized gains or losses on the sale of marketable securities aredetermined on a specific identification method, and such gains and losses are reflected as a component of interestincome and other, net.

Derivative Financial Instruments

We enter into forward foreign exchange contracts with financial institutions to reduce the risk that our cashflows and earnings will be adversely affected by foreign currency exchange rate fluctuations. This program is notdesigned for trading or speculative purposes.

In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, werecognize derivative instruments as either assets or liabilities on the balance sheet at fair value. These forwardexchange contracts are not accounted for as hedges and, therefore, changes in the fair value of these instrumentsare recorded as interest income and other, net. Neither the cost nor the fair value of these forward foreignexchange contracts was material at March 31, 2006. The notional principal of forward foreign exchange contractsto purchase U.S. dollars with foreign currencies was $477.0 and $629.5 million at December 31, 2005 andMarch 31, 2006, respectively. There were no other forward foreign exchange contracts outstanding atDecember 31, 2005 or March 31, 2006.

Note 2. Cash, Cash Equivalents and Marketable Securities

Cash, cash equivalents and marketable securities consists of the following (in thousands):

As ofDecember 31,

2005

As ofMarch 31,

2006

(unaudited)

Cash and cash equivalents:Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,588,515 $2,002,399Cash equivalents:

U.S. government notes and agencies . . . . . . . . . . . . . . . . . . . . . 2,281,858 915,782Money market mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,801 16,998

Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . 3,877,174 2,935,179

Marketable securities:Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,203,209 700,965U.S. government notes and agencies . . . . . . . . . . . . . . . . . . . . . . . . . 2,906,698 4,750,852Equity security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,166 42,032

Total marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,157,073 5,493,849

Total cash, cash equivalents and marketable securities . . . . . . . $8,034,247 $8,429,028

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The following table summarizes unrealized gains and losses related to our investments in marketablesecurities designated as available-for-sale (in thousands):

As of December 31, 2005

AdjustedCost

GrossUnrealized

Gains

GrossUnrealized

Losses Fair Value

Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,219,078 $ 28 $(15,897) $1,203,209U.S. government notes and agencies . . . . . . . . . . . . . . . . . . . . . 2,911,410 418 (5,130) 2,906,698Equity security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 42,166 — 47,166

Total marketable securities . . . . . . . . . . . . . . . . . . . . . . . . $4,135,488 $42,612 $(21,027) $4,157,073

As of March 31, 2006

AdjustedCost

GrossUnrealized

Gains

GrossUnrealized

Losses Fair Value

(unaudited)

Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 712,284 $ 30 $(11,349) $ 700,965U.S. government notes and agencies . . . . . . . . . . . . . . . . . . . . . 4,773,944 7 (23,099) 4,750,852Equity security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 37,032 — 42,032

Total marketable securities . . . . . . . . . . . . . . . . . . . . . . . . $5,491,228 $37,069 $(34,448) $5,493,849

Gross unrealized gains and losses on cash equivalents were not material at December 31, 2005 andMarch 31, 2006. We found no other-than-temporary impairments to our marketable securities in the three monthsended March 31, 2006 and March 31, 2005. We incurred $7.6 million and $4.6 million of realized losses on ourinvestments in the three months ended March 31, 2006 and March 31, 2005.

The following table summarizes the estimated fair value of our investments in marketable securitiesdesignated as available-for-sale classified by the contractual maturity date of the security (in thousands):

As ofDecember 31,

2005

As ofMarch 31,

2006

(Unaudited)

Due within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 970,073 $1,992,339Due after 1 year through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,967,148 3,390,137Due after 5 years through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,122 18,350Due after 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,730 93,023

Total marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,157,073 $5,493,849

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In accordance with EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments, the following table shows gross unrealized losses and fair value for those investments thatwere in an unrealized loss position as of December 31, 2005 and March 31, 2006, aggregated by investmentcategory and the length of time that individual securities have been in a continuous loss position (in thousands):


Less than 12 Months 12 Months or Greater Total

Security Description Fair ValueUnrealized

Loss Fair ValueUnrealized


Loss

U.S. government notes andagencies . . . . . . . . . . . . . . . . . . . . . . $2,099,408 $ (5,130) $ — $ — $2,099,408 $ (5,130)

Municipal securities . . . . . . . . . . . . . . . 607,990 (7,705) 513,425 (8,192) 1,121,415 (15,897)

Total . . . . . . . . . . . . . . . . . . . . . . $2,707,398 $(12,835) $513,425 $(8,192) $3,220,823 $(21,027)


Less than 12 Months 12 Months or Greater Total

Security Description Fair ValueUnrealized



Loss

(unaudited)

U.S. government notes andagencies . . . . . . . . . . . . . . . . . . . . . . $4,542,391 $(23,099) $ — $ — $4,542,391 $(23,099)

Municipal securities . . . . . . . . . . . . . . . 224,230 (3,375) 435,030 (7,974) 659,260 (11,349)

Total . . . . . . . . . . . . . . . . . . . . . . $4,766,621 $(26,474) $435,030 $(7,974) $5,201,651 $(34,448)

Note 3. Property and Equipment

Property and equipment consist of the following (in thousands):

As ofDecember 31,

2005

As ofMarch 31,

2006

(unaudited)

Information technology assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 949,758 $1,061,797Construction in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211,088 349,462Land and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,752 165,934Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,108 153,870Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,719 18,505

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,417,425 1,749,568Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455,676 539,887

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 961,749 $1,209,681

Note 4. Acquisitions

During the three months ended March 31, 2006, we acquired all of the voting interests of dMarcBroadcasting, Inc. (dMarc), a digital solutions provider for the radio broadcast industry. This transaction wasaccounted for as a business combination. The total purchase price was $97.6 million which primarily consisted ofcash payments of $94.4 million. In addition, we are obligated to make additional cash payments of up to$1.136 billion if certain product integration, net revenue and advertising inventory targets are met through

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December 2008. Since these contingent payments are based on the achievement of performance targets, actualpayments may be substantially lower. Substantially all of these contingent payments will be accounted for asgoodwill, and the remaining amounts will be expensed, when earned. No contingent payments were earnedthrough March 31, 2006.

During the three months ended March 31, 2006, we also acquired all of the voting interests of four othercompanies. One of these transactions was accounted for as a business combination. Because the remaining threetransactions were with companies considered to be development stage enterprises, they were accounted for asasset purchases in accordance with EITF Issue No. 98-3, Determining Whether a Nonmonetary TransactionInvolves Receipt of Productive Assets or of a Business. The total purchase price of this business combination andthese asset purchases was $79.2 million, which primarily consisted of cash payments of $75.7 million. Inaddition, we are obligated to make additional cash payments of up to $17.9 million if certain performance targetsare met through March 2010. Since these contingent payments are based on the achievement of performancetargets, actual payments may be substantially lower. Substantially all of these contingent payments will beaccounted for as goodwill, and the remaining amounts will be expensed, when earned.

In addition, during the three months ended March 31, 2006, we acquired certain other intangible assets fortotal cash payments of $15.7 million.

The following table summarizes the allocation of the purchase price for all of the above acquisitions (inthousands):

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $123,906Patents and developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,387Customer contracts and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,790Net liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,059)Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22,527)Purchased in-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $192,497

Goodwill is not deductible for tax purposes. The developed technology, customer contracts and otherintangible assets have a weighted-average useful life of 4.0 years from the date of acquisition. The amortizationof these intangibles is not deductible for tax purposes.

Purchased in-process research and development of $4.0 million in the three months ended March 31, 2006was expensed upon acquisition because technological feasibility had not been established and no futurealternative uses existed. This amount is included in research and development expenses on the accompanyingCondensed Consolidated Statements of Income and is not deductible for tax purposes.

Note 5. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the quarter ended March 31, 2006, are as follows (inthousands):

Balance as of December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $194,900Goodwill acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,906

Balance as of March 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $318,806

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Information regarding our acquisition-related intangible assets that are being amortized is as follows (inthousands):


GrossCarryingAmount

AccumulatedAmortization

NetCarrying

Value

Patents and developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,413 $46,272 $ 74,141Customer contracts and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,145 17,503 8,642

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $146,558 $63,775 $ 82,783


GrossCarryingAmount

AccumulatedAmortization

NetCarrying

Value

Patents and developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $155,724 $57,942 $ 97,782Customer contracts and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,011 21,220 62,791

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $239,735 $79,162 $160,573

Patents and developed technology and customer contracts and other have weighted-average useful livesfrom the date of purchase of 3.4 and 3.3 years.

Amortization expense of acquisition-related intangible assets for the three month ended March 31, 2006 was$15.4 million.

Estimated amortization expense for acquisition-related intangible assets on our March 31, 2006 CondensedConsolidated Balance Sheet for each of the next five years is as follows (in thousands):

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,9452007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,6132008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,5822009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,5992010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,535Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,299

$160,573

Note 6. Interest Income and Other, Net

The components of interest income and other, net were as follows (in thousands):


2005 2006

(unaudited)

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,729 $ 78,924Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (123) (8)Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,080 (10,997)

Interest income and other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,686 $ 67,919

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Note 7. Contingencies

Legal Matters

Certain companies have filed trademark infringement and related claims against us over the display of ads inresponse to user queries that include trademark terms. The outcomes of these lawsuits have differed fromjurisdiction to jurisdiction. Courts in France have held us liable for allowing advertisers to select certaintrademarked terms as keywords. We are appealing those decisions. We were also subject to two lawsuits inGermany on similar matters where the courts held that we are not liable for the actions of our advertisers prior tonotification of trademark rights. We are litigating or recently have litigated similar issues in other cases in theU.S., France, Germany, Italy, Israel and Austria. Adverse results in these lawsuits may result in, or even compel,a change in this practice which could result in a loss of revenue for us, which could harm our business.

Certain entities have also filed intellectual property claims against us, alleging that features of certain of ourproducts, including Google Web Search, Google News, Google Image Search, and Google Book Search, infringetheir rights. Adverse results in these lawsuits may include awards of damages and may also result in, or evencompel, a change in our business practices, which could result in a loss of revenue for us or otherwise harm ourbusiness.

From time to time, we may also become a party to other litigation and subject to claims incident to theordinary course of business, including intellectual property claims (in addition to the trademark and copyrightmatters noted above), labor and employment claims, breach of contract claims, and other matters.

Although the results of litigation and claims cannot be predicted with certainty, we believe that the finaloutcome of the matters discussed above will not have a material adverse effect on our business, consolidatedfinancial position, results of operations or cash flow. Regardless of the outcome, litigation can have an adverseimpact on us because of defense costs, diversion of management resources and other factors.

Note 8. Stockholders’ Equity

Stock Plans

We maintain the 1998 Stock Plan, the 2000 Stock Plan, the 2003 Stock Plan, the 2003 Stock Plan (No. 2),the 2003 Stock Plan (No. 3), the 2004 Stock Plan and plans assumed through acquisitions which are collectivelyreferred to as the “Stock Plans.” Under our Stock Plans, incentive and nonqualified stock options or rights topurchase common stock may be granted to eligible participants. Options must generally be priced to be at least85% of our common stock’s fair market value at the date of grant (100% in the case of incentive stock options).Options are generally granted for a term of ten years. Options granted under the Stock Plans generally vest 25%after the first year of service and ratably each month over the remaining 36 month period contingent uponemployment with us on the date of vest. Options granted under plans other than the 2004 Stock Plan may beexercised prior to vesting. We have also issued restricted stock units (“RSUs”) and restricted shares under ourStock Plans. An RSU award is an agreement to issue shares of our stock at the time of vest. RSUs issued to newemployees vest over four years with a yearly cliff contingent upon employment with us on the dates of vest.These RSUs vest from zero to 37.5 percent of the grant amount at the end of each of the four years from date ofhire based on the employee’s performance. RSUs under the Founders’ Award programs are issued to individualson teams that have made extraordinary contributions to Google. These awards vest quarterly over four yearscontingent upon employment with us on the dates of vest.

We estimated the fair value of each option award on the date of grant using the Black-Scholes-Merton(BSM) valuation model. Our assumptions about stock-price volatility have been based exclusively on the impliedvolatilities of publicly traded options to buy our stock with contractual terms closest to the expected life of

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GOOGLE INC.


options granted to our employees applying the guidance provided by SAB 107. In addition, our assumptionsabout the expected term have been based primarily on that of companies that have option vesting and contractualterms, expected stock volatility and employee demographics and physical locations that are similar to ours. Wehave used this comparable data because we have limited relevant historical information to support the expectedexercise behavior of our employees who have been granted options recently. This relevant historical informationis limited because our stock has been publicly traded only since August 2004, and the fair market value of ourstock has increased substantially during this time. Accordingly, the exercise behavior of employees who havebeen granted options recently may be different than that of employees who have exercised their significantlyin-the-money options after the initial public offering. The risk-free rate for periods within the contractual life ofthe option is based on the U.S. Treasury yield curve in effect at the time of grant. Forfeitures were estimatedbased on historical experience.

The following table presents the weighted-average assumptions used to estimate the fair values of the stockoptions granted in the periods presented:


2005


2006

(unaudited)

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.64% 4.63%Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40% 40%Expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 3.1Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —Weighted-average estimated fair value of options granted

during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $59.32 $128.21

The following table summarizes the activity for outstanding stock options for the three months endedMarch 31, 2006:

Options Outstanding

Number ofShares

Weighted-Average

Exercise Price

(unaudited)

Balance at December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,589,646 $113.51Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364,534 $390.94Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,045,336) $ 39.40Options canceled/forfeited/expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (93,432) $ 50.54

Balance at March 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,815,412 $126.75

The weighted average remaining contractual terms for all outstanding stock options and those exercisable atMarch 31, 2006 were 8.1 years and 7.0 years. The aggregate intrinsic values for all outstanding stock options andthose outstanding and exercisable at March 31, 2006 were $3.8 billion and $2.9 billion, based on our closingstock price of $390.00 at March 31, 2006. Also, the number of options outstanding at March 31, 2006 includes2,390,254 options granted and exercised subsequent to March 21, 2002 that are unvested at March 31, 2006, inaccordance with EITF 00-23, Issues Related to Accounting for Stock Compensation Under APB Opinion No. 25and FASB Interpretation No. 44 (EITF 00-23). However, the computations of the weighted-average exerciseprices, weighted average remaining contractual term and aggregate intrinsic value for all stock optionsoutstanding and those exercisable do not consider these unvested shares. The aggregate intrinsic value of alloptions exercised during the three months ended March 31, 2006 was $388.1 million. The total grant date fairvalue of stock options vested during the three months ended March 31, 2006 was $77.0 million.

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GOOGLE INC.


As of March 31, 2006, there was $371.7 million of unrecognized compensation cost related to outstandingstock options, net of forecasted forfeitures. This amount is expected to be recognized through year 2011. To theextent forfeiture rates are different than we have anticipated, stock-based compensation related to these awardswill be different from our expectations.

The following table summarizes the activity for our unvested restricted stock units for the three monthsended March 31, 2006:

Unvested Restricted Stock Units

Number ofShares

Weighted-AverageGrant-DateFair Value

(unaudited)

Unvested at December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . 920,057 $324.38Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279,096 $376.57Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,889) $391.88Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,115) $320.71

Unvested at March 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . 1,181,149 $347.33

As of March 31, 2006, there was $293.9 million of unrecognized compensation cost related to unvestedrestricted stock units, net of forecasted forfeitures. This amount is expected to be recognized through year 2010.To the extent forfeiture rates are different than we have anticipated, stock-based compensation related to theseawards will be different from our expectations.

The following table summarizes additional information regarding outstanding and exercisable stock optionsat March 31, 2006:

Options Outstanding Options Exercisable

Range of Exercise Prices

TotalNumber of

Shares

UnvestedOptions

Granted andExercised

Subsequent toMarch 21,

2002Number of

Shares

Weighted-Average

RemainingLife

(Years)

WeightedAverageExercise

PriceNumber of

Shares

WeightedAverageExercise

Price

$ 0.05–$ 85.00 . . . . . . 10,111,033 2,390,254 7,720,779 7.2 $ 14.76 7,486,041 $ 14.45$117.84–$198.41 . . . . . . 2,597,658 — 2,597,658 8.8 $175.87 422,923 $173.94$205.96–$298.91 . . . . . . 1,881,458 — 1,881,458 9.2 $272.80 7,358 213.50$300.97-$398.15 . . . . . . 1,920,754 — 1,920,754 9.5 $319.51 2,048 $318.03$401.78–$471.63 . . . . . . 304,509 — 304,509 9.7 $428.98 — —

$ 0.05–$471.63 . . . . . . 16,815,412 2,390,254 14,425,158 8.1 $126.75 7,918,370 $ 23.23

The number of options outstanding at March 31, 2006 includes 2,390,254 of options granted and exercisedsubsequent to March 21, 2002 that are unvested at March 31, 2006, in accordance with EITF 00-23. However,the computations of the weighted-average exercise prices and the weighted average remaining life in the tableabove do not consider these unvested shares.

Note 9. Information about Geographic Areas

Our chief operating decision-makers (i.e. chief executive officer and his direct reports) review financialinformation presented on a consolidated basis, accompanied by disaggregated information about revenues by

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GOOGLE INC.


geographic region for purposes of allocating resources and evaluating financial performance. There are nosegment managers who are held accountable for operations, operating results and planning for levels orcomponents below the consolidated unit level. Accordingly, we consider ourselves to be in a single reportingsegment and operating unit structure.

Revenues by geography are based on the billing addresses of the advertisers. No single foreign country,other than the United Kingdom, accounted for more than ten percent of total revenues in the three months endedMarch 31, 2005 or 2006. The following table sets forth revenues and long-lived assets by geographic area (inthousands):


2005 2006

(unaudited)

Revenues:United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 771,812 $1,317,521United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186,215 342,871Rest of the world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298,489 593,363

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,256,516 $2,253,755

As ofDecember 31,

2005

As ofMarch 31,

2006

(unaudited)

Long-lived assets:United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,080,236 $1,527,257International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,506 211,656

Total long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,270,742 $1,738,913

Note 10. Subsequent Events

In April, 2006, we issued 5,300,000 shares of our common stock upon the closing of a follow-on publicstock offering for net proceeds of approximately $2.064 billion.

In April 2006, we completed our $1.0 billion cash purchase of a five percent equity interest in a wholly-owned subsidiary of Time Warner, Inc. that owns all of the outstanding interests of America Online, Inc. (AOL).Previously, in March 2006, we entered into certain commercial arrangements with AOL. We believe the terms ofthose agreements are at fair value.

Our investment in this non-marketable equity security will be accounted for at historical cost. In addition,this investment will be subject to a periodic impairment review. To the extent any impairment is consideredother-than-temporary, this investment would be written down to its fair value and the loss would be recorded in“interest income and other, net.”

In April 2006, we received a preliminary approval for settlement of the Lane’s Gift class action lawsuit inArkansas which will require us to pay plaintiffs’ attorneys’ fees and issue total AdWords credits of no more than$60 million. The Adwords credits will be accounted for as a reduction to revenues in the periods they areredeemed. Plaintiffs’ attorneys’ fees were estimated to be $30 million and were expensed in the three monthsended March 31, 2006.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

In addition to historical information, this report contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Thesestatements include, among other things, statements concerning our expectations:

• regarding the growth of our operations, business and revenues and the growth rate of our costs andexpenses.

• that seasonal fluctuations in Internet usage and traditional advertising seasonality are likely to affectour business.

• that growth in advertising revenues from our web sites will continue to exceed that from our GoogleNetwork members’ web sites.

• that our operating margin may decrease as we invest in our infrastructure.

• that we will continue to employ a significant number of temporary employees.

• regarding our future stock-based compensation charges.

• that we will continue to pay most of the Google AdSense fees we receive from advertisers to our GoogleNetwork members.

• that our cost of revenues will increase in 2006 primarily as a result of anticipated increases in trafficacquisition and data center costs.

• that research and development, sales and marketing and general and administrative expenses willincrease in the future.

• regarding our expansion into international markets.

• regarding our spending on property and equipment, including costs related to information technologyinfrastructure and land and buildings.

• regarding our income tax rates, tax liabilities and the expected higher proportion of our earnings weexpect our Irish subsidiary to recognize.

• regarding the sufficiency of our existing cash, cash equivalents, marketable securities and cashgenerated from operations.

• regarding our expected further contributions to, and investments in, philanthropic endeavors.

as well as other statements regarding our future operations, financial condition and prospects and businessstrategies. These forward-looking statements are subject to certain risks and uncertainties that could cause ouractual results to differ materially from those reflected in the forward-looking statements. Factors that couldcause or contribute to such differences include, but are not limited to, those discussed in this report, and inparticular, the risks discussed under the heading “Risk Factors” in Part II, Item 1A of this report and thosediscussed in other documents we file with the Securities and Exchange Commission. The following discussionshould be read in conjunction with our Annual Report on Form 10-K filed March 16, 2006, and the consolidatedfinancial statements and notes thereto. We undertake no obligation to revise or publicly release the results of anyrevision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not toplace undue reliance on such forward-looking statements.

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The following discussion and analysis of our financial condition and results of operations should be readtogether with our condensed consolidated financial statements and related notes included elsewhere in this report.

Overview

Google is a global technology leader focused on improving the ways people connect with information. Ourinnovations in web search and advertising have made our web site a top Internet destination and our brand one ofthe most recognized in the world. Our mission is to organize the world’s information and make it universallyaccessible and useful. We serve three primary constituencies:

• Users. We provide users with products and services that enable people to more quickly and easily find,create and organize information that is useful to them.

• Advertisers. We provide advertisers our Google AdWords program, an auction-based advertisingprogram that enables them to deliver relevant ads targeted to search results or web content. OurAdWords program provides advertisers with a cost-effective way to deliver ads to customers acrossGoogle sites and through the Google Network under our AdSense program.

• Web sites. We provide members of our Google Network our Google AdSense program, which allowsthese members to deliver AdWords ads that are relevant to the search results or content on their websites. We share most of the fees these ads generate with our Google Network members—creating animportant revenue stream for them.

How We Generate Revenue

We derive most of our revenues from fees we receive from our advertisers.

Our original business model consisted of licensing our search engine services to other web sites. In the firstquarter of 2000, we introduced our first advertising program. Through our direct sales force we offeredadvertisers the ability to place text-based ads on our web sites targeted to our users’ search queries under aprogram called Premium Sponsorships. Advertisers paid us based on the number of times their ads weredisplayed on users’ search results pages, and we recognized revenue at the time these ads appeared. In the fourthquarter of 2000, we launched Google AdWords, an online self-service program that enables advertisers to placetargeted text-based ads on our web sites. AdWords customers originally paid us based on the number of timestheir ads appeared on users’ search results pages. In the first quarter of 2002, we began offering AdWordsexclusively on a cost-per-click basis, which means that an advertiser pays us only when a user clicks on one of itsads. AdWords is also available through our direct sales force.

Effective beginning the first quarter of 2004 until the end of the first quarter of 2005, the AdWordscost-per-click pricing structure was the only pricing structure available to our advertisers. However, during thesecond quarter of 2005, we launched an AdWords cost-per-impression program that enables advertisers to pay usbased on the number of times their ads appear on Google Network members’ sites specified by the advertiser. Foradvertisers using our AdWords cost-per-click pricing, we recognize as revenue the fees charged advertisers eachtime a user clicks on one of the text-based ads that appears next to the search results on our web sites, or next tothe search results or content on Google Network members’ sites. For advertisers using our AdWordscost-per-impression pricing, we recognize as revenue the fees charged advertisers each time their ads aredisplayed on the Google Network members’ sites. Our AdWords agreements are generally terminable at any timeby our advertisers.

Google AdSense is the program through which we distribute our advertisers’ AdWords ads for display onthe web sites of our Google Network members. Our AdSense program includes AdSense for search and AdSensefor content. AdSense for search, launched in the first quarter of 2002, is our service for distributing relevant adsfrom our advertisers for display with search results on our Google Network members’ sites. AdSense for content,launched in the first quarter of 2003, is our service for distributing ads from our advertisers that are relevant tocontent on our Google Network members’ sites. Our advertisers pay us a fee each time a user clicks on one of

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our advertisers’ ads displayed on Google Network members’ web sites or, for those advertisers who choose ourcost-per-impression pricing, as their ads are displayed. To date, we have paid most of these advertiser fees to themembers of the Google Network, and we expect to continue doing so for the foreseeable future. We recognizethese advertiser fees as revenue and the portion of the advertiser fee we pay to our Google Network members astraffic acquisition costs under cost of revenues. In some cases, we guarantee our Google Network membersminimum revenue share payments. Members of the Google Network do not pay any fees associated with the useof our AdSense program on their web sites. Some of our Google Network members separately license our websearch technology and pay related licensing fees to us. Our agreements with Google Network members consistlargely of uniform online “click-wrap” agreements that members enter into by interacting with our registrationweb sites. Agreements with our larger members are individually negotiated. The standard agreements have nostated term and are terminable at will. The negotiated agreements vary in duration. Both the standard agreementsand the negotiated agreements contain provisions requiring us to share with the Google Network member aportion of the advertiser fees generated by users clicking on ads on the Google Network member’s web site or,for advertisers who choose our cost-per-impression pricing, as the ads are displayed on the Google Networkmember’s web site. The standard agreements have uniform revenue share terms. The non-standard agreementsvary as to revenue share terms and are heavily negotiated.

In the third quarter of 2005, we launched the Google Publication Ads Program through which we distributeour advertisers’ ads for publication in magazines. We recognize as revenue the fees charged advertisers whentheir ads are published in magazines. Also, in the first quarter of 2006, we acquired dMarc Broadcasting, Inc.(dMarc), a digital solutions provider for the radio broadcast industry. dMarc, now one of our wholly ownedsubsidiaries, distributes our advertisers’ ads for broadcast by radio stations. We recognize as revenue the feescharged advertisers each time an ad is broadcasted or a listener responds to that ad. We consider the magazinesand radio stations that participate in these programs to be members of our Google Network.

We believe the factors that influence the success of our advertising programs include the following:

• The relevance, objectivity and quality of our search results.

• The number and type of searches initiated at our web sites.

• The number and type of searches initiated at, as well as the number of visits to and the content of, ourGoogle Network members’ web sites.

• The advertisers’ return on investment (ad cost per sale or cost per conversion) from advertisingcampaigns on our web sites or our Google Network members’ web sites or other media compared toother forms of advertising.

• The number of advertisers and the breadth of items advertised.

• The total and per click or per impression advertising spending budgets of each advertiser.

• The monetization of (or generation of revenue from) traffic on our web sites and our Google Networkmembers’ web sites.

We believe that the monetization of traffic on our web sites and our Google Network members’ web sites isaffected by the following factors:

• The relevance and quality of ads displayed with each search results page on our web sites and ourGoogle Network members’ web sites, as well as with each content page on our Google Networkmembers’ web sites.

• The number and prominence of ads displayed with each search results page on our web sites and ourGoogle Network members’ web sites, as well as with each content page on our Google Networkmembers’ web sites.

• The rate at which our users and users of our Google Network members’ web sites click onadvertisements.

• Our minimum fee per click.

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Advertising revenues made up no less than 98% of our revenues in the three months ended March 31, 2005and 2006. We derive the balance of our revenues from the license of our web search technology, the license ofour search solutions to enterprises and the sale and license of other products and services. In addition, in the firstquarter of 2006 we launched Google Video through which we make video content owned by others available fordownload and purchase by end users. We recognize as revenue the fees we receive from end users to the extentwe are the primary obligor to them; however, to the extent we are not the primary obligor, we recognize asrevenues the fees we receive from the end users net of the amounts we pay to our video content providers.

Trends in Our Business

Our business has grown rapidly since inception, resulting in substantially increased revenues, and we expectthat our business will continue to grow. However, our revenue growth rate has generally declined over time, andwe expect it will continue to do so as a result of increasing competition and the difficulty of maintaining growthrates as our revenues increase to higher levels. In addition, the main focus of our advertising programs is toprovide relevant and useful advertising to our users, reflecting our commitment to constantly improve theiroverall web experience. As a result, we may take steps to improve the relevance of the ads displayed on our websites, such as removing ads that generate low click-through rates, that could negatively affect our near-termadvertising revenues.

Both seasonal fluctuations in Internet usage and traditional retail seasonality have affected, and are likely tocontinue to affect, our business. Internet usage generally slows during the summer months, and commercialqueries typically increase significantly in the fourth quarter of each year. These seasonal trends have caused andwill likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenuegrowth rates. Prior to the second quarter of 2004, these seasonal trends may have been masked by the substantialquarter over quarter growth of Internet traffic focused on commercial transactions and ultimately by thesubstantial quarter over quarter growth in our revenues.

From the inception of the Google Network in 2002 through the first quarter of 2004, the growth inadvertising revenues from our Google Network members’ web sites exceeded that from our web sites, which hada negative impact on our operating margins. The operating margin we realize on revenues generated from adsplaced on our Google Network members’ web sites through our AdSense program is significantly lower thanrevenue generated from ads placed on our web sites because most of the advertiser fees from ads served onGoogle Network member web sites are shared with our Google Network members. However, beginning in thesecond quarter of 2004, growth in advertising revenues from our web sites has exceeded that from our GoogleNetwork members’ web sites. This trend has had a positive impact on our operating margins and we expect thatthis will continue for the foreseeable future although the relative rate of growth in revenues from our web sitescompared to the rate of growth in revenues from our Google Network members’ web sites may vary over time.

Our operating margin may decrease as we invest in building the necessary employee and systemsinfrastructures required to manage our anticipated growth. We have experienced and expect to continue toexperience substantial growth in our operations as we invest significantly in our research and developmentprograms, expand our user, advertiser and Google Network member bases and increase our presence ininternational markets, as well as promote the distribution of our Google toolbar and other products in order tomake our services easier to access. This growth has required us to continually hire new personnel and makesubstantial investments in property and equipment. Our full-time employee headcount has almost doubled overthe last twelve months, growing from 3,482 at March 31, 2005 to 6,790 at March 31, 2006. Also, we haveemployed a significant number of temporary employees in the past and expect to continue to do so in theforeseeable future. Our capital expenditures have grown from $142.4 million in the three months endedMarch 31, 2005 to $344.9 million in the three months ended March 31, 2006. We expect the annual growth rateof our investments in property and equipment for 2006, including information and technology infrastructure andland and buildings, to be substantially greater than our annual revenue growth rate for 2006. Our capital spendingbetween periods may fluctuate significantly depending on the availability and price of suitable property andequipment. Management of our growth will continue to require the devotion of significant employee and other

24

resources. We may not be able to manage this growth effectively. Finally, investments in our business aregenerally made with a focus on our long-term operations. Accordingly, there may be little or no linkage betweenour spending and our revenues in any particular quarter.

Our international revenues have grown as a percentage of our total revenues to 42% in the three monthsended March 31, 2006 from 38% in the three months ended December 31, 2005 and from 39% in the threemonths ended March 31, 2005. This increase in the portion of our revenues derived from international marketsresults largely from increased acceptance of our advertising programs, increases in our direct sales resources andcustomer support operations and our continued progress in developing localized versions of our products, inthese international markets. Although we expect to continue to make investments in international markets, theymay not result in an increase in our international revenues as a percentage of total revenues in 2006 or thereafter.

We currently anticipate that our effective tax rate will be approximately 30% in 2006 compared to 31.6% in2005, primarily because we expect that our Irish subsidiary will recognize proportionately more of our earningsin 2006 compared to 2005, and such earnings are taxed at a lower statutory tax rate than in the U.S. However, iffuture earnings recognized by our Irish subsidiary are not as proportionately great as we expect, our effective taxrate will be higher than we currently expect.

Results of Operations

The following is a more detailed discussion of our financial condition and results of operations for theperiods presented.

The following table presents our historical operating results as a percentage of revenues for the periodsindicated (unaudited):

Three Months Ended

March 31,2005

December 31,2005

March 31,2006

Consolidated Statements of Income Data:Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%Costs and expenses:

Cost of revenues(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.5 40.5 40.1Research and development(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.7 9.9 10.9Sales and marketing(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 8.5 8.5General and administrative(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 6.7 7.5Contribution to Google Foundation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 4.7 —

Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64.8 70.3 67.0

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.2 29.7 33.0Interest income and other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 3.6 3.0

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.3 33.3 36.0Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 13.9 9.7

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.4% 19.4% 26.3%

(1) Stock-based compensation recognized in the three months ended March 31, 2005, accounted for underAccounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, has beenreclassified to these expense lines to conform with the presentation in the three months ended March 31,2006. As discussed in Note 1 of the Condensed Consolidated Financial Statements included elsewhere inthis Form 10-Q, stock-based compensation for the three months ended March 31, 2006, is presented inconformity with Financial Accounting Standards Board Statement of Financial Accounting StandardsNo. 123 (revised 2004), Share-Based Payment.

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Revenues

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

Three Months Ended

March 31,2005

December 31,2005

March 31,2006

Advertising revenues:Google web sites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 656,997 $1,098,213 $1,297,317Google Network web sites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 584,115 798,573 928,376

Total advertising revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,241,112 1,896,786 2,225,693Licensing and other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,404 22,307 28,062

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,256,516 $1,919,093 $2,253,755

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

Three Months Ended

March 31,2005

December 31,2005

March 31,2006

Advertising revenues:Google web sites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52% 57% 58%Google Network web sites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 42 41

Total advertising revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 99 99Google web sites as % of advertising revenues . . . . . . . . . . . . 53 58 58Google Network web sites as % of advertising revenues . . . . . 47 42 42

Licensing and other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1% 1% 1%

Growth in our revenues in the three months ended March 31, 2006 compared to the three months endedMarch 31, 2005 and the three months ended December 31, 2005 resulted primarily from growth in advertisingrevenues. The advertising revenue growth resulted primarily from increases in the total number of paid clicks andads displayed through our programs, rather than from changes in the average fees realized. The increase in thenumber of paid clicks and ads displayed through our programs was due to an increase in aggregate traffic both onour web sites and those of our Google Network members, an increase in the number of Google Networkmembers, certain improvements in the monetization of increased traffic on our web sites and our GoogleNetwork member sites and the continued global expansion of our advertising base.

The sequential quarterly revenue growth rate decreased from 21.6% from the three months endedSeptember 30, 2005 to the three months ended December 31, 2005, to 17.4% from the three months endedDecember 31, 2005 to the three months ended March 31, 2006. In addition, the sequential quarterly revenuegrowth rate from our web sites decreased from 24.1% from the three months ended September 30, 2005 to thethree months ended December 31, 2005, to 18.1% from the three months ended December 31, 2005 to the threemonths ended March 31, 2006, and the sequential quarterly revenue growth rate from our Google Networkmembers’ web sites decreased from 18.3% from the three months ended September 30, 2005 to the three monthsended December 31, 2005, to 16.3% from the three months ended December 31, 2005 to the three months endedMarch 31, 2006. These decreases in the rates of sequential quarterly growth are primarily the result of our higherrevenue levels and seasonal slowdowns in Internet usage and commercial queries.

Revenues realized through the Google Publication Ads Program, our radio advertising efforts and GoogleVideo were not material in any of the periods presented.

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Licensing and other revenues increased by $5.8 million or 25.8% from the three months endedDecember 31, 2005 to the three months ended March 31, 2006 primarily as a result of increased sales of ourSearch Appliances.

We believe that the increase in the number of paid clicks and ads displayed through our programs is theresult of the relevance and quality of both the search results and advertisements displayed, which results in moresearches, advertisers, and Google Network members and other partners. We expect that our revenue growth rateswill generally decline in the future as a result of increasing competition and the difficulty of maintaining growthrates as our revenues increase to higher levels.

In April 2006, we received a preliminary approval for settlement of the Lane’s Gift class action lawsuit inArkansas which will require us to pay plaintiffs’ attorneys’ fees and issue total AdWords credits of no more than$60 million. The AdWords credits will be accounted for as a reduction to revenues in the periods they are redeemed.See further discussion below of the settlement of the Lane’s Gift class action lawsuit under General andAdministrative.

Revenues by Geography

Domestic and international revenues as a percentage of consolidated revenues, determined based on thebilling addresses of our advertisers, are set forth below.

Three Months Ended

March 31,2005

December 31,2005

March 31,2006

(unaudited)

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61% 62% 58%United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15% 14% 15%Rest of the world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24% 24% 27%

The growth in international revenues in the three months ended March 31, 2006 compared to the threemonths ended March 31, 2005 and the three months ended December 31, 2005 resulted largely from increasedacceptance of our advertising programs and increases in our direct sales resources and customer supportoperations in international markets and our continued progress in developing localized versions of our productsfor these international markets. Furthermore, the growth in international revenues from the three months endedDecember 31, 2005 to the three months ended March 31, 2006 also results from seasonally stronger traffic andmonetization in certain countries compared to the U.S.

In addition, the strength of the U.S. dollar relative to other foreign currencies (primarily the Euro and theJapanese Yen) in the three months ended March 31, 2006 compared to the three months ended March 31, 2005had an unfavorable impact on our international revenues. Had foreign exchange rates remained constant in theseperiods, our revenues would have been approximately $65.0 million or 0.3% higher. The impact on internationalrevenues due to the strength of the dollar relative to other foreign currencies in the three months ended March 31,2006 compared to the three months ended December 31, 2005 was not material.

While international revenues in each of the periods presented accounted for far less than half of our totalrevenues, more than half of our user traffic during these periods came from outside the U.S. Although we expectto continue to make investments in international markets, they may not result in an increase in our internationalrevenues as a percentage of total revenues in 2006 or thereafter. See Note 9 of Notes to Condensed ConsolidatedFinancial Statements included as part of this Form 10-Q for additional information about geographic areas.

Costs and Expenses

Cost of Revenues. Cost of revenues consists primarily of traffic acquisition costs. Traffic acquisition costsconsist of amounts ultimately paid to Google Network members, as well as to partners who direct search queriesto our web site. These amounts are primarily based on revenue share arrangements under which we pay these

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Google Network members and other partners a portion of the fees we receive from our advertisers. In addition,certain AdSense agreements obligate us to make guaranteed minimum revenue share payments to GoogleNetwork members based on their achieving defined performance terms, such as number of search queries oradvertisements displayed. We amortize guaranteed minimum revenue share prepayments (or accrete an amountpayable to a Google Network member if the payment is due in arrears) based on the number of search queries oradvertisements displayed on the Google Network member’s web site or the actual revenue share amounts,whichever is greater. In addition, concurrent with the commencement of a small number of AdSense and otheragreements, we have purchased certain items from, or provided other consideration to, our Google Networkmembers and partners. We have determined that certain of these amounts are prepaid traffic acquisition costs andare amortized on a straight-line basis over the terms of the related agreements.

The following table presents our traffic acquisition costs (dollars in millions), and traffic acquisition costs asa percentage of advertising revenues, for the periods presented.

Three Months Ended

March 31,2005

December 31,2005

March 31,2006

(unaudited)

Traffic acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $461.8 $628.9 $722.7Traffic acquisition costs as a percentage of advertising revenues . . . . . . . . . . 37.2% 33.2% 32.5%

In addition, other cost of revenues includes the expenses associated with the operation of our data centers,including depreciation, labor, energy and bandwidth costs, as well as credit card and other transaction feesrelated to processing customer transactions.

Cost of revenues increased by $127.1 million to $904.1 million (or 40.1% of revenues) in the three monthsended March 31, 2006, from $777.0 million (or 40.5% of revenues) in the three months ended December 31,2005. This increase in dollars was primarily the result of additional traffic acquisition costs, the depreciation ofadditional information technology assets purchased in the current and prior periods, other additional data centercosts and additional credit card and other transaction fees. There was an increase in traffic acquisition costs of$93.8 million primarily as a result of more advertiser fees generated through our AdSense program and anincrease in data center costs of $15.8 million primarily as a result of the depreciation of additional informationtechnology assets purchased in the current and prior periods as well as additional labor required to manage thedata centers. In addition, there was an increase in credit card and other transaction processing fees of $7.0 millionresulting from more advertiser fees being generated through AdWords. The decrease in cost of revenues as apercentage of revenues was primarily the result of proportionately greater revenues from our web sites comparedto our Google Network members’ web sites.

Traffic acquisition costs as a percentage of advertising revenues decreased from 33.2% in the three monthsended December 31, 2005 to 32.5% in the three months ended March 31, 2006. The reason for this decrease wasprimarily due to an increase in the proportion of advertising revenues coming from our web sites rather than fromour Google Network members’ web sites, and an increase in the proportion of our AdSense revenues comingfrom agreements with more favorable revenue share arrangements.

Cost of revenues increased by $357.3 million to $904.1 million (or 40.1% of revenues) in the three monthsended March 31, 2006, from $546.8 million (or 43.5% of revenues) in the three months ended March 31, 2005.This increase in dollars was primarily the result of additional traffic acquisition costs, the depreciation ofadditional information technology assets purchased in the current and prior periods, other additional data centercosts and additional credit card and other transaction fees. There was an increase in traffic acquisition costs of$260.9 million primarily resulting from more advertiser fees generated through our AdSense program, and anincrease in data center costs of $61.0 million primarily resulting from the depreciation of additional informationtechnology assets purchased in the current and prior periods as well as additional labor required to manage thedata centers. In addition, there was an increase in credit card and other transaction processing fees of $14.7

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million resulting from more advertiser fees being generated through AdWords. The decrease in cost of revenuesas a percentage of revenues was primarily the result of proportionately greater revenues from our web sitescompared to our Google Network members’ web sites.

Traffic acquisition costs as a percentage of advertising revenues decreased from 37.2% in the three monthsended March 31, 2005 to 32.5% in the three months ended March 31, 2006. The reason for this decrease wasprimarily due to an increase in the proportion of advertising revenues coming from our web sites rather than fromour Google Network members’ web sites, and an increase in the proportion of our AdSense revenues comingfrom agreements with more favorable revenue share arrangements.

We expect cost of revenues to continue to increase in dollars in 2006 compared to 2005, primarily as a resultof forecasted increases in traffic acquisition costs, data center costs, credit card and other transaction fees andother costs. However, traffic acquisition costs as a percentage of advertising revenues may fluctuate in the futurebased on a number of factors, including the following:

• the relative growth rates of revenues from our web sites and from our Google Network members’ websites;

• whether we are able to enter into more AdSense arrangements that provide for lower revenue shareobligations or whether increased competition for arrangements with existing and potential GoogleNetwork members results in less favorable revenue share arrangements, and

• whether we share with existing and new partners proportionately more of the aggregate advertising feesthat we earn from paid clicks derived from search queries these partners direct to our web sites.

Research and Development. Research and development expenses consist primarily of compensation andrelated costs for personnel responsible for the research and development of new products and services, as well assignificant improvements to existing products and services. We expense research and development costs as theyare incurred.

Research and development expenses increased by $56.7 million to $246.6 million (or 10.9% of revenues) inthe three months ended March 31, 2006, from $189.9 million (or 9.9% of revenues) in the three months endedDecember 31, 2005, primarily due to an increase in stock-based compensation expense of $40.3 million (seedetailed discussion below). Labor and facilities related costs increased $8.1 million as a result of 21% and 38%increases in research and development headcount from December 31, 2005 and September 30, 2005 to March 31,2006. This $8.1 million increase would have been greater if not for the disproportionately large increase to ourannual bonus accrual recorded in the three months ended December 31, 2005 as a result of our better thanexpected 2005 financial performance. In addition, there was an increase of $5.9 million in the amortization ofdeveloped technology resulting from acquisitions in current and prior periods.

Research and development expenses increased by $137.9 million to $246.6 million (or 10.9% of revenues)in the three months ended March 31, 2006, from $108.7 million (or 8.7% of revenues) in the three months endedMarch 31, 2005, primarily due to an increase in labor and facilities related costs of $69.2 million as a result of a123% increase in research and development headcount from March 31, 2005 to March 31, 2006, and an increasein stock-based compensation cost of $43.8 million (see detailed discussion below). In addition, there was anincrease in depreciation and related expenses of $11.1 million primarily as a result of additional informationtechnology assets purchased over the fifteen-month period ended March 31, 2006, and an increase of $7.5 millionin amortization of developed technology acquired in current and prior years.

We anticipate that research and development expenses will increase in dollar amount and may increase as apercentage of revenues in 2006 and future periods compared to 2005 because we expect to hire more researchand development personnel and build the infrastructure required to support the development of new, and improveexisting, products and services, and because we expect greater stock-based compensation expenses primarilybecause of our adoption of SFAS 123R on January 1, 2006 (see detailed discussion below).

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Sales and Marketing. Sales and marketing expenses consist primarily of compensation and related costs forpersonnel engaged in customer service and sales and sales support functions, as well as promotional andadvertising expenditures.

Sales and marketing expenses increased $28.3 million to $190.9 million (or 8.5% of revenues) in the threemonths ended March 31, 2006, from $162.6 million (or 8.5% of revenues) in the three months endedDecember 31, 2005. This increase in dollars was primarily due to $12.0 million in expenses associated with ourannual sales conference held in the first quarter of 2006, as well as an increase in stock based compensation of$8.1 million (see detailed discussion below) and in labor and facilities related costs of $7.4 million mostly as aresult of a 18% and 33% increase in sales and marketing headcount from December 31, 2005 and September 30,2005 to March 31, 2006. However, this $7.4 million increase would have been greater if not for thedisproportionately large increase to our annual bonus accrual recorded in the three months ended December 31,2005 as a result of our better than expected 2005 financial performance.

Sales and marketing expenses increased $101.4 million to $190.9 million (or 8.5% of revenues) in the threemonths ended March 31, 2006, from $89.5 million (or 7.1% of revenues) in the three months ended March 31,2005. This increase was primarily due to an increase in labor and facilities related costs of $40.5 million mostlyas a result of a 69% increase in sales and marketing headcount from March 31, 2005 to March 31, 2006, anincrease in promotional and advertising expenses of $34.9 million, a majority of which were related to GoogleToolbar and other product distribution costs, an increase of $9.4 million in stock-based compensation (seedetailed discussion below) and an increase in expenses associated with our annual sales conference held in thefirst quarter of each year of approximately $8.0 million.

We anticipate sales and marketing expenses will continue to increase in dollar amount and may increase as apercentage of revenues in 2006 and future periods compared to 2005 as we continue to expand our business on aworldwide basis. A significant portion of these increases relate to our plan to increase promotional andadvertising expenditures, primarily through increases in expenditures related to certain toolbar and other productdistributions, and to hire additional personnel to increase the level of service we provide to our advertisers andGoogle Network members. We also plan to add a significant number of international sales personnel to supportour worldwide expansion. We also expect greater stock-based compensation expenses primarily because of ouradoption of SFAS 123R on January 1, 2006 (see detailed discussion below).

General and Administrative. General and administrative expenses consist primarily of compensation andrelated costs for personnel and facilities related to our finance, human resources, facilities, informationtechnology and legal organizations, and fees for professional services. Professional services are principallycomprised of outside legal, audit, information technology consulting and outsourcing services.

General and administrative expenses increased $39.5 million to $169.4 million (or 7.5% of revenues) in thethree months ended March 31, 2006, from $129.9 million (or 6.7% of revenues) in the three months endedDecember 31, 2005. This increase was primarily due to the recognition of $30.0 million in estimated plaintiffs’attorneys’ expenses related to the preliminary settlement of the Lane’s Gift class action lawsuit. Furthermore,there was an increase in labor and facilities related costs of $3.4 million primarily as a result of 18% and 37%increase in headcount from December 31, 2005 and September 30, 2005 to March 31, 2006. However, this $3.4million increase would have been greater if not for the disproportionately large increase to our annual bonusaccrual recorded in the three months ended December 31, 2005 as a result of our better than expected 2005financial performance. Also, stock based compensation expense increased $7.5 million (see detailed discussionbelow). In addition, depreciation and related expenses increased $5.5 million primarily as a result of additionalinformation technology assets purchased over the six month period ended March 31, 2006. The additionalpersonnel and depreciation and related expenses are the result of the growth of our business. These increaseswere partially offset by a decrease in bad debt expense of $7.0 million primarily related to collections ofpreviously reserved receivables.

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General and administrative expenses increased $100.6 million to $169.4 million (or 7.5% of revenues) in thethree months ended March 31, 2006, from $68.8 million (or 5.5% of revenues) in the three months endedMarch 31, 2005. This increase was primarily due to the recognition of $30.0 million in estimated plaintiffs’attorneys’ expenses related to the preliminary settlement of the Lane’s Gift class action lawsuit. Furthermore,there was an increase in labor and facilities related costs of $29.3 million, primarily as a result of a 94% increasein headcount from March 31, 2005 to March 31, 2006, an increase in professional services fees of $17.4 million,and an increase in stock based compensation of $11.9 million (see detailed discussion below). In addition,depreciation and related cost increased $9.7 million primarily as a result of additional information technologyassets purchased over the fifteen month period ended March 31, 2006. The additional personnel, professionalservices and depreciation and related expenses are the result of the growth of our business.

As we expand our business and incur additional expenses associated with being a public company, webelieve general and administrative expenses will increase in dollar amount and may increase as a percentage ofrevenues in 2006 and future periods compared to 2005. We also expect greater stock-based compensationexpenses primarily because of our adoption of SFAS 123R on January 1, 2006 (see detailed discussion below).

Contribution to Google Foundation. In the three months ended December 31, 2005, we made anon-recourse, non-refundable $90.0 million contribution to the Google Foundation, a nonprofit related party ofGoogle. As a result, this contribution was recorded as an expense in the period made. We do not expect to makefurther donations to the Google Foundation for the foreseeable future.

Stock-Based Compensation.

The following is a discussion of the accounting for our stock awards through the end of 2005 under theaccounting rules then in effect:

We accounted for employee stock-based compensation using the intrinsic value method under AccountingPrinciples Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Under APB 25, deferredstock-based compensation for options granted to employees is equal to its intrinsic value, determined as thedifference between the exercise prices and the values of the underlying stock on the dates of grant.

Prior to our initial public offering we typically granted stock options at exercise prices equal to or less thanthe value of the underlying stock as determined by our board of directors on the date of option grant. Forpurposes of financial accounting, we applied hindsight within each year or quarter prior to our initial publicoffering to arrive at reassessed values for the shares underlying these options. We recognized the differencebetween the exercise prices and the reassessed values as stock-based compensation over the vesting periods on anaccelerated basis.

After the initial public offering, we have generally granted options at exercise prices equal to the fair marketvalue of the underlying stock on the dates of option grant. As a result, only an immaterial amount of stock-basedcompensation was recognized over the vesting periods on an accelerated basis.

In the fourth quarter of 2004, we began granting restricted stock units (“RSUs”) to certain employees underour Founders’ Award and other programs. Under these programs, the fair values of the underlying stock on thedates of grant are recognized as stock-based compensation over the four year vesting periods on an acceleratedbasis. In the second quarter of 2005, we began granting RSUs to all newly hired employees. These RSUs vestfrom zero to 37.5 percent of the grant amount at the end of each of the four years from date of hire based on theemployee’s performance. We recognized compensation expense for these RSUs under the variable method basedon the fair market value of the underlying shares at the end of each quarter within the vesting periods.

On January 1, 2006, we adopted SFAS 123R using the modified-prospective method. Under this method, werecognize stock-based compensation over the related service periods for any stock-awards issued after

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December 31, 2005, as well as for all stock awards issued prior to January 1, 2006 for which the requisite servicehas not been provided as of January 1, 2006 because these awards are unvested. Stock-based compensation ismeasured based on the fair values of all stock awards on the dates of grant.

We have elected to use the Black-Scholes-Merton (“BSM”) option-pricing model to determine the fair valueof stock-based awards under SFAS 123R, consistent with that used for pro forma disclosures under SFASNo. 123, Accounting for Stock-Based Compensation.

We continue to recognize stock-based compensation using the accelerated method for all stock awardsissued prior to January 1, 2006, other than RSUs issued to new employees that vest based on the employee’sperformance for which we use the straight-line method. We elected to recognize stock-based compensation usingthe straight-line method for all stock awards issued after January 1, 2006, which will likely result in therecognition of less stock-based compensation over at least the next several years compared to that which wouldhave been recognized had we continued to use the accelerated method.

