Google Earnings fall short of expectations.

To the surprise of Wall Street executives, Google’s second quarter earnings missed estimates and they are doubtful about the company’s ability to weather a dicey ad environment.

On Thursday, Google reported a net income of $1.25 billion with revenues of $5.37 billion for the quarter ended June 30, 2008, an increase of 39% compared to the second quarter of 2007 and an increase of 3% compared to the first quarter of 2008. Google reports its revenues, consistent with GAAP(Generally Accepted Accounting Principles), on a gross basis without deducting traffic acquisition costs, or TAC. In the second quarter of 2008, TAC totaled $1.47 billion, or 28% of advertising revenues.

"Strong international growth as well as sustained traffic increases on Google's web properties propelled us to another strong quarter, despite a more challenging economic environment," said Eric Schmidt, CEO of Google. "As we continue to focus on innovating in our core business of search, ads and apps, we also look forward to enhancing the experience of our users and expanding the reach of our advertisers and partners with new technologies and formats, particularly as our integration of DoubleClick gains momentum and creates new opportunities in display advertising and elsewhere."

Although the estimates may have been missed, Google is still in a better position than many of its peers and competitiors.

Here are some of the Highlights in Brief:

• Operating income was $1.58 billion, up from $1.55 billion in the first quarter.
• Traffic acquisition costs were $1.47 billion.
• Google site revenue was $3.53 billion, up 42 percent from a year ago, but up 4 percent from the first quarter. Partner sites (AdSense) was $1.66 billion, up 22 percent from a year ago, but down from the first quarter. International revenue was 52 percent of the total compared to 48 percent from a year ago.
• Paid clicks were up 19 percent, but down 1 percent from the first quarter.
• Google had 19,604 full-time employees as of June 30.
• Capital expenditures were $698 million, most of which was spent on IT.