##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 20-F
 
  o
    
    Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934
 or
 þ
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2007.
 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from to
 or
 o
    
    Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Date of event requiring this shell company report
 Commission file number: 000-51469
 BAIDU.COM, INC.
 
   
   
  
 
  
 
  
 Securities registered or to be registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredClass A ordinary shares, par value
US$0.00005 per share
    
    The NASDAQ Stock Market LLC*
(The NASDAQ Global Select Market)
 
 *
    
    Not for trading, but only in connection with the listing on The NASDAQ Global Select Market of
American depositary shares, each representing one Class A ordinary share. Securities registered or to be registered pursuant to Section 12(g) of the Act:
 None
 
 (Title of Class)
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 None
 
 (Title of Class)
  25,136,147 Class A ordinary shares and 8,996,842 Class B ordinary shares, par value US$0.00005 per share, as of December 31, 2007.
 þ o
 o þ
 þ o
  þ o o
  þ
  Board
    
    oOther
    
    o
  o
 o
 o þ
  o o




---



##### 



TABLE OF CONTENTS
 INTRODUCTION
    
    
    3PART I
    
    
    
    
    5Item 1.
    
    Identity of Directors, Senior Management and Advisers
    
    
    5Item 2.
    
    Offer Statistics and Expected Timetable
    
    
    5Item 3.
    
    Key Information
    
    
    5Item 4.
    
    Information on the Company
    
    
    44Item 4A
    
    Unresolved Staff Comments
    
    
    71Item 5.
    
    Operating and Financial Review and Prospects
    
    
    71Item 6.
    
    Directors, Senior Management and Employees
    
    
    96Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    105Item 8.
    
    Financial Information
    
    
    110Item 9.
    
    The Offer and Listing
    
    
    111Item 10.
    
    Additional Information
    
    
    113Item 11.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    119Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    120PART II
    
    
    121Item 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    121Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    121Item 15.
    
    Controls and Procedures
    
    
    121Item 16A
    
    Audit Committee Financial Expert
    
    
    122Item 16B
    
    Code of Ethics
    
    
    122Item 16C
    
    Principal Accountant Fees and Services
    
    
    122Item 16D
    
    Exemptions from The Listing Standards for Audit Committees
    
    
    123Item 16E
    
    Purchases of Equity Securities by The Issuer and Affiliated Purchasers
    
    
    123PART III
    
    
    123Item 17.
    
    Financial Statements
    
    
    123Item 18.
    
    Financial Statements
    
    
    123Item 19.
    
    Exhibits
    
    
    123EX-4.19 TECHNOLOGY CONSULTING AND SERVICES AGREEMENTEX-4.20 OPERATING AGREEMENTEX-4.21 WEB LAYOUT COPYRIGHT LICENSE AGREEMENTEX-4.22 PROXY AGREEMENTEX-4.23 EQUITY PLEDGE AGREEMENTEX-4.24 EQUITY PURCHASE OPTION AGREEMENTEX-4.25 LOAN AGREEMENTEX-8.1 LIST OF SUBSIDIARIESEX-12.1 CEO CERTIFICATIONEX-12.2 CFO CERTIFICATIONEX-13.1 CEO CERTIFICATIONEX-13.2 CFO CERTIFICATIONEX-15.1 CONSENT OF MAPLES AND CALDEREX-15.2 CONSENT OF HAWKHIGH LAW FIRMEX-15.3 CONSENT OF ERNST & YOUNG HUA MING
  2




---



##### Table of Contents



INTRODUCTION
               3




---



##### Table of Contents



FORWARD-LOOKING INFORMATION
   4




---



##### Table of Contents



PART I
 
 Item 1.
    
    Identity of Directors, Senior Management and Advisers
  
 Item 2.
    
    Offer Statistics and Expected Timetable
  
 Item 3.
    
    Key Information
 Selected Financial Data
  5




---



##### Table of Contents



For the Year Ended December 31,(in thousands except per share and per ADS data)
    
    2003
    
    2004
    
    2005
    
    2006
    
    2007RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    US$Consolidated Statements of
Income Data:Revenues:Online marketing services
    
    
    31,775
    
    
    
    106,854
    
    
    
    307,363
    
    
    
    828,484
    
    
    
    1,741,021
    
    
    
    238,673Other services
    
    
    8,796
    
    
    
    10,597
    
    
    
    11,852
    
    
    
    9,354
    
    
    
    3,404
    
    
    
    467Total revenues
    
    
    40,571
    
    
    
    117,451
    
    
    
    319,215
    
    
    
    837,838
    
    
    
    1,744,425
    
    
    
    239,140Operating costs and expenses:Cost of revenues
    
    
    (23,284
    )
    
    
    (41,192
    )
    
    
    (104,401
    )
    
    
    (245,489
    )
    
    
    (645,406
    )
    
    
    (88,477
    )Selling, general and
administrative
    
    
    (19,599
    )
    
    
    (50,724
    )
    
    
    (134,771
    )
    
    
    (250,240
    )
    
    
    (411,163
    )
    
    
    (56,366
    )Research and development
    
    
    (6,983
    )
    
    
    (14,531
    )
    
    
    (44,200
    )
    
    
    (79,231
    )
    
    
    (140,702
    )
    
    
    (19,289
    )Total operating costs and expenses
    
    
    (49,866
    )
    