SFAS 123R requires that the deferred stock-based compensation on our balance sheet on the date ofadoption be netted against additional paid-in capital. At December 31, 2005, we had $119.0 million of deferredstock-based compensation which had been netted against additional paid-in capital on January 1, 2006, asreflected in the accompanying Condensed Consolidated Balance Sheet at March 31, 2006.

As noted above, prior to the adoption of SFAS 123R, we accounted for RSUs issued to new employees thatvest based on the employee’s performance under the variable method, under which stock-based compensation ismeasured based on the fair value of the underlying shares at the end of each quarter within the vesting periods.As noted above, under SFAS 123R stock-based compensation is measured based on the fair values of theunderlying shares on the dates of grant for all such outstanding RSUs. As a result, to the extent the fair value ofthe underlying shares is greater at the end of each quarter within the vesting periods compared to the fair valueson the dates of grant, then we will recognize less stock-based compensation than we would have had wecontinued to use the variable method.

SFAS 123R requires compensation expense to be recognized based on awards ultimately expected to vest.As a result, forfeitures need to be estimated on the date of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from those estimates. On January 1, 2006, we began to estimate forfeitures based onour historical experience to determine stock-based compensation to be recognized. For the periods prior toJanuary 1, 2006, we accounted for forfeitures as they occurred.

In addition, we continue to account for stock awards issued to non-employees in accordance with theprovisions of SFAS 123R and EITF 96-18 under which we use the BSM method to measure the value of optionsgranted to non-employees at each vesting date to determine the appropriate charge to stock-based compensation.

Stock-based compensation increased $56.5 million to $114.7 million (or 5.1% of revenues) in the threemonths ended March 31, 2006 from $58.2 million (or 3.0% of revenues) in the three months ended December 31,2005. This increase was primarily a result of our adoption of SFAS 123R on January 1, 2006 under which stock-based compensation was recognized using the fair-value-based method as compared to the intrinsic value methodunder APB 25.

Stock-based compensation increased $65.8 million to $114.7 million (or 5.1% of revenues) in the threemonths ended March 31, 2006 from $48.9 million (or 3.9% of revenues) in the three months ended March 31,2005. This increase was primarily resulted from our adoption of SFAS 123R on January 1, 2006 under whichstock-based compensation was recognized using the fair-value-based method as compared to the intrinsic valuemethod under APB 25.

We expect stock-based compensation to be approximately $370.0 million in 2006 and $410.3 millionthereafter. These amounts do not include stock-based compensation related to stock awards that have been and

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may be granted to employees and directors subsequent to March 31, 2006 and stock awards that have been ormay be granted to non-employees. In addition, to the extent forfeiture rates are different than we have anticipatedstock-based compensation related to these awards will be different from our expectations.

At December 31, 2005, there were 202,090 unvested options held by non-employees with a weighted-average exercise price of $3.59 and a weighted-average 25 months remaining vesting period. These optionsgenerally vest on a monthly and ratable basis. No options or other stock awards that vest over time were grantedto non-employees in the quarter ended March 31, 2006.

Interest Income and Other, Net

Interest income and other of $67.9 million in the three months ended March 31, 2006 was primarilycomprised of $78.9 million of interest income earned on our cash, cash equivalents and marketable securitiesbalances. In addition, we recognized $1.0 million of rental income related to buildings we own. These incomesources were partially offset by $7.6 million of realized losses on sales of marketable securities, and $4.5 millionof net foreign exchange losses as a result of (i) the forward contracts that we entered into to purchase U.S. dollarswith foreign currencies to offset the foreign exchange risk on certain intercompany assets and (ii) the netmonetary assets denominated in currencies other than the local currencies.

Interest income and other of $13.7 million in the three months ended March 31, 2005 was primarily theresult of $11.7 million of interest income earned on our cash, cash equivalents and marketable securitiesbalances. In addition, we recognized $2.4 million of net foreign exchange gains as a result of (i) the forwardcontracts that we entered into to purchase U.S. dollars with Euros to offset the foreign exchange risk on certainintercompany assets and (ii) the net monetary assets denominated in currencies other than the local currencies.These income sources were also partially offset by approximately $300,000 of realized losses on sales ofmarketable securities and approximately $100,000 of interest expense incurred on equipment leases, includingthe amortization of the fair value of warrants issued to lenders in prior years.

Provision for Income Taxes

Our provision for income taxes decreased to $218.3 million, or an effective tax rate of 26.9%, in the threemonths ended March 31, 2006, from $267.6 million, or an effective tax rate of 41.8%, in the three months endedDecember 31, 2005. The effective tax rate in the fourth quarter of 2005 was much higher than the effective taxrates for the other quarters of 2005 as well as for all of 2005 (31.6%) primarily because, relative to ourexpectations during the third quarter of 2005, proportionately more of our earnings in the fourth quarter of 2005and for all of 2005 were recognized in the U.S. than by our subsidiaries outside the U.S., and such earnings weretaxed at a higher statutory tax rate than earnings generated outside the U.S. The effective tax rate of 26.9% in thefirst quarter of 2006 approximately reflects our expected effective tax rate of approximately 30% for 2006. Theeffective tax rate of 26.9% in the first quarter of 2006 is lower than the effective tax rate for 2005 of 31.6%primarily because we expect more of our earnings in 2006 to be recognized by our subsidiaries outside the U.S.and such earnings are taxed at a lower statutory tax rate than in the U.S.

Our provision for income taxes increased to $218.3 million, or an effective tax rate of 26.9% in the threemonths ended March, 2006, from $87.3 million, or an effective tax rate of 19.1% in the three months endedMarch 31, 2005, primarily due to increases in federal and state income taxes, driven by higher taxable incomeperiod over period. Also, in the three months ended March 31, 2005, we realized a $48.5 million reduction to ourtax provision as a result of disqualifying dispositions related to our incentive stock options. Our provision forincome taxes in the three months ended March 31, 2006 was not materially affected by disqualifying dispositionsrelated to incentive stock options.

As noted above, our effective tax rate in 2006 is expected to be approximately 30%; however it couldfluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower than

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anticipated in countries where we have lower statutory rates and higher than anticipated in countries where wehave higher statutory rates, by changes in the valuation of our deferred tax assets or liabilities, or by changes intax laws, regulations, accounting principles, or interpretations thereof. In addition, we are subject to thecontinuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. Weregularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacyof our provision for income taxes.

Liquidity and Capital Resources

In summary, our cash flows were:


2005 2006

(in thousands)

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 529,622 $ 824,804Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (472,328) (1,888,617)Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,505 119,896

As a result of the completion of our initial public offering in August 2004 and our follow-on stock offeringin September 2005, we raised $1,161.1 million and $4,287.2 million of net proceeds. At March 31, 2006, we had$8,429.0 million of cash, cash equivalents and marketable securities. Cash equivalents and marketable securitiesare comprised of highly liquid debt instruments of municipalities in the U.S. and the U.S. government and itsagencies, as well as an equity investment. Note 2 of Notes to Condensed Consolidated Financial Statementsincluded as part of this report describes further the composition of our cash, cash equivalents and marketablesecurities.

Our principal sources of liquidity are our cash, cash equivalents and marketable securities, as well as thecash flow that we generate from our operations. At March 31, 2006 and December 31, 2005, we had unusedletters of credit for approximately $14.6 million. We believe that our existing cash, cash equivalents, marketablesecurities and cash generated from operations will be sufficient to satisfy our currently anticipated cashrequirements through at least the next 12 months. Our liquidity could be negatively affected by a decrease indemand for our products and services. In addition, we may make acquisitions or license products andtechnologies complementary to our business and may need to raise additional capital through future debt orequity 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 includingdepreciation, amortization, in-process research and development, stock-based compensation, and the effect ofchanges in working capital and other activities. Cash provided by operating activities in the three months endedMarch 31, 2006 was $824.8 million and consisted of net income of $592.3 million, adjustments for non-cashitems of $229.8 million and cash provided by working capital and other activities of $2.7 million. Adjustmentsfor non-cash items primarily consisted of $95.9 million of depreciation and amortization expense on property andequipment and $114.7 million of stock-based compensation. In addition, working capital activities primarilyconsisted of an increase of $155.2 million in accounts receivable due to the growth in fees billed to ouradvertisers, offset by a net increase in income taxes payable and deferred income taxes of $139.2 million and anincrease of $51.2 million in accrued revenue share due to the growth in our AdSense programs and the timing ofpayments made to our Google Network members.

SFAS 123(R) requires the benefits of tax deductions in excess of recognized compensation expense to bereported as a cash flow from financing activities, rather than as a cash flow from operating activities, as wasprescribed under accounting rules applicable through December 31, 2005. In compliance with the modifiedprospective transition method under SFAS 123R, the excess tax benefits from stock-based award activity

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generated in the three months ended March 31, 2006 and in the three months ended March 31, 2005 are reportedas a cash flow from financing activities and a cash flow from operating activities, respectively.

Cash provided by operating activities in the three months ended March 31, 2005 was $529.6 million andconsisted of net income of $369.2 million, adjustments for non-cash items of $182.4 million and offset by $22.0million used in working capital and other activities. Adjustments for non-cash items primarily consisted of $77.4million of excess tax benefits from stock-based award activity, $46.5 million of depreciation and amortizationexpense on property and equipment and $48.9 million of stock-based compensation. In addition, working capitalactivities primarily consisted of an increase of $60.1 million in accounts receivable due to the growth in feesbilled to our advertisers. This was partially offset by an increase of $42.7 million in accounts payable due to theincrease in purchases of property and equipment.

As we expand our business internationally, we have offered payment terms to certain advertisers that arestandard in their locales, but longer than terms we would generally offer to our domestic advertisers. This mayincrease our working capital requirements and may have a negative effect on cash flow provided by our operatingactivities. In addition, now that we have become a public company, our cash-based compensation per employeehas increased and will likely continue to increase (primarily in the form of variable bonus awards and otherincentive arrangements) in order to retain and attract employees.

Cash used in investing activities in the three months ended March 31, 2006 of $1,888.6 million wasattributable to net purchases of marketable securities of $1,355.7 million, capital expenditures of $344.9 millionand cash consideration used in acquisitions and other investments of $188.0 million, a majority of which wasrelated to the acquisition of dMarc Broadcasting, Inc. Cash used in investing activities in the three months endedMarch 31, 2005 of $472.3 million was attributable to net purchases of marketable securities of $324.9 million,capital expenditures of $142.4 million and cash consideration used in acquisitions and other investments of $5.0million.

Capital expenditures are mainly for the purchase of information technology assets. In order to manageexpected increases in Internet traffic, advertising transactions and new products and services, and to support ouroverall global business expansion, we will continue to invest heavily in data center operations, technology,corporate facilities and information technology infrastructure. We expect the annual growth rate of ourinvestments in property and equipment in 2006, including information and technology infrastructure and landand buildings, to be substantially greater than our annual revenue growth rate in 2006.

In addition, we expect to spend a significant amount of cash on acquisitions and other investments fromtime to time. Through these acquisitions and investments, we acquire engineering teams, technologies and otherassets. In April 2006, we completed our equity investment in America Online, Inc. for $1.0 billion in cash. Alsoin connection with the acquisition of dMarc Broadcasting, Inc., we are obligated to make additional cashpayments of up to $1,136.0 million if certain performance targets are met through December 31, 2008. Sincethese contingent payments are based on the achievement of performance targets, actual payments may besubstantially lower.

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

Cash provided by financing activities in the three months ended March 31, 2006 of $119.9 million was dueprimarily to (i) excess tax benefits of $77.3 million from stock-based award activity during the period, which alsorepresents a reduction to our income taxes payable that related to the exercise, sale or vesting of these stock-based awards, (ii) net proceeds from the issuance of common stock pursuant to stock option exercises of $42.6million. Cash provided by financing activities in the three months ended March 31, 2005 of $3.5 million was due

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primarily to net proceeds from the issuance of common stock pursuant to stock option exercises of $4.1 million,net of purchases, offset by repayment of equipment loan and lease obligations of $600,000.

In April 2006, we issued 5,300,000 shares of our Class A common stock in a public stock offering for netproceeds of approximately $2.064 billion.

Contractual Obligations

We are obligated under certain agreements to make guaranteed minimum revenue share payments to GoogleNetwork members and certain partners based on their achieving defined performance terms, such as number ofsearch queries or advertisements displayed. At March 31, 2006, our aggregate outstanding non-cancelableminimum guarantee commitments totaled $201.2 million through 2008 compared to $234.3 million atDecember 31, 2005.

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in accordance with accounting principlesgenerally accepted in the U.S. In doing so, we have to make estimates and assumptions that affect our reportedamounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets andliabilities. In many cases, we could reasonably have used different accounting policies and estimates. In somecases changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly,actual results could differ materially from our estimates. To the extent that there are material differences betweenthese estimates and actual results, our financial condition or results of operations will be affected. We base ourestimates on past experience and other assumptions that we believe are reasonable under the circumstances, andwe evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as criticalaccounting policies and estimates, which we discuss further below. We have reviewed our critical accountingpolicies and estimates with the audit committee of our board of directors.

Income Taxes

We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significantjudgment is required in evaluating our tax positions and determining our provision for income taxes. During theordinary course of business, there are many transactions and calculations for which the ultimate taxdetermination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, andthe extent to which, additional taxes and interest will be due. These reserves are established when, despite ourbelief that our tax return positions are fully supportable, we believe that certain positions are likely to bechallenged and may not be sustained on review by tax authorities. We adjust these reserves in light of changingfacts and circumstances, such as the closing of a tax audit. The provision for income taxes includes the impact ofreserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.

Our effective tax rates have differed from the statutory rate primarily due to the tax impact of foreignoperations, research and experimentation tax credits, state taxes, and certain benefits realized related to stockoption activity. The effective tax rate was 26.9% and 31.6% for the quarter ended March 31, 2006 and for theyear ended December 31, 2005. Our future effective tax rates could be adversely affected by earnings beinglower than anticipated in countries where we have lower statutory rates and higher than anticipated in countrieswhere we have higher statutory rates, by changes in the valuation of our deferred tax assets or liabilities, or bychanges in tax laws, regulations, accounting principles, or interpretations thereof. In addition, we are subject tothe continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities.We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine theadequacy of our provision for income taxes.

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Stock-Based Compensation

We account for stock-based compensation in accordance with Statement of Financial Accounting Standards(SFAS) No. 123R, Shared-Based Payment. Under the provisions of SFAS No. 123R, stock-based compensationcost is estimated at the grant date based on the award’s fair value as calculated by the Black-Scholes-Merton(BSM) option-pricing model and is recognized as expense over the requisite service period. The BSM modelrequires various highly judgmental assumptions including volatility, forfeiture rates, and expected option life. Ifany of the assumptions used in the BSM model change significantly, stock-based compensation expense maydiffer materially in the future from that recorded in the current period.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, including changes in currency exchange rates and interest rates.

Foreign Exchange Risk

Our exposure to foreign currency transaction gains and losses is the result of certain net receivables duefrom our foreign subsidiaries and customers being denominated in currencies other than the U.S. dollar, primarilythe British Pound, the Euro, the Canadian Dollar and the Japanese Yen. Our foreign subsidiaries conduct theirbusinesses in local currency. Effective January 2004, our board of directors approved a foreign exchange hedgingprogram designed to minimize the future potential impact due to changes in foreign currency exchange rates. Theprogram allows for the hedging of transaction exposures. The types of derivatives that can be used under thepolicy are forward contracts, options and foreign exchange swaps. The vehicle we use is forward contracts. Wealso generate revenue in certain countries in Asia where there are limited forward currency exchange markets,thus making these exposures difficult to hedge. We have entered into forward foreign exchange contracts tooffset the foreign exchange risk on certain intercompany assets, as well as cash denominated in currencies otherthan the local currency of the subsidiary. The notional principal of forward exchange contracts to purchase U.S.dollars with foreign currencies was $629.5 million at March 31, 2006. There were no other forward exchangecontracts outstanding at March 31, 2006.

Our exposure to foreign currency translation gains and losses arises from the translation of net assets of oursubsidiaries to U.S. dollars during consolidation. We recognized translation losses of $3.2 million in the threemonths ended March 31, 2006 primarily a result of generally weakening foreign currencies against the U.S. dollar.

We considered the historical trends in currency exchange rates and determined that it was reasonablypossible that adverse changes in exchange rates of 10% for all currencies could be experienced in the near term.These changes would have resulted in an adverse impact on income before taxes of approximately $30.3 millionand $2.2 million at March 31, 2006 and December 31, 2005. The adverse impact at March 31, 2006 is afterconsideration of the offsetting effect of approximately $63.5 million and $63.3 million from forward exchangecontracts in place for the month of March 2006 and December 2005. These reasonably possible adverse changesin exchange rates of 10% were applied to total monetary assets denominated in currencies other than the localcurrencies at the balance sheet dates to compute the adverse impact these changes would have had on our incomebefore taxes in the near term.

Interest Rate Risk

We invest in a variety of securities, consisting primarily of investments in interest-bearing demand depositaccounts with financial institutions, tax-exempt money market funds and highly liquid debt securities ofcorporations and municipalities. By policy, we limit the amount of credit exposure to any one issuer.

Investments in both fixed rate and floating rate interest earning products carry a degree of interest rate risk.Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while

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floating rate securities may produce less income than predicted if interest rates fall. Due in part to these factors,our income from investments may decrease in the future.

We considered the historical volatility of short term interest rates and determined that it was reasonablypossible that an adverse change of 100 basis points could be experienced in the near term. A hypothetical 1.00%(100 basis-point) increase in interest rates would have resulted in a decrease in the fair values of our marketablesecurities of approximately $63.9 million and $60.4 million at March 31, 2006 and December 31, 2005.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Our management, with the participation of our chief executive officer and chief financial officer, evaluatedthe effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the SecuritiesExchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q. In designingand evaluating the disclosure controls and procedures, management recognizes that any controls and procedures,no matter how well designed and operated, can provide only reasonable assurance of achieving the desiredcontrol objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there areresource constraints and that management is required to apply its judgment in evaluating the benefits of possiblecontrols and procedures relative to their costs.

Based on our evaluation, our chief executive officer and chief financial officer concluded that our disclosurecontrols and procedures are designed at a reasonable assurance level and are effective to provide reasonableassurance that information we are required to disclose in reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specified in Securities and ExchangeCommission rules and forms, and that such information is accumulated and communicated to our management,including our chief executive officer and chief financial officer, as appropriate, to allow timely decisionsregarding required disclosure.

(b) Changes in internal control over financial reporting.

We regularly review our system of internal control over financial reporting and make changes to ourprocesses and systems to improve controls and increase efficiency, while ensuring that we maintain an effectiveinternal control environment. Changes may include such activities as implementing new, more efficient systems,consolidating activities, and migrating processes.

There were no changes in our internal control over financial reporting that occurred during the periodcovered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Certain companies have filed trademark infringement and related claims against us over the display of ads inresponse to user queries that include trademark terms. The outcomes of these lawsuits have differed fromjurisdiction to jurisdiction. Courts in France have held us liable for allowing advertisers to select certaintrademarked terms as keywords. We are appealing those decisions. We were also subject to two lawsuits inGermany on similar matters where the courts held that we are not liable for the actions of our advertisers prior tonotification of trademark rights. We are litigating or recently have litigated similar issues in other cases in theU.S., France, Germany, Italy, Israel and Austria. Adverse results in these lawsuits may result in, or even compel,a change in this practice which could result in a loss of revenue for us, which could harm our business.

Certain entities have also filed copyright claims against us, alleging that features of certain of our products,including Google Web Search, Google News, Google Image Search, and Google Book Search, infringe theirrights. Adverse results in these lawsuits may include awards of damages and may also result in, or even compel,a change in our business practices, which could result in a loss of revenue for us or otherwise harm our business.

From time to time, we may also become a party to other litigation and subject to claims incident to theordinary course of business, including intellectual property claims (in addition to the trademark and copyrightmatters noted above), labor and employment claims, breach of contract claims, and other matters.

Although the results of litigation and claims cannot be predicted with certainty, we believe that the finaloutcome of the matters discussed above will not have a material adverse effect on our business, consolidatedfinancial position, results of operations or cash flow. Regardless of the outcome, litigation can have an adverseimpact on us because of defense costs, diversion of management resources and other factors.

ITEM 1A. RISK FACTORS

A restated description of the risk factors associated with our business is set forth below. This descriptionincludes any material changes to and supersedes the description of the risk factors associated with our businesspreviously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2005.

Risks Related to Our Business and Industry

We face significant competition from Microsoft and Yahoo.

We face formidable competition in every aspect of our business, and particularly from other companies thatseek to connect people with information on the web and provide them with relevant advertising. Currently, weconsider our primary competitors to be Microsoft Corporation and Yahoo! Inc. Microsoft has announced plans todevelop features that make web search a more integrated part of its Windows operating system or other desktopsoftware products. We expect that Microsoft will increasingly use its financial and engineering resources tocompete with us. Both Microsoft and Yahoo have more employees than we do (in Microsoft’s case,approximately 9 times as many). Microsoft also has significantly more cash resources than we do. Both of thesecompanies also have longer operating histories and more established relationships with customers and end users.They can use their experience and resources against us in a variety of competitive ways, including by makingacquisitions, investing more aggressively in research and development and competing more aggressively foradvertisers and web sites. Microsoft and Yahoo also may have a greater ability to attract and retain users than wedo because they operate Internet portals with a broad range of content products and services. If Microsoft orYahoo are successful in providing similar or better web search results compared to ours or leverage theirplatforms or products to make their web search services easier to access than ours, we could experience asignificant decline in user traffic. Any such decline in traffic could negatively affect our revenues.

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We face competition from other Internet companies, including web search providers, Internet accessproviders, Internet advertising companies and destination web sites that may also bundle their services withInternet access.

In addition to Microsoft and Yahoo, we face competition from other web search providers, includingcompanies that are not yet known to us. We compete with Internet advertising companies, particularly in theareas of pay-for-performance and keyword-targeted Internet advertising. Also, we may compete with companiesthat sell products and services online because these companies, like us, are trying to attract users to their websites to search for information about products and services.

We also compete with destination web sites that seek to increase their search-related traffic. These destinationweb sites may include those operated by Internet access providers, such as cable and DSL service providers.Because our users need to access our services through Internet access providers, they have direct relationships withthese providers. If an access provider or a computer or computing device manufacturer offers online services thatcompete with ours, the user may find it more convenient to use the services of the access provider or manufacturer.In addition, the access provider or manufacturer may make it hard to access our services by not listing them in theaccess provider’s or manufacturer’s own menu of offerings, or may charge users to access our websites or thewebsites of our Google Network members. Also, because the access provider gathers information from the user inconnection with the establishment of a billing relationship, the access provider may be more effective than we are intailoring services and advertisements to the specific tastes of the user.

There has been a trend toward industry consolidation among our competitors, and so smaller competitorstoday may become larger competitors in the future. If our competitors are more successful than we are atgenerating traffic, our revenues may decline.

We face competition from traditional media companies, and we may not be included in the advertisingbudgets of large advertisers, which could harm our operating results.

In addition to Internet companies, we face competition from companies that offer traditional mediaadvertising opportunities. Most large advertisers have set advertising budgets, a very small portion of which isallocated to Internet advertising. We expect that large advertisers will continue to focus most of their advertisingefforts on traditional media. If we fail to convince these companies to spend a portion of their advertising budgetswith us, or if our existing advertisers reduce the amount they spend on our programs, our operating results wouldbe harmed.

We expect our revenue growth rate to decline and anticipate downward pressure on our operating marginin the future.

We expect that our revenue growth rate will decline over time and anticipate that there will be downwardpressure on our operating margin. We believe our revenue growth rate will generally decline as a result ofincreasing competition and the inevitable decline in growth rates as our revenues increase to higher levels. Webelieve our operating margin will experience downward pressure as a result of increasing competition andincreased expenditures for many aspects of our business. Our operating margin will also experience downwardpressure to the extent the proportion of our revenues generated from our Google Network members increases.The margin on revenue we generate from our Google Network members is significantly less than the margin onrevenue we generate from advertising on our web sites. Additionally, the margin we earn on revenue generatedfrom our Google Network could decrease in the future if our Google Network members demand a greater portionof the advertising fees, which could be the result of increased competition for these members.

Our operating results may fluctuate, which makes our results difficult to predict and could cause ourresults to fall short of expectations.

Our operating results may fluctuate as a result of a number of factors, many of which are outside of ourcontrol. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful,

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and you should not rely on our past results as an indication of our future performance. Our quarterly and annualexpenses as a percentage of our revenues may be significantly different from our historical or projected rates.Our operating results in future quarters may fall below expectations. Any of these events could cause our stockprice to fall. Each of the risk factors listed in Item 1A, Risk Factors, and the following factors, may affect ouroperating results:

• Our ability to continue to attract users to our web sites.

• Our ability to monetize (or generate revenue from) traffic on our web sites and our Google Networkmembers’ web sites.

• Our ability to attract advertisers to our AdWords program.

• Our ability to attract web sites to our AdSense program.

• The mix in our revenues between those generated on our web sites and those generated through ourGoogle Network.

• The amount and timing of operating costs and capital expenditures related to the maintenance andexpansion of our businesses, operations and infrastructure.

• Our focus on long term goals over short term results.

• The results of our investments in risky projects.

• Payments made in connection with the resolution of litigation matters.

• General economic conditions and those economic conditions specific to the Internet and Internetadvertising.

• Our ability to keep our web sites operational at a reasonable cost and without service interruptions.

• Our ability to forecast revenue from agreements under which we guarantee minimum payments.

• Geopolitical events such as war, threat of war or terrorist actions.

Because our business is changing and evolving, our historical operating results may not be useful to you inpredicting our future operating results. In addition, advertising spending has historically been cyclical in nature,reflecting overall economic conditions as well as budgeting and buying patterns. For example, in 1999,advertisers spent heavily on Internet advertising. This was followed by a lengthy downturn in ad spending on theweb. Also, user traffic tends to be seasonal. Our rapid growth has masked the cyclicality and seasonality of ourbusiness. As our growth rate has slowed, the cyclicality and seasonality in our business has become morepronounced and may cause our operating results to fluctuate.

If we do not continue to innovate and provide products and services that are useful to users, we may notremain competitive, and our revenues and operating results could suffer.

Our success depends on providing products and services that people use for a high quality Internetexperience. Our competitors are constantly developing innovations in web search, online advertising andproviding information to people. As a result, we must continue to invest significant resources in research anddevelopment in order to enhance our web search technology and our existing products and services and introducenew high-quality products and services that people can easily and effectively use. If we are unable to ensure thatour users and customers have a high quality experience with our products and services, then they may becomedissatisfied and move to competitors’ products and services. In addition, if we are unable to predict userpreferences or industry changes, or if we are unable to modify our products and services on a timely basis, wemay lose users, advertisers and Google Network members. Our operating results would also suffer if ourinnovations are not responsive to the needs of our users, advertisers and Google Network members, are notappropriately timed with market opportunity or are not effectively brought to market. As search technologycontinues to develop, our competitors may be able to offer search results that are, or that are perceived to be,

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substantially similar or better than those generated by our search services. This may force us to compete indifferent ways with our competitors and to expend significant resources in order to remain competitive.

We generate our revenue almost entirely from advertising, and the reduction in spending by or loss ofadvertisers could seriously harm our business.

We generated approximately 99% of our revenues in 2005 from our advertisers. Our advertisers can generallyterminate their contracts with us at any time. Advertisers will not continue to do business with us if their investmentin advertising with us does not generate sales leads, and ultimately customers, or if we do not deliver theiradvertisements in an appropriate and effective manner. If we are unable to remain competitive and provide value toour advertisers, they may stop placing ads with us, which would negatively affect our revenues and business.

We rely on our Google Network members for a significant portion of our revenues, and we benefit fromour association with them. The loss of these members could adversely affect our business.

We provide advertising, web search and other services to members of our Google Network. The revenuesgenerated from the fees advertisers pay us when users click on ads that we have delivered to our Google Networkmembers’ web sites or as ads are displayed represented 44% of our revenues in 2005 and 41% of our revenues inthe three months ended March 31, 2006. We consider this network to be critical to the future growth of ourrevenues. However, some of the participants in this network may compete with us in one or more areas.Therefore, they may decide in the future to terminate their agreements with us. If our Google Network membersdecide to use a competitor’s or their own web search or advertising services, our revenues would decline.

Our agreements with a few of the largest Google Network members account for a significant portion ofrevenues derived from our AdSense program. In addition, advertising and other fees generated from one GoogleNetwork member, AOL, primarily through our AdSense program, accounted for approximately 9% and 8% ofour revenues in 2005 and in the three months ended March 31, 2006, respectively. We recently entered into anarrangement with AOL and Time Warner under which we acquired a five percent indirect equity interest in AOLin exchange for $1 billion in cash and expanded our strategic alliance with AOL. If our relationship with AOLwere terminated or renegotiated on terms less favorable to us, our business could be adversely affected.

Also, certain of our key network members operate high-profile web sites, and we derive tangible andintangible benefits from this affiliation. If one or more of these key relationships is terminated or not renewed,and is not replaced with a comparable relationship, our business would be adversely affected.

Our business and operations are experiencing rapid growth. If we fail to effectively manage our growth,our business and operating results could be harmed and we may have to incur significant expenditures toaddress the additional operational and control requirements of this growth.

We have experienced, and continue to experience, rapid growth in our headcount and operations, which hasplaced, and will continue to place, significant demands on our management, operational and financialinfrastructure. If we do not effectively manage our growth, the quality of our products and services could suffer,which could negatively affect our brand and operating results. Our expansion and growth in international marketsheightens these risks as a result of the particular challenges of supporting a rapidly growing business in anenvironment of multiple languages, cultures, customs, legal systems, alternative dispute systems, regulatorysystems and commercial infrastructures. To effectively manage this growth, we will need to continue to improveour operational, financial and management controls and our reporting systems and procedures. These systemsenhancements and improvements will require significant capital expenditures and allocation of valuablemanagement resources. If the improvements are not implemented successfully, our ability to manage our growthwill be impaired and we may have to make significant additional expenditures to address these issues, whichcould harm our financial position. The required improvements include:

• Enhancing our information and communication systems to ensure that our offices around the world arewell coordinated and that we can effectively communicate with our growing base of users, advertisersand Google Network members.

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• Enhancing systems of internal controls to ensure timely and accurate reporting of all of our operations.

• Ensuring enhancements to our systems of internal controls are scalable to our anticipated growth inheadcount and operations.

• Standardizing systems of internal controls and ensuring they are consistently applied at each of ouroperations around the world.

• Improving our information technology infrastructure to maintain the effectiveness of our search and adsystems.

We are required to evaluate our internal control over financial reporting under Section 404 of theSarbanes Oxley Act of 2002, and any adverse results from such evaluation could result in a loss of investorconfidence in our financial reports and have an adverse effect on our stock price.

Although we concluded that our internal controls over financial reporting were effective as of December 31,2005, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, there can be no assurances that we will reachthe same conclusion at the end of future years. If our management identifies one or more material weaknesses inour internal control over financial reporting, we will be unable to assert such internal control is effective. If weare unable to assert that our internal control over financial reporting is effective, or if our auditors are unable toattest that our management’s report is fairly stated or they are unable to express an opinion on the effectivenessof our internal controls, we could lose investor confidence in the accuracy and completeness of our financialreports, which would have an adverse effect on our stock price.

We are migrating critical financial functions to a third-party provider. If this transition is not successful,our business and operations could be disrupted and our operating results could be harmed.

We have entered into an arrangement to transfer our worldwide billing, collection and credit evaluationfunctions to a third-party service provider, Bertelsmann AG, and are currently in the process of implementingthis arrangement. However, we cannot be sure that the arrangement will be completed and implementedsuccessfully or at all. The third-party provider will also help track, on an automated basis, a majority of ourgrowing number of AdSense revenue share agreements. These functions are critical to our operations and involvesensitive interactions between us and our advertisers and members of our Google Network. If we do notsuccessfully implement this project, our business, reputation and operating results could be harmed. We have noexperience managing and implementing this type of large-scale, cross-functional, international infrastructureproject. We also may not be able to integrate all of our systems and processes with those of the third-partyservice provider on a timely basis, or at all. Even if this integration is completed on time, the service providermay not perform to agreed-upon service levels. Failure of the service provider to perform satisfactorily coulddisrupt our operations, result in customer dissatisfaction and adversely affect operating results. We willimplement monitoring controls over the systems and processes of the third-party vendor. However, there may bemore risk than if we maintained and operated the controls ourselves. If we need to find an alternative source forperforming these functions, we may have to expend significant resources in doing so, and we cannot guaranteethis would be accomplished in a timely manner or without significant additional disruption to our business.

Our business depends on a strong brand, and if we are not able to maintain and enhance our brand, ourability to expand our base of users, advertisers and Google Network members will be impaired and ourbusiness and operating results will be harmed.

We believe that the brand identity that we have developed has significantly contributed to the success of ourbusiness. We also believe that maintaining and enhancing the “Google” brand is critical to expanding our base ofusers, advertisers and Google Network members. Maintaining and enhancing our brand may require us to makesubstantial investments and these investments may not be successful. If we fail to promote and maintain the“Google” brand, or if we incur excessive expenses in this effort, our business, operating results and financialcondition will be materially and adversely affected. We anticipate that, as our market becomes increasinglycompetitive, maintaining and enhancing our brand may become increasingly difficult and expensive. Maintaining

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and enhancing our brand will depend largely on our ability to be a technology leader and to continue to providehigh quality products and services, which we may not do successfully.

People have in the past expressed, and may in the future express, objections to aspects of our products. Forexample, people have raised privacy concerns relating to the ability of our Gmail email service to match relevantads to the content of email messages. In addition, some individuals and organizations have raised objections toand sued us in connection with our scanning of copyrighted materials from library collections for use in ourGoogle Book Search product. Aspects of our future products may raise similar public concerns. Publicityregarding such concerns could harm our brand. In addition, members of the Google Network and other thirdparties may take actions that could impair the value of our brand. We are aware that third parties, from time totime, use “Google” and similar variations in their domain names without our approval, and our brand may beharmed if users and advertisers associate these domains with us.

Proprietary document formats may limit the effectiveness of our search technology by preventing ourtechnology from accessing the content of documents in such formats which could limit the effectiveness of ourproducts and services.

A large amount of information on the Internet is provided in proprietary document formats such asMicrosoft Word. The providers of the software application used to create these documents could engineer thedocument format to prevent or interfere with our ability to access the document contents with our searchtechnology. This would mean that the document contents would not be included in our search results even if thecontents were directly relevant to a search. These types of activities could assist our competitors or diminish thevalue of our search results. The software providers may also seek to require us to pay them royalties in exchangefor giving us the ability to search documents in their format. If the software provider also competes with us in thesearch business, they may give their search technology a preferential ability to search documents in theirproprietary format. Any of these results could harm our brand and our operating results.

New technologies could block our ads, which would harm our business.

Technologies may be developed that can block the display of our ads. Most of our revenues are derivedfrom fees paid to us by advertisers in connection with the display of ads on web pages. As a result, ad-blockingtechnology could, in the future, adversely affect our operating results.

Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow,we could lose the innovation, creativity and teamwork fostered by our culture, and our business may beharmed.

We believe that a critical contributor to our success has been our corporate culture, which we believe fostersinnovation, creativity and teamwork. As our organization grows, and we are required to implement morecomplex organizational management structures, we may find it increasingly difficult to maintain the beneficialaspects of our corporate culture. This could negatively impact our future success. In addition, our initial publicoffering has created disparities in wealth among Google employees, which may adversely impact relationsamong employees and our corporate culture in general.

Our intellectual property rights are valuable, and any inability to protect them could reduce the value ofour products, services and brand.

Our patents, trademarks, trade secrets, copyrights and all of our other intellectual property rights areimportant assets for us. There are events that are outside of our control that pose a threat to our intellectualproperty rights as well as to our products and services. For example, effective intellectual property protectionmay not be available in every country in which our products and services are distributed or made availablethrough the Internet. Also, the efforts we have taken to protect our proprietary rights may not be sufficient oreffective. Any significant impairment of our intellectual property rights could harm our business or our ability tocompete. Also, protecting our intellectual property rights is costly and time consuming. Any increase in the

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unauthorized use of our intellectual property could make it more expensive to do business and harm ouroperating results.

Although we seek to obtain patent protection for our innovations, it is possible we may not be able to protectsome of these innovations. In addition, given the costs of obtaining patent protection, we may choose not toprotect certain innovations that later turn out to be important. Furthermore, there is always the possibility, despiteour efforts, that the scope of the protection gained will be insufficient or that an issued patent may be deemedinvalid or unenforceable. Finally, third parties increasingly have and will continue to allege that Google productsand services infringe their patent rights.

We also face risks associated with our trademarks. For example, there is a risk that the word “Google” couldbecome so commonly used that it becomes synonymous with the word “search.” If this happens, we could loseprotection for this trademark, which could result in other people using the word “Google” to refer to their ownproducts, thus diminishing our brand.

We also seek to maintain certain intellectual property as trade secrets. The secrecy could be compromisedby third parties, or intentionally or accidentally by our employees, which would cause us to lose the competitiveadvantage resulting from these trade secrets.

We are, and may in the future be, subject to intellectual property rights claims, which are costly todefend, could require us to pay damages and could limit our ability to use certain technologies in the future.

Companies in the Internet, technology and media industries own large numbers of patents, copyrights,trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or otherviolations of intellectual property rights. As we face increasing competition and become increasingly highprofile, the possibility of intellectual property rights claims against us grows. Our technologies may not be ableto withstand any third-party claims or rights against their use. Any intellectual property claims, with or withoutmerit, could be time-consuming, expensive to litigate or settle and could divert resources and attention. Inaddition, many of our agreements with members of our Google Network require us to indemnify these membersfor certain third-party intellectual property infringement claims, which would increase our costs as a result ofdefending such claims and may require that we pay damages if there were an adverse ruling in any such claims.An adverse determination also could prevent us from offering our products and services to others and mayrequire that we procure substitute products or services for these members.

With respect to any intellectual property rights claim, we may have to pay damages or discontinue thepractices found to be in violation of a third party’s rights. We may have to seek a license to continue suchpractices, which may not be available on reasonable terms and may significantly increase our operating expenses.A license to continue such practices may not be available to us at all. As a result, we may also be required todevelop alternative non-infringing technology or practices or discontinue the practices. The development ofalternative non-infringing technology or practices could require significant effort and expense. If we cannotobtain a license to continue such practices or develop alternative technology or practices for the infringingaspects of our business, we may be forced to limit our product and service offerings and may be unable tocompete effectively. Any of these results could harm our brand and operating results.

From time to time, we receive notice letters from patent holders alleging that certain of our products andservices infringe their patent rights. Some of these have resulted in litigation against us. Companies have alsofiled trademark infringement and related claims against us over the display of ads in response to user queries thatinclude trademark terms.

The outcomes of these lawsuits have differed from jurisdiction to jurisdiction. Courts in France have held usliable for allowing advertisers to select certain trademarked terms as keywords. We are appealing thosedecisions. We were also subject to two lawsuits in Germany on similar matters where the courts held that we are

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not liable for the actions of our advertisers prior to notification of trademark rights. We are litigating or haverecently litigated similar issues in other cases in the U.S., France, Germany, Israel, Italy and Austria.

In order to provide users with more useful ads, in 2004 we revised our trademark policy in the U.S. andCanada. Under our revised policy, we no longer disable ads due to selection by our advertisers of trademarks askeyword triggers for the ads. We are currently defending this policy in trademark infringement lawsuits in theUnited States. Defending these lawsuits is consuming time and resources. Adverse results in these lawsuits mayresult in, or even compel, a change in this practice which could result in a loss of revenue for us, which couldharm our business.

Certain entities have also filed copyright claims against us, alleging that features of certain of our products,including Google Web Search, Google News, Google Image Search, and Google Book Search, infringe theirrights. Adverse results in these lawsuits may include awards of damages and may also result in, or even compel,a change in our business practices, which could result in a loss of revenue for us or otherwise harm our business.In addition, generally speaking, any time that we have a product or service that links to or hosts material in whichothers allege to own copyrights, we face the risk of being sued for copyright infringement or related claims.Because these products and services comprise the majority of our products and services, the risk of potentialharm from such lawsuits is substantial.

Our international operations are subject to increased risks which could harm our business, operatingresults and financial condition.

Although we only opened our first office outside the U.S. in 2001, international revenues accounted forapproximately 42% of our total revenues in the first quarter of 2006 and more than half of our user traffic camefrom outside the U.S. during this period. We have only limited experience with operations outside the U.S. andour ability to manage our business and conduct our operations internationally requires considerable managementattention and resources and is subject to a number of risks, including the following:

• Challenges caused by distance, language and cultural differences and in doing business with foreignagencies and governments.

• Difficulties in developing products and services in different languages and for different cultures.

• Longer payment cycles in some countries.

• Credit risk and higher levels of payment fraud.

• Currency exchange rate fluctuations.

• Foreign exchange controls that might prevent us from repatriating cash earned in countries outside theU.S.

• Import and export requirements that may prevent us from shipping products or providing services to aparticular market and may increase our operating costs

• Political and economic instability.

• Potentially adverse tax consequences.

• Higher costs associated with doing business internationally.

In addition, compliance with foreign and U.S. laws and regulations that are applicable to our internationaloperations is complex and may increase our cost of doing business in international jurisdictions and ourinternational operations could expose us to fines and penalties if we fail to comply with these regulations. Theselaws and regulations include import and export requirements, U.S. laws such as the Foreign Corrupt PracticesAct, and local laws prohibiting corrupt payments to governmental officials. Although we have implementedpolicies and procedures designed to ensure compliance with these laws, there can be no assurance that ouremployees, contractors and agents will not take actions in violation of our policies. Any such violations could

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subject us to civil or criminal penalties, including substantial fines or prohibitions on our ability to offer ourproducts and services to one or more countries, and could also materially damage our reputation, our brand, ourinternational expansion efforts, our business and our operating results.

We compete internationally with local information providers and with U.S. competitors who are currentlymore successful than we are in various markets, and if we fail to compete effectively in international markets,our business will be harmed.

We face different market characteristics and competition outside the U.S. In certain markets, other websearch, advertising services and Internet companies have greater brand recognition, more users and more searchtraffic than we have. Even in countries where we have a significant user following, we may not be as successfulin generating advertising revenue due to slower market development, our inability to provide attractive localadvertising services or other factors. In order to compete, we need to improve our brand recognition and ourselling efforts internationally and build stronger relationships with advertisers. We also need to better understandour international users and their preferences. If we fail to do so, our global expansion efforts may be more costlyand less profitable than we expect.

Our business may be adversely affected by malicious third-party applications that interfere with, orexploit security flaws in, our products and services.

Our business may be adversely affected by malicious applications that make changes to our users’computers and interfere with the Google experience. These applications have in the past attempted, and may inthe future attempt, to change our users’ Internet experience, including hijacking queries to Google.com, alteringor replacing Google search results, or otherwise interfering with our ability to connect with our users. Theinterference often occurs without disclosure to or consent from users, resulting in a negative experience that usersmay associate with Google. These applications may be difficult or impossible to uninstall or disable, mayreinstall themselves and may circumvent other applications’ efforts to block or remove them. In addition, weoffer a number of products and services that our users download to their computers or that they rely on to storeinformation and transmit information to others over the Internet. These products and services are subject to attackby viruses, worms and other malicious software programs, which could jeopardize the security of informationstored in a user’s computer or in our computer systems and networks. The ability to reach users and provide themwith a superior experience is critical to our success. If our efforts to combat these malicious applications areunsuccessful, or if our products and services have actual or perceived vulnerabilities, our reputation may beharmed and our user traffic could decline, which would damage our business.

If we fail to detect click fraud or other invalid clicks, we could face potential litigation as well as lose theconfidence of our advertisers, which would cause our business to suffer.

We are exposed to the risk of fraudulent clicks and other invalid clicks on our ads from a variety of potentialsources. We have regularly refunded fees that our advertisers have paid to us that were later attributed to clickfraud and other invalid clicks, and we expect to do so in the future. Invalid clicks are clicks that we havedetermined are not intended by the user to link to the underlying content, such as inadvertent clicks on the samead twice and clicks resulting from click fraud. Click fraud occurs when a user intentionally clicks on a GoogleAdWords ad displayed on a web site for a reason other than to view the underlying content. If we are unable tostop these invalid clicks, these refunds may increase. If we find new evidence of past invalid clicks we may issuerefunds retroactively of amounts previously paid to our Google Network members. This would negatively affectour profitability, and these invalid clicks could hurt our brand. If invalid clicks are not detected, the affectedadvertisers may experience a reduced return on their investment in our advertising programs because the invalidclicks will not lead to potential revenue for the advertisers. This could lead the advertisers to become dissatisfiedwith our advertising programs, which has led to litigation alleging click fraud and could lead to further litigation,as well as potentially leading to a loss of advertisers and revenues.

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Index spammers could harm the integrity of our web search results, which could damage our reputationand cause our users to be dissatisfied with our products and services.

There is an ongoing and increasing effort by “index spammers” to develop ways to manipulate our websearch results. For example, because our web search technology ranks a web page’s relevance based in part onthe importance of the web sites that link to it, people have attempted to link a group of web sites together tomanipulate web search results. We take this problem very seriously because providing relevant information tousers is critical to our success. If our efforts to combat these and other types of index spamming are unsuccessful,our reputation for delivering relevant information could be diminished. This could result in a decline in usertraffic, which would damage our business.

Privacy concerns relating to our technology could damage our reputation and deter current and potentialusers from using our products and services.

From time to time, concerns may be expressed about whether our products and services compromise theprivacy of users and others. Concerns about our practices with regard to the collection, use, disclosure or securityof personal information or other privacy-related matters, even if unfounded, could damage our reputation andoperating results. While we strive to comply with all applicable data protection laws and regulations, as well asour own posted privacy policies, any failure or perceived failure to comply may result in proceedings or actionsagainst us by government entities or others, which could potentially have an adverse affect on our business. Lawsrelated to data protection continue to evolve. It is possible that certain jurisdictions may enact laws or regulationsthat impact our ability to offer our products and services in those jurisdictions, which could harm our business.

Our business is subject to a variety of U.S. and foreign laws that could subject us to claims or otherremedies based on the nature and content of the information searched or displayed by our products andservices, and could limit our ability to provide information regarding regulated industries and products.

The laws relating to the liability of providers of online services for activities of their users are currentlyunsettled both within the U.S. and abroad. Claims have been threatened and filed under both U.S. and foreign lawfor defamation, libel, invasion of privacy and other data protection claims, tort, unlawful activity, copyright ortrademark infringement, or other theories based on the nature and content of the materials searched and the adsposted or the content generated by our users. From time to time we have received notices from individuals whodo not want their names or web sites to appear in our web search results when certain keywords are searched. Itis also possible that we could be held liable for misinformation provided over the web when that informationappears in our web search results. If one of these complaints results in liability to us, it could be potentiallycostly, encourage similar lawsuits, distract management and harm our reputation and possibly our business. Inaddition, increased attention focused on these issues and legislative proposals could harm our reputation orotherwise affect the growth of our business.

The application to us of existing laws regulating or requiring licenses for certain businesses of ouradvertisers, including, for example, distribution of pharmaceuticals, adult content, financial services, alcohol orfirearms, can be unclear. Existing or new legislation could expose us to substantial liability, restrict our ability todeliver services to our users, limit our ability to grow and cause us to incur significant expenses in order tocomply with such laws and regulations.

Several other federal laws could have an impact on our business. Compliance with these laws andregulations is complex and may impose significant additional costs on us. For example, the Digital MillenniumCopyright Act has provisions that limit, but do not eliminate, our liability for listing or linking to third-party websites that include materials that infringe copyrights or other rights, so long as we comply with the statutoryrequirements of this act. The Children’s Online Protection Act and the Children’s Online Privacy Protection Actrestrict the distribution of materials considered harmful to children and impose additional restrictions on theability of online services to collect information from minors. In addition, the Protection of Children from SexualPredators Act of 1998 requires online service providers to report evidence of violations of federal child

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pornography laws under certain circumstances. Any failure on our part to comply with these regulations maysubject us to additional liabilities.

We also face risks associated with international data protection. The interpretation and application of dataprotection laws in Europe and elsewhere are still uncertain and in flux. It is possible that these laws may beinterpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibilityof fines, this could result in an order requiring that we change our data practices, which in turn could have amaterial effect on our business.

If we were to lose the services of Eric, Larry, Sergey or our senior management team, we may not be ableto execute our business strategy.

Our future success depends in a large part upon the continued service of key members of our seniormanagement team. In particular, our CEO Eric Schmidt and our founders Larry Page and Sergey Brin are criticalto the overall management of Google as well as the development of our technology, our culture and our strategicdirection. All of our executive officers and key employees are at-will employees, and we do not maintain anykey-person life insurance policies. The loss of any of our management or key personnel could seriously harm ourbusiness.

The initial option grants to many of our senior management and key employees are fully vested.Therefore, these employees may not have sufficient financial incentive to stay with us, we may have to incurcosts to replace key employees who leave, and our ability to execute our business model could be impaired ifwe cannot replace departing employees in a timely manner.

Many of our senior management personnel and other key employees have become, or will soon become,substantially vested in their initial stock option grants. While we often grant additional stock options tomanagement personnel and other key employees after their hire dates to provide additional incentives to remainemployed by us, these follow-on grants are typically much smaller than the initial grants. Employees may bemore likely to leave us after their initial option grant fully vests, especially if the shares underlying the optionshave significantly appreciated in value relative to the option exercise price. We have not given any additionalstock grants to Eric, Larry or Sergey, and Eric, Larry and Sergey are fully vested in their existing grants. If anymembers of our senior management team leave the company, our ability to successfully operate our businesscould be impaired. We also may have to incur significant costs in identifying, hiring, training and retainingreplacements for departing employees.

We rely on highly skilled personnel and, if we are unable to retain or motivate key personnel or hirequalified personnel, we may not be able to grow effectively.

Our performance is largely dependent on the talents and efforts of highly skilled individuals. Our futuresuccess depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnelfor all areas of our organization. Competition in our industry for qualified employees is intense, and we are awarethat certain of our competitors have directly targeted our employees. Our continued ability to compete effectivelydepends on our ability to attract new employees and to retain and motivate our existing employees.

We have in the past maintained a rigorous, highly selective and time-consuming hiring process. We believethat our approach to hiring has significantly contributed to our success to date. As we grow, our hiring processmay prevent us from hiring the personnel we need in a timely manner. In addition, as we become a more maturecompany, we may find our recruiting efforts more challenging. The incentives to attract, retain and motivateemployees provided by our option grants may not be as effective as in the past and our current and futurecompensation arrangements, which include cash bonuses, may not be successful in attracting new employees andretaining and motivating our existing employees. In addition, we have recently introduced new stock awardprograms, and under these new programs new employees will be issued a portion of their stock awards in theform of restricted stock units. These restricted stock units will vest based on individual performance, as well asthe exercise price of their stock options as compared to that of other employees who started at about the same

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time. These new stock awards programs may not provide adequate incentives to attract, retain and motivateoutstanding performers. If we do not succeed in attracting excellent personnel or retaining or motivating existingpersonnel, we may be unable to grow effectively.

Our CEO and our two founders run the business and affairs of the company collectively, which mayharm their ability to manage effectively.

Eric, our CEO, and Larry and Sergey, our founders and presidents, currently provide leadership to thecompany as a team. Our bylaws provide that our CEO and our presidents will together have general supervision,direction and control of the company, subject to the control of our board of directors. As a result, Eric, Larry andSergey tend to operate the company collectively and to consult extensively with each other before significantdecisions are made. This may slow the decision-making process, and a disagreement among these individualscould prevent key strategic decisions from being made in a timely manner. In the event our CEO and our twofounders are unable to continue to work well together in providing cohesive leadership, our business could beharmed.

We have a short operating history and a relatively new business model in an emerging and rapidlyevolving market. This makes it difficult to evaluate our future prospects and may increase the risk that we willnot continue to be successful.

