Google's colorful logo shines like a beacon from atop a building in the center of this Michigan university town. Most don't know it, but Google Ann Arbor is the company's third-largest operation after the Mountain View, Calif., and New York Googleplexes.

Open less than a year, Google Ann Arbor is the new headquarters of the AdWords division, the company's biggest revenue generator. The Midwest outpost is already pure Googleplex culture: bins filled with various munchies line one wall like a junk-food grazing trough; an on-site cafe serves up catered lunches and a Starbucks latte machine; and a plump leather recliner, with massage controls, offers respite in a quiet corner. Lava lamps populate ledges, inflatable superheroes hang from ceilings, and on-site masseuse services and West Coast ski trips are among the employee perks.

Google Ann Arbor is staffed with only about 100 or so employees; a lot of the AdWords work is still done in Mountain View. But there are plans to increase the staff to 1,000 people and make Ann Arbor the headquarters for selling and servicing AdWords and other advertising accounts. That growth plan, laid out last year, is as good as gold, said Grady Burnett, the office's head of online sales and operations, even after Google CEO Eric Schmidt lamented to analysts in July that the company "overspent" on hiring in its second fiscal quarter.

Google could take another four years to reach its projected staff level in Ann Arbor, partly because of the training required, Burnett said. Google has leased four floors in a former bank building and thoroughly modernized them with lots of bright paint, designer tiles, and funky furniture, blowing out the low office ceiling on the top floor to create an airy, warehouse feel.

Why Ann Arbor? It's home to one of the country's best public universities, and Google wants to snatch that graduating talent before it flees Michigan and a local economy troubled by overreliance on the auto industry. Google Ann Arbor also recruits from other Midwest and East Coast universities, and has lured some Berkeley and Stanford graduates. Indeed, cubbies are mostly filled with cargo-panted 20-somethings clacking away on keyboards, the occasional dog sleeping at their feet. A smaller, more button-up contingent of employees, ad-manager types, holds animated conversations in conference rooms.

Google has said its average wage in Ann Arbor would be $47,500, a difficult one from which to support a family of four in an expensive city by Midwest standards (the relatively high number of residents holding doctorates and master's degrees in the city keep wages and living expenses well above the national median). Still, Ann Arbor is a bargain compared with the exorbitantly priced Bay Area and the wages Google has to dish out in Mountain View. The median household income in Ann Arbor was about $46,000 and the median family income $71,000 in the 2000 census, compared with $69,000 for household and $80,000 for family in Mountain View.

Google co-founder Larry Page attended the University of Michigan as an engineering undergrad and grew up in East Lansing, Mich. "He has a tremendous fondness for the area," Burnett said. Ann Arbor, with a population of 114,000, a thriving downtown, plenty of parks, and a river that snakes through the city, is the state's intellectual and cultural gem, regularly appearing on best-places-to-live rankings (or it's a quirky, liberal outpost, depending on whom you ask).

And then there's that matter of the $38 million in tax breaks over 20 years that Michigan Gov. Jennifer Granholm promised Google, during an election year, if it came to Ann Arbor (she was re-elected). Not one to be ungrateful, Google has named each of its conference rooms after a popular Michigan locale with a matching hand-painted mural, such as the Mackinac Bridge or the Tahquanemon Falls. "Google is slowly starting to engage in the community, and we see them all over the place sharing their approach to doing business, talking about their business and providing mentorship," said Michael Finney, CEO of Ann Arbor Spark, the city's economic development agency.