    
    (106,447
    )
    
    
    (283,372
    )
    
    
    (574,960
    )
    
    
    (1,197,271
    )
    
    
    (164,132
    )Operating (loss)/profit
    
    
    (9,295
    )
    
    
    11,004
    
    
    
    35,843
    
    
    
    262,878
    
    
    
    547,154
    
    
    
    75,008Interest income
    
    
    325
    
    
    
    1,135
    
    
    
    13,580
    
    
    
    42,443
    
    
    
    49,009
    
    
    
    6,719Other income, net
    
    
    85
    
    
    
    347
    
    
    
    93
    
    
    
    4,098
    
    
    
    20,053
    
    
    
    2,749Income before tax and cumulative
effect of change in accounting
principle
    
    
    (8,885
    )
    
    
    12,486
    
    
    
    49,516
    
    
    
    309,419
    
    
    
    616,216
    
    
    
    84,476Taxation
    
    
    
    
    
    
    (481
    )
    
    
    (1,911
    )
    
    
    (12,256
    )
    
    
    12,752
    
    
    
    1,748Cumulative effect of change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,603
    
    
    
    
    
    
    
    Net (loss)/income
    
    
    (8,885
    )
    
    
    12,005
    
    
    
    47,605
    
    
    
    301,766
    
    
    
    628,968
    
    
    
    86,224Net (loss)/income per share of
Class A ordinary shares, per
share of Class B ordinary shares
and per ADS(1):Basic:Basic (prior to cumulative
effect of change in
accounting principle)
    
    
    (0.87
    )
    
    
    1.09
    
    
    
    2.40
    
    
    
    8.92
    
    
    
    18.57
    
    
    
    2.55Cumulative effect of change
in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.14
    
    
    
    
    
    
    
    Basic (after cumulative
effect of change in
accounting principle)
    
    
    (0.87
    )
    
    
    1.09
    
    
    
    2.40
    
    
    
    9.06
    
    
    
    18.57
    
    
    
    2.55Diluted:Diluted (prior to cumulative
effect of change in
accounting principle)
    
    
    (0.87
    )
    
    
    0.43
    
    
    
    1.49
    
    
    
    8.62
    
    
    
    18.11
    
    
    
    2.48Cumulative effect of change
in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.13
    
    
    
    
    
    
    
    
 6




---



##### Table of Contents



For the Year Ended December 31,(in thousands except per share and per ADS data)
    
    2003
    
    2004
    
    2005
    
    2006
    
    2007RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    US$Diluted (after
cumulative effect of change
in accounting principle)
    
    
    (0.87
    )
    
    
    0.43
    
    
    
    1.49
    
    
    
    8.75
    
    
    
    18.11
    
    
    
    2.48Pro forma net earnings per share
on an as converted basis for
Class A and Class B ordinary
shares (unaudited)(2):Basic
    
    
    
    
    
    
    0.45
    
    
    
    1.58
    
    
    
    9.06
    
    
    
    18.57
    
    
    
    2.55Diluted
    
    
    
    
    
    
    0.43
    
    
    
    1.49
    
    
    
    8.75
    
    
    
    18.11
    
    
    
    2.48Pro forma weighted average
aggregate number of ordinary
shares on an as converted basis
used in per share calculations
for Class A ordinary shares
(unaudited)(2):Basic
    
    
    
    
    
    
    26,696
    
    
    
    30,214
    
    
    
    33,291
    
    
    
    33,873
    
    
    
    33,873Diluted
    
    
    
    
    
    
    28,124
    
    
    
    32,044
    
    
    
    34,507
    
    
    
    34,724
    
    
    
    34,724
 
 (1)
    
    As holders of Class A and Class B ordinary shares have the same dividend right and the same
participation right in our undistributed earnings, the basic and diluted net (loss) income per
share of Class A and Class B ordinary shares are the same for all the periods presented during
which there were two classes of ordinary shares. Prior to the creation of the two classes of
ordinary shares in May 2005, we only had one class of ordinary shares. For the periods during
which there were two classes of ordinary shares, the weighted average number of ordinary
shares represents the sum of the weighted average number of Class A and Class B ordinary
shares. Please see Note 15 to our audited consolidated financial statements included in this
annual report for additional information regarding
the computation of the per share amount and the weighted average numbers of Class A and Class B
ordinary shares.(2)
    
    As holders of Class A and Class B ordinary shares have the same dividend right and the same
participation right in our undistributed earnings, the basic and diluted pro forma earnings
per share of Class A and Class B ordinary shares are the same for all the periods presented. (in thousands)
    
    As of December 31,2003
    
    2004
    
    2005
    
    2006
    
    2007RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    US$Consolidated Balance Sheets Data:Cash and cash equivalents
    
    
    62,825
    
    
    
    200,196
    
    
    
    900,593
    
    
    
    1,136,274
    
    
    
    1,350,600
    
    
    
    185,151Total assets
    
    
    76,703
    
    
    
    262,206
    
    
    
    1,136,423
    
    
    
    1,668,077
    
    
    
    2,655,908
    
    
    
    364,092Total liabilities
    
    
    19,639
    
    
    
    54,192
    
    
    
    131,370
    
    
    
    310,816
    
    
    
    634,536
    
    
    
    86,987Redeemable convertible preferred
shares
    
    
    91,622
    
    
    