We first derived revenue from our online search business in 1999 and from our advertising services in 2000,and we have only a short operating history with our cost-per-click advertising model, which we launched in 2002and our new cost-per-impression advertising model which we launched in the second quarter of 2005. As a result,we have very little operating history for you to evaluate in assessing our future prospects. Also, we derive nearlyall of our revenues from online advertising, which is an immature industry that has undergone rapid and dramaticchanges in its short history. You must consider our business and prospects in light of the risks and difficulties wewill encounter as an early-stage company in a new and rapidly evolving market. We may not be able tosuccessfully address these risks and difficulties, which could materially harm our business and operating results.

We may have difficulty scaling and adapting our existing architecture to accommodate increased trafficand technology advances or changing business requirements, which could lead to the loss of users, advertisersand Google Network members, and cause us to incur expenses to make architectural changes.

To be successful, our network infrastructure has to perform well and be reliable. The greater the user trafficand the greater the complexity of our products and services, the more computing power we will need. In 2005,we spent substantial amounts and we expect this spending to continue as we purchase or lease data centers andequipment and upgrade our technology and network infrastructure to handle increased traffic on our web sitesand to roll out new products and services. This expansion is expensive and complex and could result ininefficiencies or operational failures. If we do not implement this expansion successfully, or if we experienceinefficiencies and operational failures during the implementation, the quality of our products and services and ourusers’ experience could decline. This could damage our reputation and lead us to lose current and potential users,advertisers and Google Network members. The costs associated with these adjustments to our architecture couldharm our operating results. Cost increases, loss of traffic or failure to accommodate new technologies orchanging business requirements could harm our operating results and financial condition.

We rely on bandwidth providers, data centers or other third parties for key aspects of the process ofproviding products and services to our users, and any failure or interruption in the services and productsprovided by these third parties could harm our ability to operate our business and damage our reputation.

We rely on third-party vendors, including data center and bandwidth providers. Any disruption in thenetwork access or colocation services provided by these third-party providers or any failure of these third-partyproviders to handle current or higher volumes of use could significantly harm our business. Any financial orother difficulties our providers face may have negative effects on our business, the nature and extent of which wecannot predict. We exercise little control over these third-party vendors, which increases our vulnerability to

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problems with the services they provide. We license technology and related databases from third parties tofacilitate aspects of our data center and connectivity operations including, among others, Internet trafficmanagement services. We have experienced and expect to continue to experience interruptions and delays inservice and availability for such elements. Any errors, failures, interruptions or delays experienced in connectionwith these third-party technologies and information services could negatively impact our relationship with usersand adversely affect our brand and our business and could expose us to liabilities to third parties.

Our systems are also heavily reliant on the availability of electricity, which also comes from third-partyproviders. If we were to experience a major power outage, we would have to rely on back-up generators. Theseback-up generators may not operate properly through a major power outage and their fuel supply could also beinadequate during a major power outage. This could result in a disruption of our business.

Interruption or failure of our information technology and communications systems could impair ourability to effectively provide our products and services, which could damage our reputation and harm ouroperating results.

Our provision of our products and services depends on the continuing operation of our informationtechnology and communications systems. Any damage to or failure of our systems could result in interruptions inour service. Interruptions in our service could reduce our revenues and profits, and our brand could be damagedif people believe our system is unreliable. Our systems are vulnerable to damage or interruption fromearthquakes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses, computerdenial of service attacks or other attempts to harm our systems, and similar events. Some of our data centers arelocated in areas with a high risk of major earthquakes. Our data centers are also subject to break-ins, sabotageand intentional acts of vandalism, and to potential disruptions if the operators of these facilities have financialdifficulties. Some of our systems are not fully redundant, and our disaster recovery planning cannot account forall eventualities. The occurrence of a natural disaster, a decision to close a facility we are using without adequatenotice for financial reasons or other unanticipated problems at our data centers could result in lengthyinterruptions in our service.

We have experienced system failures in the past and may in the future. For example, in November 2003 wefailed to provide web search results for approximately 20% of our traffic for a period of about 30 minutes. Anyunscheduled interruption in our service puts a burden on our entire organization and would result in animmediate loss of revenue. If we experience frequent or persistent system failures on our web sites, ourreputation and brand could be permanently harmed. The steps we have taken to increase the reliability andredundancy of our systems are expensive, reduce our operating margin and may not be successful in reducing thefrequency or duration of unscheduled downtime.

More individuals are using non-PC devices to access the Internet, and versions of our web searchtechnology developed for these devices may not be widely adopted by users of these devices.

The number of people who access the Internet through devices other than personal computers, includingmobile telephones, hand-held calendaring and email assistants, and television set-top devices, has increaseddramatically in the past few years. The lower resolution, functionality and memory associated with alternativedevices make the use of our products and services through such devices difficult. If we are unable to attract andretain a substantial number of alternative device users to our web search services or if we are slow to developproducts and technologies that are more compatible with non-PC communications devices, we will fail to capturea significant share of an increasingly important portion of the market for online services.

Payments to certain of our Google Network members have exceeded the related fees we receive from ouradvertisers.

We have entered into, and may continue to enter into, minimum fee guarantee agreements with a smallnumber of Google Network members. In these agreements, we promise to make minimum payments to theGoogle Network member for a pre-negotiated period of time, typically from three months to a year or more. It is

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difficult to forecast with certainty the fees that we will earn under our agreements, and sometimes the fees weearn fall short of the minimum guarantee payment amounts. Also, increasing competition for arrangements withweb sites that are potential Google Network members could result in our entering into more of these minimumfee guarantee agreements under which guaranteed payments exceed the fees we receive from advertisers whoseads we place on those Google Network member sites. In each period to date, the aggregate fees we have earnedunder these agreements have exceeded the aggregate amounts we have been obligated to pay these GoogleNetwork members. However, individual agreements have resulted in guaranteed minimum and other payments tocertain Google Network members in excess of the related fees we receive from advertisers. We expect that someindividual agreements will continue to result in guaranteed minimum and other payments to certain GoogleNetwork members in excess of the related fees we receive from advertisers, which will adversely affect ourprofitability. However, we expect that the aggregate fees we will earn under agreements with guaranteedminimum and other payments will exceed the aggregate amounts we will be obligated to pay these GoogleNetwork members.

To the extent our revenues are paid in foreign currencies, and currency exchange rates becomeunfavorable, we may lose some of the economic value of the revenues in U.S. dollar terms.

As we expand our international operations, more of our customers may pay us in foreign currencies.Conducting business in currencies other than U.S. dollars subjects us to fluctuations in currency exchange rates.If the currency exchange rates were to change unfavorably, the value of net receivables we receive in foreigncurrencies and later convert to U.S. dollars after the unfavorable change would be diminished. This could have anegative impact on our reported operating results. Hedging strategies, such as forward contracts, options andforeign exchange swaps related to transaction exposures, that we have implemented or may implement tomitigate this risk may not eliminate our exposure to foreign exchange fluctuations. Additionally, hedgingprograms expose us to risks that could adversely affect our operating results, including the following:

• We have limited experience in implementing or operating hedging programs. Hedging programs areinherently risky and we could lose money as a result of poor trades.

• We may be unable to hedge currency risk for some transactions because of a high level of uncertainty orthe inability to reasonably estimate our foreign exchange exposures.

• We may be unable to acquire foreign exchange hedging instruments in some of the geographic areaswhere we do business, or, where these derivatives are available, we may not be able to acquire enoughof them to fully offset our exposure.

We may have exposure to greater than anticipated tax liabilities.

Our future income taxes could be adversely affected by earnings being lower than anticipated injurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we havehigher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in taxlaws, regulations, accounting principles or interpretations thereof. Our determination of our tax liability (like anycompany’s determination of its tax liability) is subject to review by applicable tax authorities. Any adverseoutcome of such a review could have an adverse effect on our operating results and financial condition. Inaddition, the determination of our worldwide provision for income taxes and other tax liabilities requiressignificant judgment and in the ordinary course of our business, there are many transactions and calculationswhere the ultimate tax determination is uncertain. Although we believe our estimates are reasonable, the ultimatetax outcome may differ from the amounts recorded in our financial statements and may materially affect ourfinancial results in the period or periods for which such determination is made.

We rely on insurance to mitigate some risks and, to the extent the cost of insurance increases or we areunable or choose not to maintain sufficient insurance to mitigate the risks facing our business, our operatingresults may be diminished.

We contract for insurance to cover certain potential risks and liabilities. In the current environment,insurance companies are increasingly specific about what they will and will not insure. It is possible that we may

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not be able to get enough insurance to meet our needs, may have to pay very high prices for the coverage we doget or may not be able to acquire any insurance for certain types of business risk. In addition, we have in the pastand may in the future choose not to obtain insurance for certain risks facing our business. This could leave usexposed to potential claims. If we were found liable for a significant claim in the future, our operating resultscould be negatively impacted. Also, to the extent the cost of maintaining insurance increases, our operatingresults will be negatively affected.

Acquisitions could result in operating difficulties, dilution and other harmful consequences.

We do not have a great deal of experience acquiring companies and the companies we have acquired havetypically been small. We have evaluated, and expect to continue to evaluate, a wide array of potential strategictransactions. From time to time, we may engage in discussions regarding potential acquisitions. Any of thesetransactions could be material to our financial condition and results of operations. In addition, the process ofintegrating an acquired company, business or technology may create unforeseen operating difficulties andexpenditures and is risky. The areas where we may face risks include:

• The need to implement or remediate controls, procedures and policies appropriate for a larger publiccompany at companies that prior to the acquisition lacked these controls, procedures and policies.

• Diversion of management time and focus from operating our business to acquisition integrationchallenges.

• Cultural challenges associated with integrating employees from the acquired company into ourorganization.

• Retaining employees from the businesses we acquire.

• The need to integrate each company’s accounting, management information, human resource and otheradministrative systems to permit effective management.

Foreign acquisitions involve unique risks in addition to those mentioned above, including those related tointegration of operations across different cultures and languages, currency risks and the particular economic,political and regulatory risks associated with specific countries.

Also, the anticipated benefit of many of our acquisitions may not materialize. Future acquisitions ordispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt,contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our financialcondition. Future acquisitions may require us to obtain additional equity or debt financing, which may not beavailable on favorable terms or at all.

We occasionally become subject to commercial disputes that could harm our business by distracting ourmanagement from the operation of our business, by increasing our expenses and, if we do not prevail, bysubjecting us to potential monetary damages and other remedies.

From time to time we are engaged in disputes regarding our commercial transactions. These disputes couldresult in monetary damages or other remedies that could adversely impact our financial position or operations.Even if we prevail in these disputes, they may distract our management from operating our business and the costof defending these disputes would reduce our operating results.

We have to keep up with rapid technological change to remain competitive in our rapidly evolvingindustry.

Our future success will depend on our ability to adapt to rapidly changing technologies, to adapt ourservices to evolving industry standards and to improve the performance and reliability of our services. Ourfailure to adapt to such changes would harm our business. New technologies and advertising media couldadversely affect us. In addition, the widespread adoption of new Internet, networking or telecommunications

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technologies or other technological changes could require substantial expenditures to modify or adapt ourservices or infrastructure.

Our business depends on increasing use of the Internet by users searching for information, advertisersmarketing products and services and web sites seeking to earn revenue to support their web content. If theInternet infrastructure does not grow and is not maintained to support these activities, our business will beharmed.

Our success will depend on the continued growth and maintenance of the Internet infrastructure. Thisincludes maintenance of a reliable network backbone with the necessary speed, data capacity and security forproviding reliable Internet services. Internet infrastructure may be unable to support the demands placed on it ifthe number of Internet users continues to increase, or if existing or future Internet users access the Internet moreoften or increase their bandwidth requirements. In addition, viruses, worms and similar programs may harm theperformance of the Internet. The Internet has experienced a variety of outages and other delays as a result ofdamage to portions of its infrastructure, and it could face outages and delays in the future. These outages anddelays could reduce the level of Internet usage as well as our ability to provide our solutions.

Changes in accounting rules for stock-based compensation may adversely affect our operating results,our stock price and our competitiveness in the employee marketplace.

We have a history of using employee stock options and other stock-based compensation to hire, motivateand retain our employees. In December 2004, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 123R, “Share-Based Payment,” which required us, starting January 1, 2006,to measure compensation costs for all stock-based compensation (including stock options) at fair value and torecognize these costs as expenses in our statements of income. The recognition of these expenses in ourstatements of income has had and will have a negative effect on our earnings per share, which could negativelyimpact our stock price. In addition, if we reduce or alter our use of stock-based compensation to minimize therecognition of these expenses, our ability to recruit, motivate and retain employees may be impaired, which couldput us at a competitive disadvantage in the employee marketplace.

Risks Related to Ownership of our Common Stock

The trading price for our Class A common stock has been and may continue to be volatile.

The trading price of our Class A common stock has been volatile since our initial public offering and willlikely continue to be volatile. The trading price of our Class A common stock may fluctuate widely in response tovarious factors, some of which are beyond our control. These factors include:

• Quarterly variations in our results of operations or those of our competitors.

• Announcements by us or our competitors of acquisitions, new products, significant contracts,commercial relationships or capital commitments.

• Disruption to our operations or those of our Google Network members or our data centers.

• The emergence of new sales channels in which we are unable to compete effectively.

• Our ability to develop and market new and enhanced products on a timely basis.

• Commencement of, or our involvement in, litigation.

• Any major change in our board or management.

• Changes in governmental regulations or in the status of our regulatory approvals.

• Recommendations by securities analysts or changes in earnings estimates.

• Announcements about our earnings that are not in line with analyst expectations, the likelihood of whichis enhanced because it is our policy not to give guidance on earnings.

54

• Announcements by our competitors of their earnings that are not in line with analyst expectations.

• The volume of shares of Class A common stock available for public sale.

• Sales of stock by us or by our stockholders.

• Short sales, hedging and other derivative transactions on shares of our Class A common stock.

• General economic conditions and slow or negative growth of related markets.

In addition, the stock market in general, and the market for technology companies in particular, haveexperienced extreme price and volume fluctuations that have often been unrelated or disproportionate to theoperating performance of those companies. These broad market and industry factors may seriously harm themarket price of our Class A common stock, regardless of our actual operating performance. In the past, followingperiods of volatility in the overall market and the market price of a company’s securities, securities class actionlitigation has often been instituted against these companies. This litigation, if instituted against us, could result insubstantial costs and a diversion of our management’s attention and resources.

We do not intend to pay dividends on our common stock.

We have never declared or paid any cash dividend on our capital stock. We currently intend to retain anyfuture earnings and do not expect to pay any dividends in the foreseeable future.

The concentration of our capital stock ownership with our founders, executive officers and our directorsand their affiliates will limit your ability to influence corporate matters.

Our Class B common stock has ten votes per share and our Class A common stock has one vote per share.As of March 2006, our founders, executive officers and directors (and their affiliates) together owned shares ofClass A common stock and Class B common stock representing approximately 78% of the voting power of ouroutstanding capital stock. In particular, as of December 31, 2005, our two founders and our CEO, Larry, Sergeyand Eric, controlled approximately 85% of our outstanding Class B common stock, representing approximately69% of the voting power of our outstanding capital stock. Larry, Sergey and Eric therefore have significantinfluence over management and affairs and over all matters requiring stockholder approval, including theelection of directors and significant corporate transactions, such as a merger or other sale of our company or itsassets, for the foreseeable future. In addition, because of this dual class structure, our founders, directors,executives and employees will continue to be able to control all matters submitted to our stockholders forapproval even if they come to own less than 50% of the outstanding shares of our common stock. Thisconcentrated control limits your ability to influence corporate matters and, as a result, we may take actions thatour stockholders do not view as beneficial. As a result, the market price of our Class A common stock could beadversely affected.

Provisions in our charter documents and under Delaware law could discourage a takeover thatstockholders may consider favorable.

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing achange of control or changes in our management. These provisions include the following:

• Our certificate of incorporation provides for a dual class common stock structure. As a result of thisstructure our founders, executives and employees have significant influence over all matters requiringstockholder approval, including the election of directors and significant corporate transactions, such as amerger or other sale of our company or its assets. This concentrated control could discourage othersfrom initiating any potential merger, takeover or other change of control transaction that otherstockholders may view as beneficial.

• Our board of directors has the right to elect directors to fill a vacancy created by the expansion of theboard of directors or the resignation, death or removal of a director, which prevents stockholders frombeing able to fill vacancies on our board of directors.

55

• Our stockholders may not act by written consent. As a result, a holder, or holders, controlling a majorityof our capital stock would not be able to take certain actions without holding a stockholders’ meeting.

• Our certificate of incorporation prohibits cumulative voting in the election of directors. This limits theability of minority stockholders to elect director candidates.

• Stockholders must provide advance notice to nominate individuals for election to the board of directorsor to propose matters that can be acted upon at a stockholders’ meeting. These provisions maydiscourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’sown slate of directors or otherwise attempting to obtain control of our company.

• Our board of directors may issue, without stockholder approval, shares of undesignated preferred stock.The ability to issue undesignated preferred stock makes it possible for our board of directors to issuepreferred stock with voting or other rights or preferences that could impede the success of any attempt toacquire us.

As a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. UnderDelaware law, a corporation may not engage in a business combination with any holder of 15% or more of itscapital stock unless the holder has held the stock for three years or, among other things, the board of directors hasapproved the transaction. Our board of directors could rely on Delaware law to prevent or delay an acquisition ofus.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by Google

Pursuant to the terms of our 1998 Stock Plan, 2000 Stock Plan, 2003 Stock Plan, 2003 Stock Plan (No. 2),2003 Stock Plan (No. 3), 2004 Stock Plan and equity incentive plans assumed through acquisitions (collectivelyreferred to as our “Stock Plans”), options may typically be exercised prior to vesting. We have the right torepurchase unvested shares from service providers upon their termination, and it is generally our policy to do so.The following table provides information with respect to purchases made by us of shares of our common stockduring the three month period ended March 31, 2006:

Period

TotalNumber of

SharesPurchased(1)

Average PricePaid per

Share

Total Number of SharesPurchased as Part ofPublicly AnnouncedPlans or Programs

Maximum Number (orApproximate DollarValue) of Shares that

May Yet Be PurchasedUnder the Plans or

Programs

January 1 – 31 . . . . . . . . . . . . . . . . . . . . 4,603 $0.63 — —February 1 – 28 . . . . . . . . . . . . . . . . . . . — $ — — —March 1 – 31 . . . . . . . . . . . . . . . . . . . . . 2,169 $4.95 — —

Total . . . . . . . . . . . . . . . . . . . . 6,772 $2.01 — —

(1) All shares were originally purchased from us by employees pursuant to exercises of unvested stock options.During the months listed above, we routinely repurchased the shares from our service providers upon theirtermination of employment pursuant to our right to repurchase unvested shares at the original exercise priceunder the terms of our Stock Plans and the related stock option agreements.

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ITEM 6. EXHIBITS

Location of Exhibit Incorporated byreference herein

ExhibitNumber Description Form Date

1.1 Underwriting Agreement dated March 31, 2006 between GoogleInc. and Goldman, Sachs & Co.

Current Reporton Form 8-K

March 29, 2006

10.23*† Agreement and Plan of Merger, dated as of January 16, 2006, byand among the Registrant, Enumclaw, Inc., dMarcBroadcasting, Inc. and certain other parties thereto

31.01* Certification of Chief Executive Officer pursuant to ExchangeAct Rules 13a-14(a) and 15d-14(a), as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2003

31.02* Certification of Chief Financial Officer pursuant to ExchangeAct Rules 13a-14(a) and 15d-14(a), as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2003

32.01‡ Certifications of Chief Executive Officer and Chief FinancialOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2003

* Filed herewith.† Confidential treatment has been requested for certain portions of this exhibit.‡ Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto duly authorized.

GOOGLE INC.

Date: May 10, 2006 By: /s/ ERIC SCHMIDT

Eric SchmidtChairman of the Executive Committee

and Chief Executive Officer

58

EXHIBIT INDEX

Location of Exhibit Incorporated byreference herein

ExhibitNumber Description Form Date

1.1 Underwriting Agreement dated March 31, 2006 between GoogleInc. and Goldman, Sachs & Co.

Current Reporton Form 8-K

March 29, 2006

10.23 *† Agreement and Plan of Merger, dated as of January 16, 2006, byand among the Registrant, Enumclaw, Inc., dMarc Broadcasting,Inc. and certain other parties thereto

31.01 * Certification of Chief Executive Officer pursuant to ExchangeAct Rules 13a-14(a) and 15d-14(a), as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2003

31.02 * Certification of Chief Financial Officer pursuant to ExchangeAct Rules 13a-14(a) and 15d-14(a), as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2003

32.01‡ Certifications of Chief Executive Officer and Chief FinancialOfficer pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2003

* Filed herewith.† Confidential treatment has been requested for certain portions of this exhibit.‡ Furnished herewith.

Exhibit 10.23

AGREEMENT AND PLAN OF MERGER

BY AND AMONG

GOOGLE INC.

ENUMCLAW, INC.

DMARC BROADCASTING, INC.

AND, WITH RESPECT TO ARTICLES VIII, IX AND X ONLY,

H. RICHARD DALLAS

AS STOCKHOLDER REPRESENTATIVE

AND

U.S. BANK, NATIONAL ASSOCIATION

AS ESCROW AGENT

Dated as of January 16, 2006

TABLE OF CONTENTS

Page

ARTICLE I THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1.1The Merger 11.2Effective Time 21.3Effect of the Merger 21.4Certificate of Incorporation and Bylaws 21.5Directors and Officers 21.6Effect of Merger on the Capital Stock of the Constituent Corporations 31.7Dissenting Shares 71.8Surrender of Certificates 81.9No Further Ownership Rights in Company Capital Stock 101.10Lost, Stolen or Destroyed Certificates 101.11Taking of Necessary Action; Further Action 10

ARTICLE II CONTINGENT CONSIDERATION PROVISIONS 10

2.1General Provisions 102.2Definitions Applicable to this Article II 122.3Contingent Payments 182.4Reports and Payment 192.5Stockholder Representative Review 212.6Disagreements 212.7Exclusion of Excludable Contracts 232.8Support and Control 262.9No Guarantee of Employment 272.10No Other Representations, Warranties or Commitments 272.11Certain Transactions 27

ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY 27

3.1Organization of the Company 283.2Company Capital Structure 283.3Subsidiaries 303.4Authority 303.5No Conflict 313.6Consents 313.7Company Financial Statements 323.8No Undisclosed Liabilities 323.9No Changes 323.10Accounts Receivable 343.11Tax Matters 343.12Restrictions on Business Activities 363.13Title to Properties; Absence of Liens and Encumbrances; Condition of Equipment 373.14Intellectual Property 373.15Agreements, Contracts and Commitments 433.16Interested Party Transactions 453.17Company Authorizations 463.18Litigation 463.19Minute Books 46

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TABLE OF CONTENTS(continued)

Page

3.20Environmental Matters 463.21Brokers’ and Finders’ Fees 473.22Employee Benefit Plans and Compensation 473.23Insurance 523.24Compliance with Laws 523.25Export Control Laws 523.26Customers and Suppliers 523.27Complete Copies of Materials 53

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

4.1Organization 544.2Authority 544.3No Conflict 544.4Consents 544.5Litigation 54

ARTICLE V CONDUCT PRIOR TO THE EFFECTIVE TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

5.1Conduct of Business of the Company and the Subsidiaries 545.2No Solicitation 575.3Procedures for Requesting Parent Consent 58

ARTICLE VI ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

6.1Company Stockholder Approval 596.2Access to Information 596.3Confidentiality 606.4Public Disclosure 606.5Reasonable Efforts 606.6Notification of Certain Matters 606.7Additional Documents and Further Assurances 616.8Conversion of Preferred Stock 616.9Treatment of Company Warrants 616.10Amendment to Plans 616.11Consents 616.12Terminated Agreements 616.13Modified Agreements 626.14Notices 626.15Proprietary Information and Inventions Assignment Agreement 626.16New Employment Arrangements 626.17Agreements and Documents Delivered at Signing 626.18Non-Competition Agreements 626.19Resignation of Officers and Directors 636.20Releases of Officers 636.21Termination of 401(k) Plan 636.22Expenses 636.23Spreadsheet 636.24Release of Liens 646.25FIRPTA Compliance 646.26Director and Officer Liability and Indemnification 64

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TABLE OF CONTENTS(continued)

Page

ARTICLE VII CONDITIONS TO THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

7.1Conditions to Obligations of Each Party to Effect the Merger 657.2Conditions to Obligations of Parent and Sub 657.3Conditions to Obligations of the Company 68

ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

8.1Survival of Representations and Warranties 698.2Indemnification 708.3Maximum Payments; Remedy 718.4Claims for Indemnification; Resolution of Conflicts 728.5Setoff for Losses 748.6Escrow Arrangements 758.7Third-Party Claims 788.8Stockholder Representative 78

ARTICLE IX TERMINATION, AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

9.1Termination 799.2Effect of Termination 809.3Amendment 809.4Extension; Waiver 80

ARTICLE X GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

10.1Notices 8110.2Interpretation 8210.3Counterparts 8210.4Entire Agreement; Assignment 8210.5Severability 8210.6Other Remedies 8210.7Governing Law; Exclusive Jurisdiction 8210.8Rules of Construction 8310.9Legal Representation 8310.10Resolution of Conflicts; Arbitration 83

* * * * *

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INDEX OF EXHIBITS

Exhibit Description

Exhibit A . . . . . . . . Cash Bonus PlanExhibit B . . . . . . . . Form of Written ConsentExhibit C . . . . . . . . Form of ProxyExhibit D . . . . . . . . Form of Securityholder AgreementExhibit E . . . . . . . . Form of Certificate of MergerExhibit F . . . . . . . . Form of Letter of TransmittalExhibit G . . . . . . . . Form of Non-Competition AgreementsExhibit H . . . . . . . . Form of Director and Officer Resignation LetterExhibit I . . . . . . . . . Form of Officer Release LetterExhibit J . . . . . . . . Form of Legal Opinion of Counsel of the CompanyExhibit K . . . . . . . . Form of Legal Opinion of Reed Smith LLPExhibit L . . . . . . . . Form of Legal Opinion of Counsel of Parent

Schedules Description

Schedule 1.6(a)(i) . Key EmployeesSchedule 1.6(a)(ii) . KnowledgeSchedule 2.2(s) . . . Approved ContractsSchedule 2.2(z)(i) . 2006-2007 Inventory TableSchedule 2.2(z)(ii) . 2008 Inventory TableSchedule 2.2(kk)(i) 2006-2007 Revenue TableSchedule 2.2(kk)(ii) 2008 Revenue TableSchedule 3.14(p)(i) Form of Employee Proprietary Information AgreementSchedule 3.14(p)(ii) Form of Consultant Proprietary Information AgreementSchedule 6.1(a) . . . Company Stockholder ApprovalSchedule 6.23 . . . . SpreadsheetSchedule 7.2(j) . . . Third Party ConsentsSchedule 7.2(k) . . . Terminated AgreementsSchedule 7.2(l) . . . Modified AgreementsSchedule 7.2(m) . . NoticesSchedule 7.2(n) . . . Proprietary Information and Inventions Assignment AgreementsSchedule 7.2(p) . . . Non-Competition AgreementsSchedule 7.2(u) . . . Release of LiensSchedule 8.2(a)(v) . Other Indemnity Matters

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INDEX OF DEFINED TERMS

TermSection Reference

in Agreement

2006-2007 Inventory Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2(z)2006-2007 Revenue Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2(kk)2008 Inventory Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2(z)2008 Revenue Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2(kk)280G Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1(d)401(k) Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.21acquire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Acquisition Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7(a)Action of Divestiture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5Additional Escrow Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Adjusted Listener Count . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Affiliated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preamble[***] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Arbitron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2AudioAds Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2AudioAds Operating Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Authorized Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6(d)Balance Sheet Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7Barter Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Basket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3(e)[***] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7(c)[***] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7(f)Board Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1(c)Bonus Unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(c)(iii)Broadcast Automation Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Business Day(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)California Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7(a)Cash Bonus Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RecitalsCertificate of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1(a)Certificate of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2Chad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7(e)(i)Charter Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1(a)Claim Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4(a)(i)Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2Closing Stockholder Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)COBRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.22(a)Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PreambleCompany Authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.17Company Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Company Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Company Disclosure Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Article III

*** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission.Confidential treatment has been requested with respect to the omitted portions.

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INDEX OF DEFINED TERMS(continued)


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Company Employee Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.22(a)Company Indemnified Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.26Company Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.14(a)Company Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Company Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Company Registered Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.14(b)Company Series A Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Company Series A Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Company Series B Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Company Series B-1 Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Company Series B-2 Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Company Stock Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8(c)Company System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Company Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Confidential Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5(b)Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5Consultant Proprietary Information Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.14(p)Contaminants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.14(v)Contingent Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Contingent Payment Holdback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5(b)(ii)Contingent Payment Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Costs of Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2[***] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Covered Inventory Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Covered Net Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Covered Radio Advertisement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2[***] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Covered Radio Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2[***] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Covered Radio Spot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Covered Radio Station . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.26(a)Covered Unused Radio Spot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Covered Used Radio Spot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Current Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.26(a)[***] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2[***] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7(d)[***] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7(d)Delaware Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1Director and Officer Resignation Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.19Dispute Arbitration Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6(c)Dispute Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6(a)


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in Agreement

Dispute Settlement Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6(c)Dissenting Share Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7(c)Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7(a)DOL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.22(a)Dollars or $ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.22(a)Employee Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.22(a)Employee Proprietary Information Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.14(p)Environmental Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.20(c)Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.13(d)ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.22(a)ERISA Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.22(a)Escrow Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Escrow Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Escrow Distribution Holdback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6(b)Escrow Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6(a)Escrow Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6(b)Excess Third Party Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.22Exchange Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8(a)Exchange Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8(c)Exchange Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8(a)Excludable Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7(b)Excludable Contract Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7(f)[***] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7(e)(iii)(2)Excluded Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7(e)Export Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.25(a)Final Determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6(c)Financials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7FIRPTA Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.25FMLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.22(a)GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Governmental Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6Hazardous Material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.20(a)Hazardous Materials Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.20(b)HIPAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.22(a)HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6Indemnifiable Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2(a)Indemnified Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2(a)Indemnifying Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4(a)(ii)Initial Escrow Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Initial Merger Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.14(a)Interim Financials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7International Employee Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.22(a)


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in Agreement

[***] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Inventory Contingency Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Inventory Contingency Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4(c)(i)Inventory Payment Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Inventory Reference Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.22(a)Key Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Known . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Launch Contingency Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3(a)Launch Contingent Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3(a)Launch Milestone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3(a)Lease Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.13(b)Leased Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.13(b)Letter of Transmittal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8(c)Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Listener Count . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2(a)Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2(a)Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Material Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.15(a)Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.15(a)Maximum Inventory Contingent Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Maximum Revenue Contingent Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RecitalsMerger Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Modified Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.13Non-Competition Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.18Non-Disclosure Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.14Objection Deadline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4(a)(iv)Objection Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4(a)(iii)Offer Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.16(a)Officer’s Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4(a)(i)Officer Release Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.20Open Source Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.14(t)Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PreambleParent (for purposes of Article II) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Parent Charter Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3Parent Disclosure Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Article IVParties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Payable Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5(c)Payable Contingent Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5(b)


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in Agreement

Payable Overage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6(e)Payment Adjustment Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1(e)Payment Dispute Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6(a)Payment Overage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4(b)(iii)PBGC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.22(a)Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.22(a)Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.14(a)Programming Automation Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.26(a)Pro Rata Portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Proxy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RecitalsPTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.14(b)[***] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2[***] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Radio Spot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Registered Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.14(a)Related Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Representative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5(b)Requisite Stockholder Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4Resolved Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4(b)(iii)Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.11(b)(i)Revenue Contingency Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Revenue Contingency Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4(b)(i)Revenue Payment Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Revenue Reference Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2RevenueSuite Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.15(a)(xiv)RevenueSuite Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.26(a)Review Request . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5(a)Ryan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7(e)(ii)Securityholder Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RecitalsSettled Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4(b)(i)Settlement Memorandum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4(b)(i)Shrink-Wrap Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.14(a)Source Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.14(a)Spreadsheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.23Standard Form Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.14(i)Statement of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.22Stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Stockholder Representative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PreambleStockholder Representative Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.8(b)Sub . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PreambleSubsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3Subsidiary Organizational Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3


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in Agreement

Survival Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1Surviving Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.11(a)Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.11(a)Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.14(a)Terminated Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.12Terrestrial Broadcast Radio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Third Party Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.7Third Party Expense Adjustment Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Third Party Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.22Third Party Expense Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Total Outstanding Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Unagreed Barter Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2Unobjected Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4(a)(iv)Unresolved Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5(c)WARN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.22(a)Warrantholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6(a)Written Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RecitalsWritten Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4(b)(iii)Year-End Financials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7

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THIS AGREEMENT AND PLAN OF MERGER (the “Agreement”) is made and entered into as of January 16, 2006 by andamong Google Inc., a Delaware corporation (“Parent”), Enumclaw, Inc., a Delaware corporation and a wholly-owned subsidiary ofParent (“Sub”), dMarc Broadcasting, Inc., a Delaware corporation (the “Company”), and with respect to Article VIII, Article IXand Article X hereof only, H. Richard Dallas as stockholder representative (the “Stockholder Representative”), and U.S. Bank,National Association as Escrow Agent.

RECITALS

A. The Boards of Directors of each of Parent, Sub and the Company believe it is advisable and in the best interests of eachcorporation and its respective stockholders that Parent acquire the Company through the statutory merger of Sub with and into theCompany (the “Merger”) and, in furtherance thereof, have approved this Agreement and the Merger.

B. Pursuant to the Merger, among other things, and subject to the terms and conditions of this Agreement, (i) all of the issued andoutstanding Company Capital Stock shall be converted into the right to receive the consideration set forth herein, (ii) all of the issuedand outstanding Company Options shall be cancelled in exchange for certain cash rights which shall be granted pursuant to the termsand conditions of a cash bonus plan, in substantially the form attached hereto as Exhibit A (the “Cash Bonus Plan”), and (iii) all ofthe issued and outstanding Company Warrants shall be converted into the right to receive the consideration set forth herein.

C. A portion of the Initial Merger Consideration otherwise payable by Parent in connection with the Merger and a portion of theLaunch Contingent Payment, if any, otherwise payable by Parent in connection with the terms and conditions described in Article IIhereof shall be placed in escrow by Parent as partial security for the indemnification obligations set forth in this Agreement.

D. The Company, on the one hand, and Parent and Sub, on the other hand, desire to make certain representations, warranties,covenants and other agreements in connection with the Merger.

E. Immediately following the execution and delivery of this Agreement, certain Stockholders shall execute and deliver to theCompany, and the Company shall thereafter deliver to Parent, a true, correct and complete copy of an Action by Written Consent,adopting this Agreement, the Merger and the transactions contemplated hereby, in the form attached hereto as Exhibit B (the“Written Consent”) and an irrevocable proxy coupled with an interest in the form attached as Exhibit C (the “Proxy”). In addition,certain Stockholders shall execute and deliver to Parent a stockholder agreement, in substantially the form attached hereto asExhibit D (the “Securityholder Agreement”).

NOW, THEREFORE, in consideration of the mutual agreements, covenants and other premises set forth herein, the mutualbenefits to be gained by the performance thereof, and for other good and valuable consideration, the receipt and sufficiency of whichare hereby acknowledged and accepted, the parties hereby agree as follows:

ARTICLE I

THE MERGER

1.1 The Merger. At the Effective Time and subject to and upon the terms and conditions of this Agreement and the applicableprovisions of the General Corporation Law of the State of Delaware (“Delaware Law”), Sub shall be merged with and into theCompany, the separate corporate existence of Sub

shall cease, and the Company shall continue as the surviving corporation and as a wholly-owned subsidiary of Parent. The survivingcorporation after the Merger is sometimes referred to hereinafter as the “Surviving Corporation.”

1.2 Effective Time. Unless this Agreement is earlier terminated pursuant to Section 9.1 hereof, the closing of the Merger (the“Closing”) will take place on a Business Day as promptly as practicable after the execution and delivery hereof by the parties hereto,and following the satisfaction or waiver of the conditions set forth in Article VII hereof, at the offices of Wilson Sonsini Goodrich &Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California, unless another time or place is mutually agreed upon inwriting by Parent and the Company. The date upon which the Closing actually occurs shall be referred to herein as the “ClosingDate.” On the Closing Date, the parties hereto shall cause the Merger to be consummated by filing a Certificate of Merger insubstantially the form attached hereto as Exhibit E with the Secretary of State of the State of Delaware (the “Certificate ofMerger”), in accordance with the applicable provisions of Delaware Law (the time of such filing shall be referred to herein as the“Effective Time”).

1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions ofDelaware Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, except as otherwise agreedto pursuant to the terms of this Agreement, all of the property, rights, privileges, powers and franchises of the Company and Sub shallvest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Sub shall become the debts, liabilities andduties of the Surviving Corporation.

1.4 Certificate of Incorporation and Bylaws.

(a) Unless otherwise determined by Parent prior to the Effective Time, the certificate of incorporation of the SurvivingCorporation shall be amended and restated as of the Effective Time to be identical to the certificate of incorporation of Sub as ineffect immediately prior to the Effective Time, until thereafter amended in accordance with Delaware Law and as provided in suchcertificate of incorporation; provided, however, that at the Effective Time, Article I of the certificate of incorporation of the SurvivingCorporation shall be amended and restated in its entirety to read as follows: “The name of the corporation is dMarc Broadcasting,Inc.”; provided further, however, that the provisions of the certificate of incorporation of Sub relating to the incorporator of Sub shallbe omitted from the certificate of incorporation of the Surviving Corporation.

(b) Unless otherwise determined by Parent prior to the Effective Time, the bylaws of Sub, as in effect immediately prior tothe Effective Time, shall be the bylaws of the Surviving Corporation at the Effective Time until thereafter amended in accordancewith Delaware Law and as provided in the certificate of incorporation of the Surviving Corporation and such bylaws.

1.5 Directors and Officers.

(a) Directors of Surviving Corporation. Unless otherwise determined by Parent prior to the Effective Time, the directors ofSub immediately prior to the Effective Time shall be the directors of the Surviving Corporation immediately after the Effective Time,each to hold the office of a director of the Surviving Corporation in accordance with the provisions of Delaware Law and thecertificate of incorporation and bylaws of the Surviving Corporation until their successors are duly elected and qualified.

(b) Officers of Surviving Corporation. Unless otherwise determined by Parent prior to the Effective Time, the officers ofSub immediately prior to the Effective Time shall be the officers of the Surviving Corporation immediately after the Effective Time,each to hold office in accordance with the provisions of the bylaws of the Surviving Corporation.

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(c) Directors of Subsidiaries of Surviving Corporation. Unless otherwise determined by Parent prior to the Effective Time,Parent, the Company and the Surviving Corporation shall cause the directors of Sub immediately prior to the Effective Time to be thedirectors of any Subsidiaries immediately after the Effective Time, each to hold office as a director of each such Subsidiary inaccordance with the provisions of the laws of the respective jurisdiction of organization and the respective bylaws or equivalentorganizational documents of each such Subsidiary.

(d) Officers of Subsidiaries of Surviving Corporation. Unless otherwise determined by Parent prior to the Effective Time,Parent, the Company and the Surviving Corporation shall cause the officers of Sub immediately prior to the Effective Time to be theofficers of any Subsidiaries immediately after the Effective Time, each to hold office as an officer of each such Subsidiary inaccordance with the provisions of the laws of the respective jurisdiction of organization and the bylaws or equivalent organizationaldocuments of each such Subsidiary.

1.6 Effect of Merger on the Capital Stock of the Constituent Corporations.

(a) Definitions. For all purposes of this Agreement, the following terms shall have the following respective meanings:

“Additional Escrow Amount” shall mean a dollar amount equal to ten percent (10%) of the Launch Contingent Payment, ifany, which amount shall be deducted from the distribution of such Launch Contingent Payment.

“Business” shall mean the business conducted by Parent following the Closing of inserting audio advertisements into audioradio programming broadcasts.

“Business Day(s)” shall mean each day that is not a Saturday, Sunday or other day on which Parent is closed for business orbanking institutions located in San Francisco, California are authorized or obligated by law or executive order to close.

“Closing Stockholder Consent” shall mean the approval by written consent of the holders of at least 95% of theoutstanding shares of Company Capital Stock.

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Company Capital Stock” shall mean the Company Common Stock, the Company Preferred Stock and any other shares ofcapital stock, if any, of the Company. For the avoidance of doubt, Company Capital Stock excludes Company Warrants and CompanyOptions.

“Company Common Stock” shall mean the Company Series A Common Stock and Company Series B Common Stock,collectively.

“Company Options” shall mean all issued and outstanding options (including commitments to grant options, but excludingCompany Warrants) to purchase or otherwise acquire Company Capital Stock (whether or not vested) held by any Person.

“Company Preferred Stock” shall mean the Company Series A Preferred Stock, Company Series B-1 Preferred Stock andCompany Series B-2 Preferred Stock, collectively.

“Company Series A Common Stock” shall mean the Series A Common Stock, par value $0.001 per share, of theCompany.

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“Company Series A Preferred Stock” shall mean the Series A Preferred Stock, par value $0.001 per share, of theCompany.

“Company Series B Common Stock” shall mean the Series B Common Stock, par value $0.001 per share, of theCompany.

“Company Series B-1 Preferred Stock” shall mean the Series B-1 Preferred Stock, par value $0.001 per share, of theCompany.

“Company Series B-2 Preferred Stock” shall mean the Series B-2 Preferred Stock, par value $0.001 per share, of theCompany.

“Company Warrants” shall mean all issued and outstanding warrants to purchase Company Capital Stock.

“Contingent Payment” shall mean each of the payments described in Article II hereto, payment of which is contingentupon the satisfaction of the contingencies described therein.

“Contract” shall mean any mortgage, indenture, lease, contract, covenant, plan, insurance policy or other agreement,instrument, arrangement, obligation, understanding or commitment, permit, concession, franchise or license, whether oral or written(collectively, “Contracts”).

“Dollars” or “$” shall mean United States Dollars.

“Escrow Agent” shall mean U.S. Bank, National Association, or another institution acceptable to Parent and theStockholder Representative.

“Escrow Amounts” shall mean the Initial Escrow Amount and the Additional Escrow Amount, if any, collectively.

“GAAP” shall mean U.S. generally accepted accounting principles consistently applied.

“Initial Escrow Amount” shall mean a dollar amount equal to ten million two hundred thousand dollars ($10,200,000).

“Initial Merger Consideration” shall mean an amount equal to one hundred two million dollars ($102,000,000) less theThird Party Expense Adjustment Amount.

“Key Employees” shall mean the individuals set forth on Schedule 1.6(a)(i) hereto.

“Knowledge” or “Known” shall mean (i) with respect to the Company, the actual knowledge of the Persons identified onSchedule 1.6(a)(ii), without any duty of inquiry, and (ii) with respect to Parent or Sub, the actual knowledge of the general counsel ofParent without any duty of inquiry.

“Lien” shall mean any lien, pledge, charge, claim, mortgage, security interest or other encumbrance of any sort(collectively, “Liens”).

“Material Adverse Effect” with respect to the Company or Parent shall mean any state of facts, condition, change,development, event or effect that, either alone or in combination with any other change, event or effect, is, or is reasonably likely tobe, materially adverse to the business, assets (whether tangible or intangible), condition (financial or otherwise) or operations (or, inthe case of Section 7.2(b) only,

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prospects) of such entity and its subsidiaries, taken as a whole; provided, however, that “Material Adverse Effect” shall not includethe effect of any state of facts, condition, change, development, event or effect to the extent resulting from any of the following, eitheralone or in combination:

(i) the markets in which the company and its subsidiaries operate, to the extent such effect does not disproportionatelyaffect such entity and its subsidiaries;

(ii) general economic or political conditions (including those affecting the securities markets), to the extent suchconditions do not disproportionately affect such entity and its subsidiaries;

(iii) compliance with this Agreement;

(iv) delays in or suspensions or terminations of contracts, or disruptions in supplier, customer, partner or similarbusiness relationships resulting from the public announcement of this Agreement or of the consummation of the transactionscontemplated hereby;

(v) acts of war (whether or not declared), sabotage or terrorism, military actions or the escalation thereof or other forcemajeure events occurring after the date hereof; or

(vi) any changes in applicable laws, regulations or accounting rules.

“Merger Consideration” shall mean the sum of the Initial Merger Consideration, plus any Contingent Payments that arepaid, plus any Contingent Payments that are earned but not yet paid pursuant to the terms of Article II (including, for the avoidanceof doubt, any Escrow Amounts or amounts that are subject to set-off pursuant to Section 8.5).

“Non-Disclosure Agreement” shall mean that certain Mutual Non-Disclosure Agreement effective as of June 10, 2005 byand between Parent and the Company.

“Person” shall mean an individual or entity, including a partnership, a limited liability company, a corporation, anassociation, a joint stock company, a trust, a joint venture, an unincorporated organization, or a Governmental Entity (or anydepartment, agency, or political subdivision thereof).

“Plans” shall mean the Company’s 2005 Stock Incentive Plan.

“Pro Rata Portion” shall mean (i) with respect to each Stockholder, a percentage equal to the quotient of (A) the totalnumber of shares of Company Capital Stock (on an as-converted to common stock basis) held by such Stockholder as of the EffectiveTime, divided by (B) the Total Outstanding Capitalization, (ii) with respect to each Warrantholder, a percentage equal to the quotientof (A) the maximum aggregate number of shares of Company Common Stock issuable to such Warrantholder upon full exercise,exchange or conversion of all Company Warrants and any other rights (other than Company Options) whether vested or unvestedconvertible into, exercisable for or exchangeable for, shares of Company Common Stock held by such Warrantholder, divided by(B) the Total Outstanding Capitalization, and (iii) with respect to the Cash Bonus Plan, a percentage equal to the quotient of (A) theaggregate number of Bonus Units authorized for issuance pursuant to the Cash Bonus Plan, divided by (B) the Total OutstandingCapitalization.

“Related Agreements” shall mean the Non-Disclosure Agreement, Non-Competition Agreements, Offer Letters,Securityholder Agreements and Proxies.

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“Stockholder” shall mean any holder of any Company Capital Stock immediately prior to the Effective Time. To the extenta Stockholder also holds Company Options or Company Warrants, that Stockholder shall be deemed a Stockholder only as to thatStockholder’s holdings of Company Capital Stock.

“Third Party Expense Adjustment Amount” shall mean the difference between (i) the amount of the Third PartyExpenses reflected on the Statement of Expenses and (ii) the Third Party Expense Cap.

“Third Party Expense Cap” shall mean Five Hundred Thousand Dollars ($500,000).

“Total Outstanding Capitalization” shall mean the sum of the aggregate number of (i) shares of Company Common Stockissued and outstanding immediately prior to the Effective Time, plus (ii) the maximum number of shares of Company Common Stockissuable, immediately prior to the Effective Time, upon full conversion of the issued and outstanding Company Preferred Stock, plus(iii) the maximum aggregate number of shares of Company Common Stock issuable upon full exercise, exchange or conversion of allCompany Warrants and any other rights (other than Company Options) whether vested or unvested convertible into, exercisable for orexchangeable for, shares of Company Common Stock, plus (iv) the aggregate number of Bonus Units authorized for issuance pursuantto the Cash Bonus Plan, which, for the avoidance of doubt, shall equal 600,000. Notwithstanding the foregoing, Total OutstandingCapitalization shall not include any shares of Company Capital Stock issuable upon the exercise of Company Warrants that expire orare canceled concurrently with or immediately prior to the Effective Time to the extent not exercised or converted into the right toreceive the consideration described in Section 1.6(c)(i).

“Warrantholder” shall mean any holder of Company Warrants immediately prior to the Effective Time. To the extent aWarrantholder also holds Company Capital Stock or Company Options, that Warrantholder shall be deemed a Warrantholder only asto that Warrantholder’s holdings of Company Warrants.

(b) Effect on Stockholders. At the Effective Time, by virtue of the Merger and without any action on the part of Sub, theCompany or the Stockholders, each Stockholder (other than any holders of Dissenting Shares and excluding, for avoidance of doubt,any Company Warrants and Company Options held by Stockholders, which shall be treated as provided for in Section 1.6(c) below)will receive, subject to the terms and conditions set forth in this Section 1.6 and throughout this Agreement, including the escrow andsetoff provisions set forth in Section 1.8(b) and Article VIII hereof and the contingent payment provisions set forth in Article IIhereof, upon surrender of any certificates representing shares of Company Capital Stock held by such Stockholder in the mannerprovided in Section 1.8 hereof, an amount of cash equal to such Stockholder’s Pro Rata Portion of the Initial Merger Considerationand a nontransferable (except by operation of law or pursuant to the terms of Article II) contingent right to receive, if, when and tothe extent payable in accordance with Article II, such Stockholder’s Pro Rata Portion of any Contingent Payments, in each case,rounded to the nearest cent ($0.01) (with amounts greater than or equal to $0.005 rounded up).

(c) Treatment of Company Warrants and Company Options.

(i) Effect on Company Warrants. At the Effective Time, each Company Warrant that is outstanding prior to theEffective Time hereof shall be converted, subject to the terms and conditions set forth in this Section 1.6 and throughout thisAgreement, including the escrow and setoff provisions set forth in Section 1.8(b) and Article VIII hereof and the contingent paymentprovisions set forth in Article II hereof, upon surrender of such Company Warrants in the manner provided in Section 1.8 hereof, intoan amount of cash equal to such Warrantholder’s Pro Rata Portion of the Initial Merger Consideration and a nontransferable (exceptby operation of law or pursuant to the terms of Article II) contingent right to receive, if, when and to

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the extent payable in accordance with Article II, such Warrantholder’s Pro Rata Portion of any Contingent Payments, in each case,rounded to the nearest cent ($0.01) (with amounts greater than or equal to $0.005 rounded up). The amount of such Warrantholder’sPro Rata Portion of the Initial Merger Consideration shall be reduced by an amount equal to the aggregate exercise price of suchWarrantholder’s Company Warrants.

(ii) Effect on Company Options. As of the Effective Time, each Company Option that is outstanding and not cancelledby the Company at or prior to the Effective Time hereof shall be cancelled in exchange for the Bonus Units provided inSection 1.6(c)(iii).

(iii) Adoption of Cash Bonus Plan. The Company shall grant to eligible participants a conditional right (a “BonusUnit”) under the Cash Bonus Plan to receive a portion of the Initial Merger Consideration and a nontransferable (except by operationof law) contingent right to receive, if, when and to the extent payable in accordance with Article II, a portion of each ContingentPayment, subject to the terms and conditions of the Cash Bonus Plan. As of the Effective Time, Parent shall become obligated toreserve an amount of cash for payment pursuant to the terms and conditions of the Cash Bonus Plan equal to the Cash Bonus Plan’sPro Rata Portion of the Initial Merger Consideration, and, if, when and to the extent payable in accordance with Article II, the CashBonus Plan’s Pro Rata Portion of any Contingent Payments, in each case, rounded to the nearest cent ($0.01) (with amounts greaterthan or equal to $0.005 rounded up).

(iv) Necessary Actions. Prior to the Effective Time, and subject to the review and approval of Parent, the Companyshall take all actions necessary to effect the transactions anticipated by Sections 1.6(b) and 1.6(c) under all Company Optionagreements, all Company Warrant agreements and any other plan or arrangement of the Company (whether written or oral, formal orinformal), including delivering all required notices.

(d) Withholding Taxes. The Company, and on its behalf Parent and the Surviving Corporation, shall be entitled to deductand withhold from any consideration payable or otherwise deliverable pursuant to this Agreement such amounts as may be required tobe deducted or withheld therefrom under any provision of federal, local or foreign tax law or under any applicable legal requirement.To the extent such amounts are so deducted or withheld, such amounts shall be treated for all purposes under this Agreement ashaving been paid to the Person to whom such amounts would otherwise have been paid.

(e) Capital Stock of Sub. Each share of common stock of Sub issued and outstanding immediately prior to the EffectiveTime shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock of theSurviving Corporation. Each stock certificate of Sub evidencing ownership of any such shares shall continue to evidence ownership ofsuch shares of capital stock of the Surviving Corporation.

1.7 Dissenting Shares.

(a) Notwithstanding any other provisions of this Agreement to the contrary, any shares of Company Capital Stock held by aholder who has properly demanded and not effectively withdrawn or lost such holder’s appraisal, dissenters’ or similar rights for suchshares under Delaware Law and under Chapter 13 of the California Corporations Code (“California Law”), if applicable(collectively, the “Dissenting Shares”), shall not be converted into or represent a right to receive the applicable consideration forCompany Capital Stock set forth in Section 1.6(b) hereof, but the holder thereof shall only be entitled to such rights as are providedby Delaware Law and California Law, if applicable.

(b) Notwithstanding the provisions of Section 1.7(a) hereof, if any holder of Dissenting Shares shall effectively withdraw orlose (through failure to perfect or otherwise) such holder’s appraisal or

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dissenters’ rights under Delaware Law and California Law, if applicable, then, as of the later of the Effective Time and the occurrenceof such event, such holder’s shares shall automatically be converted into and represent only the right to receive the consideration forCompany Capital Stock, as applicable, set forth in Section 1.6(b) hereof, without interest thereon, and subject to the provisions ofSection 8.6 hereof, upon surrender of the certificate representing such shares.

(c) The Company shall give Parent (i) prompt notice of any written demand for appraisal received by the Company pursuantto the applicable provisions of Delaware Law or California Law, and (ii) the opportunity to participate in all negotiations andproceedings with respect to such demands. The Company shall not, except with the prior written consent of Parent, make any paymentwith respect to any such demands or offer to settle or settle any such demands. Any communication to be made by the Company toany Stockholder with respect to such demands shall be submitted to Parent in advance and shall not be presented to any Stockholderprior to the Company receiving Parent’s consent. Notwithstanding the foregoing, to the extent that Parent, the Surviving Corporationor the Company (i) makes any payment or payments in respect of any Dissenting Shares in excess of the consideration that otherwisewould have been payable in respect of such shares in accordance with this Agreement (taking into account the expected value of anyContingent Payments) or (ii) incurs any Losses, (including attorneys’ and consultants’ fees, costs and expenses and including any suchfees, costs and expenses incurred in connection with investigating, defending against or settling any action or proceeding) in respectof any Dissenting Shares (excluding payments for such shares) ((i) and (ii) together “Dissenting Share Payments”), Parent shall beentitled to recover under the terms of Article VIII hereof the amount of such Dissenting Share Payments.

1.8 Surrender of Certificates.

(a) Exchange Agent. Computershare Trust Company, N.A., or another Person selected by Parent to the reasonablesatisfaction of the Stockholder Representative, shall serve as the exchange agent (the “Exchange Agent”) for the Merger. Any cashdeposited with the Exchange Agent shall be referred to as the “Exchange Fund.”

(b) Initial Merger Consideration and Escrow Deposits. Immediately following the Closing, Parent shall make available tothe Exchange Agent for exchange in accordance with this Article I the Initial Merger Consideration. Notwithstanding Sections 1.6(b)and 1.6(c) hereof, Parent shall deposit into the Escrow Fund: (i) a portion of the Initial Merger Consideration otherwise payablepursuant to Section 1.6 hereof equal to the Initial Escrow Amount, and (ii) a portion of the Launch Contingent Payment, if any,otherwise payable pursuant to Section 1.6 in accordance with Article II hereof (at the time such Launch Contingent Paymentbecomes payable) equal to the Additional Escrow Amount. Parent shall be deemed to have contributed with respect to eachStockholder, Warrantholder and the Cash Bonus Plan his, her or its Pro Rata Portion of the Escrow Amounts to the Escrow Fund atsuch times, rounded to the nearest cent ($0.01) (with amounts greater than or equal to $0.005 rounded up).

(c) Exchange Procedures. As soon as commercially practicable after the date hereof, Parent or the Exchange Agent shalldeliver a letter of transmittal in substantially the form of Exhibit F (the “Letter of Transmittal”) to each Stockholder andWarrantholder at the address set forth opposite each such Stockholder and Warrantholder’s name on the Spreadsheet. After receipt ofsuch letter of transmittal and any other documents that Parent or the Exchange Agent may require in order to effect the exchange (the“Exchange Documents”), the Stockholders and Warrantholders will surrender the certificates representing their shares of CompanyCapital Stock (the “Company Stock Certificates”) or Company Warrants, as the case may be, to the Exchange Agent for cancellationtogether with duly completed and validly executed Exchange Documents. Upon surrender of a Company Stock Certificate orCompany Warrants, as the case

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may be, for cancellation to the Exchange Agent, or such other agent or agents as may be appointed by Parent, together with suchExchange Documents, duly completed and validly executed in accordance with the instructions thereto, and subject to the terms ofSection 1.8(d) hereof, the holder of such Company Stock Certificate or Company Warrant, as the case may be, shall be entitled toreceive from the Exchange Agent in exchange therefor, the cash amount to which such holder is entitled pursuant to Section 1.6(b)less the amount of cash deposited or to be deposited into the Escrow Fund on such Stockholder or Warrantholder’s behalf pursuant toSection 1.8(b) hereof and Article VIII hereof, and the Company Stock Certificate or Company Warrant, as the case may be, sosurrendered shall be cancelled. In addition, holders of Company Stock Certificates or Company Warrants, as the case may be,surrendered pursuant to the terms of the preceding sentence shall be entitled to receive from the Exchange Agent, as soon ascommercially practicable after such amounts become payable pursuant to the terms of Article II, the cash amount to which suchholder is entitled pursuant to Article II hereof, subject to the holdback of the Additional Escrow Amount pursuant to the terms ofSection 1.8(b) hereof. Until so surrendered, each Company Stock Certificate outstanding after the Effective Time will be deemed, forall corporate purposes thereafter, to evidence only the right to receive the consideration provided for in this Article I. No portion ofthe Merger Consideration will be paid to the holder of any unsurrendered Company Stock Certificate with respect to shares ofCompany Capital Stock formerly represented thereby until the holder of record of such Company Stock Certificate shall surrendersuch Company Stock Certificate and the Exchange Documents pursuant hereto.

(d) Transfers of Ownership. If any cash amounts are to be disbursed pursuant to Section 1.6(b) hereof to a Person other thanthe Person whose name is reflected on the Company Stock Certificate surrendered in exchange therefor, it will be a condition of theissuance or delivery thereof that the certificate so surrendered will be properly endorsed and otherwise in proper form for transfer andthat the person requesting such exchange will have paid to Parent or any agent designated by it any transfer or other taxes required byreason of the payment of any portion of the Merger Consideration in any name other than that of the registered holder of thecertificate surrendered, or established to the satisfaction of Parent or any agent designated by it that such tax has been paid or is notpayable.

(e) Exchange Agent to Return Merger Consideration. At any time following the last day of the sixth month following theEffective Time, Parent shall be entitled to require the Exchange Agent to deliver to Parent or its designated successor or assign allcash amounts relating to the Initial Merger Consideration that have been deposited with the Exchange Agent and any and all interestthereon or other income or proceeds thereof not disbursed to the holders of Company Stock Certificates pursuant to Section 1.8(c)hereof. At any time following the last day of the sixth month following the date upon which Parent deposits the funds relating to aContingent Payment, if any, with the Exchange Agent (after such Contingent Payment becomes due and payable pursuant toArticle II), Parent shall be entitled to require the Exchange Agent to deliver to Parent or its designated successor or assign all cashamounts relating to the Contingent Payment that have been deposited with the Exchange Agent and any and all interest thereon orother income or proceeds thereof not disbursed to the holders of Company Stock Certificates pursuant to Section 1.8(c) hereof.Following return to Parent of any portion of the Merger Consideration as provided in this Section 1.8(e), thereafter the holders ofCompany Stock Certificates shall be entitled to look only to Parent (subject to the terms of Section 1.8(g) hereof) only as generalcreditors thereof with respect to any and all cash amounts that may be payable to such holders of Company Stock Certificatespursuant to Section 1.6(b) hereof upon the due surrender of such Company Stock Certificates and duly executed ExchangeDocuments in the manner set forth in Section 1.8(c) hereof. No interest shall be payable for the cash amounts delivered to Parentpursuant to the provisions of this Section 1.8(e) and which are subsequently delivered to the holders of Company Stock Certificates.

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(f) Investment of Exchange Fund. The Exchange Agent shall invest the cash deposited by Parent into the Exchange Fund asdirected by Parent on a daily basis; provided, however, that no such investment or loss thereon shall affect the amounts payable to theStockholders, Warrantholders and Cash Bonus Plan pursuant to Section 1.6(b) hereof. Any interest and other income resulting fromsuch investment shall become a part of the Exchange Fund, and any amounts in excess of the amounts payable to the Stockholderspursuant to Section 1.6(b) hereof shall promptly be paid to Parent. Any loss or other reduction resulting from such investment shall bereimbursed by Parent such that the total cash in the Exchange Fund shall at all times be an amount equal to or greater than the MergerConsideration then payable less amounts previously paid to holders of Company Stock Certificates pursuant to Section 1.6(b) ordeposited in the Escrow Fund pursuant to Section 1.8(b) and Article VIII hereof.

(g) No Liability. Notwithstanding anything to the contrary in this Section 1.8, neither the Exchange Agent, the SurvivingCorporation, nor any party hereto shall be liable to a holder of shares of Company Capital Stock for any amount paid to a publicofficial as required by any applicable abandoned property, escheat or similar law.

1.9 No Further Ownership Rights in Company Capital Stock. The cash amounts paid or payable in respect of the surrender forexchange of shares of Company Capital Stock in accordance with the terms hereof shall be deemed to be full satisfaction of all rightspertaining to such shares of Company Capital Stock, and there shall be no further registration of transfers on the records of theSurviving Corporation of shares of Company Capital Stock which were outstanding immediately prior to the Effective Time. If, afterthe Effective Time, Company Stock Certificates are presented to the Surviving Corporation for any reason, they shall be canceled andexchanged as provided in this Article I.

1.10 Lost, Stolen or Destroyed Certificates. In the event any Company Stock Certificates shall have been lost, stolen ordestroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed certificates, upon the making of an affidavitof that fact by the holder thereof, such amount, if any, as may be required pursuant to Section 1.6(b) hereof; provided, however, thatParent may, in its discretion and as a condition precedent to the issuance of such amount, require the Stockholder who is the owner ofsuch lost, stolen or destroyed certificates to either (a) deliver a bond in such amount as it may reasonably direct or (b) provide anindemnification agreement in a form and substance acceptable to Parent, against any claim that may be made against Parent or theExchange Agent with respect to the certificates alleged to have been lost, stolen or destroyed.

1.11 Taking of Necessary Action; Further Action. If at any time after the Effective Time, any further action is necessary ordesirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to allassets, property, rights, privileges, powers and franchises of the Company, Parent, Sub, and the officers and directors of the Company,Parent and Sub are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful andnecessary action.

ARTICLE II

CONTINGENT CONSIDERATION PROVISIONS

2.1 General Provisions.

(a) Contingent Payments Generally. The parties acknowledge and agree that the achievement by the Parent of certainproduct launch, revenue and ad inventory milestone targets (as described in this Article II and the Schedules attached hereto) arematerial factors in determining the valuation of the Company by Parent.

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(b) Contingent Payments as Merger Consideration. The portions of the Contingent Payments payable to the Stockholderspursuant to this Article II are intended to be treated for Tax purposes as additional consideration for the Company Capital Stock andCompany Warrants purchased by Parent in the Merger and shall be treated as such (subject to the requirement to treat a portion asimputed interest) for all Tax purposes except to the extent reasonably determined by Parent in the event of a dispute with, or contraryguidance or instruction is issued by, a taxing authority. Parent intends to treat the portions of the Contingent Payments payable to theparticipants in the Cash Bonus Plan pursuant to this Article II as compensation income taxable at ordinary income rates, and to theextent any participant in the Cash Bonus Plan received rights under the Cash Bonus Plan by virtue of being (or having been) anemployee of the Company, shall be subject to all employment-related withholding taxes. Notwithstanding anything to the contrary,Parent makes no representations or warranties to the Company, Stockholders, Warrantholders or participants in the Cash Bonus Planregarding the Tax treatment of the transactions contemplated by this Agreement by any taxing authority, or any of the Taxconsequences to any Stockholder, Warrantholder or participant in the Cash Bonus Plan relating to the transactions contemplated bythis Agreement. Each of the Company, the Stockholders, the Warrantholders and the participants in the Cash Bonus Plan must relysolely on its own tax advisors in connection with the transactions contemplated hereby.

(c) Payment to, and Allocation among, Stockholders, Warrantholders and the Cash Bonus Plan. Any Contingent Paymentsprovided for in this Article II shall be allocated among the Stockholders, the Warrantholders and the Cash Bonus Plan in accordancewith the terms of the Agreement. Any reference herein to payment of Contingent Payments to the Stockholders, Warrantholders andthe Cash Bonus Plan provided for in this Article II shall be paid as follows: (i) in the case of payments to Stockholders andWarrantholders, the aggregate amount allocable to the Stockholders and Warrantholders shall be paid to the Exchange Agent forfurther distribution to the Stockholders and Warrantholders as soon as practicable thereafter, and (ii) in the case of payments to bemade to the Cash Bonus Plan, the aggregate amount allocable to the Cash Bonus Plan shall be paid to the participants in the CashBonus Plan in accordance with the provisions of the Cash Bonus Plan.

(d) Contingent Payment Rights Not Transferable. No Stockholder or Warrantholder may, directly or indirectly, sell,exchange, transfer or otherwise dispose of his, her or its right to receive any portion of the Contingent Payments provided for herein,other than transfers (i) by the laws of divorce, descent and distribution or succession, (ii) to the Stockholder’s spouse, ex-spouse,domestic partner, lineal descendant or antecedent, brother or sister, the adopted child or adopted grandchild, or the spouse or domesticpartner of any child, adopted child, grandchild or adopted grandchild of Stockholder, or to a trust or trusts for the exclusive benefit ofthe Stockholder or the above-mentioned members of the Stockholder’s family for valid estate planning purposes or (iii) to AffiliatedPersons, in each case conditioned upon the Stockholder Representative delivering to Parent prior written notice of such transfer areasonable time prior to the transfer being effected; provided that Parent, the Exchange Agent and the Escrow Agent shall not berequired to give effect to any transfer until such parties have received from the transferor and/or the Stockholder Representative all ofthe documentation, instruments and information they may reasonably request in order to properly reflect such transfer. The notice oftransfer must include (in addition to any information requested by Parent, the Exchange Agent and the Escrow Agent) the name andaddress of the transferee, taxpayer identification number of the transferee, and a revised Spreadsheet giving effect to the transfer. Anytransfer in violation of this Section 2.1(d) shall be null and void and need not be recognized by Parent. Transfers by participants in theCash Bonus Plan shall be permitted only to the extent permitted by the terms of the Cash Bonus Plan (if at all).

(e) Payment Adjustment Fund. For each of calendar years 2006, 2007 and 2008, ten percent (10%) of each RevenueContingency Payment and Inventory Contingency Payment (rounded down to the nearest $0.01) relating to a Revenue PaymentPeriod or Inventory Payment Period, as applicable,

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ending on March 31, June 30 or September 30 of such year shall be deducted from such Revenue Contingency Payment or InventoryContingency Payment, and instead shall be deposited with the Escrow Agent (such deposits, together with interest accruing thereonare referred to as the “Payment Adjustment Fund” for such year) to be held available to reimburse Parent for any Payment Overage(as defined in Section 2.4(b)) relating to any Revenue Contingency Payment and/or Inventory Contingency Payment made in suchyear.

(f) Setoff Against Contingent Payments. Each Contingent Payment shall be subject to Parent’s right of setoff as and to theextent provided in Article VIII of the Agreement.

2.2 Definitions Applicable to this Article II.

(a) Capitalized terms not defined in this Article II shall have the meanings ascribed to them in the Agreement.

(b) The term “acquire” (and variants of such term) used with reference to [***] means to acquire the right to [***], asapplicable.

(c) “Adjusted Listener Count” shall mean, for each Covered Unused Radio Spot, the product of (i) the Listener Count forsuch Covered Unused Radio Spot, times (ii) the quotient obtained by dividing (A) the length (in seconds) of such Covered UnusedRadio Spot, by (B) the average length (in seconds) of all Covered Radio Advertisements broadcast during Covered Used Radio Spotsduring the Inventory Payment Period in which the Covered Unused Radio Spot occurs.

(d) “Affiliate” of any entity (or entities that are “Affiliated”) shall mean any other entity who either directly or indirectlythrough one or more intermediaries is in control of, is controlled by, or is under common control with, such entity. For purposes ofthis definition, “control” when used with respect to any entity means the power to direct the management and policies of such entity,directly or indirectly, whether through the ownership of voting securities, by contract or otherwise.

(e) “AudioAds Product” shall mean the products and services to be provided by Parent to (i) acquire and manage [***];(ii) sell such advertising inventory to its network of advertisers; (iii) dynamically insert audio advertisements into such advertisinginventory; and (iv) manage the ad creation, ad campaign management, reporting, billing and payments related thereto.

(f) “AudioAds Operating Group” shall mean the operating group (including development, sales, support, administrativeand other personnel) within Parent that has principal responsibility for (i) developing, launching and maintaining the AudioAdsProduct, the Company System and the Broadcast Automation Product, (ii) the sales and marketing of the use of the AudioAdsProduct, Company System and the Broadcast Automation Product and (iii) managing and developing relationships with advertisers,advertising agencies, content producers and syndicators, broadcasters and other parties with whom Parent interacts in connection withthe AudioAds Product, the Company System and the Broadcast Automation Product.

(g) “Barter Transaction” shall mean a transaction in which Parent acquires [***] property (tangible or intangible), servicesor rights in exchange for Parent providing (or entering into an obligation to provide) non-monetary consideration (that is,consideration other than the payment of cash or the obligation to pay cash), either alone or together with monetary consideration.


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(h) “Broadcast Automation Product” shall mean Parent’s programming automation solution and related services forCovered Radio Media broadcasters.

(i) “Company System” shall mean the system (which may comprise software and/or hardware) developed by the Company(as such system may be modified, replaced or augmented from time to time by Parent following the Closing) that enables Parent todynamically insert audio advertisements into [***] as directed by servers controlled by Parent, over an Internet protocol network.

(j) “Contingent Payment Report” shall mean a Revenue Contingency Report or an Inventory Contingency Report.

(k) “Costs of Revenues” shall mean, with respect to a Revenue Payment Period, the following costs and expensesrecognized by Parent during such period in accordance with GAAP (as applied by Parent), resulting from payments made to, propertyor services provided to or obligations owed to third parties in consideration for the following (subject to the provisions ofSection 2.7):

(i) Parent acquiring Radio Spots;

(ii) [***];

(iii) [***];

(iv) [***];

(v) [***]; and

(vi) [***].

Such costs and expenses may include monetary and/or non-monetary consideration (including pursuant to a BarterTransaction). Such costs and expenses include payments, transfers and obligations made to:

(1) The parties from whom Parent acquire the right to insert advertisements [***];

(2) The parties from whom Parent acquires [***]; and

(3) The parties from whom Parent acquires [***].

In the case of a Barter Transactions in which Parent provides the Broadcast Automation Product, services based on[***], the Cost of Revenues for [***] resulting from the bartered property shall be the third party costs incurred by Parent inprocuring and providing property and services required to provide such bartered property or services. In the case of any other BarterTransactions, the Cost of Revenues related to such Barter Transactions shall be as determined by


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the parties in good faith; provided that for any such other Barter Transaction with respect to which the parties have not agreed upontreatment (an “Unagreed Barter Transaction”), no cost associated with such Barter Transaction will count toward or be included inthe definition of Cost of Revenues.

(l) [***].

(m) “Covered Inventory Amount” shall mean (subject to the provisions of Section 2.7), for an Inventory Payment Period,the quotient obtained by dividing:

(i) the sum of (1) the sum of the Listener Counts for all Covered Radio Advertisements inserted into Covered RadioSpots broadcast during such Inventory Payment Period plus (2) the sum of the Adjusted Listener Counts for all Covered UnusedRadio Spots that occur during such Inventory Payment Period, by

(ii) three.

(n) “Covered Net Revenue” shall mean, for a Revenue Payment Period, the following, as determined in accordance withGAAP as applied by Parent (subject to the provisions of Section 2.7):

(i) the revenues recognized by Parent (which, for the avoidance of doubt, are calculated after giving effect to contrarevenue items including sales allowance) during such period from:

(1) Covered Radio Advertisements;

(2) [***];

(3) [***];

(4) [***];

(5) [***]; and

(6) [***];

LESS, in each case

(ii) the Cost of Revenues related to such revenues described above for such period;

provided that, no revenue derived from any Unagreed Barter Transaction (including indirectly from the property orservices acquired in such Unagreed Barter Transaction), will count toward or be included in the definition of Covered Net Revenue

(o) “Covered Radio Advertisement” shall mean an audio advertisement inserted into a Radio Spot by Parent using theCompany System.

(p) [***].


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(q) “Covered Radio Media” shall mean [***].

(r) [***].

(s) “Covered Radio Spot” shall mean a Radio Spot (i) into which Parent is, pursuant to a written contract, entitled to insertCovered Radio Advertisements using the Company System; (ii) which is recognized by the Company System as available foradvertisement insertion (by “tokenization” or otherwise) and (iii) into which the Company System has the capability of insertingCovered Radio Advertisements; provided that, in the case of clause (i), the Contract has been entered into in compliance with Parent’spolicies and procedures for contract review, approval and execution, including Parent’s “Deal Review” process and signatureauthority policy; provided further that the parties acknowledge that the Contracts listed on Schedule 2.2(s) have been approved byParent’s “Deal Review” process and signature authority policy.

(t) “Covered Unused Radio Spot” shall mean a Covered Radio Spot that has occurred and during which no Covered RadioAdvertisements were broadcast.

(u) “Covered Used Radio Spot” shall mean a Covered Radio Spot that has occurred and during which one or more CoveredRadio Advertisement was broadcast.

(v) [***].

(w) [***].

(x) “Inventory Contingency Payment” shall mean, for an Inventory Payment Period, the payment amount calculated inaccordance with Section 2.3(d) or 2.3(e) below, as applicable.

(y) “Inventory Payment Period” shall mean each of the following periods (inclusive of the beginning and ending dates ofeach such period):

January 1, 2006 through March 31, 2006

April 1, 2006 through June 30, 2006

July 1, 2006 through September 30, 2006

October 1, 2006 through December 31, 2006



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(z) “Inventory Reference Amount” shall mean, (1) for an Inventory Payment Period ending on or before December 31,2007, the amount set forth in the table entitled “2006-2007 Inventory Table” in Schedule 2.2(z)(i) directly to the right, in such table,of the entry in the Covered Inventory Amount column that includes the Covered Inventory Amount achieved for such InventoryPayment Period, and (2) for Inventory Payment Period ending after January 1, 2008, the amount set forth in the table entitled “2008Inventory Table” in Schedule 2.2(z)(ii) directly to the right, in such table, of the entry in the Covered Inventory Amount column thatincludes the Covered Inventory Amount achieved for such Inventory Payment Period.

(aa) “Listener Count” shall, for a Covered Radio Spot, mean the measure of the number of listeners applicable to suchCovered Radio Spot, determined as follows:

(i) For Covered Radio Advertisements and Covered Unused Radio Spots broadcast [***]:

(1) [***].

(2) [***].

(ii) [***].

(iii) The parties agree to use the most recently available published listener count data that is effective in the CompanySystem.


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(iv) The methodology described in this definition is intended to describe the current methodology used by theCompany to present audience measurement data to its advertisers for purposes of purchasing and determining pricing for CoveredRadio Spots. Upon request of one of the Parties from time to time, the Parties agree to discuss and consider in good faith whether themethodologies defined herein remain valid, and if, in the exercise of their good faith judgment, they determine that they do not,including if Arbitron ceases to provide data, then the Parties shall negotiate in good faith appropriate modifications to this ListenerCount definition.

(bb) “Maximum Inventory Contingent Consideration” shall mean the maximum total amount of Inventory ContingencyPayments that may be earned pursuant to Sections 2.3(d) and 2.3(e) of this Article II below, which (i) for the period 2006 – 2007 isequal to an aggregate of $90,000,000 and (ii) for the period 2008 is equal to an aggregate of $181,000,000.

(cc) “Maximum Revenue Contingent Consideration” shall mean the maximum total amount of Revenue ContingencyPayments that may be earned pursuant to Sections 2.3(b) and 2.3(c) below, which (i) for the period 2006 – 2007 is equal to anaggregate of $300,000,000 and (ii) for the period 2008 is equal to an aggregate of $540,000,000.

(dd) “Parent” shall, for purposes of this Article II, mean Parent and/or its consolidated subsidiaries.

(ee) “Party” and “Parties” shall mean, for purposes of this Article II, Parent and the Stockholder Representative.

(ff) [***].

(gg) [***].

(hh) “Radio Spot” shall mean a contiguous segment of not less than 10 seconds of audio broadcasting airtime on CoveredRadio Media that may be filled with audio advertisements.

(ii) “Revenue Contingency Payment” shall mean, for a Revenue Payment Period, the payment amount calculated inaccordance with Sections 2.3(b) or 2.3(c) below, as applicable.

(jj) “Revenue Payment Period” means each of the following periods (inclusive of the beginning and ending dates of eachsuch period):


January 1, 2006 through June 30, 2006

January 1, 2006 through September 30, 2006

January 1, 2006 through December 31, 2006


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April 1, 2006 through March 31, 2007

July 1, 2006 through June 30. 2007

October 1, 2006 through September 30, 2007



January 1, 2008 through June 30, 2008

January 1, 2008 through September 30, 2008


(kk) “Revenue Reference Amount” shall mean, (1) for a Revenue Payment Period ending on or before December 31, 2007,the amount set forth in the table entitled “2006-2007 Revenue Table” in Schedule 2.2(kk)(i) directly to the right, in such table, of theentry in the Covered Net Revenues column which includes the Covered Net Revenue amount achieved for such Revenue PaymentPeriod, and (2) for a Revenue Payment Period ending after January 1, 2008, the amount set forth in the table entitled “2008 RevenueTable” in Schedule 2.2(kk)(ii) directly to the right, in such table, of the entry in the Covered Net Revenues column which includesthe Covered Net Revenue amount achieved for such Revenue Payment Period.

(ll) [***].

2.3 Contingent Payments. The Stockholders, Warrantholders and Cash Bonus Plan shall be entitled to the following ContingentPayments:

(a) Product Launch. Parent shall pay to the Stockholders, Warrantholders and the Cash Bonus Plan (in accordance with theprovisions of Section 2.4) Twenty Five Million Dollars ($25,000,000) (the “Launch Contingent Payment”) in cash if and only if,prior to the three (3) year anniversary of the Closing Date (“Launch Contingency Date”), Parent launches [***] (the “LaunchMilestone”); provided that any such product launch shall be subject to Parent’s product launch processes and procedures and shall besubject to Parent’s determination of when the [***] is ready for launch (including Parent’s determination as to the necessary features,performance, scalability, and security requirements for launch and Parent’s determination of whether or not any features describedabove are to be included in the [***] at launch).

(b) 2006-2007 Revenue Milestones. For each completed Revenue Payment Period ending on or before December 31, 2007,Parent shall pay (in accordance with the provisions of Section 2.4) to the Stockholders, Warrantholders, and the Cash Bonus Plan (inaccordance with their respective Pro Rata Portions) cash in the aggregate equal to (i) for the first Revenue Payment Period duringsuch period, the Revenue Reference Amount for such Revenue Payment Period, and (ii) for each subsequent Revenue Payment Periodduring such period, the amount, if any, by which (A) the Revenue Reference Amount for such Revenue Payment Period exceeds(B) the highest Revenue Reference Amount achieved in any of the prior completed Revenue Payment Periods.


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(c) 2008 Revenue Milestones. For each completed Revenue Payment Period ending after January 1, 2008 and on or beforeDecember 31, 2008, Parent shall pay (in accordance with the provisions of Section 2.4) to the Stockholders, Warrantholders and theCash Bonus Plan (in accordance with their respective Pro Rata Portions) cash in the aggregate equal to (i) for the first RevenuePayment Period during such period, the Revenue Reference Amount for such Revenue Payment Period, and (ii) for each subsequentRevenue Payment Period during such period, the amount, if any, by which (A) the Revenue Reference Amount for such RevenuePayment Period exceeds (B) the highest Revenue Reference Amount achieved in any of the prior completed Revenue PaymentPeriods ended after January 1, 2008.

(d) 2006-2007 Inventory Milestones. For each completed Inventory Payment Period ending on or before December 31,2007, Parent shall pay (in accordance with the provisions of Section 2.4) to the Stockholders, Warrantholders and Cash Bonus Plan(in accordance with their respective Pro Rata Portions) cash in the aggregate equal to (i) for the first Inventory Payment Period duringsuch period, the Inventory Reference Amount for such Inventory Payment Period, and (ii) for each subsequent Inventory PaymentPeriod during such period, the amount, if any, by which (A) the Inventory Reference Amount for such Inventory Payment Periodexceeds (B) the highest Inventory Reference Amount achieved in any of the prior completed Inventory Payment Periods.

(e) 2008 Inventory Milestones. For each completed Inventory Payment Period ending after January 1, 2008 and on or beforeDecember 31, 2008, Parent shall pay (in accordance with the provisions of Section 2.4) to the Stockholders, Warrantholders and CashBonus Plan (in accordance with their respective Pro Rata Portions) cash in the aggregate equal to (i) for the first Inventory PaymentPeriod during such period, the Inventory Reference Amount for such Inventory Payment Period, and (ii) for each subsequentInventory Payment Period during such period, the amount, if any, by which (A) the Inventory Reference Amount for such InventoryPayment Period exceeds (B) the highest Inventory Reference Amount achieved in any of the prior completed Inventory PaymentPeriods ended after January 1, 2008.

(f) Calculation of Reference Amounts. For purposes of clarification, in no event, with respect to the 2006-2007 time periodand the 2008 time period, will Parent be required to pay an aggregate amount of Revenue Contingency Payments or InventoryContingency Payments that is in excess of the highest Revenue Reference Amount or Inventory Reference Amount, as applicable,actually achieved in any of the completed Revenue Payment Periods or Inventory Payment Periods during such 2006-2007 timeperiod or 2008 time period, as applicable, subject in any event to Parent’s right to recover for indemnity claims and PaymentOverages. Any Launch Contingent Payment that is not earned as provided herein and any portion of the Maximum InventoryContingent Consideration and Maximum Revenue Contingent Consideration that are not earned as provided herein shall in each casenot be included in the Merger Consideration and shall not be paid to the Stockholders, Warrantholders or the Cash Bonus Plan.

(g) Period from January 1, 2006 through Closing. For purposes of determining the Revenue Reference Amount andInventory Reference Amount for the first Revenue Reference Period and Inventory Reference Period of 2006, transactions occurringbetween January 1, 2006 and the Closing will be counted (notwithstanding that they occurred prior to the Closing) to the extent thatthey would have counted had they occurred after the Closing.

2.4 Reports and Payment.

(a) Launch Contingency Report. Upon the written request of the Stockholder Representative (provided that not more thanone such request shall be made each calendar quarter), Parent

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shall no later than fifteen (15) Business Days following receipt of such request, deliver to the Stockholder Representative a reportsetting forth the Parent’s assessment of the progress towards the launch [***]. No later than thirty (30) days following achievement ofthe Launch Milestone, Parent shall pay the Launch Contingent Payment to the Stockholders, the Warrantholders and the Cash BonusPlan.

(b) Revenue Contingency Report; Payment; Overage Claim.

(i) No later than sixty (60) days following the last day of each Revenue Payment Period (ninety (90) days in the case ofa Revenue Payment Period ending on December 31 of any year), Parent shall deliver to the Stockholder Representative and theEscrow Agent a written report setting forth Parent’s good faith determination of the Covered Net Revenue and the Revenue ReferenceAmount for such Revenue Payment Period, and the resulting Revenue Contingency Payment payable, if any, for such RevenuePayment Period (the “Revenue Contingency Report”).

(ii) No later than sixty (60) days following the last day of each Revenue Payment Period (ninety (90) days in the caseof a Revenue Payment Period ending on December 31 of any year), Parent shall pay to the Stockholders and to the Cash Bonus Planthe amount of the Revenue Contingency Payment, subject to Sections 2.1(e) and 2.1(f).

(iii) If Parent determines that it made one or more Revenue Contingency Payments in respect of Revenue PaymentPeriods occurring during a calendar year that were in excess of the amounts that it should have paid, Parent may include in theRevenue Contingency Report for the Revenue Payment Period ending December 31 of such calendar year a written report settingforth Parent’s good faith determination of such excess payment, including the adjusted Covered Net Revenue(s) and the RevenueReference Amount(s) for the applicable Revenue Payment Period(s). Such an excess payment of a Revenue Contingency Payment, oran excess payment of an Inventory Contingency Payment described in Section 2.4(c) below, is referred to herein as a “PaymentOverage.” If Parent fails to include in the Revenue Contingency Report for the Revenue Payment Period ending December 31 of acalendar year a written report setting forth Parent’s good faith determination of any Payment Overage in respect of Revenue PaymentPeriods occurring during such calendar year, Parent waives any right to object to the amount of any such Revenue ContingencyPayments, unless the Stockholder Representative submits to Parent and the Escrow Agent a Payment Dispute Report with respect anysuch Revenue Contingency Payments.

(c) Inventory Contingency Report; Payment; Overage Claim.

(i) No later than sixty (60) days (ninety (90) days in the case of an Inventory Payment Period ending on December 31of any year) following the last day of each Inventory Payment Period, Parent shall deliver to the Stockholder Representative and theEscrow Agent a written report setting forth Parent’s good faith determination of the Covered Inventory Amount and the InventoryReference Amount for such Inventory Payment Period, and the Inventory Contingency Payment payable, if any, for such InventoryPayment Period (the “Inventory Contingency Report”). The Inventory Contingency Report and the Revenue Contingency Report fora period may be combined into a single report.

(ii) No later than sixty (60) days following the last day of each Inventory Payment Period (ninety (90) days in the caseof an Inventory Payment Period ending on December 31 of any year), Parent shall pay to the Stockholders and the Cash Bonus Planthe amount of the Inventory Contingency Payment, subject to Sections 2.1(e) and 2.1(f) of this Article II.

(iii) If Parent determines in good faith that that it made one or more Inventory Contingency Payments in respect ofInventory Payment Periods occurring during a calendar year that were in


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excess of the amounts that it should have paid, Parent may include in the Inventory Contingency Report for the Inventory PaymentPeriod ending December 31 of such calendar year a written report setting forth Parent’s good faith determination of such excesspayment, including the adjusted Covered Inventory Amount(s) and the Inventory Reference Amount(s) for the applicable InventoryPayment Period(s). If Parent fails to include in the Inventory Contingency Report for the Inventory Payment Period endingDecember 31 of a calendar year a written report setting forth Parent’s good faith determination of any Payment Overage in respect ofInventory Payment Periods occurring during such calendar year, Parent waives any right to object to the amount of any such InventoryContingency Payments, unless the Stockholder Representative submits to Parent and the Escrow Agent a Payment Dispute Reportwith respect any such Inventory Contingency Payments.

2.5 Stockholder Representative Review.

(a) Upon the written request of the Stockholder Representative (a “Review Request”), Parent shall promptly deliver to theStockholder Representative a copy of all supporting work papers and accounting records reasonably requested by the StockholderRepresentative that were utilized in preparing the Contingent Payment Report relating to any Revenue Payment Period or InventoryPayment Period; provided however that a Review Request must be made, if at all, no later than one hundred eighty (180) daysfollowing the last day of the calendar year during which occurred the Revenue Payment Period or Inventory Payment Period to whichthe Review Request relates. The review provided for in this Section 2.5(a) shall occur during ordinary business hours, and shall be atthe Stockholder Representative’s sole expense.

(b) Information provided to the Stockholder Representative under the terms of this Article II (including the existence andamounts of any Contingent Payments and the fact of any dispute relating to any Contingent Payment) shall be referred to as“Confidential Information.” The Stockholder Representative shall, (i) except as required by law, keep all Confidential Informationconfidential, shall not disclose or reveal any Confidential Information to any person other than its Representatives (as defined below)who are actively and directly participating in Stockholder Representative’s review or dispute of the Contingent Payments provided forherein and shall cause those persons to observe the terms of this provision; (ii) shall not use Confidential Information for any purposeother than in connection with its review or dispute of the Contingent Payments as provided for herein. The Stockholders andWarrantholders shall be responsible for any breach of the terms of this provision by them or their Representatives. “Representative”shall mean, as to the Stockholder Representative, its agents and advisors (including, without limitation, financial advisors, attorneysand accountants). Parent shall keep and retain complete and accurate records in sufficient detail to reasonably enable the StockholderRepresentative to complete the review described above.

(c) Parent shall cause such records to be kept and retained in sufficient detail to satisfy Parent’s obligations underSection 2.5(a). If any such information required to be delivered under Section 2.5(a) is maintained by Parent in electronic form,Parent shall make such information available to the Stockholder Representative in electronic form.

2.6 Disagreements.

(a) If the Stockholder Representative concludes in good faith that a Revenue Contingency Report or Inventory ContingencyReport contains inaccuracies or that the calculations of the Contingent Payment or Payment Overage, as applicable, contained in aRevenue Contingency Report or Inventory Contingency Report do not comply with the terms of this Agreement in any way, theStockholder Representative may notify Parent and Escrow Agent of its conclusions (such notice, a “Payment Dispute Report”). AnyPayment Dispute report delivered by the Stockholder Representative must be in writing,

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shall state in reasonable detail the basis for the conclusion and its calculation of the Contingent Payment due to the Stockholders,Warrantholders and the Cash Bonus Plan and/or, if applicable, the Payment Overage due to Parent, and shall be delivered to Parentand the Escrow Agent no later than one hundred eighty (180) days after the end of the calendar year during which occurred theRevenue Payment Period(s) and Inventory Payment Period(s) that are the subject of the Payment Dispute Report (such period, the“Dispute Period” for Contingency Periods during such calendar year). A Revenue Contingency Report or Inventory ContingencyReport shall be final, and shall be conclusive and binding upon the parties (including with respect to any Payment Overage includedtherein), with respect to all of its contents if the Stockholder Representative does not timely deliver a Payment Dispute Report inrespect of such Revenue Contingency Report or Inventory Contingency as provided herein.

(b) If the Stockholder Representative timely delivers a Payment Dispute Report in accordance with Section 2.6(a), thedispute represented thereby shall be resolved in accordance with the provisions of Section 10.10 (subject to the provisions ofSection 2.6(d) below); provided, however, that the dispute resolution proceedings relating to all disputes regarding Revenue PaymentPeriods and Inventory Payment Periods that occur during the same calendar year must be combined into a single negotiation,mediation and/or arbitration process, as applicable; provided further that such dispute resolution proceedings shall not commenceuntil after the ninetieth (90th) day following the end of such calendar year.

(c) If a dispute arises between the parties relating to an Launch Contingency Report, a Revenue Contingency Report or anInventory Contingency Report, the parties agree to engage in mediation, as described in Section 10.10(b), for no more than thirty(30) days. If after the aforementioned thirty (30) day period, the dispute has not been resolved, such dispute will be submitted to anarbitrator or arbitration panel chosen pursuant to Section 10.10(d); provided that, for purposes of disputes under this Article II, theseventy-five (75) day period referenced in Section 10.10(f) shall instead be sixty (60) days, and the ninety (90) day period referencedin Section 10.10(f) shall instead be sixty (60) days. The arbitrator(s) decision shall be final and binding on all parties andnon-appealable. A dispute as described above will be considered to be finally determined and conclusive upon the parties (a “FinalDetermination”) under the following circumstances (1) an agreement among the Parent and Stockholder Representative is reachedpursuant to negotiations or mediation conducted pursuant to this Section 2.6(d) which is memorialized in a written settlementagreement executed by both parties (a “Dispute Settlement Agreement”); or (2) a final decision from an arbitration proceedingconducted pursuant to this Section 2.6(d) (a “Dispute Arbitration Decision”).

(d) If the dispute resolution process of Section 10.10 results in Parent being required to (or agreeing to) pay additionalamounts to the Stockholders, Warrantholders and the Cash Bonus Plan, Parent shall within ten (10) Business Days of the FinalDetermination pay such additional amount of Contingent Payment to the Stockholders, Warrantholders and the Cash Bonus Plan.

(e) Escrow Recovery of Overage Amount. A Payment Overage asserted by Parent shall become final and binding upon theparties if it is the subject of a Final Determination or if the Stockholder Representative does not timely object to such assertedPayment Overage as provided in Section 2.6 above (such a final Payment Overage, a “Payable Overage”). A Payable Overage shallbe satisfied as follows: (1) first out of the Payment Adjustment Fund, (2) then (if amounts remain to be paid), at Parent’s election byclaim against the Escrow Fund and/or by offsetting such remaining Payment Overage against any future Contingent Payments. TheEscrow Agent shall be entitled to rely on a Dispute Settlement Agreement or a written Dispute Arbitration Decision, to make adistribution to Parent out of the Escrow Fund or the Payment Adjustment Fund of a Payment Overage determined in the DisputeSettlement Agreement or Dispute Decision. The Escrow Agent shall be entitled to rely on a Revenue Contingency Report or InventoryContingency Report with respect to which no Payment Dispute Report was timely delivered and that specifically identifies an assertedPayment Overage, and make a distribution to Parent out of the Escrow Fund or the Payment Adjustment Fund of such PaymentOverage.

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(f) Release of Payment Adjustment Fund to Stockholders, Warrantholders and the Cash Bonus Plan.

(i) As soon as practicable following the one hundred eightieth (180th) day after the end of each of calendar year 2006,2007 and 2008, to the extent that the Payment Adjustment Fund for each such year exceeds the aggregate amount of any PaymentOverages asserted by Parent for the Inventory Payment Periods and Revenue Payment Periods in such year, the Escrow Agent shalldistribute such excess amount to the Exchange Agent for payment to the Stockholders and Warrantholders, and to Parent for paymentto the Cash Bonus Plan, in each case in proportion to their respective Pro Rata Portions.

(ii) For each of calendar years 2006, 2007 and 2008, in the case that Parent does not timely assert a Payment Overage(as provided in Section 2.4) for any Revenue Payment Period or Inventory Payment Period occurring during such calendar year, theEscrow Agent shall distribute any remaining amounts of the Payment Adjustment Fund applicable to such year to the Exchange Agentfor payment to the Stockholders and Warrantholders, and to Parent for payment to the Cash Bonus Plan, in each case in proportion totheir respective Pro Rata Portions, as soon as practicable after the day following the last day on which a Payment Overage relating toany Revenue Payment Period or Inventory Payment Period occurring during such year could be timely asserted hereunder.

(iii) For each of calendar years 2006, 2007 and 2008, in the case that any Payment Overages have been timely assertedby Parent for any Revenue Payment Periods or Inventory Payment Periods occurring during any such calendar year, but no disputerelating to any of the asserted Payment Overages for such year is timely raised by the Stockholder Representative, after payment ofsuch Payment Overages to Parent out of the Payment Adjustment Fund, the Escrow Agent shall distribute any remaining amounts ofthe Payment Adjustment Fund applicable to such year to Parent as soon as practicable after the day following the last day on whichStockholder Representative could have timely disputed any such Payment Overages.

(iv) For each of calendar years 2006, 2007 and 2008, in the case that any Payment Overages have been timely assertedby Parent for any Revenue Payment Periods or Inventory Payment Periods occurring during any such calendar year, and a disputerelating to any such asserted Payment Overage is timely raised by the Stockholder Representative, on the day on which the EscrowAgent receives written notice of the Final Determination of all such disputes relating to Payment Overages asserted with respect tosuch year, after payment to Parent out of the applicable Payment Adjustment Fund of all Payment Overages to which Parent is entitledpursuant to such Final Determinations, the Escrow Agent shall distribute any amount remaining in the Payment Adjustment Fund forsuch calendar year to the Exchange Agent for payment to the Stockholders and Warrantholders, and to Parent for payment to the CashBonus Plan (in each case in proportion to their respective Pro Rata Portions).

(g) All negotiations pursuant to this Section 2.6 shall be treated as compromise and settlement negotiations for purposes ofthe Federal Rules of Evidence and state rules of evidence.

2.7 Exclusion of Excludable Contracts.

(a) Acquisition Contract. An “Acquisition Contract” shall mean [***].


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(b) Excludable Contract. An “Excludable Contract” shall mean [***].

(c) Blanket Authorization. A “Blanket Authorization” shall mean [***].

(d) Deal Review. [***].

(e) Excluded Contract. Each of the following agreements shall be an “Excluded Contract”:

(i) [***]:

(1) An Excludable Contract with respect to which [***]; or


(ii) [***]:




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(iii) [***]:

(1) An Excludable Contract with respect to which the Parent has delivered an Excludable Contract Notice (definedbelow) and the Stockholder Representative has delivered notice to Parent within five (5) business days thereafter requesting that suchExcludable Contract be treated as an Excluded Contract.

(2) Any Acquisition Contract providing for [***].

(f) Notice to Stockholder Representative. If Parent proposes to enter into, or enters into, an Excludable Contract or a BlanketAuthorization, and [***], Parent shall give notice to the Stockholder Representative of such contract or blanket authorization (orproposed contract or blanket authorization, as applicable) (each, a “Excludable Contract Notice” or “Blanket AuthorizationNotice”).

(g) [***]. Without limiting the foregoing, for purposes of Sections 2.7(e)(i)(2) and 2.7(e)(ii)(2), notice of any suchagreement or proposed agreement will be deemed given if [***].

(h) Effect of Excluded Contracts. No revenue derived from any Excluded Contract (including indirectly from themonetization of property or services acquired in such Excluded Contract) will count toward or be included in the definition ofCovered Net Revenue, and no third party cost arising out of such Excluded Contract will count toward or be included in the definitionof Cost of Revenues, in each case for any applicable Revenue Payment Period. In addition, no Listener Counts for Covered RadioAdvertisements, and no Adjusted Listener Counts for Covered Unused Radio Spots, in each case from any Radio Spots acquireddirectly or indirectly through such Excluded Contract shall count toward or be included in the calculation of Covered InventoryAmount for any applicable Inventory Payment Period.

(i) Stockholder Representative Confidentiality. Notwithstanding anything to the contrary, Parent’s obligations hereundershall in no event be interpreted in a manner to require it to violate any confidentiality obligations applicable to it.

(j) Requests for Confirmation. From time to time, at Parent’s request, Chad, Ryan or the Stockholder Representative, as thecase may be, will confirm in writing his understanding as to the list of agreements that are Excluded Contracts, and/or sign anacknowledgement of the parties’ understanding with respect thereto.


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(k) Appointment. Each of the Stockholders and Warrantholders hereby appoints Chad and Ryan as its agent andattorney-in-fact for and on behalf of the Stockholders to give and receive notices and communications, and to sign the confirmationscontemplated by this Section 2.7, but only to the extent Chad or Ryan, as the case may be, are still then employed by Parent. Anyaction of Chad or Ryan permitted to be taken under this Section 2.7 shall be binding upon and effective against the Stockholders andWarrantholders.

2.8 [***] Control.

(a) Subject to the other provisions of this Section 2.8, [***].

(b) Notwithstanding anything herein to the contrary, the AudioAds Operating Group will be subject to Parent’s operatingpolicies, processes and procedures, including:

(i) All expenditures by the AudioAds Operating Group will be subject to Parent’s spending authority policy.

(ii) All contracts entered into by the AudioAds Operating Group will be subject to Parent’s deal review and contractsapproval policies, processes an procedures (including Parent’s signature authority policy).

(iii) All product and feature launches by the AudioAds Operating Group will be subject to Parent’s product and featurelaunch policies, processes and procedures.

(iv) All hiring and terminations by the AudioAds Operating Group will be subject to Parent’s hiring and humanresources policies, processes and procedures.

(c) Upon Closing, Chad Steelberg will be the General Manager of the AudioAds Operating Group, reporting to [***].

(d) [***].

(e) [***].

(f) [***], Parent shall have the ultimate power, right and discretion to control all aspects of its business and operations(including decisions


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regarding the features, functions and characteristics of any of its products, the technology on which its products and associatedsoftware are based, whether and when to launch its products, how to price, market and distribute its products and the terms andconditions of any agreement by which it will agree to be bound).

2.9 No Guarantee of Employment. Nothing herein shall constitute a guarantee of employment or engagement of any employee orcontractor of the Company or Parent, and either of them may terminate any employee or contractor, with or without cause, at any timeand such termination shall not constitute a breach of this Agreement.

2.10 No Other Representations, Warranties or Commitments. This Agreement contains the entire agreement with respect toParent’s and the Surviving Corporation’s obligations in connection with the achievement of any of the Lunch Milestone or inventoryor revenue targets that would result in the payment of any Contingent Payments hereunder. Other than the express representations ofParent contained in Article IV, notwithstanding anything else (including any prior or contemporaneous communications) to thecontrary, for purposes of determining the parties’ rights under this Article II, Parent and the Surviving Corporation make no, andnone of the Company, any Stockholder, Warrantholder nor any participant in the Cash Bonus Plan are relying on any, representations,warranties or covenants either with respect to the support to be provided in order to achieve the launch of [***] or the inventory orrevenue targets or as to the likelihood or feasibility of achieving the launch of the [***] or the inventory or revenue targets.

2.11 Certain Transactions. Notwithstanding any other provision of this Article II, for purposes of determining the achievementof the Covered Net Revenue and Covered Inventory thresholds that determine the payment of Contingent Payments pursuant toSections 2.3(b), 2.3(c), 2.3(d) and 2.3(e), unless prior notice is provided to Parent, there shall not be counted in such determinationany Covered Net Revenue or Covered Inventory Amount that results from a transaction involving (a) one or more Persons with whicha 1% or greater Stockholder directly or indirectly is an Affiliate; or (b) has an agreement or arrangement pursuant to which theStockholder, Warrantholder or participant in the Cash Bonus Plan agrees to share the economic benefit of any Contingent Paymentshereunder with such Persons in relation to such transaction and which in any way relates to Covered Radio Spots, Covered RadioAdvertisements, [***], Contingent Payments or the achievement of the thresholds relevant to Sections 2.3(b), 2.3(c), 2.3(d) and2.3(e). Each Stockholder, Warrantholder and participant in the Cash Bonus Plan agrees to provide prompt written notice to Parentprior to consummation of any transaction described in the preceding sentence. Following such notice, Parent agrees to evaluate allsuch transactions in good faith with the same scrutiny that would apply to transactions which do not involve such conflicting interests.To the Company’s Knowledge, no Stockholder, Warrantholder or participant in the Cash Bonus Plan is a party to any transactiondescribed in (b) above.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company hereby represents and warrants to Parent and Sub, subject to such exceptions as are specifically disclosed in thedisclosure schedule (referencing the appropriate section and subsection numbers) supplied by the Company to Parent (the “CompanyDisclosure Schedule”) and dated as of the date hereof, (A) on the date hereof and, (B) if the Closing occurs, as of the Closing Date(except where a representation or warranty is made as of the date hereof or a specific date herein), as though made on the ClosingDate, as set forth below. Notwithstanding anything herein to the contrary, the representations and warranties contained in thisArticle III are the only representations and warranties being made by the Company in this Agreement.


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3.1 Organization of the Company.

(a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State ofDelaware. The Company has the corporate power to own its properties and to carry on its business as currently conducted and ascurrently contemplated to be conducted. The Company is duly qualified or licensed to do business and in good standing as a foreigncorporation in each jurisdiction in which the character or location of its assets or properties (whether owned, leased or licensed) or thenature of its business make such qualifications necessary. The Company has delivered a true and correct copy of its certificate ofincorporation, as amended to date (the “Certificate of Incorporation”) and bylaws, as amended to date, each in full force and effecton the date hereof (collectively, the “Charter Documents”), to Parent. The Board of Directors of the Company has not approved orproposed to the Stockholders any amendment to any of the Charter Documents.

(b) Section 3.1(b) of the Company Disclosure Schedule lists the directors and officers of the Company as of the date hereof.

(c) Section 3.1(c) of the Company Disclosure Schedule lists every state or foreign jurisdiction in which the Company hasEmployees or facilities or otherwise conducts its business.