    211,352
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total shareholders (deficit) / equity
    
    
    (34,558
    )
    
    
    (3,338
    )
    
    
    1,005,053
    
    
    
    1,357,261
    
    
    
    2,021,372
    
    
    
    277,105Total liabilities, redeemable
convertible preferred shares and
shareholders equity
    
    
    76,703
    
    
    
    262,206
    
    
    
    1,136,423
    
    
    
    1,668,077
    
    
    
    2,655,908
    
    
    
    364,092
 7




---



##### Table of Contents



Exchange Rate Information
   Period
    
    Noon Buying RatePeriod-End
    
    Average(1)
    
    Low
    
    High(RMB per U.S. Dollar)2003
    
    
    8.2767
    
    
    
    8.2771
    
    
    
    8.2800
    
    
    
    8.27652004
    
    
    8.2765
    
    
    
    8.2768
    
    
    
    8.2774
    
    
    
    8.27642005
    
    
    8.0702
    
    
    
    8.1826
    
    
    
    8.2765
    
    
    
    8.07022006
    
    
    7.8041
    
    
    
    7.9579
    
    
    
    8.0702
    
    
    
    7.80412007
    
    
    7.2946
    
    
    
    7.5806
    
    
    
    7.8127
    
    
    
    7.2946December
    
    
    7.2946
    
    
    
    7.3682
    
    
    
    7.4120
    
    
    
    7.29462008January
    
    
    7.1818
    
    
    
    7.2405
    
    
    
    7.2946
    
    
    
    7.1818February
    
    
    7.1115
    
    
    
    7.1644
    
    
    
    7.1973
    
    
    
    7.1100March
    
    
    7.0120
    
    
    
    7.0722
    
    
    
    7.1110
    
    
    
    7.0105April
    
    
    6.9870
    
    
    
    6.9997
    
    
    
    7.0185
    
    
    
    6.9840May
    
    
    6.9400
    
    
    
    6.9725
    
    
    
    7.0000
    
    
    
    6.9377June (through June 4, 2008)
    
    
    6.9633
    
    
    
    6.9433
    
    
    
    6.9633
    
    
    
    6.9325
 
 (1)
    
    Annual averages are calculated using the average of month-end rates of the relevant year.
Monthly averages are calculated using the average of the daily rates during the relevant
period. Capitalization and Indebtedness
  Reasons for the Offer and Use of Proceeds
  8




---



##### Table of Contents



Risk Factors
 Risks Related to Our Business
 Our limited operating history makes it difficult to evaluate our future prospects and results of
operations.
  
    
    maintain our leading position in the Internet search market in China;
    
    offer new and innovative products and services to attract and retain a larger user
base;
    
    attract additional customers and increase spending per customer;
    
    increase awareness of our brand and continue to develop user and customer loyalty;
    
    respond to competitive market conditions;
    
    respond to changes in the regulatory environment;
    
    manage risks associated with intellectual property rights;
    
    maintain effective control of our costs and expenses;
    
    attract, retain and motivate qualified personnel;
    
    build profitable operations in new markets such as the Japanese Internet search
market; and
    
    upgrade our technology to support increased traffic and expanded services.
  We sustained losses in the past and our historical financial information may not be representative
of our future results of operations.
  9




---



##### Table of Contents



If the Internet and, in particular, online marketing are not broadly adopted in China, our ability
to increase revenue and sustain profitability could be materially and adversely affected.
  
    
    difficulties associated with developing a larger user base with demographic
characteristics attractive to customers;
    
    increased competition and potential downward pressure on online marketing prices;
    
    higher customer acquisition costs due in part to the limited experience of small to
medium-sized enterprises, or SMEs, with the Internet as a marketing channel;
    
    failure to develop an independent and reliable means of verifying online traffic;
    
    ineffectiveness of our online marketing delivery, tracking and reporting systems;
and
    
    lack of increase in Internet usage in China.
 We face significant competition and may suffer from a loss of users and customers as a result.
  10




---



##### Table of Contents



Our business depends on a strong brand, and if we are not able to maintain and enhance our brand,
our business and operating results may be harmed.
   11




---



##### Table of Contents



If we fail to continue to innovate and provide products and services to attract and retain users,
we may not be able to generate sufficient user traffic levels to remain competitive.
  If we fail to keep up with rapid technological changes, our future success may be adversely
affected.
  We may face intellectual property infringement claims and other related claims that could be
time-consuming and costly to defend and may result in our inability to continue providing certain
of our existing services.
  12




---



##### Table of Contents



Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd Grokster Grokster Grokster Grokster
  13




---



##### Table of Contents



We may be subject to patent infringement claims with respect to our P4P platform.
  14




---



##### Table of Contents



We may be subject to claims based on the content found on our websites.
    15




---



##### Table of Contents



We may not be able to prevent others from unauthorized use of our intellectual property, which
could harm our business and competitive position.
  If we fail to retain existing customers or attract new customers for our online marketing services,
our business and growth prospects could be seriously harmed.
  Because we rely to a large extent on distributors in providing our P4P services, our failure to
retain key distributors or attract additional distributors could materially and adversely affect
our business. Moreover, there is no assurance that our direct sales model in some key geographic
markets will continue to be successful.
  16