3.2 Company Capital Structure.

(a) The authorized capital stock of the Company consists of 6,675,987 shares of Series A Common Stock, of which2,619,405 shares are issued and outstanding, 420,000 shares of Series B Common Stock, of which no shares are issued andoutstanding, 660,000 shares of Company Series A Preferred Stock, all of which shares are issued and outstanding, 966,797 shares ofCompany Series B-1 Preferred Stock, all of which shares are issued and outstanding, and 1,216,982 shares of Company Series B-2Preferred Stock, of which 1,169,810 shares are issued and outstanding. Each share of Company Preferred Stock is convertible on aone-share for one-share basis into Company Common Stock. As of the date hereof, the capitalization of the Company is as set forth inSection 3.2(a) of the Company Disclosure Schedule. Assuming the same total capitalization as on the date hereof, the total number ofshares of Company Capital Stock outstanding as of immediately prior to the Effective Time (assuming the conversion, exercise, orexchange of all securities (including the Company Preferred Stock) convertible into, or exercisable or exchangeable for, shares ofCompany Capital Stock and the exercise of all Company Options and Company Warrants) will be as set forth in Section 3.2(a) of theCompany Disclosure Schedule. The Company Capital Stock is held by the Persons with the domicile addresses and in the amounts setforth in Section 3.2(a) of the Company Disclosure Schedule, which further sets forth for each such Person the number of shares held,class and/or series of such shares and the number of the applicable Company Stock Certificates representing such shares. Alloutstanding shares of Company Capital Stock are duly authorized, validly issued, fully paid and non-assessable and are not subject topreemptive rights created by statute, the Charter Documents, or any agreement to which the Company is a party or by which it isbound.

(b) All outstanding shares of Company Capital Stock, Company Options and Company Warrants have been issued orrepurchased (in the case of shares that were outstanding and repurchased by the Company or any Stockholder) in compliance with allapplicable federal, state, foreign, or local statutes, laws, rules, or regulations, including federal and state securities laws, and wereissued, transferred and repurchased (in the case of shares that were outstanding and repurchased by the Company or any Stockholder)in accordance with any right of first refusal or similar right or limitation Known to the Company, including those in the CharterDocuments. There are no outstanding shares of Company Capital Stock that constitute unvested restricted stock or that are otherwisesubject to a repurchase or redemption right. There are no declared or accrued but unpaid dividends with respect to any shares ofCompany Capital Stock. Except as set forth in Section 3.2(a) of the Company Disclosure Schedule, the Company has no other capitalstock authorized, issued or outstanding.

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(c) Except for the Plans, the Company has never adopted, sponsored or maintained any stock option plan or any other planor agreement providing for equity compensation to any person. The Company has reserved 600,000 shares of Company CommonStock for issuance to employees and directors of, and consultants to, the Company upon the issuance of stock or the exercise ofoptions granted under the Plans, of which (i) 369,876 shares are issuable, as of the date hereof, upon the exercise of outstanding,unexercised options granted under the Plans, (ii) no shares have been issued upon the exercise of options granted under the Plans as ofthe date hereof, (iii) no shares have been issued in the form of restricted stock granted under the Plans, and (iv) 230,124 shares remainavailable for future grant as of the date hereof. The Company Options that are outstanding immediately prior to the Effective Timewill be converted at the Effective Time by the administrator of the Plan into Bonus Units pursuant to the terms and conditions of theCash Bonus Plan at the Effective Time. Section 3.2(c) of the Company Disclosure Schedule sets forth for each outstanding CompanyOption and Company Warrant, the name of the holder of such option or warrant, the number of shares of Company Capital Stockissuable upon the exercise of such option or warrant, the exercise price of such option or warrant, the date of grant (in the case ofoptions), and the vesting schedule (in the case of options), including the extent vested to date and whether the vesting of such option issubject to acceleration as a result of the transactions contemplated by this Agreement or any other events (including a description ofany such acceleration provisions). The terms of the Plans authorize the administrator of such Plans to amend the Plans, as required, toeffect the provisions set forth in Section 1.6(c) hereof with respect to each Company Option without the consent of any holder of anyCompany Option granted under such Plans. True and complete copies of all agreements and instruments relating to or issued under thePlans have been provided to Parent and such agreements and instruments have not been amended, modified or supplemented, andthere are no agreements to amend, modify or supplement such agreements or instruments from the forms thereof provided to Parent.

(d) Except for the Cash Bonus Plan, the Company has never adopted, sponsored or maintained any plan that will require thepayment of any cash bonuses in connection with the transactions contemplated by this Agreement. The Bonus Units under the CashBonus Plan are intended to be equivalent to the value of 600,000 shares of Company Common Stock which had been reserved forissuance to employees and directors of, and consultants to, the Company. Exhibit A to the Cash Bonus Plan contains the names of theparticipants in the Cash Bonus Plan, the number of Bonus Units each participant has been, or will be, granted under the Cash BonusPlan, and the vesting schedule with respect to each such participant.

(e) As of the date hereof, no shares of Company Capital Stock are issuable upon the exercise of outstanding CompanyOptions that have not been issued under the Plans. Except as set forth in Sections 3.2(a) and 3.2(c) of the Company DisclosureSchedule, as of the date hereof, no shares of Company Capital Stock are issuable upon the exercise of outstanding Company Warrants.Except for the Company Options and Company Warrants, there are no options, warrants, calls, rights, convertible securities,commitments or agreements of any character, written or oral, to which the Company is a party or by which the Company is boundobligating the Company to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed,any shares of the capital stock of the Company or obligating the Company to grant, extend, accelerate the vesting of, change the priceof, otherwise amend or enter into any such option, warrant, call, right, commitment or agreement. There are no outstanding orauthorized stock appreciation, phantom stock, profit participation, or other similar rights with respect to the Company. Except ascontemplated hereby, neither the Company nor, to the Knowledge of the Company, any other Stockholder is a party to any votingtrusts, proxies, or other agreements or understandings with respect to the voting stock of the Company. Except as set forth inSection 3.2(e) of the Company

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Disclosure Schedule, there are no agreements to which the Company is a party relating to the registration, sale or transfer (includingagreements relating to rights of first refusal, co-sale rights or “drag-along” rights) of any Company Capital Stock. As a result of theMerger, Parent will be the sole record and beneficial holder of all issued and outstanding shares of Company Capital Stock and allrights to acquire or receive any shares of Company Capital Stock, whether or not such shares of Company Capital Stock areoutstanding.

3.3 Subsidiaries. Section 3.3(a) of the Company Disclosure Schedule lists each entity in which the Company owns any shares ofcapital stock or any interest in, or controls, directly or indirectly, any other corporation, limited liability company, partnership,association, joint venture or other business entity. Section 3.3(b) of the Company Disclosure Schedule lists each corporation, limitedliability company, partnership, association, joint venture or other business entity of which the Company owns, directly or indirectly,more than 50% of the stock or other equity interest entitled to vote on the election of the members of the board of directors or similargoverning body (each, a “Subsidiary” and collectively, the “Subsidiaries”). Except for the Subsidiaries, the Company does not haveand has never had any subsidiaries or affiliated companies and does not otherwise own and has never otherwise owned any shares ofcapital stock or any interest in, or control, directly or indirectly, any other corporation, limited liability company, partnership,association, joint venture or other business entity. Each entity listed on Section 3.3(a) of the Company Disclosure Schedule that is nolonger in existence has been duly dissolved in accordance with its charter documents and the laws of the jurisdiction of itsincorporation or organization and there are no outstanding liabilities or obligations (outstanding, contingent or otherwise), includingtaxes, with respect to any such entity. Each Subsidiary is a corporation or limited liability company duly organized, validly existingand in good standing under the laws of the jurisdiction of its incorporation or organization. Each Subsidiary has the corporate powerto own its properties and to carry on its business as currently conducted and as currently contemplated to be conducted. EachSubsidiary is duly qualified or licensed to do business and in good standing as a foreign corporation or company, as the case may be,in each jurisdiction in which the character or location of its assets or properties (whether owned, leased or licensed) or the nature of itsbusiness make such qualifications necessary. The Company has delivered a true and correct copy of each Subsidiary’s charterdocuments and bylaws or articles of organization and operating agreement, as the case may be, each as amended to date and in fullforce and effect on the date hereof, to Parent (the “Subsidiary Organizational Documents”). Section 3.3(c) of the CompanyDisclosure Schedule lists the directors and officers or members, as the case may be, of each Subsidiary as of the date of thisAgreement. The operations now being conducted by each Subsidiary are not now and have never been conducted under any othername. All of the outstanding shares of capital stock or membership interests, as the case may be, of each Subsidiary are owned ofrecord and beneficially by the Company. All outstanding shares of capital stock or membership interests, as the case may be, of eachSubsidiary are duly authorized, validly issued, fully paid and non-assessable and not subject to preemptive rights created by statute,the Subsidiary Organizational Documents, or any agreement to which such Subsidiary is a party or by which it is bound, and havebeen issued in compliance with all applicable legal requirements. There are no options, warrants, calls, rights, commitments oragreements of any character, written or oral, to which each Subsidiary is a party or by which it is bound obligating the Subsidiary toissue, deliver, sell, repurchase or redeem, or cause to be issued, sold, repurchased or redeemed, any shares of the capital stock ormembership interests, as the case may be, of each Subsidiary or obligating each Subsidiary to grant, extend, accelerate the vesting of,change the price of, otherwise amend or enter into any such option, warrant, call right, commitment or agreement. There are nooutstanding or authorized stock appreciation, phantom stock, profit participation, or other similar rights with respect to any of theSubsidiaries. Neither the Company nor any Subsidiary has agreed or is obligated to make any future investment in, or capitalcontribution to, any Person.

3.4 Authority. The Company has all requisite power and authority to enter into this Agreement and any Related Agreements towhich it is a party and to consummate the transactions contemplated hereby and

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thereby. The execution and delivery of this Agreement and any Related Agreements to which the Company is a party and theconsummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on thepart of the Company and no further action is required on the part of the Company to authorize this Agreement and any RelatedAgreements to which it is a party and the transactions contemplated hereby and thereby, subject only to the approval of thisAgreement by the Stockholders. The vote required to approve this Agreement by the Stockholders is set forth in Section 3.4 of theCompany Disclosure Schedule (the “Requisite Stockholder Vote”). This Agreement and the Merger have been unanimouslyapproved by the Board of Directors of the Company. This Agreement and each of the Related Agreements to which the Company is aparty have been duly executed and delivered by the Company and assuming the due authorization, execution and delivery by the otherparties hereto and thereto and the due authorization and execution of the Written Consent, constitute the valid and binding obligationsof the Company and the Stockholders enforceable against them in accordance with their respective terms.

3.5 No Conflict. The execution and delivery by the Company of this Agreement and any Related Agreement to which theCompany is a party, and the consummation of the transactions contemplated hereby and thereby, will not conflict with or result in anyviolation of or default under (with or without notice or lapse of time, or both) or give rise to a right of termination, cancellation,modification or acceleration of any obligation or loss of any benefit under (any such event, a “Conflict”) (i) any provision of theCharter Documents or the Subsidiary Organizational Documents, (ii) any Material Contract or Contract that does not materially differin substance from the Standard Form Agreement to which the Company or any Subsidiary is a party or by which any of theirproperties or assets (whether tangible or intangible) are bound, or (iii) any judgment, order, decree, statute, law, ordinance, rule orregulation applicable to the Company, any Subsidiary or any of their properties or assets (whether tangible or intangible). Section 3.5of the Company Disclosure Schedule sets forth all necessary consents, waivers and approvals of parties to any Material Contracts asare required thereunder in connection with the Merger, or for any such Material Contract to remain in full force and effect withoutlimitation, modification or alteration after the Effective Time so as to preserve all rights of, and benefits to, the Company and theSubsidiaries under such Material Contracts from and after the Effective Time. There are no consents, waivers or approvals from anyparty to any Contract that does not materially differ in substance from the Standard Form Agreement that are necessary or required inorder for such Contract to remain in full force and effect without limitation, modification or alteration after the Effective Time.Following the Effective Time, the Surviving Corporation and each of its subsidiaries will be permitted to exercise all of their rightsunder the Material Contracts and Contracts that do not materially differ in substance from the Standard Form Agreement without thepayment of any additional amounts or consideration other than ongoing fees, royalties or payments which the Company or anySubsidiary would otherwise be required to pay pursuant to the terms of such Material Contracts had the transactions contemplated bythis Agreement not occurred.

3.6 Consents. No consent, notice, waiver, approval, order or authorization of, or registration, declaration or filing with any court,administrative agency or commission or other federal, state, county, local or other foreign governmental authority, instrumentality,agency or commission (each, a “Governmental Entity”) or a party to any Material Contract to which the Company or any Subsidiaryis a party (so as not to trigger any Conflict), is required by, or with respect to, the Company or any Subsidiary in connection with theexecution and delivery of this Agreement and any Related Agreement to which the Company is a party or the consummation of thetransactions contemplated hereby and thereby, except for (a) such consents, notices, waivers, approvals, orders, authorizations,registrations, declarations and filings as may be required under applicable securities laws, (b) the filing of the Certificate of Mergerwith the Secretary of State of the State of Delaware, (c) the adoption of this Agreement and approval of the transactions contemplatedby this Agreement by the Stockholders and (d) the filing of notification, and expiration or early termination of the waiting periodunder, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), as well as any required approvalunder foreign antitrust laws, if applicable.

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3.7 Company Financial Statements. Section 3.7 of the Company Disclosure Schedule sets forth the Company’s (a) unauditedconsolidated balance sheet as of December 31, 2004, and the related consolidated statements of income, cash flow and stockholders’equity for the three (3) month period then ended (the “Year-End Financials”), and (b) unaudited consolidated balance sheet as ofNovember 30, 2005 (the “Balance Sheet Date”), and the related unaudited statements of income, cash flow and stockholders’ equityfor the eleven months then ended (the “Interim Financials”). The Year-End Financials and the Interim Financials (collectivelyreferred as the “Financials”) are true and correct in all material respects and have been prepared in accordance with GAAP applied ona consistent basis throughout the periods indicated and consistent with each other (except that the Financials do not contain footnotesand other presentation items that may be required by GAAP). The Financials present fairly in all material respects the Company’sconsolidated financial condition, operating results and cash flows as of the dates and during the periods indicated therein, subject inthe case of the Interim Financials to normal year-end adjustments, which are not material in amount or significance in any individualcase or in the aggregate. The Company’s unaudited consolidated balance sheet as of the Balance Sheet Date is referred to hereinafteras the “Current Balance Sheet.”

3.8 No Undisclosed Liabilities. Neither the Company nor any Subsidiary has any liability, indebtedness, obligation, expense,claim, deficiency, guaranty or endorsement of any type, whether accrued, absolute, contingent, matured, unmatured or other, of anature required to be reflected in financial statements in accordance with GAAP, except for those which (a) have been reflected in theCurrent Balance Sheet, (b) have arisen in the ordinary course of business consistent with past practices since the Balance Sheet Dateand prior to the date hereof or (c) have arisen since the date hereof and do not arise from a violation of Section 5.1 hereof.

3.9 No Changes. Since the Balance Sheet Date, except as (i) expressly permitted hereunder, (ii) required hereby, (iii) set forth inSection 3.9 of the Company Disclosure Schedule, or (iv) specifically consented to by Parent pursuant to Section 5.1 or Section 5.3hereof, there has not been, occurred or arisen any:

(a) transaction by the Company or any Subsidiary except in the ordinary course of business as conducted on that date andconsistent with past practices;

(b) modifications, amendments or changes to the Charter Documents or the Subsidiary Organizational Documents except asexpressly contemplated by this Agreement;

(c) payment, discharge, waiver or satisfaction by the Company or any Subsidiary, in any amount in excess of $15,000 in anyone case, or $50,000 in the aggregate, of any claim, liability, right or obligation (absolute, accrued, asserted or unasserted, contingentor otherwise), other than payments, discharges or satisfactions in the ordinary course of business of liabilities reflected or reservedagainst in the Current Balance Sheet;

(d) destruction of, damage to, or loss (whether or not covered by insurance) of any material assets (whether tangible orintangible) or material business of the Company or any Subsidiary or any loss of, or material adverse change in the Company’s or anySubsidiary’s relationships with, any of their material customers;

(e) employment dispute, including claims or matters raised by any individual, Governmental Entity, or any workers’representative organization, bargaining unit or union regarding labor trouble or claim of wrongful discharge or other unlawfulemployment or labor practice or action with respect to the Company or any Subsidiary;

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(f) adoption or change in accounting policies or procedures (including any change in reserves for excess or obsoleteinventory, doubtful accounts or other reserves, or depreciation or amortization policies or rates) by the Company or any Subsidiaryother than as required by GAAP;

(g) adoption of or change in any material election in respect of Taxes, adoption of or change in any accounting method inrespect of Taxes, agreement or settlement of any claim or assessment in respect of Taxes, or extension or waiver of the limitationperiod applicable to any claim or assessment in respect of Taxes by the Company or any Subsidiary;

(h) declaration, setting aside or payment of a dividend or other distribution (whether in cash, stock or property) in respect ofany Company Capital Stock or capital stock of any Subsidiary, or any split, combination or reclassification in respect of any shares ofCompany Capital Stock or capital stock of any Subsidiary, or any issuance or authorization of any issuance of any other securities inrespect of, in lieu of or in substitution for shares of Company Capital Stock or capital stock of any Subsidiary, or any direct or indirectrepurchase, redemption, or other acquisition by the Company of any shares of Company Capital Stock or capital stock of anySubsidiary (or options, warrants or other rights convertible into, exercisable or exchangeable therefor), except in accordance with theagreements evidencing Company Options or Company Warrants;

(i) termination or extension, or any material amendment, waiver or modification of the terms, of any Material Contract;

(j) other than pursuant to Standard Form Agreements, sale, lease, sublease, license or other disposition of any of the materialassets (whether tangible or intangible) or material properties of the Company or any Subsidiary, including, but not limited to, the saleof any accounts receivable of the Company or any Subsidiary, or any creation of any Lien in such material assets or materialproperties;

(k) loan by the Company or any Subsidiary to any Person, incurring by the Company or any Subsidiary of any indebtedness,guaranteeing by the Company or any Subsidiary of any indebtedness, issuance or sale of any debt securities of the Company or anySubsidiary or guaranteeing of any debt securities of others, except for (i) loans, advances or capital contributions to or investments inwholly-owned Subsidiaries made in the ordinary course of business consistent with past practices, and (ii) advances to Employees fortravel and business expenses in the ordinary course of business consistent with past practices;

(l) waiver or release of any material right or claim of the Company or any Subsidiary, including any write off, discount orother compromise of any account receivable of the Company or any Subsidiary that exceeds $1,000 in any one case;

(m) commencement, settlement, notice or, to the Knowledge of the Company, threat of any lawsuit or proceeding or otherinvestigation against the Company or any Subsidiary or their respective properties or affairs;

(n) notice of any claim or potential claim of ownership by any Person other than the Company of the Company IntellectualProperty Rights or of infringement by the Company or any Subsidiary of any other Person’s Intellectual Property Rights;

(o) issuance or sale, or contract to issue or sell, by the Company or any Subsidiary of any shares of Company Capital Stockor capital stock of any Subsidiary, or securities convertible into, or exercisable or exchangeable for, shares of Company Capital Stockor capital stock of any Subsidiary, or any securities, warrants, options or rights to purchase any of the foregoing, except for issuancesof (i) Company

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Capital Stock upon the exercise of Company Options granted under the Plans or Company Warrants in accordance with their terms(each of which Company Options and Company Warrants are listed on Section 3.2(c) of the Company Disclosure Schedule) and(ii) additional Company Options granted under the Plans;

(p) (i) sale or license of any Company Intellectual Property or execution of any agreement with respect to the CompanyIntellectual Property with any Person or with respect to the Intellectual Property Rights of any Person (other than licenses granted bythe Company pursuant to Standard Form Agreements), or (ii) purchase or license of any Intellectual Property Rights or execution ofany agreement with respect to the Intellectual Property Rights of any Person (other than licenses granted by the Company pursuant toStandard Form Agreements), (iii) agreement with respect to the development of any Intellectual Property Rights with a third party, or(iv) change in pricing or royalties set or charged by the Company or any Subsidiary to its customers or licensees or in pricing orroyalties set or charged by Persons who have licensed Intellectual Property Rights to the Company or any Subsidiary;

(q) Material Adverse Effect with respect to the Company; or

(r) agreement by the Company or any Subsidiary, or any officer or Employees on behalf of the Company or any Subsidiary,to do any of the things described in the preceding clauses (a) through (q) of this Section 3.9 (other than negotiations with Parent andits representatives regarding the transactions contemplated by this Agreement).

3.10 Accounts Receivable.

(a) The Company has made available to Parent a list of all accounts receivable of the Company and each Subsidiary as ofthe Balance Sheet Date, together with an aging schedule indicating a range of days elapsed since invoice.

(b) All of the accounts receivable of the Company and each Subsidiary (i) arose in the ordinary course of business, (ii) arecarried at values determined in accordance with GAAP consistently applied, (iii) are not subject to any valid setoff or counterclaim,and (iv) do not represent obligations for goods sold on consignment, on approval or on a sale-or-return basis or subject to any otherrepurchase or return arrangement. No person has any Lien on any accounts receivable of the Company or any Subsidiary, and nowritten request or agreement for deduction or discount has been made with respect to any accounts receivable of the Company or anySubsidiary.

3.11 Tax Matters.

(a) Definition of Taxes. For the purposes of this Agreement, the term “Tax” or, collectively, “Taxes” shall mean (i) any andall U.S. federal, state, local and non-U.S. taxes, assessments and other governmental charges, duties, impositions and liabilities,including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem,transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes as well as public imposts, fees and socialsecurity charges (including health, unemployment, workers’ compensation and pension insurance), together with all interest, penaltiesand additions imposed with respect to such amounts, (ii) any liability for the payment of any amounts of the type described inclause (i) of this Section 3.11(a) as a result of being a member of an affiliated, consolidated, combined or unitary group for any period(including any arrangement for group or consortium relief or similar arrangement), and (iii) any liability for the payment of anyamounts of the type described in clauses (i) or (ii) of this Section 3.11(a) as a result of any express or implied obligation to indemnifyany other person or as a result of any obligation under any agreement or arrangement with any other person with respect to suchamounts and including any liability for taxes of a predecessor entity.

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(b) Tax Returns and Audits.

(i) The Company and each of its Subsidiaries has (a) prepared and timely filed all U.S. federal, and all material state,local and non-U.S. returns, estimates, information statements and reports (“Returns”) (including as material Returns, withoutlimitation, income, sales and use and payroll tax returns) relating to Taxes of the Company or any of its Subsidiaries or theirrespective operations, and such Returns are true and correct and have been completed in accordance with applicable law and(b) timely paid all material Taxes it is required to pay.

(ii) The Company and each of its Subsidiaries has withheld from payments to their respective Employees and otherthird parties, all U.S. federal, state and non-U.S. income Taxes and social security charges and other Taxes required to be withheld,and have timely paid such Taxes over to the appropriate authorities.

(iii) Neither the Company nor any of its Subsidiaries has been delinquent in the payment of any material Tax, nor isthere any Tax deficiency outstanding, assessed or proposed against the Company or any of its Subsidiaries, nor has the Company orany of its Subsidiaries executed any waiver of any statute of limitations on or extending the period for the assessment or collection ofany Tax.

(iv) No audit or other examination of any Return of the Company or any of its Subsidiaries is presently in progress, norhas the Company or any of its Subsidiaries been notified in writing of any request for such an audit or other examination. Noadjustment relating to any Return filed by the Company or any of its Subsidiaries has been proposed formally or, to the Knowledge ofthe Company, informally by any Tax authority to the Company or any of its Subsidiaries or any representative thereof. No claim hasever been made by any authority in a jurisdiction where the Company or any its Subsidiaries does not file Tax Returns that theCompany or any of its Subsidiaries is or may be subject to taxation by that jurisdiction.

(v) Neither the Company nor any of its Subsidiaries has material liabilities for unpaid Taxes which have not beenaccrued or reserved on the Current Balance Sheet, whether asserted or unasserted, contingent or otherwise, and neither the Companynor any of its Subsidiaries has incurred any liability for Taxes since the Balance Sheet Date other than in the ordinary course ofbusiness.

(vi) The Company has made available to Parent or its legal counsel, copies of all Returns for the Company and itsSubsidiaries filed for all periods since its inception.

(vii) There are (and immediately following the Effective Time there will be) no Liens on the assets of the Company orany of its Subsidiaries relating to or attributable to Taxes other than Liens for Taxes not yet due and payable. Neither the Companynor any of its Subsidiaries has Knowledge of any basis for the assertion of any claim relating or attributable to Taxes which, ifadversely determined, would result in any Lien on the assets of the Company or any of its Subsidiaries.

(viii) Neither the Company nor any of its Subsidiaries has (A) ever been a member of an affiliated group (within themeaning of Code §1504(a)) filing a consolidated federal income Tax Return (other than a group the common parent of which was theCompany), (B) ever been a party to any Tax sharing, indemnification or allocation agreement, (C) any liability for the Taxes of anyperson (other than the Company or any of its Subsidiaries), under Treasury Regulation § 1.1502-6 (or any similar provision of state,local or non-U.S. law, including any arrangement for group or consortium relief or similar arrangement), as a transferee or successor,by contract or agreement, or otherwise and (D) ever been a party to any joint venture, partnership or other arrangement that could betreated as a partnership for Tax purposes.

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(ix) Neither the Company nor any of its Subsidiaries has been, at any time, a “United States Real Property HoldingCorporation” within the meaning of Section 897(c)(2) of the Code.

(x) Neither the Company nor any of its Subsidiaries has constituted either a “distributing corporation” or a “controlledcorporation” in a distribution of stock intended to qualify for tax-free treatment under Section 355 of the Code.

(xi) Neither the Company nor any of its Subsidiaries has engaged in a reportable transaction under Treasury RegulationSection 1.6011-4(b), including a transaction that is the same or substantially similar to one of the types of transactions that the InternalRevenue Service has determined to be a Tax avoidance transaction and identified by notice, regulation, or other form of publishedguidance as a listed transaction, as set forth in Treasury Regulation Section 1.6011-4(b)(2).

(xii) Each of the Company and its Subsidiaries is and has at all times been resident for Tax purposes in its country ofincorporation or formation and is not and has not at any time been treated as resident in any other country for any Tax purpose(including any arrangement for the avoidance of double taxation). Neither the Company nor any of its Subsidiaries is subject to Tax inany country other than its country of incorporation or formation by virtue of having a permanent establishment or other place ofbusiness or by virtue of having a source of income in that country. Neither the Company nor any of its Subsidiaries is liable for anyTax as the agent of any other Person or business or constitutes a permanent establishment or other place of business of any otherPerson, business or enterprise for any Tax purpose.

(xiii) Each of the Company and its Subsidiaries is in full compliance with all terms and conditions of any Taxexemption, Tax holiday or other Tax reduction agreement or order of a territorial or non-U.S. government and the consummation ofthe transactions contemplated by this Agreement will not have any adverse effect on the continued validity and effectiveness of anysuch Tax exemption, Tax holiday or other Tax reduction agreement or order.

(xiv) Neither the Company nor any of its Subsidiaries will be required to include any income or gain or exclude anydeduction or loss from taxable income as a result of (A) any change in method of accounting under Section 481(c) of the Code,(B) closing agreement under Section 7121 of the Code, (C) deferred intercompany gain or excess loss account under TreasuryRegulations under Section 1502 of the Code (or in the case of each of (A), (B) or (C), under any similar provision of applicable law),(D) installment sale or open transaction disposition or (E) prepaid amount.

(c) Executive Compensation Tax. There is no contract, agreement, plan or arrangement to which the Company or anySubsidiary is a party, including the provisions of this Agreement, covering any Employee of the Company or any Subsidiary, which,individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to Sections 280G or404.

3.12 Restrictions on Business Activities. There is no agreement (non-competition or otherwise), commitment, judgment,injunction, order or decree to which the Company or any Subsidiary is a party or otherwise binding upon the Company or anySubsidiary which has or may reasonably be expected to have the effect of prohibiting or impairing any business practice of theCompany or any Subsidiary, any acquisition of property (tangible or intangible) by the Company or any Subsidiary, the conduct ofbusiness by the Company or any Subsidiary, or otherwise limiting the freedom of the Company or any Subsidiary to engage in anyline of business or to compete with any Person. Without limiting the generality of the foregoing, neither the Company nor anySubsidiary has entered into any Contract under which the Company or any Subsidiary is

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restricted from selling, licensing, manufacturing or otherwise distributing any of its technology or products or from providing servicesto customers or potential customers or any class of customers, in any geographic area, during any period of time, or in any segment ofthe market.

3.13 Title to Properties; Absence of Liens and Encumbrances; Condition of Equipment.

(a) Neither the Company nor any Subsidiary owns any real property, nor has the Company or any Subsidiary ever ownedany real property.

(b) Section 3.13(b) of the Company Disclosure Schedule identifies all real property currently leased, subleased or licensedby or from the Company or any Subsidiary or otherwise used or occupied by the Company or any Subsidiary for the operation of itsbusiness (the “Leased Real Property”), including any lease agreement, lease guarantee, sublease or other agreement for the leasing,use or occupancy of the Leased Real Property to which the Company or any Subsidiary is a party or of which the Company or anySubsidiary is a beneficiary, and all amendments and modifications thereof (collectively, the “Lease Agreements”). The Company hasprovided Parent with correct and complete copies of the copies or originals of the Lease Agreements. To the Knowledge of theCompany, (i) all Lease Agreements are valid and effective in accordance with their respective terms, (ii) no rentals payable thereunderby the Company or any of its Subsidiaries are past due and (iii) there is not any existing default or event of default thereunder (orevent which with notice or lapse of time, or both, would constitute a default by the Company or any of its Subsidiaries or any otherparty to any Lease Agreement). Neither the Company nor any Subsidiary has received any notice of a default, alleged failure toperform, or any offset or counterclaim with respect to any such Lease Agreement, which has not been fully remedied and withdrawn.Assuming the receipt of consents relating to the Lease Agreements set forth in Section 3.5 of the Company Disclosure Schedule, theClosing will not affect the enforceability against any person of any such Lease Agreement or the rights of the Company or theSurviving Corporation or any of its Subsidiaries to the continued use and possession of the Leased Real Property for the conduct ofbusiness as presently conducted.

(c) The Company and each Subsidiary has good and valid title to, or, in the case of leased properties and assets, validleasehold interests in, all of their respective tangible properties and tangible assets, real, personal and mixed, used or held for use inthe conduct of the business of the Company and each Subsidiary as currently conducted free and clear of any Liens, except (i) Liensfor Taxes not yet due and payable, and (ii) such imperfections of title and encumbrances, if any, which do not materially adverselyaffect the value of or materially interfere with the present use of the property subject thereto or affected thereby.

(d) Section 3.13(d) of the Company Disclosure Schedule lists all items of equipment (the “Equipment”) owned or leasedby the Company and the Subsidiaries that have a book value of at least $5,000 as of the date hereof, and such Equipment is adequatefor the conduct of the business of the Company and the Subsidiaries as currently conducted and as currently contemplated to beconducted.

3.14 Intellectual Property.


“Company Intellectual Property” shall mean any and all Intellectual Property Rights that are owned or purported tobe owned by the Company or any Subsidiary.

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“Intellectual Property Rights” shall mean worldwide (i) patents and patent applications, (ii) copyrights, copyrightregistrations and applications for copyright registration, (iii) trade secrets, (iv) trademarks, trade names and service marks,(v) divisions, continuations, renewals and reissuances of the foregoing (as applicable).

“Products” shall mean all products and services developed as of the date hereof (including products and services ofwhich development is substantially completed as of the date hereof that are set forth in the milestones in Article II), distributed,marketed, imported for resale, sold or licensed out by or on behalf of the Company or any Subsidiary in the ten year period precedingthe date hereof.

“Registered Intellectual Property“ shall mean patents, trademark registrations, copyright registrations, and anyapplication for any of the foregoing.

“Shrink-Wrap Code” means generally commercially available binary code (other than development tools anddevelopment environments) where available for a cost of not more than $5,000 for a perpetual license for a single user or work station(or $50,000 in the aggregate for all users and work stations).

“Source Code” shall mean computer software in a form that is readily suitable for review and edit by trainedprogrammers, including related programmer comments embedded therein. For avoidance of doubt, Source Code excludes anysoftware that is wholly or substantially in binary form and any documentation or other information provided or used with suchsoftware.

“Technology” shall mean any or all of the following (i) computer programs, architecture, documentation,(ii) inventions (whether or not patentable), discoveries, improvements, and technology, (iii) proprietary and confidential information,trade secrets and know how, (iv) databases, data compilations and collections and technical data, (v) logos, trade names, trade dress,trademarks and service marks, (vi) domain names, web addresses and sites, (vii) methods and processes and (viii) devices, prototypes,and schematics.

(b) Section 3.14(b)(i) of the Company Disclosure Schedule (i) lists all Registered Intellectual Property that is part ofCompany Intellectual Property (the “Company Registered Intellectual Property”), all domain names registered in the Company’sname and applications and registrations therefor and all material unregistered trademarks used by the Company with respect to itsProducts and (ii) lists any proceedings or actions before any court or tribunal (including the United States Patent and TrademarkOffice (the “PTO”) or equivalent authority anywhere in the world) to which Company or any Subsidiary is a party and in whichclaims are raised relating to the validity, enforceability, scope, ownership or infringement of any of the Company RegisteredIntellectual Property. Section 3.14(b)(ii) of the Disclosure Schedule lists all Products released on or before January 5, 2006, by nameand version number (other than any version of any Product first released by Scott Studios before October 1, 2004).

(c) To the Company’s Knowledge, except as set forth in Section 3.14(c)(i) of the Company Disclosure Schedule, each itemof Company Registered Intellectual Property is valid and subsisting, other than any registered trademarks indicated onSection 3.14(b)(i) of the Company Disclosure Schedule as no longer being used by the Company or any Subsidiaries. All necessaryregistration, maintenance and renewal fees in connection with such Company Registered Intellectual Property that are or will be duefor payment on or before the Closing Date have been or will be timely paid and all necessary documents and certificates in connectionwith such Company Registered Intellectual Property that are or will be due for filing on or before the Closing Date have been or willbe timely filed with the relevant patent, copyright, trademark or other authorities in the United States or foreign jurisdictions, as thecase may be, for the purposes of maintaining such Company Registered Intellectual Property. Section 3.14(c)(ii) of the

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Company Disclosure Schedule lists all actions that must be taken by the Company within 60 days of the Closing Date, including thepayment of any registration, maintenance or renewal fees or the filing of any documents, for the purposes of maintaining or renewingany Company Registered Intellectual Property.

(d) There are no agreements to which Company or any Subsidiary is a party that would restrict the ability of the SurvivingCorporation or the Parent to transfer or license Company Intellectual Property without restriction and without payment of any kind toany third party immediately following the Closing, except to the extent of restrictions and payment or other obligations that bind theCompany immediately before the Closing pursuant to agreements set forth in Section 3.14(d) of the Company Disclosure Schedule.

(e) The Company or a Subsidiary owns each item of Company Intellectual Property, including all Company RegisteredIntellectual Property listed in Section 3.14(b)(i) of the Company Disclosure Schedule, free and clear of any liens, mortgages, securityinterests or pledges, other than those set forth on Section 3.14(e) of the Company Disclosure Schedule.

(f) Except for trade secrets that lost their status as trade secrets upon the release of a new product or service, upon theissuance of a patent or publication of a patent application, or as a result of a good faith business decision to disclose such trade secret,and except for trademarks, service marks, slogans or similar designations that the Company or a Subsidiary made a good faithbusiness decision to stop using, neither the Company nor any Subsidiary has (i) transferred ownership of, or granted any exclusivelicense with respect to, any Intellectual Property Rights that are or, as of the time of such transfer or exclusive license, were materialto the Company, to any other person or, (ii) except as set forth in Section 3.14(b)(i) and Section 3.14(c)(i), permitted the Company’sor any Subsidiary’s rights in any Company Intellectual Property that is or was at the time material to the Company to enter into thepublic domain.

(g) The Company and the Subsidiaries are the exclusive owners of all Company Intellectual Property. Other thanIntellectual Property Rights licensed to Company under (i) licenses for the public or open source technology listed in Section 3.14(t)of the Company Disclosure Schedule, (ii) licenses listed in Section 3.14(h) of the Company Disclosure Schedule, (iii) agreements thatare not substantially focused on the license of Intellectual Property Rights, such as service, lease, sales or nondisclosure agreements inwhich the license of Intellectual Property Rights is incidental to the primary purposes of such agreement, or (iv) licenses for Shrink-Wrap Code, the Company Intellectual Property includes all of the Intellectual Property Rights that are used in or necessary to theconduct of the Company’s business as currently conducted, and the Company possesses all Technology that is used in or necessary tothe conduct of the Company’s business as currently conducted.

(h) Other than (i) licenses for the public or open source technology listed in Section 3.14(t) of the Company DisclosureSchedule and (ii) licenses for Shrink-Wrap Code, Section 3.14(h) of the Company Disclosure Schedule sets forth all of theagreements under which the Company or any Subsidiary receives a license from any Person of any Intellectual Property Rights ofsuch Person or a third party, other than agreements that are not substantially focused on the license of Intellectual Property Rights,such as service, lease, sales or nondisclosure agreements in which the license of Intellectual Property Rights is incidental to theprimary purposes of such agreement. For purposes of clarification, any agreement under which Technology is licensed to theCompany or any Subsidiary is deemed to be a license of the Intellectual Property Rights implicitly licensed thereunder,notwithstanding whether the term Intellectual Property Rights is used in such agreement.

(i) Other than (x) non-disclosure agreements, (y) non-exclusive licenses and related agreements with respect thereto of theProducts to end-users (in each case, pursuant to written agreements

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that do not materially differ in substance from the Company’s standard form(s) including attachments and which is or are included inSection 3.14(i) of the Company Disclosure Schedule (the “Standard Form Agreements”)), or (z) as specified in Section 3.14(i) ofthe Company Disclosure Schedule, Section 3.14(i) of the Company Disclosure Schedule lists all contracts, licenses and agreements towhich the Company or any Subsidiary is a party under which the Company or any Subsidiary has granted rights under any CompanyIntellectual Property to third parties (other than rights granted to contractors or vendors to use Company Intellectual Property for thesole benefit of the Company or any Subsidiary). For purposes of clarification, any agreement under which Products or Technology arelicensed to third parties is deemed to be a license of the Intellectual Property Rights implicitly licensed thereunder notwithstandingwhether the term Intellectual Property Rights is used in such agreement.

(j) Except as set forth in Section 3.14(j) of the Company Disclosure Schedule, no third party that has licensed IntellectualProperty Rights to the Company or any Subsidiary has retained sole ownership of or exclusive license rights under any IntellectualProperty Rights in any material improvements or derivative works made solely or jointly by the Company or any Subsidiary undersuch license. For purposes of clarification, any agreement under which Technology is licensed to the Company or any Subsidiary isdeemed to be a license of the Intellectual Property Rights implicitly licensed thereunder notwithstanding whether the term IntellectualProperty Rights is used in such agreement.

(k) Other than (i) the public or open source technology listed in Section 3.14(t) of the Company Disclosure Schedule and(ii) agreements entered into by the Company or any Subsidiary substantially in the form of the Standard Form Agreements, and otherthan as provided in any of the agreements listed in Section 3.14(i) of the Company Disclosure Schedule, and other than obligationsimplied by law, Section 3.14(k) of the Company Disclosure Schedule lists all Contracts between the Company or any Subsidiary andany other Person wherein or whereby the Company or any Subsidiary has agreed to indemnify such Person with respect to theinfringement or misappropriation of the Intellectual Property Rights of any third party.

(l) To the Company’s Knowledge, none of the Contracts listed in Section 3.14(h) or Section 3.14(i) of the CompanyDisclosure Schedule are subject to any material dispute regarding the scope of the rights under Intellectual Property Rights grantedunder such Contract, or performance under such Contract including with respect to any payments to be made or received by theCompany or any Subsidiary thereunder.

(m) The operation of the business of the Company and the Subsidiaries as it is currently conducted, including the design,development, use, import, branding, advertising, promotion, marketing, manufacture and sale of any Product, and, to its Knowledge,as contemplated to be conducted with respect to the radio business following the Merger as contemplated in Article II, does notinfringe or misappropriate any Intellectual Property Rights of any Person or violate any publicity or similar right of any Person underthe laws of any jurisdiction. Neither the Company nor any Subsidiary has received notice from any Person claiming that suchoperation or any Product infringes or misappropriates any Intellectual Property Rights of any Person or violates any right of publicityor similar right of any Person (nor, subject to Section 3.14(m) of the Company Disclosure Schedule, does the Company or anySubsidiary have Knowledge of any facts that constitute a reasonable basis for any good-faith claim of such infringement ormisappropriation).

(n) Except as set forth in Section 3.14(n) of the Company Disclosure Schedule, neither this Agreement nor the transactionscontemplated by this Agreement, including the assignment to Parent by operation of law or otherwise of any contracts or agreementsto which the Company or any Subsidiary is a party, will result, under any agreements to which the Company or any Subsidiary is aparty, in: (i) Parent,

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any of its subsidiaries or the Surviving Corporation granting to any third party any right to or with respect to any Intellectual PropertyRights owned by, or licensed to, any of them (other than rights granted by Company on or prior to the Closing Date under IntellectualProperty Rights owned or held by the Company as of the Closing Date that are obtained by Parent, any of its subsidiaries or theSurviving Corporation as a result of this Agreement or the transactions contemplated by this Agreement, and other than IntellectualProperty Rights in updates, upgrades or new versions of Products that Parent, any of its subsidiaries or the Surviving Corporation isobligated to provide to any third party under any agreement between Company and such third party that is assigned to or assumed byParent, any of its subsidiaries or the Surviving Corporation by operation of law or otherwise which agreement does not materiallydiffer in substance from the Company’s Standard Form Agreements included in Section 3.14(i) of the Company DisclosureSchedule), (ii) Parent, any of its subsidiaries or the Surviving Corporation, being bound by, or subject to, any non-compete or othermaterial restriction on the operation or scope of their respective businesses, or (iii) Parent, any of its subsidiaries or the SurvivingCorporation being obligated to pay any royalties or license fees with respect to Intellectual Property Rights of any third party inexcess of those payable by Company in the absence of this Agreement or the transactions contemplated hereby under the same orsimilar circumstances, or Parent, any of its subsidiaries or the Surviving Corporation being obligated to offer any discounts to anythird party in excess of those payable by, or required to be offered by, any of them, respectively, in the absence of this Agreement orthe transactions contemplated hereby, other than discounts that Company would have been required to offer in the absence of thisAgreement or the transactions contemplated hereby under such agreements under the same or similar circumstances.

(o) To the Knowledge of the Company, no Person is infringing or misappropriating any Company Intellectual Property.

(p) The Company and each Subsidiary has taken reasonable steps to protect the Company’s rights in confidentialinformation and trade secrets of the Company and the Subsidiaries or provided by any other person to the Company. Without limitingthe foregoing, except as provided in Section 3.14(p) of the Company Disclosure Schedule, (i) the Company and the Subsidiaries have,and enforce, a policy requiring each current and former employee to execute proprietary information, confidentiality and assignmentagreements substantially in one of the Company’s standard forms for employees (a copy of each such form is attached asSchedule 3.14(p)(i) hereto (the “Employee Proprietary Information Agreement”)), (ii) the Company and the Subsidiaries have,and enforce, a policy requiring each current and former consultant or contractor who is involved in the development of Technologyfor the Company to execute an agreement containing proprietary information, confidentiality and assignment provisions substantiallyin the Company’s standard form for consultants or contractors (a copy of which is attached as Schedule 3.14(p)(ii) hereto (the“Consultant Proprietary Information Agreement”)) and (iii) all current and former employees of the Company and eachSubsidiary and all current and former consultants and contractors of the Company and each Subsidiary involved in the development ofTechnology for the Company (other than Technology licensed to the Company pursuant to agreements listed in Section 3.14(h) of theCompany Disclosure Schedule) have (or will as of the Closing have) executed an Employee Proprietary Information Agreement or aConsultant Proprietary Information Agreement, as appropriate.

(q) No Company Intellectual Property or Product is subject to any outstanding decree, order, judgment, settlementagreement, or similar obligation binding on the Company or any Subsidiary that restricts in any manner the use, transfer or licensingthereof by the Company and the Subsidiaries or that affects the validity, use or enforceability of such Company Intellectual Propertyor Product.

(r) No (i) Product, (ii) material authored by or for the Company that is published or distributed by the Company or anySubsidiary (or, to the Company’s Knowledge, third party advertisements or other third party materials served, published or distributedby the Company), or (iii) conduct or statement of the Company or any Subsidiary, violates any law or regulation.

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(s) No government funding or facilities or resources of a university, college or other educational institution or researchcenter (i.e., an independent research institute conducting client-sponsored research and development) was used in the development ofCompany Intellectual Property and (b) no Governmental Entity, university, college, or other educational institution has any claim orright in or to Company Intellectual Property (except under any non-exclusive licenses and related agreements with respect theretogranted to any such entities of the Products pursuant to written agreements that do not materially differ in substance from theCompany’s Standard Form Agreements included in Section 3.14(i) of the Company Disclosure Schedule).

(t) Section 3.14(t) of the Company Disclosure Schedule lists all software or other material that is distributed as “opensource software” (also known as “free software”) or under a similar licensing or distribution model (including but not limited to theGNU General Public License (GPL), GNU Lesser General Public License (LGPL), Mozilla Public License (MPL), BSD licenses, theArtistic License, the Netscape Public License, the Sun Community Source License (SCSL), the Sun Industry Standards License(SISL) and the Apache License) (collectively, “Open Source Materials”) used by the Company or any Subsidiary in any way, anddescribes the manner in which such Open Source Materials were used (such description shall include, without limitation, whether theOpen Source Materials were distributed by the Company or any Subsidiary, and if they were so distributed, whether the Open SourceMaterials were modified by the Company or any Subsidiary), other than (i) Open Source Material incorporated into any Shrink WrapCode, (ii) Open Source Materials used by Company solely as incorporated into any office equipment or other equipment or productspurchased or leased or otherwise obtained by Company from third parties, and (iii) Open Source Materials incorporated withoutCompany’s Knowledge into Technology licensed, leased, sold or otherwise transferred by any third party to the Company. Exceptwith respect to Open Source Materials incorporated without Company’s Knowledge into Technology licensed, sold or otherwisetransferred by any third party to the Company, and except as provided in Section 3.14(t) of the Company Disclosure Schedule, neitherthe Company nor any Subsidiary has (i) incorporated Open Source Materials into, or combined Open Source Materials with, anyProduct or Company Intellectual Property or used Open Source Materials to provide any Product; (ii) distributed Open SourceMaterials in conjunction with or for use with any Product or Company Intellectual Property; or (iii) used Open Source Materials thatcreate, or purport to create, obligations for the Company or any Subsidiary with respect to Intellectual Property Rights or grant, orpurport to grant, to any third party, any rights or immunities under Intellectual Property Rights (including, but not limited to, usingany Open Source Materials that require, as a condition of use, modification and/or distribution of such Open Source Materials or thatother software incorporated into, derived from or distributed with such Open Source Materials be (x) disclosed or distributed in sourcecode form, (y) be licensed for the purpose of making derivative works, or (z) be redistributable at no charge or with any restriction onthe consideration charged therefor).

(u) Except as provided in Section 3.14(u) of the Company Disclosure Schedule, neither the Company nor any Subsidiarynor any other Person acting on any of their behalf has disclosed or agreed under any circumstance, to disclose to any Person, anySource Code that is covered in substantial part by the Company Intellectual Property, except for disclosures to employees, contractorsor consultants under agreements that prohibit use or disclosure except in the performances of services to the Company or anySubsidiary.

(v) All Products (and all parts thereof) are free of any and any “back door,” “time bomb,” “Trojan horse,” “worm,” “dropdead device,” “virus” or other software routines or hardware components that permit unauthorized access or the unauthorizeddisablement or erasure of such Product (or all parts

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thereof) or data or other software of users (“Contaminants”), other than Contaminants of which Company has no Knowledge thatwere introduced by software licensed to Company or any of its Subsidiaries from any third party or that were distributed byCompany’s Subsidiaries before such Subsidiaries were acquired by Company. Company endeavors to prevent the introduction ofContaminants into Products from software licensed from third parties using the procedures specified in Section 3.14(v) of theCompany Disclosure Schedule.

(w) Section 3.14(w) of the Company Disclosure Schedule sets forth Company’s current (as of January 5, 2006) list ofknown bugs maintained by its development or quality control groups with respect to the Products.

(x) The Company and the Subsidiaries have taken the steps and implemented the procedures specified in Section 3.14(x) ofthe Company Disclosure Schedule to protect the information technology systems used in connection with the operation of theCompany and the Subsidiaries from Contaminants. The Company and the Subsidiaries have the disaster recovery and security plans,procedures and facilities for the business specified in Section 3.14(x) of the Company Disclosure Schedule. To the Company’sKnowledge, there have been no material unauthorized intrusions or breaches of the security of information technology systems.

(y) Except as set forth in Section 3.14(y) of the Company Disclosure Schedule, the Company and the Subsidiaries havecomplied with all applicable laws and its internal privacy policies relating to (i) the privacy of users of their products and services andof all Internet websites owned, maintained or operated by the Company and the Subsidiaries and (ii) the collection, storage andtransfer of any personally identifiable information collected by the Company and the Subsidiaries or by third parties having authorizedaccess to the records of the Company and the Subsidiaries. Except as set forth in Section 3.14(y) of the Company DisclosureSchedule, the execution, delivery and performance of this Agreement by the Company and any Subsidiary complies with allapplicable laws relating to privacy and with the Company’s and the Subsidiaries’ privacy policies. Copies of all current and priorprivacy policies of the Company and the Subsidiaries, including the privacy policies included in the Company’s and the Subsidiaries’Internet websites, are attached to Section 3.14(y) of the Company Disclosure Schedule. Except as set forth in Section 3.14(y) of theCompany Disclosure Schedule, each such privacy policy and all materials distributed or marketed by the Company and theSubsidiaries have at all times made all disclosures to users or customers required by applicable laws, and none of such disclosuresmade or contained in any such privacy policy or in any such materials have been inaccurate, misleading or deceptive or in violation ofany applicable laws.

(z) The Company and the Subsidiaries have taken the steps specified in Section 3.14(z) of the Company DisclosureSchedule to protect the personally identifiable information in their possession against loss and against unauthorized access, use,modification, disclosure or other misuse. To the Knowledge of the Company, there has been no unauthorized access to or other misuseof that information.

(aa) Notwithstanding anything herein, the representations and warranties contained in this Section 3.14 are the onlyrepresentations and warranties being made with respect to infringement of any Intellectual Property Rights of any third party or thesufficiency of Intellectual Property Rights to the conduct of the business by the Company.

3.15 Agreements, Contracts and Commitments.

(a) Section 3.15(a) of the Company Disclosure Schedule (specifying the appropriate paragraph) sets forth a complete andaccurate list of all Contracts to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary isotherwise bound, as follows (each such Contract required to be disclosed in Section 3.15(a) of the Company Disclosure Schedule, a“Material Contract” and collectively, the “Material Contracts”):

(i) each employment, contractor or consulting Contract with an employee or individual consultant, contractor, orsalesperson, any Contract to grant any severance or termination pay (in cash or otherwise) to any employee, or any contractor,consulting or sales Contract with a firm or other organization;

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(ii) each Contract or plan, including any stock option plan, stock appreciation rights plan or stock purchase plan, any ofthe benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of thetransactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of thetransactions contemplated by this Agreement;

(iii) each fidelity or surety bond or completion bond;

(iv) each lease of personal property having a per year value in excess of $15,000 individually or $50,000 (not includingany leases listed in Section 3.15(a)(iv) of the Company Disclosure Schedule) in the aggregate;

(v) each Contract of indemnification or guaranty;

(vi) each Contract relating to capital expenditures and involving future payments in excess of $50,000 individually or$100,000 in the aggregate;

(vii) each Contract relating to the disposition or acquisition of assets or any interest in any business enterprise outsidethe ordinary course of the Company’s business;

(viii) each mortgage, indenture, guarantee, loan or credit agreement, security agreement or other Contract or instrumentrelating to the borrowing of money or extension of credit;

(ix) each purchase order or Contract for the purchase of materials involving annual payments of $15,000 individuallyor $50,000 in the aggregate (excluding those purchase orders or Contracts set forth in Section 3.15(a)(ix) of the Company DisclosureSchedule);

(x) each dealer, distribution, joint marketing, strategic alliance or development Contract;

(xi) each sales representative, original equipment manufacturer, manufacturing, value added, remarketer, reseller, orindependent software vendor, or other Contract for distribution of the products, technology or services of the Company or anySubsidiary;

(xii) each nondisclosure, confidentiality or similar Contract other than such Contracts with customers, employees andprospective customers and employees;

(xiii) each Contract required to be disclosed on Section 3.14(h) and 3.14(i) of the Company Disclosure Schedule;

(xiv) each of the Company’s standard agreements pursuant to which the owners of the radio station(s) listed inSection 3.15(a)(xv) of the Company Disclosure Schedule agree to give the Company certain blocks of advertisement time inexchange for a percentage of revenue received (the “RevenueSuite Agreement”);

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(xv) each Contract required to be disclosed on Section 3.14(u) of the Company Disclosure Schedule; and

(xvi) each other Contract that involves $15,000 individually or $50,000 in the aggregate or more and is not cancelablewithout penalty within 30 days.

(b) Each Material Contract to which the Company or any Subsidiary is a party or any of its properties or assets (whethertangible or intangible) is subject is a valid and binding agreement of the Company (or such Subsidiary, as applicable) enforceableagainst each of the parties thereto in accordance with its terms, and is in full force and effect with respect to the Company (or suchSubsidiary, as applicable) and, to the Knowledge of the Company, any other party thereto.

(c) The Company (or such Subsidiary, as applicable) is in compliance with and has not breached, violated or defaultedunder, or received notice that it has breached, violated or defaulted under, any of the terms or conditions of any such MaterialContract, nor to the Knowledge of the Company is any party obligated to the Company (or such Subsidiary, as applicable) pursuant toany such Material Contract subject to any breach, violation or default thereunder, nor does the Company have Knowledge of anyevent that with the lapse of time, giving of notice or both would constitute such a breach, violation or default by the Company (or suchSubsidiary, as applicable) or any such other party. True and complete copies of each Material Contract disclosed in the CompanyDisclosure Schedule or required to be disclosed pursuant to Section 3.15 have been made available to Parent.

(d) All outstanding indebtedness of the Company may be prepaid without penalty.

(e) No more than an aggregate of ten percent (10%) of the Standard Form Agreements to which the Company or anySubsidiary is a party or any of their respective properties or assets (whether tangible or intangible) are subject (i) are not enforceableagainst each of the parties thereto in accordance with their terms; or (ii) are not in full force and effect with respect to the Company(or such Subsidiary, as applicable) and, to the Knowledge of the Company, any other party thereto.

3.16 Interested Party Transactions.

(a) Except as set forth in Section 3.16(a) of the Company Disclosure Schedule, no officer, director, or Stockholder of theCompany or any Subsidiary (nor any ancestor, sibling, descendant or spouse of any of such Persons, or any trust, partnership orcorporation in which any of such Persons has or has had an interest), has or has had, directly or indirectly, (i) any interest in any entity(other than the Company and the Subsidiaries) which furnished or sold, or furnishes or sells, services, products, technology orIntellectual Property that the Company or any Subsidiary furnishes or sells, or proposes to furnish or sell, or (ii) any interest in anyentity (other than the Company and the Subsidiaries) that purchases from or sells or furnishes to the Company or any Subsidiary, anygoods or services, or (iii) other than as set forth in Section 3.15(a) of the Company Disclosure Schedule, any interest in, or is a partyto, any Contract to which the Company or any Subsidiary is a party; provided, however, that ownership of no more than one percent(1%) of the outstanding voting stock of a publicly traded corporation shall not be deemed to be an “interest in any entity” for purposesof this Section 3.16. To the Knowledge of the Company, there are no agreements, contracts, or commitments with regard tocontribution or indemnification between or among any of the Stockholders.

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(b) All transactions pursuant to which any Interested Party has purchased any services, products, or technology from, or soldor furnished any services, products or technology to, the Company or any Subsidiary that were entered into on or after the inception ofthe Company have been on an arms-length basis on terms no less favorable to the Company than would be available from anunaffiliated party.

3.17 Company Authorizations. Each consent, license, permit, grant or other authorization (i) pursuant to which the Company orany Subsidiary currently operates or holds any interest in any of its properties, or (ii) which is required for the operation of theCompany’s or any Subsidiary’s business as currently conducted or currently contemplated to be conducted or the holding of any suchinterest (collectively, “Company Authorizations”) has been issued or granted to the Company (or such Subsidiary, as applicable).The Company Authorizations are in full force and effect and constitute all Company Authorizations required to permit the Companyand each Subsidiary to operate or conduct its businesses or hold any interest in their respective properties or assets.

3.18 Litigation. Except as set forth in Section 3.18 of the Company Disclosure Schedule, there is no action, suit, claim orproceeding of any nature pending, or to the Knowledge of the Company, threatened, against the Company, any Subsidiary, theirproperties (tangible or intangible) or any of their officers or directors (in such capacity). To the Knowledge of the Company, there isno investigation pending or threatened, against the Company, any Subsidiary, any of their properties (tangible or intangible) or any oftheir officers or directors by or before any Governmental Entity.

3.19 Minute Books. The minutes of the Company and the Subsidiaries delivered to counsel for Parent contain complete andaccurate records of all material actions taken, and summaries of all meetings held, by the Stockholders and the Board of Directors ofthe Company and each Subsidiary (and any committees thereof) since the time of incorporation of the Company or such Subsidiary, asthe case may be. At the Closing, the minute books of the Company and the Subsidiaries will be in the possession of the Company.

3.20 Environmental Matters.

(a) Hazardous Material. Neither the Company nor any Subsidiary has: (i) operated any underground storage tanks at anyproperty that the Company or any Subsidiary has at any time owned, operated, occupied or leased, or (ii) released any amount of anysubstance that has been designated by any Governmental Entity or by applicable federal, state or local law to be radioactive, toxic,hazardous or otherwise a danger to health, reproduction or the environment, including PCBs, asbestos, petroleum, and urea-formaldehyde and all substances listed as hazardous substances pursuant to the Comprehensive Environmental Response,Compensation, and Liability Act of 1980, as amended, or defined as a hazardous waste pursuant to the United States ResourceConservation and Recovery Act of 1976, as amended, and the regulations promulgated pursuant to said laws (a “HazardousMaterial”), but excluding office and janitorial supplies properly and safely maintained. No Hazardous Materials are present in, on orunder any property, including the land and the improvements, ground water and surface water thereof, that the Company or anySubsidiary has at any time owned, operated, occupied or leased.

(b) Hazardous Materials Activities. Neither the Company nor any Subsidiary has transported, stored, used, manufactured,disposed of, released or exposed their employees or others to Hazardous Materials in violation of any law or in a manner that wouldresult in liability to the Company or any Subsidiary, nor has the Company or any Subsidiary disposed of, transported, sold, ormanufactured any product containing a Hazardous Material (any or all of the foregoing being collectively referred to herein as“Hazardous Materials Activities”) in violation of any rule, regulation, treaty or statute promulgated by any Governmental Entity toprohibit, regulate or control Hazardous Materials or any Hazardous Material Activity.

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(c) Permits. The Company and the Subsidiaries currently hold all environmental approvals, permits, licenses, clearances andconsents (the “Environmental Permits”) necessary for the conduct of their Hazardous Material Activities and other businesses of theCompany and the Subsidiaries as such activities and businesses are currently being conducted and as currently contemplated to beconducted.

(d) Environmental Liabilities. No action, proceeding, revocation proceeding, amendment procedure, writ, injunction orclaim is pending, or to the Knowledge of the Company, threatened, concerning any Environmental Permit, Hazardous Material or anyHazardous Materials Activity of the Company or any Subsidiary. The Company has no Knowledge of any fact or circumstance whichcould result in any environmental litigation or liability which could reasonably be expected to impose upon the Company or anySubsidiary any environmental liability.

(e) Reports and Records. The Company has delivered to Parent all records in the Company’s and each of its Subsidiary’spossession concerning the Hazardous Materials Activities of the Company and the Subsidiaries relating to its business and allenvironmental audits and environmental assessments of any Leased Real Property conducted at the request of, or otherwise in thepossession of the Company. The Company and the Subsidiaries have complied with all environmental disclosure obligations imposedby applicable law with respect to this transaction.

(f) Notwithstanding anything to the contrary herein, the representations and warranties contained in this Section 3.20 are theonly representations and warranties being made with respect to any environmental health or safety matter, including natural resources,related to the Company or its Subsidiaries.

3.21 Brokers’ and Finders’ Fees. Neither the Company nor any Subsidiary has incurred, nor will it incur, directly or indirectly,any liability for brokerage or finders’ fees or agents’ commissions, fees related to investment banking or similar advisory services orany similar charges in connection with this Agreement or any transaction contemplated hereby, nor will Parent or the SurvivingCorporation incur, directly or indirectly, any such liability based on arrangements made by or on behalf of the Company or anySubsidiary.

3.22 Employee Benefit Plans and Compensation.


“COBRA” shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

“Company Employee Plan” shall mean any material plan, program, policy, practice, contract, agreement or otherarrangement providing for compensation, severance, termination pay, deferred compensation, performance awards, stock or stock-related awards, welfare benefits, fringe benefits or other employee benefits or remuneration of any kind, whether written, unwritten orotherwise, funded or unfunded, including each “employee benefit plan,” within the meaning of Section 3(3) of ERISA which is or hasbeen maintained, contributed to, or required to be contributed to, by the Company or any ERISA Affiliate for the benefit of anyEmployee, or with respect to which the Company or any ERISA Affiliate has or may have any liability or obligation and anyInternational Employee Plan.

“DOL” shall mean the United States Department of Labor.

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“Employee” shall mean any current or former employee, consultant, independent contractor or director of theCompany or any ERISA Affiliate.

“Employee Agreement” shall mean each management, employment, severance, separation, consulting, contractor,relocation, repatriation, expatriation, loan, visa, work permit or other agreement, or contract (including, any offer letter or anyagreement providing for acceleration of Company Options) between the Company or any ERISA Affiliate and any Employee.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

“ERISA Affiliate” shall mean any other current or former Person or entity under common control with the Companywithin the meaning of Section 414(b), (c), (m) or (o) of the Code, and the regulations issued thereunder.

“FMLA” shall mean the Family Medical Leave Act of 1993, as amended.

“HIPAA” shall mean the Health Insurance Portability and Accountability Act of 1996, as amended.

“International Employee Plan” shall mean each Company Employee Plan or Employee Agreement that has beenadopted or maintained by the Company or any ERISA Affiliate, whether formally or informally, or with respect to which theCompany or any ERISA Affiliate will or may have any liability, for the benefit of Employees who perform services outside theUnited States.

“IRS” shall mean the United States Internal Revenue Service.

“PBGC” shall mean the United States Pension Benefit Guaranty Corporation.

“Pension Plan” shall mean each Company Employee Plan that is an “employee pension benefit plan,” within themeaning of Section 3(2) of ERISA.

“WARN” shall mean the Worker Adjustment and Retraining Notification Act.

(b) Schedule. Section 3.22(b)(1) of the Company Disclosure Schedule contains an accurate and complete list of eachCompany Employee Plan and each Employee Agreement. Neither the Company nor any ERISA Affiliate has made any legallybinding commitment to establish any new Company Employee Plan or Employee Agreement, to modify any Company Employee Planor Employee Agreement (except to the extent required by law or to conform any such Company Employee Plan or EmployeeAgreement to the requirements of any applicable law, in each case as previously disclosed to Parent in writing, or as required by thisAgreement), or to enter into any Company Employee Plan or Employee Agreement. Section 3.22(b)(2) of the Company DisclosureSchedule sets forth a table setting forth the name and salary of each employee of the Company and each Subsidiary as of the datehereof. To the Knowledge of the Company, no Key Employee currently intends to terminate his or her employment.Section 3.22(b)(3) of the Company Disclosure Schedule contains an accurate and complete list of all Persons that have had in the past12 months a consulting or advisory relationship with the Company and each Subsidiary.

(c) Documents. The Company has provided to Parent (i) correct and complete copies of all documents embodying eachCompany Employee Plan and each Employee Agreement including all amendments thereto and all related trust documents, (ii) thethree most recent annual reports (Form

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Series 5500 and all schedules and financial statements attached thereto), if any, required under ERISA or the Code in connection witheach Company Employee Plan, (iii) if the Company Employee Plan is funded, the most recent annual and periodic accounting ofCompany Employee Plan assets, (iv) the most recent summary plan description together with the summary(ies) of materialmodifications thereto, if any, required under ERISA with respect to each Company Employee Plan, (v) all material written agreementsand contracts relating to each Company Employee Plan, including administrative service agreements and group insurance contracts,(vi) correspondence within the past three years to or from any governmental agency relating to any Company Employee Plan, (vii) allmodel COBRA forms and related notices, (viii) all policies pertaining to fiduciary liability insurance covering the fiduciaries for eachCompany Employee Plan, (ix) all discrimination tests for each Company Employee Plan since inception, (x) all registrationstatements, annual reports (Form 11-K and all attachments thereto) and prospectuses prepared in connection with each CompanyEmployee Plan and (xi) the most recent IRS determination or opinion letter issued with respect to each Company Employee Plan.

(d) Employee Plan Compliance. The Company and each Subsidiary has performed all obligations required to be performedby it under, is not in default or violation of, and the Company has no Knowledge of any default or violation by any other party to, anyCompany Employee Plan, and each Company Employee Plan has been established and maintained in accordance with its terms and incompliance in all material respects with all applicable laws, statutes, orders, rules and regulations, including ERISA or the Code. AnyCompany Employee Plan intended to be qualified under Section 401(a) of the Code has obtained a favorable determination letter (oropinion letter, if applicable) as to its qualified status under the Code. No “prohibited transaction,” within the meaning of Section 4975of the Code or Sections 406 and 407 of ERISA, and not otherwise exempt under Section 408 of ERISA, has occurred with respect toany Company Employee Plan. There are no actions, suits or claims pending or, to the Knowledge of the Company, threatened (otherthan routine claims for benefits) against any Company Employee Plan or against the assets of any Company Employee Plan. EachCompany Employee Plan can be amended, terminated or otherwise discontinued after the Effective Time in accordance with its terms,without liability to Parent, the Company or any ERISA Affiliate (other than ordinary administration expenses and contributionsrelating to services performed before such amendment, termination or discontinuance). There are no audits, inquiries or proceedingspending or, to the Knowledge of the Company or any officers of any ERISA Affiliates, threatened by the IRS, DOL, or any otherGovernmental Entity with respect to any Company Employee Plan. Neither the Company nor any ERISA Affiliate is subject to anypenalty or Tax with respect to any Company Employee Plan under Section 502(i) of ERISA or Sections 4975 through 4980 of theCode. The Company has timely made all contributions and other payments required by and due under the terms of each CompanyEmployee Plan. Each “nonqualified deferred compensation plan” (as defined in Section 409A(d)(1) of the Code) has been operatedsince January 1, 2005 in good faith compliance with Section 409A of the Code and IRS Notice 2005-1. No nonqualified deferredcompensation plan has been “materially modified” (within the meaning of IRS Notice 2005-1) at any time after October 3, 2004.

(e) No Pension Plan. Neither the Company nor any ERISA Affiliate has ever maintained, established, sponsored,participated in, or contributed to, any Pension Plan subject to Part 3 of Subtitle B of Title I of ERISA, Title IV of ERISA orSection 412 of the Code.

(f) No Self-Insured Plan. Neither the Company nor any ERISA Affiliate has ever maintained, established, sponsored,participated in or contributed to any self-insured plan that provides medical, dental or any other similar employee benefits toemployees (including any such plan pursuant to which a stop-loss policy or contract applies).

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(g) Collectively Bargained, Multiemployer and Multiple-Employer Plan. At no time has the Company or any ERISAAffiliate contributed to or been obligated to contribute to any multiemployer plan (as defined in Section 3(37) of ERISA). Neither theCompany nor any ERISA Affiliate has at any time ever maintained, established, sponsored, participated in or contributed to anymultiple employer plan or to any plan described in Section 413 of the Code.

(h) No Post-Employment Obligations. No Company Employee Plan or Employee Agreement provides, or reflects orrepresents any liability to provide, post-termination or retiree life insurance, health or other employee welfare benefits to any Personfor any reason, except as may be required by COBRA or other applicable statute, and neither the Company nor any Subsidiary hasever represented, promised or contracted (whether in oral or written form) to any Employee (either individually or to Employees as agroup) or any other Person that such Employee(s) or other Person would be provided with life insurance, health or other employeewelfare benefits, except to the extent required by statute.

(i) COBRA; FMLA; HIPAA. The Company and each ERISA Affiliate has, prior to the Effective Time, complied in allmaterial respects with COBRA, FMLA, HIPAA, the Women’s Health and Cancer Rights Act of 1998, the Newborns’ and Mothers’Health Protection Act of 1996, and any similar provisions of state law applicable to its Employees.

(j) Effect of Transaction. Neither the execution and delivery of this Agreement nor the consummation of the transactionscontemplated hereby or any termination of employment or service in connection therewith will (i) result in any payment (includingseverance, golden parachute, bonus or otherwise), becoming due to any Employee, (ii) result in any forgiveness of indebtedness,(iii) materially increase any benefits otherwise payable by the Company or any Subsidiary or (iv) result in the acceleration of the timeof payment or vesting of any such benefits except as required under Section 411(d)(3) of the Code.

(k) Parachute Payments. There is no agreement, plan, arrangement or other contract covering any Employee that, consideredindividually or considered collectively with any other such agreements, plans, arrangements or other contracts, will, or couldreasonably be expected to, give rise directly or indirectly to the payment of any amount that would be characterized as a “parachutepayment” within the meaning of Section 280G(b)(2) of the Code. There is no agreement, plan, arrangement or other contract by whichthe Company is bound to compensate any Employee for excise taxes paid pursuant to Section 4999 of the Code. Section 3.22(k) ofthe Company Disclosure Schedule lists all persons whom the Company reasonably believes are “disqualified individuals” (within themeaning of Section 280G of the Code and the regulations promulgated thereunder) as determined as of the date hereof.

(l) Employment Matters. The Company and each Subsidiary is in compliance in all material respects with all applicableforeign, federal, state and local laws, rules and regulations respecting employment, employment practices, terms and conditions ofemployment, employee safety and health and wages and hours, and in each case, with respect to Employees: (i) has withheld andreported all amounts required by law or by agreement to be withheld and reported with respect to wages, salaries and other paymentsto Employees, (ii) is not liable for any arrears of wages, severance pay or any Taxes or any penalty for failure to comply with any ofthe foregoing, and (iii) is not liable for any payment to any trust or other fund governed by or maintained by or on behalf of anygovernmental authority, with respect to unemployment compensation benefits, social security or other benefits or obligations forEmployees (other than routine payments to be made in the normal course of business and consistent with past practice). There are noactions, suits, claims or administrative matters pending or, to the Company’s Knowledge, threatened against the Company, anySubsidiary or any of their Employees relating to any Employee, Employee Agreement or Company Employee Plan. There are nopending or, to the Company’s Knowledge, threatened

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claims or actions against Company, any Subsidiary or any Company or Subsidiary trustee under any worker’s compensation policy orlong-term disability policy. The services provided by each of the Company’s and their ERISA Affiliates’ Employees is terminable atthe will of the Company and its ERISA Affiliates and any such termination would result in no liability to the Company or any ERISAAffiliate. Section 3.22(l) of the Company Disclosure Schedule lists all liabilities of the Company to any Employee that result from thetermination by the Company or Parent of such Employee’s employment or provision of services, a change of control of the Company,or a combination thereof. To the Knowledge of the Company, neither the Company nor any ERISA Affiliate has direct or indirectliability with respect to any misclassification of any Person as an independent contractor rather than as an employee, or with respect toany employee leased from another employer.

(m) Labor. No work stoppage or labor strike against the Company or any Subsidiary is pending or, to the Knowledge of theCompany, threatened. The Company has no Knowledge of any activities or proceedings of any labor union to organize anyEmployees. There are no actions, suits, claims, labor disputes or grievances pending or threatened or reasonably anticipated relating toany labor matters involving any Employee, including charges of unfair labor practices. Neither the Company nor any Subsidiary hasengaged in any unfair labor practices within the meaning of the National Labor Relations Act. Neither the Company nor anySubsidiary presently, nor have they in the past been, a party to, or bound by, any collective bargaining agreement or union contractwith respect to Employees and no collective bargaining agreement is being negotiated by the Company or any Subsidiary. Within thepast year, the Company has not incurred any liability or obligation under WARN or any similar state or local law that remainsunsatisfied, and no terminations prior to the Closing Date shall result in unsatisfied liability or obligation under WARN or any similarstate or local law.

(n) No Interference or Conflict. To the Knowledge of the Company, no stockholder, director, officer, Employee orconsultant of the Company or any Subsidiary is obligated under any contract or agreement, subject to any judgment, decree, or orderof any court or administrative agency that would interfere with such person’s efforts to promote the interests of the Company or anySubsidiary or that would interfere with the Company’s or any Subsidiary’s business. Neither the execution nor delivery of thisAgreement, nor the carrying on of the Company’s or any Subsidiary’s business as presently conducted or proposed to be conductednor any activity of such officers, directors, Employees or consultants in connection with the carrying on of the Company’s or anySubsidiary’s business or businesses as presently conducted or currently proposed to be conducted will, to the Knowledge of theCompany, conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract oragreement under which any of such officers, directors, Employees, or consultants is now bound.

(o) International Employee Plan. Neither the Company nor any ERISA Affiliate currently or has it ever had the obligation tomaintain, establish, sponsor, participate in, be bound by or contribute to any International Employee Plan.

(p) Employee Compensation, Status and Performance Matters. Section 3.22(p) of the Company Disclosure Schedulecontains a complete and accurate list of the employees of the Company as of the date hereof and shows with respect to each suchemployee (i) the employee’s name, position held, all remuneration payable and other benefits provided or which the Company isbound to provide (whether at present or in the future) to each such employee, or any person connected with any such person, andincludes, if any, particulars of all profit sharing, incentive and bonus arrangements to which the Company is a party, whether legallybinding or not, (ii) the date of hire, (iii) vacation eligibility for the current calendar year, (iv) leave status (including type of leave,expected return date for non-disability related leaves and expiration dates for disability leaves), (v) visa status, and (vi) the name ofany union, collective bargaining agreement or other similar labor agreement covering such employee.

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3.23 Insurance. Section 3.23 of the Company Disclosure Schedule contains a complete and accurate list of all insurance policiesand fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors of the Companyand each Subsidiary. There is no claim by the Company or any Subsidiary pending under any of such policies or bonds as to whichcoverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable underall such policies and bonds have been paid, and the Company, the Subsidiaries and their affiliates are otherwise in materialcompliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage).The Company has no Knowledge of threatened termination of, or premium increase with respect to, any of such policies.

3.24 Compliance with Laws. Except as disclosed in Section 3.24 of the Company Disclosure Schedule, the Company and eachSubsidiary has complied in all material respects with, is not in violation in any material respect of, and has not received any notices ofviolation with respect to, any foreign, federal, state or local statute, law or regulation.

3.25 Export Control Laws. Except as disclosed in Section 3.25 of the Company Disclosure Schedule, the Company and eachSubsidiary has at all times conducted its export transactions in material compliance with (i) all applicable U.S. export and reexportcontrols, including the United States Export Administration Act and Regulations and Foreign Assets Control Regulations and (ii) allother applicable import/export controls in other countries in which the Company conducts business. Without limiting the foregoing:

(a) Except as disclosed in Section 3.25(a) of the Company Disclosure Schedule, the Company and each Subsidiary hasobtained all material export licenses, license exceptions and other consents, notices, waivers, approvals, orders, authorizations,registrations, declarations and filings with any Governmental Entity required for (i) the export and reexport of products, services,software and technologies and (ii) releases of technologies and software to foreign nationals located in the United States and abroad(“Export Approvals”);

(b) The Company and each Subsidiary is in material compliance with the terms of all applicable Export Approvals;

(c) There are no pending or, to the Knowledge of the Company, threatened claims against the Company or any Subsidiarywith respect to such Export Approvals; and

(d) No Export Approvals for the transfer of export licenses to Parent or the Surviving Corporation are required, or suchExport Approvals can be obtained expeditiously without material cost.

3.26 Customers and Suppliers.

(a) Section 3.26(a) of the Company Disclosure Schedule lists each Person (other than the Company or its Subsidiaries) thathas purchased or licensed either broadcast automation system Products from or on behalf of the Company or any Subsidiary or hasentered into a RevenueSuite Agreement with the Company or any Subsidiary (the “Customers”), and (ii) for each Customer, theProduct so purchased or licensed, indicating (A) which of such Customers have purchased or licensed the Company’s (or itsSubsidiaries’) broadcast programming automation systems (each such Customer, a “Programming Automation Customer”) andidentifying, for each Programming Automation Customer, the names of the radio station(s) (including call letters) that use suchbroadcast programming automation system (each such radio station, a “Covered Radio Station”) and the aggregate number of suchCovered Radio Stations and (B) which of such Customers have entered into RevenueSuite Agreements (each such Customer, a“RevenueSuite Customer”) and identifying the Covered Radio Stations that are parties to or are covered by each such RevenueSuiteAgreement.

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(b) Section 3.26(b) of the Company Disclosure Schedule lists the 15 largest suppliers of the Company and its Subsidiarieson the basis of cost of goods or services purchased for the 12-month period ending on the Current Balance Sheet Date.

(c) To the Company’s Knowledge, the Covered Ratio Stations that are covered by the Programming Automation Customersidentified in Section 3.26(a) of the Company Disclosure Schedule represent approximately [***] of the total U.S. commercial radioinstallations for which the Company has information on the use of radio automation software. Except as disclosed in Section 3.26(c)of the Company Disclosure Schedule, RevenueSuite Customers representing no more than ten percent (10%) of the Covered RadioStations have (i) ceased or significantly reduced their business with the Company, or threatened to cease or significantly reduce theirbusiness with the Company or (ii) to the Knowledge of the Company, been threatened with bankruptcy or insolvency.

(d) Except as disclosed in Section 3.26(d) of the Company Disclosure Schedule, none of the suppliers listed inSection 3.26(b) of the Company Disclosure Schedule has (i) ceased or reduced, in any material respect, its sales or provision ofservices to the Company or any Subsidiary, (ii) to the Knowledge of the Company, threatened to cease or materially reduce such salesor provision of services or (iii) to the Knowledge of the Company, been threatened with bankruptcy or insolvency.

3.27 Complete Copies of Materials. Each document (or summaries of same) that has been made available to Parent or its counsel,including all Contracts and other documents listed on the Company Disclosure Schedule, is true, correct and complete. The phrase“made available to Parent” when used herein shall be deemed to mean that such information has been delivered to Parent in anunrestricted and unredacted form in the online data room located at http://sp.dmarc.net/sites/google/default.aspx.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB

Each of Parent and Sub hereby represents and warrants to the Company, subject to such exceptions as are specifically disclosedin the disclosure schedule (referencing the appropriate section and subsection numbers) supplied by Parent to the Company (the“Parent Disclosure Schedule”) and dated as of the date hereof, (A) on the date hereof and, (B) if the Closing occurs, as of theClosing Date (except where a representation or warranty is made as of the date hereof or a specific date herein), as though made onthe Closing Date, as set forth below. Notwithstanding anything herein to the contrary, the representations and warranties contained inthis Article IV are the only representations and warranties being made by Parent and Sub in this Agreement.

4.1 Organization. Parent is a corporation duly incorporated, validly existing and in good standing under the laws of the state ofDelaware, and Sub is a corporation duly incorporated, validly existing and in good standing under the laws of the state of Delaware.Each of Parent and Sub has the corporate power to own its properties and to carry on its business as currently conducted and toconduct the Business.

4.2 Authority. Each of Parent and Sub has all requisite corporate power and authority to enter into this Agreement and anyRelated Agreements to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution anddelivery by each of Parent and Sub of this Agreement and any Related Agreements to which it is a party and the consummation of thetransactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of Parent andSub,


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and no further action is required on the part of Parent and Sub to authorize this Agreement and any Related Agreements to which it isa party and the transactions contemplated hereby and thereby. This Agreement and any Related Agreements to which Parent and Subare parties have been duly executed and delivered by Parent and Sub and, assuming the due authorization, execution and delivery bythe other parties hereto and thereto constitute the valid and binding obligations of Parent and Sub, enforceable against each of Parentand Sub in accordance with their terms.

4.3 No Conflict. The execution and delivery by Parent and Sub of this Agreement and any Related Agreement to which Parent orSub is a party, and the consummation of the transactions contemplated hereby or thereby, will not result in or give rise to a Conflictunder (a) any provision of Parent’s certificate of incorporation, as amended to date, and bylaws, as amended to date (the “ParentCharter Documents”) or (b) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Parent or Sub orany of their properties or assets (whether tangible or intangible). Neither the Parent Charter Documents nor any material Contract towhich Parent or Sub is a party or to which any of their properties or assets (whether tangible or intangible) are bound prohibits orprevents the consummation of the Merger or Parent’s ability to conduct the Business.

4.4 Consents. No consent, notice, waiver, approval, order or authorization of, or registration, declaration or filing with, anyGovernmental Entity, or a party to any material Contract to which Parent or Sub is a party (so as not to trigger any Conflict) isrequired by or with respect to Parent or Sub in connection with the execution and delivery of this Agreement and any RelatedAgreements to which Parent or Sub is a party or Parent and Sub’s consummation of the Merger and the transactions contemplatedhereby and thereby, except for (a) such consents, notices, waivers, approvals, orders, authorizations, registrations, declarations andfilings as may be required under applicable securities laws, (b) the filing of the Certificate of Merger with the Secretary of State of theState of Delaware and (c) the filing of notification, and expiration or early termination of the waiting period under, the HSR Act, aswell as any required approval under foreign antitrust laws, if applicable.

4.5 Litigation. Except as set forth in Section 4.5 of the Parent Disclosure Schedule, (a) there is no action, suit, claim orproceeding of any nature pending against Parent, Sub, their properties (tangible or intangible) or any of their officers or directors (insuch capacity), that would, either individually or in the aggregate, have a material adverse effect on the ability of Parent or Sub toconsummate the Merger and the transactions contemplated hereby or prohibit or prevent Parent from conducting the Business or (b) tothe Knowledge of Parent and Sub, there is no action, suit, claim or proceeding of any nature threatened against Parent, Sub, theirproperties (tangible or intangible) or any of their officers or directors (in such capacity), that would, either individually or in theaggregate, have a material adverse effect on the ability of Parent or Sub to consummate the Merger and the transactions contemplatedhereby. To the Knowledge of Parent or Sub, there is no investigation pending or threatened against Parent, Sub, their properties(tangible or intangible) or any of their officers or directors (in such capacity) by or before any Governmental Entity, that would, eitherindividually or in the aggregate, prohibit or prevent (a) the consummation of the Merger or (b) Parent from conducting the Business.

ARTICLE V

CONDUCT PRIOR TO THE EFFECTIVE TIME

5.1 Conduct of Business of the Company and the Subsidiaries. During the period from the date of this Agreement and continuinguntil the earlier of the termination of this Agreement or the Effective Time, the Company and each Subsidiary agree to usecommercially reasonable efforts to operate the business of the Company and each Subsidiary, except (i) as specifically disclosed inSection 5.1 of the Company Disclosure

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Schedule, (ii) with the prior written consent of Parent or (iii) as specifically contemplated by this Agreement, in the ordinary courseconsistent with past practices, to pay their respective debts and Taxes when due (subject to the right of Parent to review and approveany Tax Returns in accordance with this Agreement), to pay or perform other obligations when due, and, to the extent consistenttherewith, to preserve intact their respective present business organizations, keep available the services of their respective presentofficers and Employees, preserve their respective assets and technology and preserve their respective relationships with customers,suppliers, distributors, licensors, licensees, and others having business dealings with them, all with the goal of preserving unimpairedthe goodwill and ongoing businesses of the Company and each Subsidiary at the Effective Time, except as specifically disclosed inSection 5.1 of the Company Disclosure Schedule. Without limiting the generality of the foregoing, except (i) as expresslycontemplated by this Agreement, (ii) as expressly set forth in Section 5.1 of the Company Disclosure Schedule, or (iii) with the priorwritten consent of Parent, neither the Company nor any of its Subsidiaries shall from and after the date of this Agreement:

(a) other than in the ordinary course of business consistent with past practices, undertake any expenditure, transaction orcommitment exceeding $15,000 individually or $50,000 in the aggregate;

(b) other than pursuant to Standard Form Agreements, sell, lease, license or otherwise dispose of any of their respectiveproperties or assets, including the sale of any accounts receivable, except properties or assets (whether tangible or intangible) whichare not Intellectual Property and only in the ordinary course of business and consistent with past practices; grant or otherwise create orconsent to the creation of any easement, covenant, restriction, assessment or charge affecting any owned property or leased propertyor any part thereof; or convey, assign, sublease, license or otherwise transfer all or any portion of any owned property or leasedproperty or any interest or rights therein;

(c) (i) other than pursuant to Standard Form Agreements, sell, license or transfer to any Person any Company IntellectualProperty Right or enter into any Contract with respect to any Company Intellectual Property with any Person or with respect to anyIntellectual Property Rights of any Person, (ii) buy or license any Intellectual Property Rights or enter into any Contract with respectto the Intellectual Property Rights of any Person, or (iii) enter into any Contract with respect to the development of any IntellectualProperty Rights with a third party;

(d) other than in the ordinary course of business consistent with past practices, propose or consent to change or changepricing or royalties charged by the Company or any Subsidiary to customers or licensees, or the pricing or royalties set or charged bypersons who have licensed Intellectual Property Rights to the Company or an Subsidiary;

(e) terminate or extend, or amend, waive, modify, or violate the terms of, any Material Contract disclosed on the CompanyDisclosure Schedule (or agree to do so), or, other than Standard Form Agreements, enter into any Contract which would have beenrequired to have been disclosed in Section 3.15(a) of the Company Disclosure Schedule had such Contract been entered into prior tothe date hereof;

(f) engage in or enter into any transaction or commitment, or relinquish any material right, outside the ordinary course ofbusiness and consistent with past practice;

(g) enter into or amend, waive or modify the terms of any Contract pursuant to which any other party is granted marketing,distribution, development or similar rights of any type or scope with respect to any Products or technology of the Company or anySubsidiary;

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(h) other than as required by law, judicial order or decree, commence or settle any lawsuit, threat of any lawsuit orproceeding or other investigation by or against the Company or any Subsidiary or relating to any of their businesses, properties orassets;

(i) declare, set aside, or pay any dividends on or make any other distributions (whether in cash, stock or property) in respectof any Company Capital Stock or capital stock of any Subsidiary, or split, combine or reclassify any Company Capital Stock or capitalstock of any Subsidiary or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for suchshares, or repurchase, redeem or otherwise acquire, directly or indirectly, any such shares (or options, warrants or other rightsexercisable therefor), except in accordance with the agreements evidencing Company Options or Company Warrants;

(j) other than Company Capital Stock issued upon the exercise of Company Options granted under the Plans and CompanyWarrants (to the extent disclosed in Section 3.2(c) of the Company Disclosure Schedule) in accordance with their terms, issue, grant,deliver or sell or authorize or propose the issuance, grant, delivery or sale of, or purchase or propose the purchase of, any shares ofCompany Capital Stock or capital stock of any Subsidiary or any securities convertible into, or subscriptions, rights, warrants oroptions to acquire, or other agreements or commitments of any character obligating it to issue or purchase any such shares or otherconvertible securities;

(k) cause or permit any amendments to the Charter Documents or Subsidiary Organizational Documents;

(l) acquire or agree to acquire by merging or consolidating with, or by purchasing any assets or equity securities of, or byany other manner, any business or any corporation, partnership, association or other business organization or division thereof, orotherwise acquire or agree to acquire any assets or equity securities which are material, individually or in the aggregate, to thebusinesses of the Company or any Subsidiary;

(m) enter into any agreement to purchase or sell any interest in real property, grant any security interest in any real property,enter into any lease, sublease, license or other occupancy agreement with respect to any real property or alter, amend, modify orterminate any of the terms of any Lease Agreements;

(n) incur any indebtedness or guarantee any indebtedness or issue or sell any debt securities or guarantee any debt securitiesor other obligations of others;

(o) grant any loans to others or purchase debt securities of others or amend the terms of any outstanding loan agreement;

(p) grant any severance or termination pay (in cash or otherwise) to any Employee, including any officer, except paymentsmade pursuant to standard written agreements outstanding on the date hereof and disclosed in the Company Disclosure Schedule;

(q) adopt or amend any Company Employee Plan (including the Cash Bonus Plan), enter into any employment contract, payor agree to pay any special bonus or special remuneration to any director or Employee of the Company or any Subsidiary, or increaseor agree to increase the salaries, wage rates, or other compensation or benefits of any Employees, except payments made pursuant tostandard written agreements outstanding on the date hereof and disclosed in the Company Disclosure Schedule;

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(r) take any action to accelerate (either partially or fully) the vesting or exercisability of any Company Options or thevesting or of any Company Capital Stock;

(s) revalue any of its assets (whether tangible or intangible), including without limitation writing off notes or accountsreceivable, settle, discount or compromise any accounts receivable, or reverse any reserves other than in the ordinary course ofbusiness and consistent with past practice;

(t) pay, discharge or satisfy, in an amount in excess of $15,000 in any one case, or $50,000 in the aggregate, any claim,liability, loan or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge orsatisfaction in the ordinary course of business of liabilities reflected or reserved against in the Current Balance Sheet;

(u) make or change any material election in respect of Taxes, adopt or change any accounting method in respect of Taxes,enter into any closing agreement, settle any claim or assessment in respect of Taxes, consent to any extension or waiver of thelimitation period applicable to any claim or assessment in respect of Taxes, or file any material Tax Return (including any amendedTax Return), unless such Tax Return has been provided to Parent for review within a reasonable period prior to the due date for filingand Parent has consented to such filing;

(v) other than Standard Form Agreements, enter into any licensing, distribution, joint venture, strategic alliance or jointmarketing or any similar arrangement or agreement;

(w) hire, offer to hire or terminate any Employees, or encourage any Employees to resign from the Company or anySubsidiary;

(x) adopt or change the accounting policies or procedures of the Company or any Subsidiary, including with respect toreserves for doubtful accounts, or payment or collection policies or practices; or

(y) take, commit or agree in writing or otherwise to take, any of the actions described in Sections 5.1(a) throughSection 5.1(x), inclusive, or any other action that would (i) prevent the Company or any Subsidiary from performing, or cause theCompany or any Subsidiary not to perform, its covenants hereunder in any material respect, or (ii) cause or result in any of itsrepresentations and warranties contained herein being untrue or incorrect in any material respect (without giving effect to anylimitation as to “materiality” set forth therein).

5.2 No Solicitation.

(a) Until the earlier of (i) the Effective Time, or (ii) the date of termination of this Agreement pursuant to the provisions ofSection 9.1 hereof, neither the Company nor any of the Company’s affiliates shall (nor shall the Company permit any of its officers,directors, employees, stockholders, agents, representatives or affiliates to), directly or indirectly, take any of the following actionswith any party other than Parent and its designees: (a) solicit, encourage, seek, entertain, support, assist, initiate or participate in anyinquiry, negotiations or discussions, or enter into any agreement, with respect to any offer or proposal to acquire all or any materialpart of the business, properties or technologies of the Company or any of its Subsidiary, or any amount of the Company Capital Stockor capital stock of any Subsidiary (whether or not outstanding), whether by merger, purchase of assets, purchase of Company CapitalStock (except for the conversion of Preferred Stock as contemplated herein), tender offer, license or otherwise, or effect any suchtransaction, (b) disclose any information not customarily disclosed to any Person concerning the business, technologies or propertiesof the Company or any of its Subsidiaries, or afford to any Person access to their respective properties, technologies, books or records,not customarily

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afforded such access, (c) assist or cooperate with any Person to make any proposal to purchase all or any part of the Company CapitalStock or assets of the Company or any Subsidiary, or (d) enter into any agreement with any Person providing for the acquisition of theCompany or any Subsidiary (other than inventory in the ordinary course of business), whether by merger, purchase of assets, purchaseof Company Capital Stock (except for the conversion of Preferred Stock as contemplated herein), license, tender offer or otherwise. Inthe event that the Company or any of the Company’s affiliates shall receive, prior to the Effective Time or the termination of thisAgreement in accordance with Section 9.1 hereof, any offer, proposal, or request, directly or indirectly, of the type referenced inclause (a), (c) or (d) above, or any request for disclosure or access as referenced in clause (b) above, the Company shall immediately(x) suspend any discussions with such offeror or party with regard to such offers, proposals, or requests and (y) notify Parent thereof,including information as to the identity of the offeror or the party making any such offer or proposal and the specific terms of suchoffer or proposal, as the case may be, and such other information related thereto as Parent may reasonably request.

(b) The parties hereto agree that irreparable damage would occur in the event that the provisions of this Section 5.2 were notperformed in accordance with their specific terms or were otherwise breached. It is accordingly agreed by the parties hereto thatParent shall be entitled to an immediate injunction or injunctions, without the necessity of proving the inadequacy of money damagesas a remedy and without the necessity of posting any bond or other security, to prevent breaches of the provisions of this Section 5.2and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this beingin addition to any other remedy to which Parent may be entitled at law or in equity. Without limiting the foregoing, it is understoodthat any violation of the restrictions set forth above by any officer, director, agent, representative or affiliate of the Company or anySubsidiary shall be deemed to be a breach of this Agreement by the Company.

5.3 Procedures for Requesting Parent Consent. If the Company desires to take an action which would be prohibited pursuant toSection 5.1 hereof without the written consent of Parent, prior to taking such action, the Company shall request such written consentby sending an e-mail or facsimile to each of the following individuals, each of whom shall use commercially reasonable efforts toreply within five (5) Business Days to such request for written consent (it being understood that the written consent of only one suchindividual shall be required prior to the Company taking such action):

[***]


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ARTICLE VI

ADDITIONAL AGREEMENTS

6.1 Company Stockholder Approval.

(a) Immediately following the execution of this Agreement, the Company shall deliver to Parent a true, correct and completecopy of the Written Consent, evidencing the adoption by the Requisite Stockholder Vote of the Merger, this Agreement and thetransactions contemplated hereby, including (i) the deposit of the Escrow Amounts into the Escrow Fund, (ii) the right of theIndemnified Parties to setoff the amount of any Losses with respect to which the Indemnified Parties are entitled to indemnificationagainst any Contingent Payments that have not been paid as of the Claim Date and (iii) the appointment of the StockholderRepresentative as the agent and attorney-in-fact for the Stockholders, having the powers and rights to limited liability andindemnification set forth herein. The Company shall have also obtained and delivered to Parent a Proxy and SecurityholderAgreement from each of the Stockholders listed on Schedule 6.1(a).

(b) The Company shall promptly, but in no event later than 10 Business Days after the date hereof deliver notice to itsStockholders who have not executed the Written Consent of the adoption by Written Consent of this Agreement, the Merger and thetransactions contemplated hereby, including each of the matters set forth in Section 6.1(a) hereof, pursuant to and in accordance withthe applicable provisions of Delaware Law and the Charter Documents.

(c) The board of directors of the Company shall not withdraw, alter, modify, change or revoke (i) its recommendation to theStockholders to vote in favor of this Agreement, the Merger and the transactions contemplated hereby (the “BoardRecommendation”) nor (ii) its approval of this Agreement, the Merger and the transactions contemplated hereby; provided, however,that the board of directors of the Company may change its Board Recommendation if the board of directors reasonably concludes ingood faith, after receipt of advice from outside legal counsel, that the failure of the board of directors to change such BoardRecommendation would result in a breach of its fiduciary obligations to the Stockholders of the Company under applicable law.

(d) Immediately following the execution of this Agreement, the Company shall submit to the Stockholders for approval (in amanner satisfactory to Parent) by such number of Stockholders as is required by the terms of Section 280G(b)(5)(B) of the Code, anypayments and/or benefits that Parent determines may separately or in the aggregate, constitute “parachute payments” (within themeaning of Section 280G of the Code and the regulations promulgated thereunder), such that such payments and benefits shall not bedeemed to be “parachute payments” under Section 280G of the Code, and prior to the Effective Time the Company shall deliver toParent evidence satisfactory to Parent (i) that a Stockholder vote was solicited in conformance with Section 280G and the regulationspromulgated thereunder and the requisite Stockholder approval was obtained with respect to any payments and/or benefits that weresubject to the Stockholder vote (the “280G Approval”), or (ii) that the 280G Approval was not obtained and as a consequence, thatsuch “parachute payments” shall not be made or provided, pursuant to the waivers of those payments and/or benefits which wereexecuted by the affected individuals on the date of this Agreement.

6.2 Access to Information. The Company shall afford Parent and its accountants, counsel and other representatives, reasonableaccess during the period from the date hereof and prior to the Effective Time to (i) all of the properties, books, contracts,commitments and records of the Company, including all design processes, methodologies and source code with respect to theCompany Intellectual Property, (ii) all other information concerning the business, properties and personnel (subject to restrictionsimposed by applicable law) of the Company and its Subsidiaries as Parent may reasonably request, and (iii) all Employees of theCompany and its Subsidiaries as identified by Parent. The Company agrees to provide to Parent and its accountants, counsel and otherrepresentatives copies of internal financial statements (including Tax Returns and supporting documentation) promptly upon request.No information or knowledge obtained in any investigation pursuant to this Section 6.2 or otherwise shall affect or be deemed tomodify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Mergerin accordance with the terms and provisions hereof.

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6.3 Confidentiality. Each of the parties hereto hereby agrees that the information obtained in any investigation pursuant toSection 6.2 hereof, or pursuant to the negotiation and execution of this Agreement or the effectuation of the transactions contemplatedhereby, shall be governed by the terms of the Non-Disclosure Agreement. In this regard, the Company acknowledges that Parent’sClass A Common Stock is publicly traded and that any information obtained during the course of its due diligence could beconsidered to be material non-public information within the meaning of federal and state securities laws. Accordingly, the Companyacknowledges and agrees not to engage in any discussions, correspondence or transactions in Parent’s Class A Common Stock inviolation of applicable securities laws.

6.4 Public Disclosure. Except as provided in Section 6.1, neither the Company nor any of its representatives shall issue anystatement or communication to any third party (other than to its agents that are bound by confidentiality restrictions and toStockholders and holders of Company Options and Bonus Units) regarding the subject matter of this Agreement or the transactionscontemplated hereby, including, if applicable, the termination of this Agreement and the reasons therefor, without the consent ofParent. Until the earlier of (a) the Effective Time or (b) the date of termination of this Agreement pursuant to the provisions ofSection 9.1 hereof, Parent shall not issue any statement or communication to any third party (other than its agents that are bound byconfidentiality restrictions) regarding the subject matter of this Agreement or the transactions contemplated hereby, including, ifapplicable, the termination of this Agreement and the reasons therefor, without the consent of the Company (which shall not beunreasonably withheld or delayed), except that this restriction shall be subject to Parent’s obligation to comply with applicablesecurities laws and the rules of The Nasdaq Stock Market.

6.5 Reasonable Efforts. Subject to the terms and conditions provided in this Agreement, each of the parties hereto shall usecommercially reasonable efforts to take promptly, or cause to be taken promptly, all actions, and to do promptly, or cause to be donepromptly, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective thetransactions contemplated hereby, to cause all conditions to the obligations of the other parties hereto to effect the Merger to occur, toobtain all necessary waivers, consents, approvals and other documents required to be delivered hereunder and to effect all necessaryregistrations and filings and to remove any injunctions or other impediments or delays, legal or otherwise, in order to consummate andmake effective the transactions contemplated by this Agreement for the purpose of securing to the parties hereto the benefitscontemplated by this Agreement; provided, however, that no party shall be required to agree to (a) any license, sale or otherdisposition or holding separate (through establishment of a trust or otherwise) of any shares of capital stock or of any business, assetsor properties of Parent, its subsidiaries or affiliates or of the Company, (b) the imposition of any limitation on the ability of Parent, itssubsidiaries or affiliates or the Company to conduct their respective businesses or own any capital stock or assets or to acquire, holdor exercise full rights of ownership of their respective businesses and, in the case of Parent, the businesses of the Company, or (c) theimposition of any impediment on Parent, its subsidiaries or affiliates or the Company under any statute, rule, regulation, executiveorder, decree, order or other legal restraint governing competition, monopolies or restrictive trade practices (any such action describedin (a), (b) or (c), an “Action of Divestiture”). Nothing herein shall require any party to litigate with any Governmental Entity.

6.6 Notification of Certain Matters. During the period from the date of this Agreement and continuing until the earlier of thetermination of this Agreement or the Effective Time, the Company or Parent, as the case may be, shall give prompt notice to theothers of the occurrence or non-occurrence of any event, the occurrence or non-occurrence of which is reasonably likely to cause(a) any of their respective representations or warranties contained in this Agreement to be untrue or inaccurate at or prior to the

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Effective Time, (b) any failure of the Company or Parent, as the case may be, to comply with or satisfy any of their respectivecovenants, conditions or agreements or (c) any of their respective conditions set forth in Section 7.2 or Section 7.3, as the case maybe, to become incapable of being satisfied; provided, however, that the delivery of any notice pursuant to this Section 6.6 shall notlimit or otherwise affect any remedies available to the party receiving such notice. No disclosure by the Company or Parent pursuantto this Section 6.6 shall be deemed to amend or supplement their respective Disclosure Schedules or prevent or cure anymisrepresentation, breach of warranty or breach of covenant by such party.

6.7 Additional Documents and Further Assurances. Each party hereto, at the request of another party hereto, shall execute anddeliver such other instruments and do and perform such other acts and things as may be reasonably necessary or desirable foreffecting completely the consummation of the Merger and the transactions contemplated hereby.

6.8 Conversion of Preferred Stock. The Company shall use commercially reasonable efforts to cause each holder of CompanyPreferred Stock to convert all shares of Company Preferred Stock held by such holder to shares of Company Common Stock inaccordance with the Company’s Certificate of Incorporation prior to the Effective Time.

6.9 Treatment of Company Warrants. Subject to the review and approval of Parent (not to be unreasonably withheld), theCompany shall take all actions necessary to effect the provisions set forth in Section 1.6(c) under all Company Warrants and allCompany Warrant agreements, including without limitation any necessary amendments to any Company Warrants and the delivery ofall required notices under such Company Warrants.

6.10 Amendment to Plans. Subject to the review and approval of Parent (not to be unreasonably withheld), the Company shalltake all actions necessary to effect the provisions set forth in Section 1.6(c) under all Plans, all Company Option agreements and anyother plan or arrangement of the Company (whether written or oral, formal or informal), including without limitation any necessaryamendments to any Plans and the delivery of all required notices under such Plans.

6.11 Consents. At the request and direction of Parent, the Company shall use commercially reasonable efforts to obtain allnecessary consents, waivers and approvals of any parties to any Material Contract as are required thereunder in connection with theMerger or for any such Material Contracts to remain in full force and effect, all of which are required to be listed in Section 3.5 of theCompany Disclosure Schedule, so as to preserve all rights of, and benefits to, the Company under such Material Contract from andafter the Effective Time. Such consents, waivers and approvals shall be in a form reasonably acceptable to Parent.