---



##### Table of Contents



We rely on our Baidu Union members for a significant portion of our revenues. If we fail to retain
existing Baidu Union members or attract additional members, our revenue growth and profitability
may be adversely affected.
  Our strategy of acquiring complementary businesses, assets and technologies may fail.
  
    
    potential ongoing financial obligations and unforeseen or hidden liabilities;
    
    failure to achieve the intended objectives, benefits or revenue-enhancing
opportunities;
    
    costs and difficulties of integrating acquired businesses and managing a larger
business; and
    
    diversion of resources and management attention.
  17




---



##### Table of Contents



We may not be able to manage our expanding operations effectively.
   Our recent expansion into the Japanese market may not be successful.
    
    
    trade barriers and changes in trade regulations;
    
    difficulties in developing, staffing and simultaneously managing a foreign operation
as a result of distance, language and cultural differences;
    
    stringent local labor laws and regulations;
    
    longer customer payment cycles;
 18




---



##### Table of Contents




    
    currency exchange rate fluctuations;
    
    political or social unrest or economic instability;
    
    import or export restrictions;
    
    seasonal volatility in business activity;
    
    risks related to government regulations or required compliance with local laws and
changes in such laws and regulations; and
    
    potentially adverse tax consequences.
  Our operating results may fluctuate, which makes our results difficult to predict and could cause
our results to fall short of expectations.
  
    
    general economic conditions in China and economic conditions specific to the
Internet, Internet search and online marketing;
    
    our ability to continue to attract users to our website;
    
    our ability to attract additional customers and increase spending per customer;
    
    the announcement or introduction of new or enhanced products and services by us or
our competitors;
    
    the amount and timing of operating costs and capital expenditures related to the
maintenance and expansion of our businesses, operations and infrastructure;
    
    the results of our acquisitions of, or investments in, other businesses or assets;
    
    PRC regulations or actions pertaining to activities on the Internet, including MP3
music, news, gambling, online games and other forms of entertainment; and
    
    geopolitical events, natural disasters or epidemics such as war, threat of war,
avian influenza, Severe Acute Respiratory Syndrome, or SARS, or other public health
epidemics.
 19




---



##### Table of Contents



Our business may be adversely affected by third-party software applications that interfere with our
receipt of information from, and provision of information to, our users, which may impair our
users experience.
  Our success depends on the continuing and collaborative efforts of our senior management team and
other key personnel, and our business may be harmed if we lose their services.
   20




---



##### Table of Contents



The initial option grants to many of our key personnel are fully vested. Therefore, these employees
may not have sufficient financial incentive to continue to work for our company, and our ability to
execute our business model could be impaired if we cannot replace departing key personnel in a
timely manner.
  We rely on highly skilled personnel and, if we are unable to retain or motivate them or hire
qualified personnel, we may not be able to grow effectively.
   If we are unable to adapt or expand our existing technology infrastructure to accommodate greater
traffic or additional customer requirements, our business may be harmed.
  If we fail to detect fraudulent click-through, we could lose the confidence of our customers and
our revenues could decline.
  21




---



##### Table of Contents



The successful operation of our business depends upon the performance and reliability of the
Internet infrastructure and fixed telecommunications networks in China.
   Interruption or failure of our information technology and communications systems could impair our
ability to effectively provide our products and services, which could damage our reputation and
harm our operating results.
  22




---



##### Table of Contents



Our business could be adversely affected if our software contains bugs.
  Concerns about the security of electronic commerce transactions and confidentiality of information
on the Internet may reduce use of our network and impede our growth.
  If we fail to maintain an effective system of internal control over financial reporting, we may
lose investor confidence in the reliability of our financial statements.
   23




---



##### Table of Contents



We have limited business insurance coverage.
  Risks Related to Our Corporate Structure
 PRC laws and regulations governing our businesses and the validity of certain of our contractual
arrangements are uncertain. If we are found to be in violation, we could be subject to sanctions.
In addition, changes in such PRC laws and regulations or changes in interpretations thereof may
materially and adversely affect our business.
    24




---



##### Table of Contents



If the PRC government were to classify P4P services as a form of online advertising or as part of
Internet content provider services, we may have to conduct our P4P business through Baidu Netcom,
which would increase our effective tax rate, and we might be subject to sanctions and required to
pay delinquent taxes.
  25




---



##### Table of Contents



We may be adversely affected by complexity, uncertainties and changes in PRC regulation of Internet
business and companies, including limitations on our ability to own key assets such as our website.
  
    
    We only have contractual control over our websites. We do not own the websites due
to the restriction of foreign investment in businesses providing value-added
telecommunication services in China, including online information services.
    
    There are uncertainties relating to the regulation of the Internet business in
China, including evolving licensing practices. This means that permits, licenses or
operations at some of our companies may be subject to challenge. This may disrupt our
business, or subject us to sanctions, requirements to increase capital or other
conditions or enforcement, or compromise enforceability of related contractual
arrangements, or have other harmful effects on us.
    
    Certain PRC government authorities have stated publicly that they are in the process
of promulgating new laws and regulations that will regulate Internet activities. The
areas of regulation may include online advertising, online news displaying online
audio-video program broadcasting and the provision of culture-related information over
the Internet. Other aspects of our online operations may be regulated in the future.
If our operations do not comply with these new regulations at the time they become
effective, we could be subject to penalties.
  26




---



##### Table of Contents



In order to comply with PRC laws and regulations limiting foreign ownership of Internet and online
advertising businesses, we conduct our ICP and online advertising businesses through our
consolidated affiliated entities in China by means of contractual arrangements. If the PRC
government determines that these contractual arrangements do not comply with applicable
regulations, our business could be adversely affected.
  27




---



##### Table of Contents



Our contractual arrangements with our consolidated affiliated entities in China and their
individual shareholders may not be as effective in providing control over these entities as direct
ownership.
  The new PRC Property Rights Law may affect the perfection of the pledge in our equity pledge
agreements with our consolidated affiliated entities and their individual shareholders.
  28




---



##### Table of Contents



Our contractual arrangements with our consolidated affiliated entities in China may result in
adverse tax consequences to us.
  
    
    increasing Baidu Netcoms, Beijing Perusals and BaiduPays tax expenses without
reducing Baidu Onlines tax expenses, which could subject Baidu Netcom, Beijing Perusal
and BaiduPay to late payment fees and other penalties for under-payment of taxes; and
 
    
    resulting in Baidu Onlines loss of its preferential tax treatment.
  We may have exposure to greater than anticipated tax liabilities.
  The principal shareholder of Baidu Netcom has potential conflicts of interest with us, which may
adversely affect our business.
  29




---



##### Table of Contents



Our corporate actions are substantially controlled by our principal shareholders and affiliated
entities.
  We may be unable to collect long-term loans to the shareholders of our consolidated affiliated
entities in China.
  Risks Related to Doing Business in China
 Adverse changes in economic and political policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could adversely affect our business.
  30




---



##### Table of Contents



Regulation and censorship of information disseminated over the Internet in China may adversely
affect our business and subject us to liability for information linked to our website.
    31




---



##### Table of Contents



PRC government authorities may deem certain third-party websites unlawful and could require us
to remove links to such websites, which may reduce our user traffic and have a material adverse
effect on our business.
  Intensified government regulation of Internet cafes could restrict our ability to maintain or
increase user traffic to our website.
  The newly enacted PRC Enterprise Income Tax Law could increase the enterprise income tax rate
applicable to Baidu Online, Baidu Times and Baidu China or impose PRC withholding tax on dividends
from such PRC operating subsidiaries, which would have a material adverse effect on our result of
operations.
  32




---



##### Table of Contents



33




---



##### Table of Contents



We may be deemed a PRC resident enterprise under the EIT Law, which could subject us to PRC
taxation on our global income, and which may have a material adverse effect on our results of
operations.
  34




---



##### Table of Contents



Under the EIT Law, dividends payable by us and gains on the disposition of our shares or ADSs may
be subject to PRC taxation.
  Our subsidiaries and affiliated entities are subject to restrictions on paying dividends and making
other payments to us.
  Uncertainties with respect to the PRC legal system could adversely affect us.
   35




---



##### Table of Contents



You may experience difficulties in effecting service of legal process upon, enforcing foreign
judgments or bringing original actions in China based on United States or other foreign laws
against, us or our management.
  Governmental control of currency conversion may affect the value of your investment.
  PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents and registration requirements for employee stock ownership plans or share option plans
may subject our PRC resident beneficial owners or the plan participants to personal liability,
limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries ability to
increase their registered capital or distribute profits to us, or may otherwise adversely affect
us.
  36




---



##### Table of Contents



37




---



##### Table of Contents



A regulation adopted in August 2006 establishes more complex procedures for acquisitions conducted
by foreign investors, which could make it more difficult for us to pursue growth through
acquisitions.
  Fluctuation in the value of the RMB may have a material adverse effect on your investment.
   38




---



##### Table of Contents



We face risks related to health epidemics and other outbreaks.
  We may incur substantial administrative and staffing cost due to the promulgation of the new labor
contract law.
  Risks Related to Our ADSs
 The trading price of our ADSs has been volatile and may continue to be volatile regardless of our
operating performance
  
    
    actual or anticipated fluctuations in our quarterly operating results;
 39




---



##### Table of Contents




    
    changes in financial estimates by securities research analysts;
    
    conditions in Internet search and online marketing markets;
    
    changes in the economic performance or market valuations of other Internet search or
Internet companies that are perceived to be comparable to us;
    
    announcements by us or our competitors of new products, acquisitions, strategic
partnerships, joint ventures or capital commitments;
    
    addition or departure of key personnel;
    
    fluctuations of exchange rates between RMB and the U.S. dollar;
    
    intellectual property litigation; and
    
    general economic or political conditions in China.
  Substantial future sales or the perception of sales of our ADSs in the public market could cause
the price of our ADSs to decline.
   You may not have the same voting rights as the holders of our ordinary shares and may not receive
voting materials in time to be able to exercise your right to vote.
  40




---



##### Table of Contents



You may not be able to participate in rights offerings and may experience dilution of your holdings
as a result.
  You may be subject to limitations on transfer of your ADSs.
  You may face difficulties in protecting your interests, and your ability to protect your rights
through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands
law, conduct most of our operations in China and all of our officers reside outside the United
States.
  41




---



##### Table of Contents



Our dual-class ordinary share structure with different voting rights could discourage others from
pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs
may view as beneficial.
   42




---



##### Table of Contents



Our articles of association contain anti-takeover provisions that could adversely affect the rights
of holders of our ordinary shares and ADSs.
  