6.12 Terminated Agreements. The Company shall use commercially reasonable efforts to cause each of the Contracts listed onSchedule 7.2(k) hereto (the “Terminated Agreements”) to be terminated, effective as of and contingent upon the Closing, includingsending all required notices, such that each such Contract shall be of no further force or effect immediately following the EffectiveTime. Upon the Closing, the Company shall have paid all amounts owed under the Terminated Agreements (as a result of thetermination of the Terminated Agreements or otherwise), and the Surviving Corporation will not incur any claim, liability orobligation (absolute, accrued, asserted or unasserted, contingent or otherwise) under any Terminated Agreement following the ClosingDate. The Company shall be responsible for making any payments required to terminate the Terminated Agreements. In the event theMerger does not close for any reason (other than pursuant to Sections 9.1(b) (if Parent is in breach) or 9.1(f)), Parent shall not haveany liability to the Company, the Stockholders or any other Person for any costs, claims, liabilities or damages resulting from theCompany seeking to obtain such terminations.

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6.13 Modified Agreements. The Company shall use commercially reasonable efforts to modify each of the agreements listed onSchedule 7.2(l) (the “Modified Agreements”) hereto in the manner set forth on Schedule 7.2(l) hereto effective as of and contingentupon the Closing, so that the required modifications are in effect immediately following the Effective Time. The Company shall beresponsible for making any payments required in connection with the Modified Agreements.

6.14 Notices. The Company shall send each of the notices set forth on Schedule 7.2(m) (the “Notices”) hereto promptlyfollowing the date hereof. The Company shall be responsible for making any payments required in connection with the Notices.

6.15 Proprietary Information and Inventions Assignment Agreement. The Company shall use commercially reasonable efforts tocause each current employee of the Company and its Subsidiaries and each former employee of the Company and its Subsidiaries whois listed on Schedule 7.2(n) hereto, to have entered into and executed, and each person who becomes an employee of the Company orany Subsidiary after the date hereof and prior to the Closing shall be required by the Company to enter into and execute, an EmployeeProprietary Information Agreement with the Company and each of its Subsidiaries effective as of such employee’s first date ofemployment or service. The Company shall use commercially reasonable efforts to cause each current consultant or contractor of theCompany and its Subsidiaries, and each former consultant or contractor of the Company and its Subsidiaries who is listed onSchedule 7.2(n) hereto, to have entered into and executed, and each Person who becomes a consultant or contractor of the Companyor any Subsidiary after the date hereof and prior to the Closing shall be required by the Company to enter into and execute, aConsultant Proprietary Information Agreement with the Company and each of its Subsidiaries effective as of such consultant orcontractor’s first date of service.

6.16 New Employment Arrangements.

(a) Parent may offer certain Employees, including the Key Employees, “at-will” employment by Parent and/or the SurvivingCorporation, to be effective as of the Closing Date, upon proof of a legal right to work in the United States. Such “at-will”employment will: (i) be set forth in offer letters on Parent’s standard form (each, an “Offer Letter”), (ii) be subject to and incompliance with Parent’s applicable policies and procedures, including employment background checks and the execution of Parent’semployee proprietary information agreement, governing employment conduct and performance, (iii) have terms, including theposition and salary, which will be determined by Parent, (iv) include, if applicable, a waiver by the Employee of any future equity-based compensation to which such Employee may otherwise have been entitled, (v) include, if applicable, a valid release by certainEmployees and (vi) supersede any prior express or implied employment agreements, arrangement or offer letter in effect prior to theClosing Date.

(b) Subsequent to the execution of this Agreement, the Company shall use commercially reasonable efforts to cause eachKey Employee to sign an Offer Letter and to cause such Offer Letter to remain in full force and effect through the Closing Date.

6.17 Agreements and Documents Delivered at Signing. The Company shall use commercially reasonable efforts to cause eachagreement and document that was executed by any Person and delivered to Parent prior to or concurrent with the execution of thisAgreement, including the Non-Disclosure Agreement, each Securityholder Agreement and each Proxy, to remain in full force andeffect through the Closing Date.

6.18 Non-Competition Agreements. The Company shall use commercially reasonable efforts to cause the individuals listed onSchedule 7.2(p) to execute and deliver to Parent a Non-Competition Agreement in substantially the form attached hereto asExhibit G (the “Non-Competition Agreements”).

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6.19 Resignation of Officers and Directors. The Company shall cause each officer and director of the Company and itsSubsidiaries to execute a resignation letter in the form attached hereto as Exhibit H (the “Director and Officer ResignationLetter”), effective as of the Effective Time.

6.20 Releases of Officers. The Company shall cause each officer of the Company and its Subsidiaries to execute a release in theform attached hereto Exhibit I (the “Officer Release Letter”), effective as of the Effective Time.

6.21 Termination of 401(k) Plan. Effective as of no later than the day immediately preceding the Closing Date, each of theCompany and any ERISA Affiliate shall terminate any and all Company Employee Plans intended to include a Code Section 401(k)arrangement (each, a “401(k) Plan”) (unless Parent provides written notice to the Company that such 401(k) plans shall not beterminated). Unless Parent provides such written notice to the Company, no later than five Business Days prior to the Closing Date,the Company shall provide Parent with evidence that such Company Employee Plan(s) have been terminated (effective as of no laterthan the day immediately preceding the Closing Date) pursuant to resolutions of the Board of Directors of the Company, or suchERISA Affiliate, as the case may be. The form and substance of such resolutions shall be subject to review and approval of Parent.The Company also shall take such other actions in furtherance of terminating such Company Employee Plan(s) as Parent mayreasonably require. In the event that termination of a 401(k) Plan would reasonably be anticipated to trigger liquidation charges,surrender charges or other fees then such charges and/or fees shall be included in Third Party Expenses and shall be the responsibilityof the Company, and the Company shall take such actions as are necessary to reasonably estimate the amount of such charges and/orfees and provide such estimate in writing to Parent no later than 15 calendar days prior to the Closing Date.

6.22 Expenses. Whether or not the Merger is consummated, all fees and expenses incurred in connection with the Mergerincluding all legal, accounting, financial advisory, consulting and all other fees and expenses of third parties incurred by a party inconnection with the negotiation and effectuation of the terms and conditions of this Agreement and the transactions contemplatedhereby, including, but not limited to, any payments made or anticipated to be made by the Company as a brokerage or finders’ fee,agents’ commission or any similar charge (“Third Party Expenses”), shall be the obligation of the respective party incurring suchfees and expenses; provided, however, that, if the Merger is consummated, Parent shall pay up to a maximum of the Third PartyExpense Cap in reasonable and documented Third Party Expenses incurred by the Company in connection with the negotiation andeffectuation of the terms and conditions of this Agreement and the transactions contemplated hereby. The Company shall provideParent with a statement of its estimated Third Party Expenses showing detail of both the paid and unpaid Third Party Expensesincurred by the Company as of the Closing Date not less than three Business Days prior to the Closing Date in form reasonablysatisfactory to Parent (the “Statement of Expenses”), and the Statement of Expenses shall be certified as true and correct in formacceptable to Parent as of the Closing Date by the Company’s Chief Financial Officer. The Statement of Expenses will reflect allThird Party Expenses incurred and expected to be incurred by the Company as a result of the negotiation and effectuation of thisAgreement and the transactions contemplated hereby (including any Third Party Expenses anticipated to be incurred after theClosing). Any Third Party Expenses incurred by the Company that are not reflected on the Statement of Expenses, and thus not part ofthe Third Party Expense Adjustment Amount (“Excess Third Party Expenses”), shall be paid out of the Escrow Amount and shallnot be subject to the Basket.

6.23 Spreadsheet. The Company shall deliver three Business Days prior to the Closing Date to Parent and the Exchange Agent aspreadsheet (the “Spreadsheet”) substantially in the form attached hereto as Schedule 6.23, which spreadsheet shall be certified ascomplete and correct by the Chief Executive Officer and Chief Financial Officer of the Company as of the Closing and which shallinclude, among other things, as of the Closing:

(a) all Stockholders and their respective addresses, the number of shares of Company Capital Stock held by suchStockholders (including the respective certificate numbers), the date of acquisition of such shares, such Stockholder’s Pro RataPortion, the amount of the Initial Merger Consideration to be paid to each Stockholder, the amount of the Launch Contingent Paymentthat may be paid to each Stockholder to the extent that such Launch Contingent Payment may be paid, the amount of cash to bedeposited into the Escrow Fund on behalf of each Stockholder in respect of the Initial Escrow Amount and the Additional EscrowAmount for the Launch Contingent Payment, if any, and such other information relevant thereto or which the Exchange Agent mayreasonably request;

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(b) all Warrantholders and their respective addresses, the number of shares of Company Capital Stock underlying theCompany Warrants held by such Warrantholders (including the respective certificate numbers, if applicable), the date of acquisitionof such Company Warrants, such Warrantholder’s Pro Rata Portion, the amount of the Initial Merger Consideration to be paid to eachWarrantholder, the amount of the Launch Contingent Payment that may be paid to each Warrantholder to the extent that such LaunchContingent Payment may be paid, the amount of cash to be deposited into the Escrow Fund on behalf of each Warrantholder in respectof the Initial Escrow Amount and the Additional Escrow Amount for the Launch Contingent Payment, if any, and such otherinformation relevant thereto or which the Exchange Agent may reasonably request; and

(c) all holders of Bonus Units and their respective addresses, the number of Bonus Units held by each holder (or to be heldby such holder immediately prior to the Effective Time), the grant dates of such Bonus Units, the vesting arrangement with respect tosuch Bonus Units and indicating, the Pro Rata Portion attributed to the Cash Bonus Plan, the amount of the Initial MergerConsideration to be paid or reserved for each holder of Bonus Units, the amount of the Launch Contingent Payment that may beallocated to the Cash Bonus Plan to the extent that such Launch Contingent Payment may be paid, the amount of cash to be depositedinto the Escrow Fund on behalf of the Cash Bonus Pool in respect of the Initial Escrow Amount and the Additional Escrow Amountfor the Launch Contingent Payment, if any, and such other information relevant thereto or which the Exchange Agent may reasonablyrequest.

6.24 Release of Liens. The Company shall file, or shall have filed, all agreements, instruments, certificates and other documents,in form and substance reasonably satisfactory to Parent, that are necessary or appropriate to effect the release of all Liens set forth inSchedule 7.2(u) hereto.

6.25 FIRPTA Compliance. On the Closing Date, the Company shall deliver to Parent a statement (a “FIRPTA ComplianceCertificate”) in a form reasonably acceptable to Parent to the effect that no interest in the Company is a U.S. real property interest.

6.26 Director and Officer Liability and Indemnification. For each person who is an officer of the Company or a member of theCompany’s Board of Directors immediately prior to the Effective Time (each, a “Company Indemnified Person”), Parent shall, andshall cause the Surviving Corporation to, fulfill and honor the obligations of the Company pursuant to any indemnification provisionsunder the Charter Documents as in effect on the date hereof or pursuant to the indemnification agreements listed in Section 6.26 ofthe Company Disclosure Schedule for a period of not less than six (6) years following the Effective Time; provided, however, that theobligations of Parent and the Surviving Corporation pursuant to this Section 6.26 (a) shall be subject to any limitation imposed byapplicable law, and (b) shall not be deemed to release any Company Indemnified Person or any affiliate of such CompanyIndemnified Person who is also an officer or director of the Company from his, her or its indemnity obligations under Article VIIIhereof, nor shall such Company Indemnified Person or any affiliate of such Company Indemnified Person have any right ofcontribution, indemnification or right of advancement from the Surviving Corporation or Parent with respect to any Loss claimed byany of the Indemnified Parties against such Company Indemnified Person or any affiliate of such Company Indemnified Person in his,her or its capacity as a Stockholder or Warrantholder pursuant to Article VIII hereof.

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ARTICLE VII

CONDITIONS TO THE MERGER

7.1 Conditions to Obligations of Each Party to Effect the Merger. The respective obligations of the Company, Parent and Sub toeffect the Merger shall be subject to the satisfaction or waiver, at or prior to the Effective Time, of the following conditions:

(a) No Order. No Governmental Entity shall have enacted, issued, promulgated, enforced or entered any statute, rule,regulation, executive order, decree, injunction, order or other legal restraint (whether temporary, preliminary or permanent) which isin effect and which has the effect of making the Merger illegal or otherwise prohibiting or preventing consummation of the Merger.

(b) No Injunctions; Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other orderissued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shallbe in effect, nor shall any proceeding brought by a Governmental Entity seeking any of the foregoing be threatened or pending.

(c) Regulatory Approvals/HSR Act. If applicable, all waiting periods under the HSR Act relating to the transactionscontemplated hereby will have expired or terminated early and all material foreign antitrust approvals required to be obtained prior tothe Merger in connection with the transactions contemplated hereby have been obtained.

7.2 Conditions to Obligations of Parent and Sub. The obligations of Parent and Sub to effect the Merger shall be subject to thesatisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, exclusivelyby Parent and Sub:

(a) Representations, Warranties and Covenants. (i) The representations and warranties of the Company in this Agreementthat are qualified by “materiality” (including “Material Adverse Effect”) or contain any other materiality exception or qualificationshall have been, or shall be (as the case may be), true and correct in all respects, and the representations and warranties of theCompany in this Agreement that are not so qualified shall have been, or shall be (as the case may be), true and correct in all materialrespects, in each case as of the date hereof and as of the Closing Date (other than the representations and warranties of the Companyas of a specified date, which shall have been, or shall be (as the case may be), true and correct as of such date), and (ii) the Companyshall have performed and complied in all material respects with all covenants and obligations under this Agreement required to beperformed and complied with by such parties as of the Closing.

(b) No Material Adverse Effect. There shall not have occurred any Material Adverse Effect with respect to the Companysince the Balance Sheet Date.

(c) Stockholder Approval. Stockholders constituting the Closing Stockholder Consent shall have approved this Agreement,the Certificate of Merger, the Merger, and the transactions contemplated hereby and thereby.

(d) 280G Stockholder Approval. With respect to any payments and/or benefits that Parent determines may constitute“parachute payments” under Section 280G of the Code with respect to any Employees, the Stockholders shall have (i) approved,pursuant to the method provided for in the regulations

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promulgated under Section 280G of the Code, any such “parachute payments” or (ii) shall have voted upon and disapproved suchparachute payments, and, as a consequence, such “parachute payments” shall not be paid or provided for in any manner and Parentand its subsidiaries shall not have any liabilities with respect to such “parachute payments.”

(e) Board Approval. This Agreement, the Merger and the transactions contemplated hereby shall have been unanimouslyapproved by the Board of Directors of the Company, which approval shall not have been revoked.

(f) Litigation. There shall be no action, suit, claim, order, injunction or proceeding of any nature pending, or overtlythreatened, against Parent or the Company, their respective properties or any of their respective officers, directors or subsidiariesarising out of, or in any way connected with, the Merger or the other transactions contemplated by the terms of this Agreementwherein an unfavorable judgment, decree or order would (i) prevent the performance of this Agreement or the consummation of anyof the transactions contemplated hereby, (ii) declare unlawful the transactions contemplated by this Agreement, (iii) cause suchtransactions to be rescinded or (iv) otherwise seeking any of the results set forth in Section 7.1(a) hereof.

(g) Conversion of Preferred Stock. Each share of Company Preferred Stock shall have been converted into shares ofCompany Common Stock in accordance with the Company’s Certificate of Incorporation.

(h) Treatment of Company Options. The Company shall have taken all necessary actions in accordance with Section 6.10hereof to provide for the cancellation of all Company Options outstanding prior to the Effective Date in exchange for the Bonus Unitsdescribed in Section 1.6(c) hereof.

(i) Exercise or Termination of Company Warrants. The Company shall have taken all necessary actions in accordance withSection 6.9 hereof to provide for the conversion of all Company Warrants that are outstanding prior to the Effective Date for theMerger Consideration described in Section 1.6(c) hereof, and each such Company Warrant shall have been either (i) converted by theholder(s) of such Company Warrants in accordance with Section 1.6(c) or (ii) to the extent not converted, terminated or canceled as ofimmediately prior to the Effective Time either pursuant to their own terms or pursuant to an agreement with the holder(s) thereof, andthe Company shall have delivered to Parent written evidence of such exercise, termination or cancellation.

(j) Third Party Consents. The Company shall have delivered to Parent all necessary consents, waivers and approvals ofparties to any Material Contract set forth on Schedule 7.2(j) hereto as are required thereunder in connection with the Merger, or forany such Contract to remain in full force and effect without limitation, modification or alteration after the Effective Time.

(k) Termination of Agreements. The Company shall have terminated each of those agreements listed on Schedule 7.2(k)hereto effective as of and contingent upon the Closing and, from and after the Closing, each such agreement shall be of no furtherforce or effect.

(l) Modification of Agreements. The Company shall have modified those agreements listed on Schedule 7.2(l) hereto in themanner set forth on Schedule 7.2(l) hereto effective as of and contingent upon the Closing.

(m) Notices for Agreements. The Company shall have sent the notices set forth on Schedule 7.2(m) hereto.

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(n) Proprietary Information and Inventions Assignment Agreement. The Company shall have provided evidence reasonablysatisfactory to Parent that as of the Closing each Person listed on Schedule 7.2(n) has entered into and executed an EmployeeProprietary Information Agreement or Consultant Proprietary Information Agreement, as applicable.

(o) New Employment Arrangements. Each Key Employee (i) shall have entered into “at-will” employment arrangementswith Parent and/or the Surviving Corporation pursuant to their execution of an Offer Letter which shall be in full force and effect,(ii) shall have agreed to be employees of Parent after the Closing, (iii) shall be employees of the Company immediately prior to theEffective Time and (iv) shall not have notified (whether formally or informally) Parent or the Company of such employee’s intentionof leaving the employ of Parent or the Company following the Effective Time; provided, however, that, other than Chad Steelberg andRyan Steelberg, the aggregate amount of salary and bonus described in the Offer Letter provided by Parent to such Key Employee isat least equal to such Key Employee’s salary with the Company as of the date hereof.

(p) Non-Competition Agreements. Each of the individuals listed on Schedule 7.2(p) shall have executed and delivered toParent at the Closing a Non-Competition Agreement.

(q) Resignation and Release of Officers and Directors. Parent shall have received a duly executed (i) Director and OfficerResignation Letter from each of the officers and directors of the Company and its Subsidiaries and (ii) Officer Release Letter fromeach of the officers of the Company and its Subsidiaries effective as of the Effective Time.

(r) Termination of 401(k) Plans. Unless Parent has explicitly instructed otherwise pursuant to Section 6.21 hereof, Parentshall have received from the Company evidence reasonably satisfactory to Parent that all 401(k) Plans have been terminated pursuantto resolution of the Board of Directors of the Company or the ERISA Affiliate, as the case may be, (the form and substance of whichshall have been subject to review and approval of Parent), effective as of no later than the day immediately preceding the ClosingDate, and Parent shall have received from the Company evidence of the taking of any and all further actions as provided inSection 6.21 hereof.

(s) Statement of Expenses. Parent shall have received from the Company the Statement of Expenses pursuant toSection 6.22 hereof three Business Days prior to the Closing Date, and such Statement of Expenses shall be certified as true andcorrect in form acceptable to Parent as of the Closing Date by the Company’s Chief Financial Officer.

(t) Spreadsheet. Parent and the Exchange Agent shall have received from the Company three Business Days prior to theClosing Date the Spreadsheet pursuant to Section 6.23 hereof, which shall have been certified as of the Closing Date as complete andcorrect by the Chief Executive Officer and the Chief Financial Officer of the Company.

(u) Release of Liens. Parent shall have received from the Company a duly and validly executed copy of all agreements,instruments, certificates and other documents, in form and substance reasonably satisfactory to Parent, that are necessary orappropriate to evidence the release of all Liens set forth in Schedule 7.2(u) hereto.

(v) Legal Opinion. Parent shall have received a legal opinion from legal counsel to the Company in the form attached heretoas Exhibit J, and with respect to the capitalization of the Company, a legal opinion from Reed Smith LLP in the form attached heretoas Exhibit K.

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(w) Certificate of the Company. Parent shall have received a certificate from the Company, validly executed by the ChiefExecutive Officer and Chief Financial Officer of the Company for and on the Company’s behalf, to the effect that, as of the Closing:

(i) the representations and warranties of the Company in this Agreement that are qualified by “materiality” (including“Material Adverse Effect”) or contain any other materiality exception or qualification shall have been, or shall be (as the case maybe), true and correct in all respects, and the representations and warranties of the Company in this Agreement that are not so qualifiedshall have been, or shall be (as the case may be), true and correct in all material respects, in each case as of the date hereof and as ofthe Closing Date (other than the representations and warranties of the Company as of a specified date, which shall have been, or shallbe (as the case may be), true and correct as of such date);

(ii) the Company has performed and complied in all material respects with all covenants and obligations under thisAgreement required to be performed and complied with by the Company as of the Closing; and

(iii) to the Company’s Knowledge, the conditions to the obligations of Parent and Sub set forth in this Section 7.2 havebeen satisfied (unless otherwise waived in accordance with the terms hereof).

(x) Certificate of Secretary of Company. Parent shall have received a certificate, validly executed by the Secretary of theCompany, certifying as to (i) the terms and effectiveness of the Charter Documents, (ii) the valid adoption of resolutions of the Boardof Directors of the Company (whereby the Merger and the transactions contemplated hereunder were unanimously approved by theBoard of Directors) and (iii) that the Stockholders constituting the Closing Stockholder Consent have adopted and approved theMerger, this Agreement and the consummation of the transactions contemplated hereby.

(y) Certificate of Good Standing. Parent shall have received a long-form certificate of good standing from the Secretary ofState of the State of Delaware which is dated within five (5) Business Days prior to Closing with respect to the Company. Parent shallhave received a Certificate of Status of Foreign Corporation of the Company issued by the Secretary of State of the State of Californiadated within five (5) Business Days prior to the Closing.

(z) FIRPTA Certificate. Parent shall have received a copy of the FIRPTA Compliance Certificate.

7.3 Conditions to Obligations of the Company. The obligations of the Company to effect the Merger shall be subject to thesatisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, exclusivelyby the Company:

(a) Representations, Warranties and Covenants. (i) the representations and warranties of Parent and Sub in this Agreementthat are qualified by “materiality” (including “Material Adverse Effect”) or contain any other materiality exception or qualificationshall have been, or shall be (as the case may be), true and correct in all respects, and the representations and warranties of Parent andSub in this Agreement that are not so qualified shall have been, or shall be (as the case may be), true and correct in all materialrespects, in each case as of the date hereof and as of the Closing Date (other than the representations and warranties of Parent and Subas of a specified date, which shall have been, or shall be (as the case may be), true and correct as of such date), and (ii) each of Parentand Sub shall have performed and complied in all material respects with all covenants and obligations under this Agreement requiredto be performed and complied with by such parties as of the Closing.

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(b) Litigation. There shall be no action, suit, claim, order, injunction or proceeding of any nature pending, or overtlythreatened, against Parent properties or any of its officers, directors or subsidiaries arising out of, or in any way connected with, theMerger or the other transactions contemplated by the terms of this Agreement wherein an unfavorable judgment, decree or orderwould prohibit or prevent (i) the consummation of the Merger or (ii) Parent from engaging in the Business.

(c) Certificate of Parent. The Company shall have received a certificate from Parent validly executed by a Vice President ofParent for and on its behalf to the effect that, as of the Closing:

(i) the representations and warranties of Parent and Sub in this Agreement that are qualified by “materiality” (including“Material Adverse Effect”) or contain any other materiality exception or qualification shall have been, or shall be (as the case maybe), true and correct in all respects, and the representations and warranties of Parent and Sub in this Agreement that are not soqualified shall have been, or shall be (as the case may be), true and correct in all material respects, in each case as of the date hereofand as of the Closing Date (other than the representations and warranties of Parent and Sub as of a specified date, which shall havebeen, or shall be (as the case may be), true and correct as of such date);

(ii) Parent and Sub have performed and complied in all material respects with all covenants and obligations under thisAgreement required to be performed and complied with by such parties as of the Closing; and

(iii) to Parent’s Knowledge, the conditions to the obligations of the Company set forth in this Section 7.3 have beensatisfied (unless otherwise waived in accordance with the terms hereof).

(d) Certificate of Good Standing. The Company shall have received a long-form certificate of good standing from theSecretary of State of the State of Delaware which is dated within five (5) Business Days prior to Closing with respect to each ofParent and Sub. The Company shall have received a Certificate of Status of Foreign Corporation of each of Parent and Sub issued bythe Secretary of State of the State of California dated within five (5) Business Days prior to the Closing.

(e) Legal Opinion. The Stockholder Representative, on behalf of the Stockholders, shall have received a legal opinion fromlegal counsel to Parent in the form attached hereto as Exhibit L.

ARTICLE VIII

SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW

8.1 Survival of Representations and Warranties. The representations and warranties of the Company contained in this Agreement,any Related Agreement to which the Company is a party or in the certificate delivered pursuant to Section 7.2(w) herein, shall survivefor a period of eighteen (18) months following the Closing Date (the date of expiration of such eighteen (18) month period, the“Survival Date”); provided, however, that the representations and warranties of the Company contained in Section 3.5 (No Conflict),Section 3.12 (Restrictions on Business Activities), Section 3.14 (Intellectual Property), Section 3.15 (Agreements, Contracts andCommitments), Section 3.18 (Litigation), Section 3.24 (Compliance with Laws) hereof shall survive for a period of 36 monthsfollowing the Closing Date and the representations and warranties of the Company contained in Section 3.2 (Company CapitalStructure), Section 3.11 (Tax Matters), Section 3.22 (Employee Benefit Plans and Compensation) hereof shall survive until theexpiration of the applicable statute of limitations, respectively. The representations and warranties of Parent and Sub contained in thisAgreement or in any certificate delivered pursuant to this Agreement, shall survive for a period of 36 months following the ClosingDate. Notwithstanding the foregoing, claims for fraud with respect to a representation or warranty contained herein on the part of theparties to this Agreement shall not expire.

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8.2 Indemnification.

(a) By virtue of the Merger, the Stockholders, Warrantholders and the holders of Bonus Units agree to severally and notjointly (and in proportion to each Stockholder and Warrantholder’s Pro Rata Portion and, in the case of all the holders of Bonus Unitsin the aggregate, the Cash Bonus Plan’s Pro Rata Portion) indemnify and hold harmless Parent and its officers, directors, affiliates,employees, agents and representatives, including the Surviving Corporation (the “Indemnified Parties”), against all claims, losses,liabilities, damages, deficiencies, diminution in value, costs, interest, awards, judgments, penalties and expenses, including attorneys’and consultants’ fees and expenses and including any such expenses incurred in connection with investigating, defending against orsettling any of the foregoing (hereinafter individually a “Loss” and collectively “Losses”) incurred or sustained by the IndemnifiedParties, or any of them (including the Surviving Corporation), directly or indirectly, as a result of (the following, the “IndemnifiableMatters”):

(i) any breach or inaccuracy of a representation or warranty of the Company contained in Article III of this Agreementor in the certificate delivered by or on behalf of the Company pursuant to Section 7.2(w) of this Agreement;

(ii) any failure by the Company prior to the Closing to perform or comply with any covenant applicable to any of themcontained in this Agreement;

(iii) any Dissenting Share Payments;

(iv) any Excess Third Party Expenses;

(v) any of the matters disclosed on Schedule 8.2(a)(v) hereto; or

(vi) any payment or consideration arising under any consents, notices, waivers or approvals of any party under anyMaterial Contract or for any such Material Contract to remain in full force or effect following the Effective Time or in connectionwith the termination of any Terminated Agreements, in each case pursuant to Sections 6.11, 6.12 and 7.2 hereof.

The Stockholders and Warrantholders (including any officer or director of the Company or any Subsidiary, in suchcapacity prior to the Effective Time) shall not have any right of contribution, indemnification or right of advancement from theSurviving Corporation or Parent with respect to any Loss incurred by an Indemnified Party.

(b) For the purpose of determining the amount of the Loss resulting from a breach or inaccuracy of a representation orwarranty of the Company (but not for the purpose of determining the existence of such breach or inaccuracy), any “materiality” or“Material Adverse Effect” qualifiers or words of similar import contained in such representation or warranty giving rise to the claimof indemnity hereunder shall in each case be disregarded and without effect (as if such standard or qualification were deleted fromsuch representation or warranty).

(c) In the case any Indemnified Party claims a diminution in value as part of a Loss, the parties hereto agree that the amountof such Loss shall not be determined by applying a multiplier to revenues, income or other income statement item.

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(d) Nothing in this Agreement shall limit the right of Parent, any other Indemnified Party or any other party thereto topursue remedies under any Related Agreement against the parties thereto.

(e) In the case of a breach of any representation, warranty or covenant by Parent or Sub in this Agreement or the certificatedelivered by or on behalf of Parent and Sub pursuant to Section 7.3(c) of this Agreement, the Stockholder Representative, on behalfof the Stockholders, shall have recourse to any available remedy under applicable law (including claims for breach of contract);provided, however, that any dispute arising from any claim of breach of any such representation, warranty or covenant shall beresolved in accordance with the provisions of Section 10.10 hereof.

8.3 Maximum Payments; Remedy.

(a) Except as set forth in Section 8.3(b) and Section 8.3(c) hereof, the maximum aggregate amount the Indemnified Partiesmay recover pursuant to the indemnity set forth in this Article VIII hereof for Losses shall be limited to the lesser of (i) twentypercent (20%) of the sum of (A) (1) the Merger Consideration actually paid to the Stockholders, (2) the Merger Consideration actuallypaid to the Warrantholders and (3) the Merger Consideration contributed to the Cash Bonus Plan, plus (B) the Merger Considerationearned but not yet paid (in each case, including the Escrow Amounts), as of the date that the Claim becomes a Payable Claim or(ii) one hundred twenty-seven million dollars ($127,000,000).

(b) Nothing in this Article VIII shall limit the liability of any Stockholder or Warrantholder or any other Person in respectof Losses arising out of any fraud on the part of such Stockholder, Warrantholder or other Person with respect to a representation orwarranty, or willful breach on the part of any party hereto of any covenant contained in this Agreement or any certificates or otherinstruments delivered pursuant to this Agreement, or willful breach by any party to any Related Agreement of any covenant containedin such Related Agreement.

(c) Nothing in this Article VIII shall limit the liability of Parent, the Company, the Stockholders or any other Person forany breach of their respective representations, warranties or covenants contained in this Agreement, any Related Agreements or in anycertificates or other instruments delivered pursuant to this Agreement if the Merger does not close.

(d) Notwithstanding anything to the contrary herein, the parties hereto agree and acknowledge that any Indemnified Partymay bring a claim for indemnification for any Loss under this Article VIII notwithstanding the fact that such Indemnified Party hadknowledge of the breach, event or circumstance giving rise to such Loss prior to the Closing or waived any condition to the Closingrelated thereto.

(e) Notwithstanding the foregoing, no Indemnified Party shall be entitled to indemnification for any Losses hereunder untilthe aggregate amount of all Losses under all claims of all Indemnified Parties shall exceed Five Hundred Thousand Dollars($500,000) (the “Basket”), at which time all Losses incurred shall be subject to indemnification hereunder in full including theamount of the Basket; provided, however, that the provisions of this Section 8.3(e) shall not apply as a threshold to any and all claimsor payments made with respect to all Losses incurred pursuant to clauses (iii)-(vi) of Section 8.2(a), which shall be indemnified in fullwithout regard to the Basket.

(f) Subject to Sections 8.3(b) and 8.3(c), the indemnification provisions of this Article VIII shall be the exclusive remedyof the Indemnified Parties for the recovery of any Losses arising out of this Agreement, including the certificate delivered by or onbehalf of the Company pursuant to Section 7.2(w); provided, however, that nothing in this Agreement shall limit (i) the liability ofany party under any Related Agreements or (ii) Parent’s ability to seek injunctive relief for any breach of Sections 5.2, 6.3 and 6.4.

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(g) No claim may be asserted by an Indemnified Party for breach of any representation, warranty or covenant containedherein, unless a written notice of such claim is received by the Stockholder Representative pursuant to Section 8.4(a), on or prior tothe date on which the representation, warranty or covenant on which such claim is based ceases to survive as set forth in Section 8.1,in which case such representation, warranty or covenant shall survive as to such claim until such claims has been finally resolved.

(h) Except to the extent that the Losses resulted from fraud with respect to any representation or warranty or willful breachof any covenant committed by any Person, claims by an Indemnified Party for Losses pursuant to this Agreement shall only besatisfied (and, for the avoidance of doubt, claims by an Indemnified Party for Losses pursuant to this Agreement may not be satisfiedin any other way): (A) first, from the Escrow Fund, and (B) second, by setoff against any amounts owed to the Stockholders,Warrantholders or Cash Bonus Plan under this Agreement (provided that Contingent Payments shall not be deemed owed, for thispurpose, unless the contingencies to such payments have been satisfied). Notwithstanding the immediately preceding sentence, claimsby an Indemnified Party for Losses pursuant to this Agreement resulting from fraud with respect to any representation or warranty orwillful breach of any covenant committed by any Person may be satisfied in full in any manner available to such Indemnified Party,including claims on the Escrow Fund, setoff against any amounts owed to the Stockholders, Warrantholders or Cash Bonus Plan orclaims against the Person committing such fraud or willful breach directly.

8.4 Claims for Indemnification; Resolution of Conflicts.

(a) Claims for Indemnification.

(i) An Indemnified Party may seek recovery of Losses pursuant to this Article VIII by delivering to the StockholderRepresentative (and, in the case of recovery sought directly from one or more Stockholders or Warrantholders directly, delivering tosuch Stockholder(s) or Warrantholder(s)) an Officer’s Certificate in respect of such claim. The date of such delivery of an Officer’sCertificate is referred to herein as the “Claim Date” of such Officer’s Certificate (and the claims for indemnification containedtherein). For purposes hereof, “Officer’s Certificate” shall mean a certificate signed by any officer of Parent: (A) stating that anIndemnified Party has paid, sustained, incurred, or accrued, or reasonably anticipates that it will have to pay, sustain, incur or accrueLosses and (B) specifying in reasonable detail the individual items of Losses included in the amount so stated, the date each such itemwas paid, sustained, incurred, or accrued, or the basis for such anticipated liability, and the nature of the Indemnifiable Matter towhich such item is related.

(ii) In the event that an Indemnified Party pursues a claim directly against any Stockholder(s), Warrantholder(s) or anyother Person as permitted by Section 8.4(a)(i), subject to the provisions of Section 8.4(a)(iii), Section 8.4(b) and Section 10.10hereof, each Person from whom indemnification is sought (an “Indemnifying Party”) shall promptly, and in no event later than 30days after delivery of an Officer’s Certificate to each such Indemnifying Party, wire transfer to the Indemnified Party an amount ofcash equal to the amount of the Loss; provided, however, if such Stockholder(s) or Warrantholder(s) objects to the claim pursuant toSection 8.4(a)(iii), the claim shall be resolved and the indemnification shall be performed, if required, pursuant to Section 8.4(b) andSection 10.10 hereof.

(iii) The Stockholder Representative (or, in the case of a claim directly against one or more Stockholder(s) orWarrantholder(s), such Stockholder(s) or Warrantholder(s)) may object to a

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claim for indemnification set forth in an Officer’s Certificate by delivering to the Indemnified Party seeking indemnification (and, inthe case of a claim against the Escrow Fund, to the Escrow Agent) a written statement of objection to the claim made in the Officer’sCertificate (an “Objection Notice”), provided, however, that, to be effective, such Objection Notice must (A) be delivered to theIndemnified Party (and, in the case of a claim for recourse against the Escrow Fund, to the Escrow Agent) prior to midnight(California time) on or prior to the Objection Deadline and (B) set forth in reasonable detail the nature of the objections to the claimsin respect of which the objection is made, which could include Parent’s failure to provide reasonable detail regarding the nature of theIndemnifiable Matter.

(iv) If the Stockholder Representative (or the Stockholder(s) or Warrantholder(s), in the event that indemnification is beingsought hereunder directly from such Stockholder(s) or Warrantholder(s)) does not object in writing within the 30-day period afterdelivery by the Parent of the Officer’s Certificate, and if Parent shall have given a second notice to the Stockholder Representative (orthe Stockholder(s) or Warrantholder(s) in the event that indemnification is being sought hereunder directly from such Stockholder(s)or Warrantholder(s)) of such failure to object and the Stockholder Representative (or such Indemnifying Party) shall not have objectedwithin thirty (30) days after receipt of such second notice (such date, the “Objection Deadline”), such failure to so object shall be anirrevocable acknowledgment by the Stockholder Representative and the Stockholders or Warrantholders that the Indemnified Party isentitled to the full amount of the claims for Losses set forth in such Officer’s Certificate (and such entitlement shall be conclusivelyand irrefutably established) (any such claim, an “Unobjected Claim”).

(b) Resolution of Conflicts.

(i) In case the Stockholder Representative (or the Stockholder(s) or Warrantholder(s), in the event that indemnificationis being sought hereunder directly from such Stockholder(s) or Warrantholder(s)) timely delivers an Objection Notice in accordancewith Section 8.4(a)(iii) hereof, the dispute shall be resolved in accordance with the provisions of Section 10.10 hereof. If theStockholder Representative (or the objecting Stockholder(s) or Warrantholder(s)) and Parent reach an agreement with respect to suchdispute pursuant to Sections 10.10(a) or 10.10(b) or otherwise, a memorandum setting forth such agreement shall be prepared andsigned by both parties (a “Settlement Memorandum”) and, in the case of a claim against the Escrow Fund, shall be furnished to theEscrow Agent and, in the case of a claim directly against the Stockholder(s) or Warrantholder(s), to the Stockholders orWarrantholders (any claims covered by such an agreement, “Settled Claims”). The Escrow Agent shall be entitled to rely on any suchSettlement Memorandum and make distributions from the Escrow Fund in accordance with the terms thereof.

(ii) The procedures described in Section 10.10 shall apply to any dispute among the Stockholders or Warrantholdersand the Indemnified Parties under this Article VIII hereof, whether relating to claims upon the Escrow Fund or to any otherindemnification obligations set forth in this Article VIII.

(iii) If no agreement with respect to a dispute relating to indemnification obligations of this Article VIII can bereached after good faith negotiation (and, if applicable, mediation) prior to 45 days after delivery of an Objection Notice with respectto such claim, any party to such dispute may demand arbitration of the matter unless the amount of the Loss that is at issue is thesubject of a pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained,or both parties agree to arbitration prior to such time, and in either such event the matter shall be settled by arbitration conductedpursuant to Section 10.10. The decision of the arbitrator or a majority of the three arbitrators, as the case may be, under Section 10.10as to the validity and amount of any claim in such Officer’s Certificate shall be final, binding, and conclusive upon the parties to thisAgreement and any other

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Stockholders or Warrantholders. Such decision shall be written and shall be supported by written findings of fact and conclusionswhich shall set forth the award, judgment, decree or order awarded by the arbitrator(s) (a “Written Decision”), and the Escrow Agentshall be entitled to rely on, and make distributions from the Escrow Fund in accordance with, the terms of such Written Decision.Claims determined by arbitration are referred to as “Resolved Claims.” Within 30 days of a decision of the arbitrator(s) requiringpayment by one party to another, such party shall make the payment to such other party, including any distributions out of the EscrowFund, as applicable.

8.5 Setoff for Losses.

(a) By virtue of this Agreement and as partial security for the indemnity obligations provided for in Section 8.2 hereof andsubject to the limitations set forth in Section 8.3 and the other limitations and conditions in this Article VIII, the Indemnified Partiesshall have the right in the manner provided in this Section 8.5 to setoff the amount of any Losses with respect to which theIndemnified Parties are entitled to indemnification hereunder against any Contingent Payments that have not been paid as of theClaim Date.

(b) At the time that any Contingent Payment is due and payable as provided herein (such a Contingent Payment, a “PayableContingent Payment”), such Payable Contingent Payment shall be reduced as follows:

(i) Any Payable Contingent Payment shall, subject to the limitations set forth in Section 8.3 and the other limitationsand conditions of this Article VIII be irrevocably reduced by the amount of any Payable Claims (as defined below) that arise prior tothe payment of such Payable Contingent Payment, and any such setoff against a Payable Contingent Payment shall (to the extent ofsuch setoff) satisfy the indemnification obligation in respect of such Payable Claim. For the avoidance of doubt, in the event that aPayable Claim cannot be satisfied by setoff pursuant to this Section 8.5 because of the limitation set forth in Section 8.3(a), theunsatisfied portion of such Claim may be satisfied by setoff against any future Payable Contingent Payments to the extent that suchfuture Payable Contingent Payments enable the recovery of additional Losses within the limits of Section 8.3(a).

(ii) Any Payable Contingent Payment shall be reduced as of the date such Payable Contingent Payment is made by theamount of any Unresolved Claims (as defined below) pending resolution of any such Unresolved Claims, and any such amount shallnot be distributed to the Exchange Agent at such time (such amount, a “Contingent Payment Holdback”). Parent shall deposit suchContingent Payment Holdback into an escrow fund with the Escrow Agent. If such Unresolved Claims become Payable Claims, suchclaims shall, subject to Section 8.5(b)(i), be satisfied by setoff against the Contingent Payment Holdback. As soon as all UnresolvedClaims have been resolved and any such resolved claims that become Payable Claims have been setoff against the ContingentPayment Holdback, Parent shall cause the Escrow Agent to deliver to the Exchange Agent for distribution the remaining portion of theContingent Payment Holdback, if any.

(c) A “Payable Claim” shall mean a claim for indemnification of Losses, to the extent that such claim has not been satisfiedby cash payment, Escrow Fund distribution or setoff against a Contingent Payment, which is (i) a Resolved Claim, (ii) an AuthorizedClaim (as defined in Section 8.6(d)), (iii) a Settled Claim, or (iv) an Unobjected Claim. An “Unresolved Claim” shall mean anyclaim specified in any Officer’s Certificate, to the extent that such claim is not a Payable Claim and has not been satisfied by cashpayment, Escrow Fund distribution or setoff against a Contingent Payment.

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8.6 Escrow Arrangements.

(a) Escrow Fund. By virtue of this Agreement and as partial security for the indemnity obligations provided for inSection 8.2 hereof, at the Effective Time, Parent will deposit with the Escrow Agent the Initial Escrow Amount and, if and when theLaunch Contingent Payment becomes due and payable, the Additional Escrow Amounts, without any act of the Stockholders (any andall of such deposits to constitute an escrow fund to be governed by the terms set forth herein). The Escrow Amounts and anyAdditional Escrow Amounts (plus any interest paid on such Escrow Amounts in accordance with Section 8.6(c)(ii) hereof)(collectively, the “Escrow Fund”) shall be available to compensate the Indemnified Parties for any claims by such parties for anyLosses suffered or incurred by them and for which they are entitled to recovery under this Article VIII. The Escrow Agent mayexecute this Agreement following the date hereof and prior to the Closing, and such later execution, if so executed after the datehereof, shall not affect the binding nature of this Agreement as of the date hereof between the other signatories hereto.

(b) Escrow Period; Distribution upon Termination of Escrow Periods. Subject to the following requirements, the EscrowFund shall be in existence immediately following the Effective Time and shall terminate at 5:00 p.m., local time at Parent’s corporateheadquarters in California, on the date 30 days following the Survival Date (the “Escrow Period”), and the Escrow Agent shalldistribute any remaining funds in the Escrow Account to the Stockholders, Warrantholders and Cash Bonus Plan following suchtermination; provided, however, that the Escrow Fund shall not terminate with respect to any amount in respect of any UnresolvedClaims relating to facts and circumstances existing prior to the Survival Date, and any such amount shall not be distributed to theStockholders, Warrantholders and Cash Bonus Plan at such time (such amount, an “Escrow Distribution Holdback”). As soon as allsuch claims have been resolved, the Escrow Agent shall deliver the remaining portion of the Escrow Fund, if any, not required tosatisfy such Unresolved Claims. Deliveries of the remaining Escrow Amounts out of the Escrow Fund to the Stockholders,Warrantholders and the Cash Bonus Plan pursuant to this Section 8.6(b) shall be made in proportion to their respective Pro RataPortions of the remaining amounts in the Escrow Fund, with the amount delivered to each Stockholder, Warrantholder and the CashBonus Plan rounded to the nearest cent ($0.01) (with amounts of $0.005 and above rounded up).

(c) Protection of Escrow Fund.

(i) The Escrow Agent shall hold and safeguard the Escrow Fund during the Escrow Period, shall treat such fund as atrust fund in accordance with the terms of this Agreement and shall hold and dispose of the Escrow Fund only in accordance with theterms of this Article VIII. The Escrow Agent shall hold and safeguard the Payment Adjustment Funds during the period beginningupon Parent’s deposit of such funds with the Escrow Agent until such time as such funds are distributed in accordance with the termsof Article II, shall treat such fund as a trust fund in accordance with the terms of this Agreement and shall hold and dispose of thePayment Adjustment Funds only in accordance with the terms of Article VIII.

(ii) The Escrow Amounts and the Payment Adjustment Funds shall be invested in U.S. Treasury bills with maturities ofnot more than 30 days and any interest paid on such Escrow Amounts or Payment Adjustment Funds, as applicable, shall be added tothe Escrow Fund or Payment Adjustment Funds, as applicable, and become a part thereof. For any period of time before such U.S.Treasury bills can be purchased by the Escrow Agent or after such bills mature, the Escrow Amounts and the Payment AdjustmentFunds, as applicable, shall be invested in a business money market account of the Escrow Agent (or another nationally recognizedbanking institution) and any interest paid on such Escrow Amounts or Payment Adjustment Funds, as applicable, shall be added to theEscrow Fund or Payment Adjustment Funds, as applicable, and become a part thereof and available for satisfaction of claims in thecase of the Escrow Amounts and Payment Overage claims in the case of the Payment Overage Funds. The parties hereto agree

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that Parent is the owner of any cash in the Escrow Fund and the Payment Adjustment Funds, and that all interest on or other taxableincome, if any, earned from the investment of such cash pursuant to this Agreement shall be treated for tax purposes as earned byParent. At the end of Parent’s taxable year, an amount equal to income earned from the investment of cash contained in the EscrowFund and the Payment Adjustment Funds, as applicable, shall be deemed distributed to the Stockholders and Warrantholders inaccordance with their percentage interests in the Escrow Fund and the Payment Adjustment Funds, as applicable, and thenrecontributed by the Stockholders and Warrantholders to the Escrow Fund or the Payment Adjustment Funds, as applicable. Thedeemed distribution represents interest for the deferral of payment of a portion of the Merger Consideration resulting from the escrowarrangement. The Stockholders and Warrantholders shall be responsible for any Taxes due with respect to the deemed distribution.

(d) Claims for Indemnification. Upon receipt by the Escrow Agent at any time on or before the last day of the EscrowPeriod of an Officer’s Certificate, the Escrow Agent shall, subject to the provisions of Section 8.3(g) and Section 8.4(b) hereof,deliver to Parent, as promptly as practicable, cash held in the Escrow Fund equal to the Losses claimed in the Officer’s Certificate;provided, however, until the Objection Deadline relating to an Officer’s Certificate, the Escrow Agent shall make no delivery toParent of any Escrow Amounts pursuant to this Section 8.6(d) unless the Escrow Agent shall have received written authorization fromthe Stockholder Representative to make such delivery (a claim with respect to which such an authorization has been delivered, an“Authorized Claim”). Upon the Objection Deadline relating to an Officer’s Certificate, to the extent that no Objection Notice hasbeen timely delivered with respect to Losses claimed in such Officer’s Certificate, the Escrow Agent shall make delivery of cash fromthe Escrow Fund equal to the amount of Losses claimed in the Officer’s Certificate.

(e) Escrow Agent’s Duties.

(i) The Escrow Agent shall be obligated only for the performance of such duties as are specifically set forth herein, andas set forth in any additional written escrow instructions which the Escrow Agent may receive after the date of this Agreement whichare signed by an officer of Parent and the Stockholder Representative, and may rely and shall be protected in relying or refrainingfrom acting on any instrument reasonably believed to be genuine and to have been signed or presented by the proper party or parties.The Escrow Agent shall not be liable for any act done or omitted hereunder as Escrow Agent while acting in good faith and in theexercise of reasonable judgment, and any act done or omitted pursuant to the advice of legal counsel shall be conclusive evidence ofsuch good faith.

(ii) The Escrow Agent is hereby expressly authorized to disregard any and all warnings given by any of the partieshereto or by any other person, excepting only orders or process of courts of law, and is hereby expressly authorized to comply withand obey orders, judgments or decrees of any court. In case the Escrow Agent obeys or complies with any such order, judgment ordecree of any court, the Escrow Agent shall not be liable to any of the parties hereto or to any other person by reason of suchcompliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacatedor found to have been entered without jurisdiction.

(iii) The Escrow Agent shall not be liable in any respect on account of the identity, authority or rights of the partiesexecuting or delivering or purporting to execute or deliver this Agreement or any documents or papers deposited or called forhereunder.

(iv) The Escrow Agent shall not be liable for the expiration of any rights under any statute of limitations with respect tothis Agreement or any documents deposited with the Escrow Agent.

(v) In performing any duties under this Agreement, the Escrow Agent shall not be liable to any party for damages,losses or expenses, except for negligence or willful misconduct on the part

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of the Escrow Agent. The Escrow Agent shall not incur any such liability for (A) any act or failure to act made or omitted in goodfaith, or (B) any action taken or omitted in reliance upon any instrument, including any written statement of affidavit provided for inthis Agreement that the Escrow Agent shall in good faith believe to be genuine, nor will the Escrow Agent be liable or responsible forforgeries, fraud, impersonations, or determining the scope of any representative authority. In addition, the Escrow Agent may consultwith legal counsel in connection with performing the Escrow Agent’s duties under this Agreement and shall be fully protected in anyact taken, suffered, or permitted by him/her in good faith in accordance with the advice of counsel. The Escrow Agent is notresponsible for determining and verifying the authority of any person acting or purporting to act on behalf of any party to thisAgreement.

(vi) If any controversy arises between the parties to this Agreement, or with any other party, concerning the subjectmatter of this Agreement, its terms or conditions, the Escrow Agent will not be required to determine the controversy or to take anyaction regarding it. The Escrow Agent may hold all documents and the Escrow Amounts or Payment Adjustment Funds, as applicable,and may wait for settlement of any such controversy by final appropriate legal proceedings or other means as, in the Escrow Agent’sdiscretion, may be required, despite what may be set forth elsewhere in this Agreement. In such event, the Escrow Agent will not beliable for damages. Furthermore, the Escrow Agent may at its option, file an action of interpleader requiring the parties to answer andlitigate any claims and rights among themselves. The Escrow Agent is authorized to deposit with the clerk of the court all documentsand the Escrow Amounts held in escrow, except all costs, expenses, charges and reasonable attorney fees incurred by the EscrowAgent due to the interpleader action and which the parties jointly and severally agree to pay. Upon initiating such action, the EscrowAgent shall be fully released and discharged of and from all obligations and liability imposed by the terms of this Agreement.

(vii) The parties and their respective successors and assigns agree jointly and severally to indemnify and hold EscrowAgent harmless against any and all losses, claims, damages, liabilities and expenses, including reasonable costs of investigation,counsel fees, including allocated costs of in-house counsel and disbursements that may be imposed on the Escrow Agent or incurredby the Escrow Agent in connection with the performance of its duties under this Agreement, including but not limited to any litigationarising from this Agreement or involving its subject matter, other than those arising out of the negligence or willful misconduct of theEscrow Agent.

(viii) The Escrow Agent may resign at any time upon giving at least thirty (30) days written notice to the Parent and theStockholder Representative; provided, however, that no such resignation shall become effective until the appointment of a successorescrow agent which shall be accomplished as follows: Parent and the Stockholder Representative shall use their best efforts tomutually agree on a successor escrow agent within thirty (30) days after receiving such notice. If the parties fail to agree upon asuccessor escrow agent within such time, the Escrow Agent shall have the right to appoint a successor escrow agent authorized to dobusiness in the State of California. The successor escrow agent shall execute and deliver an instrument accepting such appointmentand it shall, without further acts, be vested with all the estates, properties, rights, powers, and duties of the predecessor escrow agentas if originally named as escrow agent. Upon appointment of a successor escrow agent, the Escrow Agent shall be discharged fromany further duties and liability under this Agreement.