    
    A dual-class ordinary share structure.
    
    Our board of directors has the authority, without approval by the shareholders, to
issue up to a total of 10,000,000 preferred shares in one or more series. Our board of
directors may establish the number of shares to be included in each such series and may
fix the designations, preferences, powers and other rights of the shares of a series of
preferred shares.
    
    Our board of directors has the right to elect directors to fill a vacancy created by
the increase of the board of directors or the resignation, death or removal of a
director, which prevents shareholders from having the sole right to fill vacancies on
our board of directors.
 We may be classified as a passive foreign investment company, which could result in adverse U.S.
federal income tax consequence to U.S. Holders .
  43




---



##### Table of Contents



Item 4.
    
    Information on the Company
 History and Development of the Company
    Business Overview
    44




---



##### Table of Contents



www.baidu.jp
 Products and Services for Users
  Baidu Web Search
  
    
    Related Search  provides alternative search terms based on the original queries to
help users find relevant web pages quickly;
    
    Search in Results  enables users to conduct additional searches within the initial
search results;
    
    Search by Chinese Phonetics (Pinyin)  enables users to conduct quick searches by
entering Chinese phonetics with letters of the English alphabet instead of Chinese
characters;
    
    Advanced Search  enables users to create more focused queries by employing
techniques such as narrowing results to specified words or phrases, document formats,
geographic regions, time frames or websites;
    
    Snapshots  provides snapshots of web pages taken when the pages were indexed,
allowing users to view web pages that cannot be quickly or easily opened;
    
    Translation  provides instant translations of words and phrases from English to
Chinese or vice versa;
    
    Spell Checker  suggests alternate search terms when a search appears to contain
misspellings or typing errors;
 45




---



##### Table of Contents




    
    Stock Quotes  provides links to stock information of companies listed on the stock
exchanges in China;
    
    News, Knows, Postbar, Maps, Video, and Blog Information  displays results from
other Baidu products including Baidu News, Baidu Knows, Baidu Postbar, Baidu Maps,
Baidu Video Search and Baidu Blog Search;
    
    Weather, Train and Flight Schedules and Other Local Information  enables users to
check weather, domestic train and flight schedules as well as schedules of
international flights departing from or arriving in China;
 Baidu Post Bar
 Baidu News
 Baidu Knows
 Baidu MP3 Search
 Baidu Image Search
 46




---



##### Table of Contents



Baidu Space
 Baidu Encyclopedia .
 Other Search and Community Products
 Baidu Movie
 Baidu Search Ranking and Search Index
 Baidu Web Directory
 Baidu Map Search
 Baidu Yellow Page Search
 Baidu Ancient Chinese Literature Search
 47




---



##### Table of Contents



Baidu Government Information Search
 Baidu Postal Code Search
 Baidu Educational Website Search and University Search
 Baidu Legal Search
 Baidu Frequently Used Information Search
 Baidu Local Search
 Baidu Mobile Search
 Baidu Blog Search
 Baidu Search and Store
 Baidu Online Video Search
 Baidu Love
 Baidu Patent Search.
 Baidu Voice Search
 48




---



##### Table of Contents



Baidu 2008 Olympics
 Baidu Games
 Baidu Finance
 Baidu Statistics Search
 Baidu Entertainment
 Other Products offered at Baidu.com
 Baidu Japanese Language Search. www.baidu.jp
 New Products and Services Announced.
   49




---



##### Table of Contents



Products and Services for Customers
  Online Marketing Services
 P4P
    
    
    Keyword Suggestions  We suggest synonyms and associated phrases to use as keywords
or text in search listings. These suggestions can improve click-through rates of the
customers listing and increase the likelihood that a user will enter into a
transaction with the customer;
    
    Account Management  We help manage customers P4P accounts by, among other things,
adjusting keywords from time to time at their request to help increase the
click-through rate for their listings; and
    
    Performance Reporting  We provide our customers online daily reports of the number
of click-throughs, clicked keywords and the total costs incurred, as well as
statistical reports organized by geographic region.
 ProTheme
 50




---



##### Table of Contents



Fixed Ranking
 Targetizement
 Baidu TV.
 Brand-Link
 Other Forms of Online Advertising
 Other Services
   51




---



##### Table of Contents



Baidu Union
  Our Customers
 Online Marketing
  
    
    P4P Customers  Our P4P customers are those who primarily use our auction-based P4P
services. They are generally SMEs with modest marketing budgets and, as a result,
require cost-effective online marketing solutions to reach their potential customers.
Our P4P platform allows them, directly or through our distributors, to easily manage
their online marketing spending on a prepaid basis.
    