(f) Fees. All fees of the Escrow Agent for performance of its duties hereunder shall be paid by Parent in accordance with thestandard fee schedule of the Escrow Agent. It is understood that the fees and usual charges agreed upon for services of the EscrowAgent shall be considered compensation for ordinary services as contemplated by this Agreement. In the event that the conditions ofthis Agreement are not promptly fulfilled, or if the Escrow Agent renders any service not provided for in this Agreement, or if theparties request a substantial modification of its terms, or if any controversy arises, or if the Escrow

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Agent is made a party to, or intervenes in, any litigation pertaining to the Escrow Fund, the Payment Adjustment Funds or theirsubject matter, the Escrow Agent shall be reasonably compensated for such extraordinary services and reimbursed for all costs,attorney’s fees, including allocated costs of in-house counsel, and expenses occasioned by such default, delay, controversy orlitigation.

(g) Successor Escrow Agents. Any corporation into which the Escrow Agent in its individual capacity may be merged orconverted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to whichthe Escrow Agent in its individual capacity shall be a party, or any corporation to which substantially all the corporate trust businessof the Escrow Agent in its individual capacity may be transferred, shall be the Escrow Agent under this Escrow Agreement withoutfurther act.

8.7 Third-Party Claims. In the event Parent becomes aware of a third party claim (a “Third Party Claim”) which Parentreasonably believes may result in a demand against the Escrow Fund or for other indemnification pursuant to this Article VIII, Parentshall notify the Stockholder Representative (or, in the event indemnification is being sought hereunder directly from an IndemnifyingParty, such Indemnifying Party) of such claim, and the Stockholder Representative shall be entitled on behalf of the Stockholders andWarrantholders (or, in the event indemnification is being sought hereunder directly from one or more Stockholder or Warrantholder,such Stockholder(s) or Warrantholder(s) shall be entitled), at their expense, to participate in, but not to determine or conduct, thedefense of such Third Party Claim. Parent shall have the right in its sole discretion to conduct the defense of, and to settle, any suchclaim; provided, however, that except with the consent of the Stockholder Representative (or, in the event indemnification is beingsought hereunder directly from one or more Stockholder or Warrantholder, such Stockholder(s) or Warrantholder(s)), no settlement ofany such Third Party Claim with third party claimants shall be determinative of (a) the amount of Losses relating to such matter or(b) whether Parent is entitled to indemnification pursuant to this Article VIII. In the event that the Stockholder Representative hasconsented to any such settlement, the Stockholders and Warrantholders shall have no power or authority to object under any provisionof this Article VIII to the amount of the Losses with respect to such settlement. If there is a Third Party Claim that, if adverselydetermined would give rise to a right of recovery for Losses hereunder, then any amounts incurred or sustained by the IndemnifiedParties in defense of such Third Party Claim, regardless of the outcome of such claim, shall be deemed Losses hereunder.

8.8 Stockholder Representative.

(a) Each of the Stockholders and Warrantholders hereby appoints Rick Dallas as its agent and attorney-in-fact as theStockholder Representative for and on behalf of the Stockholders and Warrantholders to give and receive notices andcommunications, to authorize payment to Parent from the Escrow Fund or by setoff in satisfaction of claims by Parent, to object tosuch payments, to agree to, negotiate, enter into settlements and compromises of, and demand arbitration and comply with orders ofcourts and awards of arbitrators with respect to such claims, and with respect to other disputes that may arise under this Agreement(including relating to any Contingent Payments), and to take all other actions that are either (i) necessary or appropriate in thejudgment of either of the Stockholder Representative for the accomplishment of the foregoing or (ii) specifically mandated by theterms of this Agreement. Such agency may be changed by the Stockholders and Warrantholders from time to time upon not less thanthirty (30) days prior written notice to Parent; provided, however, that the Stockholder Representative may not be removed unlessholders of a two-thirds interest of the Escrow Fund agree to such removal and to the identity of the substituted agent. A vacancy in theposition of Stockholder Representative may be filled by the holders of a majority in interest of the Escrow Fund. No bond shall berequired of the Stockholder Representative, and the Stockholder Representative shall not receive any compensation for its services.Notices or communications to or from the Stockholder Representative shall constitute notice to or from the Stockholders andWarrantholders.

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(b) The Stockholder Representative shall not be liable for any act done or omitted hereunder as Stockholder Representativewhile acting in good faith and in the exercise of reasonable judgment. Stockholders and Warrantholders on whose behalf the EscrowAmounts were contributed to the Escrow Fund shall indemnify the Stockholder Representative and hold the StockholderRepresentative harmless against any loss, liability or expense incurred without negligence or bad faith on the part of the StockholderRepresentative and arising out of or in connection with the acceptance or administration of the Stockholder Representative’s dutieshereunder, including the reasonable fees and expenses of any legal counsel retained by the Stockholder Representative (“StockholderRepresentative Expense”). Following the termination of the Escrow Period and the resolution of all pending claims made by theIndemnified Parties for Losses, the Stockholder Representative shall have the right to recover the Stockholder RepresentativeExpenses from any remaining portion of the Escrow Fund prior to any distribution to the Stockholders, Warrantholders and the CashBonus Plan, and prior to any such distribution, shall deliver to the Escrow Agent a certificate setting forth the StockholderRepresentative Expenses actually incurred. Upon receipt of such certificate, the Escrow Agent shall pay such StockholderRepresentative Expenses to the Stockholder Representative. Notwithstanding the foregoing, the Stockholder Representative’s right torecover Stockholder Representative Expenses shall not prejudice Parent’s right to recover the full amount of indemnifiable Losses thatParent is entitled to recover from the Escrow Fund. Additionally, the Stockholder Representative may setoff StockholderRepresentation Expenses against any Payable Contingent Payments which are not part of a Contingent Payment Holdback (until suchholdback is available to be released to the Stockholders, Warrantholders and the Cash Bonus Plan).

(c) A decision, act, consent or instruction of the Stockholder Representative, including but not limited to an amendment,extension or waiver of this Agreement pursuant to Section 9.3 and Section 9.4 hereof, shall constitute a decision of the Stockholdersand Warrantholders and shall be final, binding and conclusive upon the Stockholders and Warrantholders; and the Escrow Agent andParent may rely upon any such decision, act, consent or instruction of the Stockholder Representative as being the decision, act,consent or instruction of the Stockholders and Warrantholders. The Escrow Agent and Parent are hereby relieved from any liability toany person for any acts done by them in accordance with such decision, act, consent or instruction of the Stockholder Representative.

ARTICLE IX

TERMINATION, AMENDMENT AND WAIVER

9.1 Termination. Except as provided in Section 9.2 hereof, this Agreement may be terminated and the Merger abandoned at anytime prior to the Effective Time:

(a) by mutual agreement of the Company and Parent;

(b) by Parent or the Company if the Closing Date shall not have occurred by March 31, 2006, which date shall automaticallybe extended to the four-month anniversary of the date of this Agreement if the Closing Date shall not have occurred as a result of afailure to satisfy any of the conditions set forth in Section 7.1(a) Section 7.1(b) or Section 7.1(c); provided, however, that the right toterminate this Agreement under this Section 9.1(b) shall not be available to any party whose action or failure to act has been aprincipal cause of or resulted in the failure of the Merger to occur on or before such date and such action or failure to act constitutesbreach of this Agreement;

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(c) by Parent or the Company if any Governmental Entity shall have enacted, issued, promulgated, enforced or entered anystatute, rule, regulation, executive order, decree, injunction, order or other legal restraint which is in effect and which has the effect ofmaking the Merger illegal.

(d) by Parent or the Company if there shall be any action taken, or any statute, rule, regulation or order enacted,promulgated or issued or deemed applicable to the Merger by any Governmental Entity, which would constitute an Action ofDivestiture;

(e) by Parent if neither Parent nor Sub is in material breach of their obligations under this Agreement and there has been abreach of any representation, warranty, covenant or agreement of the Company contained in this Agreement such that the conditionsset forth in Section 7.2(a) hereof would not be satisfied and such breach has not been cured within twenty (20) calendar days afterwritten notice thereof to the Company; provided, however, that no cure period shall be required for a breach which by its naturecannot be cured; or

(f) by the Company if the Company is not in material breach of its obligations under this Agreement, and there has been abreach of any representation, warranty, covenant or agreement of Parent contained in this Agreement such that the conditions set forthin Section 7.3(a) hereof would not be satisfied and such breach has not been cured within twenty (20) calendar days after writtennotice thereof to Parent; provided, however, that no cure period shall be required for a breach which by its nature cannot be cured.

(g) By Parent if the Written Consent is not delivered by the Requisite Stockholder Vote within eighteen (18) hoursfollowing the exchange of signature pages by Parent, Sub, the Company and the Stockholder Representative.

9.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 9.1 hereof, this Agreement shallforthwith become void and there shall be no liability or obligation on the part of Parent or the Company, or their respective officers,directors or stockholders, if applicable; provided, however, that each party hereto and each other Person shall remain liable for itsbreaches of this Agreement, Related Agreements or in any certificate or other instruments delivered pursuant to this Agreement priorto its termination; and provided further, however, that the provisions of Sections 6.3, 6.4, 6.22 and 8.3(c) hereof, Article X hereof andthis Section 9.2 shall remain in full force and effect and survive any termination of this Agreement pursuant to the terms of thisArticle IX.

9.3 Amendment. This Agreement may be amended by the parties hereto at any time by execution of an instrument in writingsigned on behalf of the party against whom enforcement is sought; provided, however, that, following the Closing, the written consentof the Stockholder Representative shall also be required to approve any amendment on behalf of the Company. For purposes of thisSection 9.3, the Stockholders and Warrantholders agree that any amendment of this Agreement as to which the StockholderRepresentative has given his written consent shall be binding upon and effective against the Stockholders and Warrantholders whetheror not they have signed such amendment.

9.4 Extension; Waiver. At any time prior to the Closing, Parent, on the one hand, and the Company and the StockholderRepresentative, on the other hand, may, to the extent legally allowed, (a) extend the time for the performance of any of the obligationsof the other party hereto, (b) waive any inaccuracies in the representations and warranties made to such party contained herein or inany document delivered pursuant hereto, and (c) waive compliance with any of the covenants, agreements or conditions for the benefitof such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if setforth in an instrument in writing signed on behalf of such party. For purposes of this Section 9.4, the Stockholders agree that anyextension or waiver signed by the Stockholder Representative shall be binding upon and effective against all Stockholders whether ornot they have signed such extension or waiver.

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ARTICLE X

GENERAL PROVISIONS

10.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if deliveredpersonally or by commercial messenger or courier service, or mailed by registered or certified mail (return receipt requested) or sentvia facsimile (with acknowledgment of complete transmission) to the parties at the following addresses (or at such other address for aparty as shall be specified by like notice or, if specifically provided for elsewhere in this Agreement such as Section 5.3, by email);provided, however, that notices sent by mail will not be deemed given until received:

(a) if to Parent or Sub, to:

Google Inc.1600 Amphitheatre ParkwayMountain View, California 94043Attention: General CounselFacsimile No.:

with a copy to:

Wilson Sonsini Goodrich & RosatiProfessional Corporation650 Page Mill RoadPalo Alto, California 94304Attention: [***]

[***]Facsimile No.: [***]

(b) if to the Company or the Stockholder Representative, to:

[***]

with a copy to:

Gibson, Dunn & Crutcher LLP1801 California Street, Suite 4200Denver, Colorado 80202Attention: [***]Facsimile No.: [***]


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(c) If to the Escrow Agent, to:

U.S. Bank, National AssociationCorporate Trust ServicesOne California Street, Suite 2100San Francisco, California 94111Attention: [***]Facsimile No.: [***]

10.2 Interpretation. The words “include,” “includes” and “including” when used herein shall be deemed in each case to befollowed by the words “without limitation.” The table of contents and headings contained in this Agreement are for referencepurposes only and shall not affect in any way the meaning or interpretation of this Agreement.

10.3 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and thesame agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered tothe other party, it being understood that all parties need not sign the same counterpart.

10.4 Entire Agreement; Assignment. This Agreement, the Exhibits hereto, the Company Disclosure Schedule, the ParentDisclosure Schedule and other Schedules hereto, the Non-Disclosure Agreement, and the documents and instruments and otheragreements among the parties hereto referenced herein: (a) constitute the entire agreement among the parties with respect to thesubject matter hereof and supersede all prior agreements and understandings both written and oral, among the parties with respect tothe subject matter hereof, (b) except as provided in Section 6.26, are not intended to confer upon any other person any rights orremedies hereunder, and (c) shall not be assigned by operation of law or otherwise, except that Parent may assign its rights anddelegate its obligations hereunder to its affiliates as long as Parent remains ultimately liable for all of Parent’s obligations hereunder.All Exhibits, the Company Disclosure Schedule, the Parent Disclosure Schedule and other Schedules attached hereto are herebyincorporated by reference into, and made a part of, this Agreement. The disclosures contained in the Company Disclosure Scheduleand other Schedules hereto shall be deemed to relate to representations and warranties in any Section of the Agreement to which suchdisclosures relate, either expressly or as is obvious on the face of such disclosures.

10.5 Severability. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a courtof competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effectand the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of theparties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid andenforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void orunenforceable provision.

10.6 Other Remedies. Except as set forth in Sections 8.3(f) through 8.3(g), any and all remedies herein expressly conferred upona party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party,and the exercise by a party of any one remedy will not preclude the exercise of any other remedy.

10.7 Governing Law; Exclusive Jurisdiction. Except to the extent the Delaware General Corporation Law is applicable to theMerger, this Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of thelaws that might otherwise govern under applicable principles of conflicts of laws thereof. Subject to Section 10.10 hereof, each of theparties hereto irrevocably consents to the exclusive jurisdiction and venue of any court within Santa Clara County, State of California,in connection with any matter based upon or arising out of this Agreement or the matters


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contemplated herein, agrees that process may be served upon them in any manner authorized by the laws of the State of California forsuch persons and waives and covenants not to assert or plead any objection which they might otherwise have to such jurisdiction,venue and such process. Subject to Section 10.10 hereof, each party agrees not to commence any legal proceedings related heretoexcept in such courts.

10.8 Rules of Construction. The parties hereto agree that they have been represented by counsel during the negotiation andexecution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing thatambiguities in an agreement or other document will be construed against the party drafting such agreement or document.

10.9 Legal Representation. In any dispute or proceeding arising under or in connection with this Agreement including, withoutlimitation, under Article VIII, the Stockholders shall have the right, at their election, to retain the firm of Gibson, Dunn & CrutcherLLP to represent them in such matter, and Parent, for itself and for its successors and assigns and for the Indemnified Parties and theirrespective successors and assigns, hereby irrevocably waives and consents to any such representation in any such matter. The Parentacknowledges that the foregoing provision shall apply whether or not Gibson, Dunn & Crutcher LLP provides legal services to theStockholders or the Company after the Closing Date. Parent, for itself and its successors and assigns, and for the Indemnified Partiesand their respective successors and assigns, hereby irrevocably acknowledges and agrees that all communications among theStockholders and their counsel, including without limitation Gibson, Dunn & Crutcher LLP, made in connection with the negotiation,preparation, execution, delivery and closing under, or any dispute or proceeding arising under or in connection with, this Agreement,or any matter relating to any of the foregoing, are privileged communications among the Stockholders and such counsel, and neitherParent, nor any Person purporting to act on behalf of or through Parent, will seek to obtain the same by any process.

10.10 Resolution of Conflicts; Arbitration. Any claim or dispute arising out of or related to this Agreement, or the interpretation,making, performance, breach or termination thereof, shall (except as specifically set forth in this Agreement) be resolved pursuant tothe procedures set forth below.

(a) The parties to the dispute shall attempt in good faith to agree upon the respective rights of the parties with respect tosuch dispute.

(b) Either party may, but shall not be obligated to, initiate non-binding mediation of the dispute with the assistance of aneutral arbitrator belonging to and under the rules of the CPR Institute for Dispute Resolution. The party requesting the mediationshall arrange for mediation services, subject to the approval of the other party, which shall not be unreasonably withheld. Mediationshall take place in Santa Clara County, California during reasonable business hours and upon reasonable advance notice. Mediationmay be scheduled to begin at any time, but with at least ten (10) business days’ written notice to all parties. If one party initiatesmediation, the parties (i) shall participate in the mediation in good faith and shall devote reasonable time and energy to the mediationso as to promptly resolve the dispute or conclude that they cannot resolve the dispute and (ii) shall not pursue other remedies whilesuch mediation is proceeding, other than injunctive relief.

(c) If no such agreement can be reached after good faith negotiation (and, if applicable, mediation) prior to 30 days aftercommencement of such negotiation (and, if applicable, mediation) (or in the case of a dispute over a claim for indemnification underArticle VIII, prior to 30 days following delivery of an Objection Notice with respect to such claim) either party may demandarbitration of the matter, and the matter shall be settled by binding arbitration pursuant to this Section 10.10 in the County of SantaClara, California in accordance with the then current Commercial Arbitration Rules of the American Arbitration Association.Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. The arbitrator(s) shall have theauthority to grant any equitable and legal remedies that would be available in any judicial proceeding instituted to resolve a dispute.

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(d) Selection of Arbitrators. Such arbitration shall be conducted by a single arbitrator chosen by mutual agreement of theparties. Alternatively, at the request of either party before the commencement of arbitration, the arbitration shall be conducted by threeindependent arbitrators, none of whom shall have any competitive interests with any of the parties, in which case each party shall eachselect one arbitrator, and the two arbitrators so selected shall select a third arbitrator. If the dispute concerns the determination of anyContingent Payment described in Article II, the third arbitrator must be an independent accounting firm of national stature that isneutral and has no competitive interests with Parent or the Stockholder Representative (including without limitation that suchaccounting firm shall not have provided substantial services to Parent, the Stockholder Representative or any Stockholder within thethree (3) year period preceding the arbitration proceeding); provided, however, that if the dispute concerns the determination of theLaunch Contingent Payment, the third arbitrator shall (in addition to the other requirements of this Section 10.10(d)) have substantialexperience in the integration of management information systems; provided further, however, that if the dispute concerns thedetermination of an Inventory Contingency Payment or a Revenue Contingency Payment, the third arbitrator shall (in addition to theother requirements of this Section 10.10(d)) have substantial experience in the radio industry.

(e) Discovery. In any arbitration under this Section 10.10, each party shall be limited to calling a total of five witnesses bothfor purposes of deposition and the arbitration hearing, unless the arbitrator(s) determines that such a limitation would be unfair to oneor more of the parties; provided that the parties agree that the number of allowed witnesses shall be as few as possible and anyincrease to a number in excess of five shall be strictly limited to such additional witnesses as is minimally necessary (as determinedby the arbitrator(s) to avoid such unfairness). Subject to the foregoing limitation on the number of witnesses, the arbitrator orarbitrators, as the case may be, shall set a limited time period and establish procedures designed to reduce the cost and time fordiscovery while allowing the parties an opportunity, adequate in the sole judgment of the arbitrator or majority of the three arbitrators,as the case may be, to discover relevant information from the opposing parties about the subject matter of the dispute. The arbitrator,or a majority of the three arbitrators, as the case may be, shall rule upon motions to compel or limit discovery and shall have theauthority to impose sanctions for discovery abuses, including attorneys’ fees and costs, to the same extent as a competent court of lawor equity, should the arbitrators or a majority of the three arbitrators, as the case may be, determine that discovery was sought withoutsubstantial justification or that discovery was refused or objected to without substantial justification.

(f) Decision. The decision of the arbitrator or a majority of the three arbitrators, as the case may be, as to the validity andamount of any claim in such Officer’s Certificate shall be final, binding, and conclusive upon the parties to this Agreement. Suchdecision shall be written and delivered to Parent, the Stockholder Representative and the Escrow Agent and shall be supported bywritten findings of fact and conclusions which shall set forth the award, judgment, decree or order awarded by the arbitrator(s).Within 30 days of a decision of the arbitrator(s) requiring payment by one party to another, such party shall make the payment to suchother party, including any distributions out of the Escrow Fund, as applicable. The parties agree to use all commercially reasonablyefforts to cause the arbitration hearing to be conducted within 75 days after the appointment of the mutually-selected arbitrator or thelast of the three arbitrators, as the case may be, and to use all reasonable efforts to cause the decision of the arbitrator(s) to befurnished within 90 days after the appointment of the mutually-selected arbitrator or the last of the three arbitrators, as the case maybe.

(g) Other Relief. The parties to the arbitration may apply to a court of competent jurisdiction for a temporary restrainingorder, preliminary injunction or other interim or conservatory relief, as necessary, without breach of this arbitration provision andwithout abridgement of the powers of the arbitrator(s).

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(h) Costs and Expenses. The parties agree that each party shall pay its own costs and expenses (including counsel fees) ofany such arbitration, and each party waives its right to seek an order compelling the other party to pay its portion of its costs andexpenses (including counsel fees) for any arbitration; provided, however, that the arbitrator(s) may, in their discretion, determine tocompel a party to pay all or a portion of the costs and expenses (including counsel fees) of the other party(ies) if the arbitrator(s)determine that such party has acted in bad faith with respect to the matters that are the subject of the arbitration.

[remainder of page intentionally left blank]

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IN WITNESS WHEREOF, Parent, Sub, the Company, the Escrow Agent and the Stockholder Representative have caused thisAgreement to be signed, all as of the date first written above.

GOOGLE INC.

By:/s/ David C. Drummond

David C. DrummondVice President, Corporate Development

DMARC BROADCASTING, INC.

By:/s/ Chad Steelberg

Chad SteelbergChief Executive Officer

By:/s/ Ryan Steelberg

Ryan SteelbergPresident

ENUMCLAW, INC.

By:/s/ David C. Drummond

David C. DrummondPresident

U.S. BANK, NATIONAL ASSOCIATION

By:/s/ Michael P. Susnow

Michael P. SusnowVice President

STOCKHOLDER REPRESENTATIVE

By:/s/ H. Richard Dallas

H. Richard Dallas

SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER

Exhibit 31.01

CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Eric Schmidt, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Google Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results of operations and cash flows of the registrantas of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control overfinancial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control overfinancial reporting to be designed under our supervision, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented inthis report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end ofthe period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting thatoccurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case ofan annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’sboard of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal controlover financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal control over financial reporting.

Date: May 10, 2006

/s/ ERIC SCHMIDT

Eric SchmidtChief Executive Officer

Exhibit 31.02

CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO


I, George Reyes, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Google Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results of operations and cash flows of the registrantas of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control overfinancial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control overfinancial reporting to be designed under our supervision, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented inthis report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end ofthe period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting thatoccurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case ofan annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’sboard of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal controlover financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal control over financial reporting.

Date: May 10, 2006

/s/ GEORGE REYES

George Reyes ChiefFinancial Officer

Exhibit 32.01

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICERPURSUANT TO

18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO


I, Eric Schmidt, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, that the Quarterly Report of Google Inc. on Form 10-Q for the quarterly periodended March 31, 2006, fully complies with the requirements of Section 13(a) or 15(d) of the Securities ExchangeAct of 1934 and that information contained in such Form 10-Q fairly presents, in all material respects, thefinancial condition and results of operations of Google Inc.

Date: May 10, 2006 By: /s/ ERIC SCHMIDT

Name: Eric Schmidt

Title: Chief Executive Officer

I, George Reyes, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, that the Quarterly Report of Google Inc. on Form 10-Q for the quarterly periodended March 31, 2006, fully complies with the requirements of Section 13(a) or 15(d) of the Securities ExchangeAct of 1934 and that information contained in such Form 10-Q fairly presents, in all material respects, thefinancial condition and results of operations of Google Inc.

Date: May 10, 2006 By: /s/ GEORGE REYES

Name: George Reyes

Title: Chief Financial Officer

May 10, 2006

VIA OVERNIGHT COURIER FOIA Confidential Treatment RequestedUnder 17 C.F.R. §§ 200.80(b)(4) and 230.406

Office of the SecretarySecurities and Exchange Commission100 F Street, N.E.Washington, D.C. 20549

Re: Request for Confidential Treatment under Rule 24b-2 promulgated under theSecurities Exchange Act of 1934 for Exhibit 10.23 to Google Inc.’s QuarterlyReport on Form 10-Q for the quarterly period ended March 31, 2006

Ladies and Gentlemen:

In connection with the filing on May 10, 2006 by Google Inc., a Delaware corporation (the “Company”), of its Quarterly Reporton Form 10-Q for the quarterly period ended March 31, 2006 (the “Report”) with the Securities and Exchange Commission (the“Commission”), we respectfully submit on behalf of the Company this confidential treatment request pursuant to Rule 24b-2 of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”).

Enclosed is a copy of the Agreement and Plan of Merger, dated as of January 16, 2006, by and among the Company, Enumclaw,Inc., dMarc Broadcasting, Inc. and certain other parties (the “Merger Agreement”), filed as Exhibit 10.23 to the Report. The portionsof the Merger Agreement that the Company desires to keep confidential are highlighted, bracketed and in bold font (collectively, the“Confidential Portions”). We have also stamped “CONFIDENTIAL” each page of the Merger Agreement that contains ConfidentialPortions.

The Confidential Portions have been excluded from the Merger Agreement filed electronically with the Commission asExhibit 10.23 to the Report. For your convenience, we have also enclosed a copy of the Merger Agreement as filed with theCommission via EDGAR.

The Confidential Portions of the Merger Agreement for which confidential treatment is requested constitute confidentialcommercial or financial information or trade secrets within the purview of 5 U.S.C. 552(b)(4) of the Freedom of Information Act (the“FOIA”) (“Exemption 4”), as more fully described below. The Company hereby requests confidential treatment of such portions inaccordance with Rule 24b-2 of the Exchange Act, Exemption 4 and 17 C.F.R. § 200.80(b)(4). The Company submits the MergerAgreement voluntarily for review by the Commission and advises that no determination has been made by the Commission, otherfederal agencies or a court concerning confidential treatment of the Merger Agreement. In addition, please note that we have sent acopy of this letter to the Commission’s Freedom of Information Act Officer.

Securities and Exchange CommissionMay 10, 2006Page 2

In addition to the Confidential Portions, the Company also hereby requests confidential treatment of each of the following itemsunder Exemption 4 because disclosure of such information would defeat the effectiveness of any confidential treatment grantedhereunder:

• This transmittal letter and any subsequent letters regarding this request for confidential treatment.

• Any memoranda, notes, correspondence or other writings made by any member or employee of the Commission or by theCompany or any representative on its behalf relating to the Merger Agreement, this transmittal letter or any of the foregoingdocuments or any conference or telephone calls with respect thereto.

• Any copies or extracts of any of the foregoing.

This letter sets forth the basis for confidential treatment, certain background information regarding the Company and an item byitem analysis of the information for which the Company is requesting confidential treatment, including the term for which suchtreatment is requested.

I. Basis of Confidential Treatment Request

A. Statutory Provisions

The Commission may grant confidential treatment under Rule 24b-2 if it determines that disclosure is not required to protectinvestors and that disclosure would substantially damage the Company’s competitive position. Exemption 4, referred to in Rule 24b-2,exempts from the broad public disclosure requirements of the FOIA “trade secrets and commercial or financial information obtainedfrom a person and privileged or confidential.” Exemption 4 is intended to protect both the interests of commercial entities that submitproprietary information to the government and the interests of the government in receiving continued access to such data.

1. Background to Exemption 4 of the FOIA

Exemption 4 of the FOIA provides generally that the provisions of the FOIA requiring agencies to make informationavailable to the public do not apply to matters that are trade secrets and commercial or financial information obtained from a personand privileged or confidential. See generally 5 U.S.C. § 552(b)(4).

While the FOIA was intended to provide the general public with the means to better understand the processes ofgovernment, the FOIA also contains safeguards to protect “important rights of privacy with respect to certain information inGovernment files.” S. Rep. No. 89-813, at 3 (1965), quoted in National Parks and Conservation Ass’n v. Morton, 498 F.2d 765, 767(D.C. Cir. 1974) (“National Parks I”). Consequently, Exemption 4 was specifically designed to forestall any use of the FOIA to obtaininformation that would cause substantial harm to the competitive position of an individual or entity. Exemption 4 was designed both(i) to encourage submitters to provide the government with commercial and financial

CONFIDENTIAL TREATMENT REQUESTED


information and to shield such submitters from the competitive disadvantages which would result from the publication of suchinformation, and (ii) to provide the government with assurances that the information supplied is reliable and to enable the governmentto make “intelligent, well informed decisions.” National Parks I, 498 F.2d at 767-68. As explained by the Senate, the purpose ofExemption 4 is to “protect the confidentiality of information which is obtained by the Government . . . but which would customarilynot be released to the public by the person from whom it was obtained.” S. Rep. No. 89-913 at 9, quoted in National Parks I, 498 F.2dat 766. See also H.R. Rep. No. 89-1497, at 10 (1966), reprinted in 1966 U.S.C.C.A.N. 2418, 2427.

Exemption 4 is an expression of long-standing federal policy that confidential business information must remainconfidential. This policy, which seeks to preclude the pirating and unauthorized disclosure of confidential commercial information, isembodied in various provisions of federal law (i.e. 18 U.S.C. § 1905, 17 C.F.R. § 200.80(b)(4), 48 C.F.R §§ 24.201-24.203 and48 C.F.R. § 15.508). Recognizing the importance of this policy, the Court of Appeals for the Fifth Circuit has unequivocally ruled thatExemption 4 is to serve a dual purpose: “The purpose of Exemption 4 is two-fold – to protect the interests of individuals who discloseconfidential information to government agencies and to protect the Government as well.” Shermco Indus., Inc. v. Secretary of AirForce, 613 F.2d 1314, 1317 (5th Cir. 1980). Thus, Exemption 4 must be viewed as “an express affirmation of a legislative policyfavoring confidentiality of private information furnished to government agencies, the disclosure of which might be harmful to privateinterests.” Westinghouse Elec. Corp. v. Schlesinger, 542 F.2d 1190, 1211 (4th Cir. 1976), superseded by statute on other grounds asstated in CNA, 830 F.2d at 1142 n.62 (as to Exemption 3). Exemption 4 “was manifestly intended to protect that private interest.” Id.(emphasis added).

B. Applicability of Exemption 4

For Exemption 4 to apply, the following test must be satisfied: (1) the information for which an exemption is sought must bea trade secret, or such information must be commercial or financial in character; (2) such information must be obtained from a person,which includes a corporation; and (3) such information must be privileged or confidential. Nadler v. Federal Deposit Ins. Corp., 92F.3d 93, 95 (2nd Cir. 1996); GC Micro Corp v. Defense Logistics Agency, 33 F.3d 1109, 1112 (9th Cir. 1994).

The information contained in the Confidential Portions includes: (i) highly negotiated and sensitive terms, (ii) sensitivemethodology and strategies related to the Company’s business, (iii) sensitive information related to the Company’s current and futureplans for capital expenditures, infrastructure, product development, sales, marketing and pricing, (iv) sensitive information related tonew markets into which the Company is contemplating entering, (v) sensitive information related to the value the Company places oncommodities, products and services it must procure in the marketplace going forward in order to operate its business, and(vi) sensitive information related to the metrics the Company uses to measure its success with new products and in new markets. TheCompany seeks to protect this information, which has never been made available to the public, from disclosure because publicdisclosure of this information would likely cause substantial harm to the Company’s competitive position for the reasons described inPart III of this letter.



1. Commercial or Financial Information

a. Definition of “Trade Secret”

For purposes of Exemption 4, a trade secret is a “secret, commercially valuable plan, formula, process, or devicethat is used for the making, preparing, compounding, or processing of trade commodities and that can be said to be the end product ofeither innovation or substantial effort.” Center for Auto Safety v. Nat’l Highway Traffic Safety Admin., 244 F.3d 144, 150-51 (D.C.Cir. 2001), quoting Public Citizen Health Research Group v. Food and Drug Admin., 704 F.2d 1280, 1288 (D.C. Cir. 1983). Thisdefinition requires that there be a direct relationship between the trade secret and the productive process. Public Citizen, 704 F.2d at1288. Once information is determined to constitute a trade secret, the inquiry ends there and the information is exempt from therequirements of public disclosure under the FOIA. Id. at 1283.

The Company respectfully submits that certain of the Confidential Portions fall squarely within the scope of theTrade Secrets Act because they reflect information relating to “the trade secrets, processes, operations, style of work . . . or tothe . . . amount or source of any income, profits, losses, or expenditures of any person, firm, partnership, corporation, orassociation . . . .” 18 U.S.C. § 1905. In addition, courts have held that the Trade Secrets Act “‘is at least coextensive’” withExemption 4 of the FOIA. McDonnell Douglas, 180 F.3d at 305 (citation omitted). Thus “when a person can show that informationfalls within Exemption 4, the government is precluded from releasing it under the Trade Secrets Act.” Id. Accordingly, any decisionby the Commission to release the Confidential Portions, which fall within the purview of Exemption 4, pursuant to an exercise ofdiscretion would be “not in accordance with law” within the meaning of Section 10 of the Administrative Procedure Act,5 U.S.C. § 706. See Chrysler Corp. v. Brown, 441 U.S. 281, 318 (1979).

b. Definition of “Commercial or Financial Information”

The United States Court of Appeals for the District of Columbia has held that these terms should be given theirordinary meaning and has specifically rejected the argument that the term “commercial” be confined to records that “reveal basiccommercial operations,” holding instead that records are commercial so long as the submitter has a “commercial interest” in them.Public Citizen Health Research Group v. Food & Drug Admin., 704 F.2d 1280, 1290 (D.C. Cir. 1983). Examples of items generallyregarded as commercial or financial information include: business sales statistics, technical designs, license and royalty information,customer and supplier lists, and information on financial condition. See Landfair v. United States Dep’t of the Army, 645 F. Supp. 325,327 (D.C. Cir. 1986). Likewise, in Critical Mass Energy Project v. Nuclear Regulatory Comm’n, 644 F. Supp. 344, 346 (D.D.C.1986), vacated on other grounds, 830 F.2d 278, 281 (D.C. Cir. 1987), the court held that “information is commercial if it relates tocommerce, or it has been compiled in pursuit of profit.” Prices and quantities are ordinarily understood to be “commercial” in nature,since they directly affect profit. See Landfair, 645 F. Supp. at 327.

The Company respectfully submits that the Confidential Portions constitute confidential commercial or financialinformation, as such terms are described above, and that their disclosure would likely result in substantial competitive injury to theCompany for the specific reasons set forth in Part III of this letter.



2. Provided by a Person

Under the second requirement of Exemption 4, information for which confidential treatment is requested must beprovided to the Commission by a person. The Landfair court stated that the term “person” refers to a wide range of entities, includingcorporations. 645 F. Supp. at 327. The Company, which is a corporation, is a person within the meaning of Exemption 4. Accordingly,the second requirement of the test for the applicability of Exemption 4 has been satisfied with respect to the Confidential Portionsbecause such information has been provided to the Commission by the Company.

3. Privileged or Confidential Information

Commercial or financial information is considered “confidential” within the meaning of Exemption 4 where (i) it is notcustomarily released to the public by the person from whom it was obtained, and (ii) requiring disclosure would likely impair thegovernment’s ability to obtain necessary information in the future or public disclosure would cause substantial harm to thecompetitive position of the person from whom the information was obtained. S. Rep. No. 813, 89th Cong., 1st Sess. 9 (1965); see alsoBurke Energy Corp. v. Dep’t of Energy, 583 F. Supp. 507 (1984); National Parks and Conservation Ass’n v. Morton, 498 F.2d 765(1974). Evidence revealing actual competition and the likelihood of substantial competitive injury are sufficient to bring commercialinformation within the realm of confidentiality. Public Citizen, 704 F.2d at 1291.

The Company respectfully submits that the Confidential Portions should be considered “confidential” for the reasonsset forth below. In addition, because of concerns over possible competitive harm, the Company has not previously made public any ofthe redacted material in the Merger Agreement. Accordingly, the third test under Exemption 4 has been satisfied with respect to theConfidential Portions.

II. OVERVIEW

A. Company Background and Competitive Landscape

As discussed more fully in the Report, the Company is a global technology leader focused on improving the ways peopleconnect with information. The Company’s innovations in web search and advertising have made its web site a top Internet destinationand its brand one of the most recognized in the world. The Company maintains the largest, most comprehensive index of web sitesand other content, and it makes this information freely available to anyone with an Internet connection. The Company’s automatedsearch technology helps people obtain nearly instant access to relevant information from its vast online index.

The Company generates revenue primarily by delivering relevant, cost-effective online advertising. Businesses use theCompany’s advertising products to promote their own products and services with targeted advertising, and the thousands of third-party web sites that comprise the Company’s network



use its advertising products to deliver relevant ads that generate revenue and enhance the user experience. In addition, the Companyhas recently commenced efforts to broaden the type of targeted advertising it offers and the media in which it offers such advertising.The acquisition of dMarc Broadcasting effectuated through the Merger Agreement comprises one step in the Company’s strategy tooffer targeted “offline” advertising.

The Company faces formidable competition in every aspect of its business, and particularly from other companies that seekto connect people with information and provide them with relevant advertising. The Company competes with Internet advertisingcompanies, particularly in the areas of pay-for-performance and keyword-targeted Internet advertising, as well as from companies thatoffer traditional media advertising opportunities.

The Company competes to attract and retain relationships with users, advertisers and web sites and other media companies.The Company competes in this area principally on the basis of the return on investment realized by advertisers using its advertisingproducts. The Company also competes to attract and retain web sites and other media outlets as members of its network based on thesize and quality of its advertiser base, its ability to help its network members generate revenues from advertising and the terms ofagreements with its network members. In addition, the Company competes based on the quality of customer service, features and easeof use of its products. While the Company believes that it competes favorably in these areas, the industry is evolving rapidly and isbecoming increasingly competitive, and larger, more established companies are increasingly focusing on businesses that directlycompete with the Company.

B. The Merger Agreement

On January 16, 2006, the Company entered into the Merger Agreement with Enumclaw, Inc., a Delaware corporation andwholly-owned subsidiary of the Company (“Merger Sub”), dMarc Broadcasting, Inc., a Delaware corporation (“dMarc”), andcertain other parties. Under the terms of the Merger Agreement, the Company acquired all of the outstanding capital stock of dMarcby means of a reverse triangular merger, pursuant to which Merger Sub merged with and into dMarc, with dMarc surviving as awholly-owned subsidiary of the Company (the “Merger”). The Company paid $102 million upon the closing of the Merger, whichoccurred on February 17, 2006. In addition, subject to the satisfaction of certain terms and conditions described in the MergerAgreement, the Company is obligated to make additional contingent cash payments from time to time if certain product integration,net revenue and advertising inventory targets are met over the next three years. The maximum amount of potential contingentconsideration payable under the Merger Agreement is $1.136 billion over the next three years.

III. REASONS FOR REQUESTING CONFIDENTIAL TREATMENT

A. Overview

The Merger is important to the Company’s business because it represents one of its early and most significant steps towardoffering targeting advertising through traditional (or “offline”) media channels. The Confidential Portions were heavily negotiated,strategic and unique terms that, if disclosed, would be likely to cause direct substantial commercial and competitive harm to theCompany for the reasons and in the manner described below.



B. Discussion

The material for which confidential treatment has been requested is limited and is confined to certain information theCompany considers extremely proprietary in nature. Disclosure of certain information relating to capital expenditures, personnel,operations, product development, sales, marketing, pricing, the possibility of entering new markets, the methodology by which theCompany values various commodities, products and services, and the inventory and revenue targets and other anticipated events thatare the basis for contingent consideration payments, could allow competitors to predict the details and timing of the Company’s futureplans and otherwise allow competitors to appropriate and use such information to the detriment of the Company’s competitiveposition. In addition, disclosure of certain key financial terms, including valuation metrics, could disadvantage the Company in futurenegotiations to acquire other companies.

The Company does not believe that the Confidential Portions are material to the Company’s investors. By providinginvestors with the redacted version of the Merger Agreement and the descriptions of the Merger Agreement in the Company’s filingswith the Commission, the Company believes that investors will have all of the material information they need to know about thetransaction, including the upfront purchase price, the types of various contingent payments the Company could pay in the future, themaximum amount payable by the Company in each year, and all of the terms associated with the indemnification provisions providedby dMarc to the Company. Accordingly, the Company respectfully submits that disclosure of the Confidential Portions to theCompany’s stockholders, prospective stockholders and the public at large is not necessary to assure the availability of adequateinformation about the Company nor is disclosure necessary for the protection of stockholders, prospective stockholders and thepublic. The only parties that would benefit from public disclosure of the Confidential Portions are the Company’s competitors andprospective companies with whom the Company could enter into commercial arrangements for the purchase or sale of advertising oradvertising inventory or prospective companies who might enter into similar agreements with the Company in the future. Moreover,disclosure of the Confidential Portions poses a significant competitive threat to the Company and may be detrimental to the interestsof its stockholders and prospective investors because third parties could use this information to gain an unfair advantage in negotiatingfuture agreements with the Company.

The information for which the Company is requesting confidential treatment falls into the following categories:

1. Pricing, Payment and Purchase Information

Prices, purchase information, valuation metrics, contingent payment terms and related provisions (collectively, the“Purchase Information”) are terms that fall within the plain meaning of “commercial or financial information” for purposes ofExemption 4. Such terms are the result of intense negotiations and are heavily dependent on the business relationship of the parties, aswell as the specific terms of the transaction memorialized by the Merger Agreement. The Company may in the future acquire othercompanies, and disclosure of certain Purchase Information would severely inhibit the Company’s ability to obtain more favorableterms in future agreements. In addition, the Company’s industry is highly competitive. The Company faces formidable competition inevery aspect of its business, and particularly from other



companies that seek to monetize user traffic through the delivery of targeted advertising. In addition, the Company and its competitorsfrequently compete in the acquisition of the same target companies. Competitors could use certain Purchase Information as abenchmark to undercut the Company in acquisition negotiations with target companies, which would adversely affect the Company’sability to negotiate favorable terms in future agreements.

Furthermore, the Company believes that disclosure of Purchase Information beyond the information contained in theredacted version of the Merger Agreement is not necessary because detailed financial statements of the Company are already publiclyavailable in filings made with the Commission, along with detailed descriptions of the Company’s business model, revenue sourcesand expenses. Disclosure of the Purchase Information would add little value to an investor’s understanding of the Company’sbusiness, yet such disclosure would likely cause substantial harm to the Company’s competitive position.

2. Product Information

The Merger Agreement discloses information concerning innovations and products and services currently beingdeveloped or researched by the Company and the capital and other resources the Company intends to expend on the research,development, maintenance, support, sales and marketing of such products and services. This information falls within the plainmeaning of “commercial or financial information,” and the disclosure of such information would result in substantial competitiveharm to the Company. The Company expends significant capital and resources to develop, research, maintain, support, sell and marketits innovations, and disclosure of such information would give the Company’s competitors insight into the strategic direction of itsbusiness and would allow its competitors to estimate the Company’s methodology and ability to develop, maintain, support, marketand sell the technology referenced in the Merger Agreement. Disclosure of what innovations are under way or being considered at theCompany and the resources it intends to expend on such technology would enable competitors to pursue the same or similar productsor services, or might unfairly advantage counterparties with whom the Company is negotiating for the purchase of products, goods orservices, which, in each case, would threaten the Company’s ability to compete effectively in the market with respect to suchproducts. Consequently, disclosure could harm the Company in its negotiations with other providers, licensors and advertisers inconnection with its development of these innovations. Such information is confidential as it has not been previously disclosed andbecause public disclosure of this information would result in substantial economic harm to the Company and its stockholders.

Disclosure of this product and service information is unnecessary for the protection of investors because detailedinformation regarding the Company’s current products is included in the Company’s public filings made with the Commission. TheCompany believes the information in its public filings adequately provides investors with an understanding and appreciation of thedirection of the Company’s business without unnecessarily disclosing competitively sensitive information.

3. Trade Secrets and Technical Information

For purposes of Exemption 4, a trade secret is “a secret, commercially viable plan, formula, process or device that isused for the making, preparing, compounding or processing of trade



commodities and that can be said to be the end product of either innovation or substantial effort”. Anderson v. Dept of Health andHuman Servs., 907 F.2d 936, 944 (10th Cir. 1990) (quotations omitted); Public Citizen, 704 F.2d at 1288. This definition requires thatthere be a direct relationship between the trade secret and the productive process. Anderson, 907 F.2d at 944. Once information isdetermined to constitute a trade secret, the inquiry ends and the information is exempt from the requirements of public disclosureunder the FOIA. Public Citizen, 704 F.2d at 1283.

Information relating to products in development in the Merger Agreement constitutes highly confidential,commercially valuable information used by Company in the commercial development of its innovations and services. Thisconfidential information provides the Company an advantage over its competitors and thus falls squarely within the definition of atrade secret and should not be disclosed to the public. Provisions relating to product targets and performance criteria reveal areas ofresearch interest and potential product development and resources that are dedicated to various of the Company’s projects or phases ofdevelopment. As such, they constitute a “commercially viable plan” because a competitor may determine the planned timing ordevelopment and date of introduction of a product. Although certain aspects of development processes may be described in generalterms in public materials, the activities set forth in the Merger Agreement disclose technologies of interest to the Company morespecifically such that a competitor could deduce certain program characteristics including methodology and areas of productdevelopment (which the Company believes in themselves are trade secrets and commercial information) from the scheduled activities.For example, the Company firmly believes that a competitor with knowledge of the Company’s specific program objectives, researchand development strategy and technology goals would attempt to develop technologies using the same methodology and maycomplete development tools based on these technologies at a faster pace or with more success than the Company through use of theCompany’s highly confidential trade secrets. Accordingly, the Company believes that certain portions of the Merger Agreementdiscussed below should be afforded confidential treatment as trade secrets.

4. Business Strategy and Prejudice to Future Negotiations

Certain terms and conditions contained in the Merger Agreement were intensely negotiated and their disclosure wouldlikely result in significant competitive harm to the Company. The Company is likely to enter into similar arrangements with otherparties in the future. The Company’s future negotiations with other companies for similar relationships could be significantly impairedby disclosure of this confidential information. Competitors, armed with the knowledge of the terms the Company has agreed to in thepast, will be able to demand the same or better terms and undercut the Company in future negotiations. Accordingly, disclosure wouldprevent the Company from obtaining the best possible deal for its stockholders.

IV. ITEMIZATION OF CONFIDENTIAL PORTIONS AND REASONS FOR CONFIDENTIAL TREATMENT

The Company requests confidential treatment of information contained in the following portions of the Merger Agreement, ashighlighted in gray on the enclosed marked copy of the Merger Agreement:



Identification of Confidential PortionDescription of

InformationCross Reference toRelevant Discussion

• Index of Defined Terms, page V, 14th

defined termTerm describing specific measurerelevant to contingent considerationcalculations under Merger Agreement

III.B.1. Purchase Information

III.B.4. Business Strategy & Prejudice

• Index of Defined Terms, page V,22nd and 23rd defined terms

• Index of Defined Terms, page VI,39th and 40th defined terms

• Index of Defined Terms, page VII,25th defined term

Terms relating to specific internalprocess and contractual terms relevant tocontingent consideration calculationsunder Merger Agreement


III.B.3. Trade Secret

III.B.4. Business Strategy & Prejudice





• Index of Defined Terms, page VI, 25th,,29th, 31st and 38th defined terms

• Index of Defined Terms, page VIII, 1st

defined term• Index of Defined Terms, page IX, 14th

and 15th defined terms

• §2.2(b) defined terms

• §2.2(e) defined terms

• §2.2(g) defined terms

• §2.2(i) defined terms

• §§2.2(k)(ii), (iii), (iv), (v) and (vi)

• §§2.2(k)(vi)(1), (2) and (3) definedterms

• §2.2(l)

• §§2.2(n)(i)(2), (3), (4), (5) and (6)

• §2.2(p)

• §2.2(q)

• §2.2(r)

• §2.2(v)

• §2.2(w)

• §2.2(aa)(i)

• §2.2(aa)(ii)

• §2.2(ff)

• §2.2(gg)

• §2.2(ll)

Terms identifying certain products andservices relevant to contingentconsideration calculations under MergerAgreement


III.B.2. Product Information


III.B.4. Business Strategy &Prejudice

• §2.3(a)

• §2.4(a)

• §2.10

• §2.11

Terms describing certain product launchinformation relevant to contingentconsideration calculations under MergerAgreement









• §§2.7(a), (b), (c), (d), (e), (f) and (g) Terms identifying certain products andservices relevant to contingentconsideration calculations under MergerAgreement





• §3.26 Information concerning customer baseand market share


• §§2.8(a), (d), (e) and (f) Terms relating to support obligations ofthe Company relevant to contingentconsideration





• §2.8(c)• §5.3• §10.1

Specific contact information forindividuals involved in transaction

V. Term of Confidential Treatment

With respect to all of the Confidential Portions, confidential treatment is requested until January 16, 2009, which is the date three(3) years following the date on which the Merger Agreement was executed and marks the end of the period for which contingentpayments are calculated. Disclosure of the Confidential Portions prior to such date could substantially harm the Company’scompetitive positions for the reasons described above. The Company reserves the right to seek an extension of confidential treatmentbeyond such date if circumstances make such an extension necessary.

VI. ADDITIONAL INFORMATION

A. No Previous Disclosure

Because of concerns over possible competitive harm, the Company has not made public any of the redacted material in theMerger Agreement. Copies of the Merger Agreement have been carefully safeguarded at the facilities of the Company. Attorneys,accountants and other third parties who have reviewed the Merger Agreement in the course of performing services for the Companyhave done so only under strict terms of confidentiality.



B. Disclosure to Other Government Agencies and Request for Notification of Further Disclosures

The Company consents to the disclosure to government agencies, offices, or bodies, and to Congress of the provisions forwhich confidentiality has been requested.

The Company understands that in granting any order pursuant to delegated authority for confidential treatment relating tothese materials, the staff of the Commission does not undertake to furnish notice other than as required under the applicable rules andregulations.

C. Other Information

The Company would be pleased to submit any other information that the Commission or the staff may require in support ofthis request for confidential treatment.

D. Notices and Orders

All notices and orders related to this confidential treatment request should be sent to:

Google Inc.Attention: General Counsel1600 Amphitheatre ParkwayMountain View, CA 94043Phone: (650) 253-4000Fax: (650) 649-1920

with a copy to:

Wilson Sonsini Goodrich & Rosati, Professional Corporation650 Page Mill RoadPalo Alto, CA 94304Attention: Christian MontegutPhone: (650) 493-9300Fax: (650) 493-6811

VII. CONCLUSION

The Company would like to stress the harm that would result from public disclosure of the information covered by this requestfor confidential treatment. For the reasons set forth above, the Company believes that the information can justifiably be withheld fromthe public both under Rule 24b-2 of the Exchange Agent and Exemption 4 for at least the period of time requested. Disclosure of theConfidential Portions prior to such date could substantially harm the Company’s competitive positions for the reasons describedabove. The Company believes the unredacted portions of the Merger Agreement should be sufficient to enable investors to makesound investment decisions and that public access to such confidential information is not necessary for investor purposes.



In the event your determination regarding this application may be adverse to the Company as to any of the selected provisionssubmitted for confidential treatment, the Company respectfully requests that you contact the undersigned as soon as possible in orderthat we may arrange a conference or make additional submissions in support of this request for confidential treatment.

Please confirm receipt of this letter and its enclosures by date stamping the enclosed copy of this letter and returning it to theundersigned in the enclosed postage-paid envelope.

Again, please do not hesitate to contact the undersigned at (650) 493-9300 if you have any questions regarding the foregoing.

Very truly yours,

WILSON SONSINI GOODRICH & ROSATIProfessional Corporation

/s/ Christian Montegut

Christian Montegut

Enclosurescc: Freedom of Information Act Officer (without enclosures)

David DrummondMatt SuchermanDavid SegreJon Avina


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