    Tailored Solutions Customers  Our tailored solutions customers generally seek
solutions to meet certain pre-determined performance metrics, such as number of
click-throughs, duration of placement, number of converted users and number of
telephone calls. They are generally medium and large enterprises with dedicated online
marketing budgets. Depending on their objectives and desired end results, we design
customized performance-based solutions comprising of P4P, fixed ranking and other query
and non-query sensitive marketing services.
 Sales and Distribution
  52




---



##### Table of Contents



Marketing
    Strategic Relationships
    53




---



##### Table of Contents



Competition
  U.S.-based Internet Search Providers
 Chinese Internet Companies
 Other Advertising Media
 Technology
  54




---



##### Table of Contents



Web Search Technology
  Link Analysis Techniques
 Information Extraction Techniques
 Web Crawling Techniques
 Chinese Language Processing Techniques
 P4P Technology
  55




---



##### Table of Contents



P4P Auction System
 P4P Billing System
 P4P Customer Service System
 ProTheme Contextual Promotion Technology
 Branded Advertising Technology
 Targetizement Technology
 Large-Scale Systems Technology
  56




---



##### Table of Contents



Intellectual Property
 
  Regulation
  57




---



##### Table of Contents



Regulations on Value-Added Telecommunications Services and Internet Content Services
     
    
    opposes the fundamental principles stated in the PRC constitution;
 58




---



##### Table of Contents




    
    compromises national security, divulges state secrets, subverts state power or
damages national unity;
    
    harms the dignity or interests of the state;
    
    incites ethnic hatred or racial discrimination or damages inter-ethnic unity;
    
    undermines the PRCs religious policy or propagates heretical teachings or feudal
superstitions;
    
    disseminates rumors, disturbs social order or disrupts social stability;
    
    disseminates obscenity or pornography, encourages gambling, violence, murder or fear
or incites the commission of a crime;
    
    insults or slanders a third party or infringes upon the lawful rights and interests
of a third party; or
    
    is otherwise prohibited by law or administrative regulations.
   Restrictions on Foreign Ownership in Value-Added Telecommunications Services
  59




---



##### Table of Contents



60




---



##### Table of Contents



Regulations on News Display
    Regulation on Internet Culture Activities
   61




---



##### Table of Contents



Regulation on Broadcasting Audio/Video Programs through the Internet
    62




---



##### Table of Contents



Regulations on Advertisements
     Regulation on Software Products
   63




---



##### Table of Contents



Regulations on Intellectual Property Rights
  Patent
 Copyright
   64




---



##### Table of Contents



Trademark
  65




---



##### Table of Contents



Regulation on Information Security
      Regulations on Internet Privacy
  66




---



##### Table of Contents



Regulations on Foreign Exchange
 Foreign Currency Exchange
   Dividend Distribution
  
    
    Wholly Foreign Owned Enterprise Law (1986), as amended;
    
    Wholly Foreign Owned Enterprise Law Implementing Rules (1990), as amended;
    
    Sino-foreign Equity Joint Venture Enterprise Law (1979), as amended;
    
    Sino-foreign Equity Joint Venture Enterprise Law Implementing Rules (1983), as
amended;
    
    PRC Enterprise Income Tax Law (2007); and
    
    Implementation Rules of the PRC Enterprise Income Tax Law (2007).
  67




---



##### Table of Contents



Foreign Exchange Registration of Offshore Investment by PRC Residents
     Regulations on Properties
  68




---



##### Table of Contents



Regulations on Labor
  Regulations on Taxation
  Regulations in Japan
  69




---



##### Table of Contents



Organizational Structure
  Name
    
    Country of Incorporation
    
    Ownership InterestBaidu Online Network Technology (Beijing) Co. Ltd.
    
    China
    
    100% indirectBaidu (China) Co., Ltd.
    
    China
    
    100% indirectBaidu.com Times Technology (Beijing) Co., Ltd.
    
    China
    
    100% indirectBaidu, Inc.
    
    Japan
    
    100% indirectBaidu Holdings Limited
    
    British Virgin Islands
    
    100% directBaidu (Hong Kong) Limited
    
    Hong Kong
    
    100% indirect
     70




---



##### Table of Contents



Property, Plant and Equipment
   
 Item 4A.
    
    Unresolved Staff Comments
  
 Item 5.
    
    Operating and Financial Review and Prospects
  Operating Results
  Revenue Composition
  
    
    online marketing services, which accounted for 96.3%, 98.9% and 99.8% of our total
revenues in 2005, 2006 and 2007, respectively; and
    
    other services, which accounted for 3.7%, 1.1% and 0.2% of our total revenues in
2005, 2006 and 2007, respectively.
 Online Marketing Services
 71




---



##### Table of Contents




    
    the number of users visiting our websites and our Baidu Union members properties;
    
    the number of searches initiated on our websites and our Baidu Union members
properties;
    
    the rate at which users click on paid search results;
    
    the number of online marketing customers;
    
    the competitiveness of bidding for keywords by P4P customers;
    
    the total online marketing budgets of our customers; and
    
    the total number of sponsored links and advertisements displayed on our websites and
the bidding price for click-through.
  72




---



##### Table of Contents



Other Services
 Revenue Collection
     Operating Costs and Expenses
  Cost of Revenues
  73




---



##### Table of Contents



For the Year Ended December 31,(in thousands, except percentages)
    
    2005
    
    2006
    
    2007RMB
    
    %
    
    RMB
    
    %
    
    RMB
    
    US$
    
    %Total revenues
    
    
    319,215
    
    
    
    100.0
    
    
    
    837,838
    
    
    
    100.0
    
    
    
    1,744,425
    
    
    
    239,140
    
    
    
    100.0Cost of revenues:Business tax and surcharges
    
    
    (20,770
    )
    
    
    6.5
    
    
    
    (51,833
    )
    
    
    6.2
    
    
    
    (108,783
    )
    
    
    (14,913
    )
    
    
    6.2Traffic acquisition costs
    
    
    (21,212
    )
    
    
    6.6
    
    
    
    (75,180
    )
    
    
    9.0
    
    
    
    (204,693
    )
    
    
    (28,061
    )
    
    
    11.7Bandwidth costs
    
    
    (21,274
    )
    
    
    6.7
    
    
    
    (40,005
    )
    
    
    4.8
    
    
    
    (117,554
    )
    
    
    (16,115
    )
    
    
    6.8Depreciation of servers and other
equipment
    
    
    (25,259
    )
    
    
    7.9
    
    
    
    (51,574
    )
    
    
    6.1
    
    
    
    (147,115
    )
    
    
    (20,168
    )
    
    
    8.4Operational expenses
    
    
    (14,912
    )
    
    
    4.7
    
    
    
    (25,481
    )
    
    
    3.0
    
    
    
    (65,544
    )
    
    
    (8,985
    )
    
    
    3.8Share-based compensation expenses
    
    
    (974
    )
    
    
    0.3
    
    
    
    (1,416
    )
    
    
    0.2
    
    
    
    (1,717
    )
    
    
    (235
    )
    
    
    0.1Total cost of revenues
    
    
    (104,401
    )
    
    
    32.7
    
    
    
    (245,489
    )
    
    
    29.3
    
    
    
    (645,406
    )
    
    
    (88,477
    )
    
    
    37.0
 Traffic Acquisition Costs
 Bandwidth Costs
 Depreciation of Servers and Other Equipment
 Operational Expenses
 Operating Expenses
  74




---



##### Table of Contents



For the Year Ended December 31,(in thousands, except percentages)
    
    2005
    
    2006
    
    2007RMB
    
    %
    
    RMB
    
    %
    
    RMB
    
    US$
    
    %Total revenues
    
    
    319,215
    
    
    
    100.0
    
    
    
    837,838
    
    
    
    100.0
    
    
    
    1,744,425
    
    
    
    239,140
    
    
    
    100.0Cost of revenues
    
    
    (104,401
    )
    
    
    32.7
    
    
    
    (245,489
    )
    
    
    29.3
    
    
    
    (645,406
    )
    
    
    (88,477
    )
    
    
    37.0Selling, general and administrative
    
    
    (134,771
    )
    
    
    42.3
    
    
    
    (250,240
    )
    
    
    29.9
    
    
    
    (411,163
    )
    
    
    (56,366
    )
    
    
    23.6Selling and marketing
    
    
    (76,173
    )
    
    
    23.9
    
    
    
    (149,856
    )
    
    
    17.9
    
    
    
    (275,283
    )
    
    
    (37,738
    )
    
    
    15.8General and administrative
    
    
    (58,598
    )
    
    
    18.4
    
    
    
    (100,384
    )
    
    
    12.0
    
    
    
    (135,880
    )
    
    
    (18,628
    )
    
    
    7.8Research and development
    
    
    (44,200
    )
    
    
    13.8
    
    
    
    (79,231
    )
    
    
    9.4
    
    
    
    (140,702
    )
    
    
    (19,289
    )
    
    
    8.1Total costs and operating expenses
    
    
    (283,372
    )
    
    
    88.8
    
    
    
    (574,960
    )
    
    
    68.6
    
    
    
    (1,197,271
    )
    
    
    (164,132
    )
    
    
    68.7
 Selling, General and Administrative Expenses
   Research and Development Expenses
  Share-based Compensation Expenses
  75




---



##### Table of Contents



For the Year Ended December 31,(in thousand)
    
    2005
    
    2006
    
    2007RMB
    
    %
    
    RMB
    
    %
    
    RMB
    
    US$
    
    %Allocation of Share-based
Compensation ExpensesCost of revenues
    
    
    974
    
    
    
    2.9
    
    
    
    1,416
    
    
    
    2.9
    
    
    
    1,717
    
    
    
    235
    
    
    
    4.3Selling, general and administrative
    
    
    22,804
    
    
    
    67.9
    
    
    
    32,970
    
    
    
    68.3
    
    
    
    17,371
    
    
    
    2,382
    
    
    
    43.6Research and development
    
    
    9,793
    
    
    
    29.2
    
    
    
    13,894
    
    
    
    28.8
    
    
    
    20,760
    
    
    
    2,846
    
    
    
    52.1Total share-based compensation expenses
    
    
    33,571
    
    
    
    100.0
    
    
    
    48,280
    
    
    
    100.0
    
    
    
    39,848
    
    
    
    5,463
    
    
    
    100.0
 Taxation
   PRC Enterprise Income Tax
  76




---



##### Table of Contents



77




---



##### Table of Contents



78




---



##### Table of Contents



PRC Business Tax
  PRC VAT
  79




---



##### Table of Contents



Critical Accounting Policies
   Revenue Recognition
  Online Marketing Services
        80




---



##### Table of Contents



Accounting for Nonmonetary Transactions
 Accounting for Advertising Barter
Transactions
 Accounting by a Grantee for an Equity Instrument to Be Received in
Conjunction with Providing Goods or Services
 
    
    The date the parties come to a mutual understanding of the terms of the equity-based
compensation arrangement and a commitment for performance by us to earn the equity
instruments is reached; or
    
    The date at which our performance necessary to earn the equity instruments is
completed.
   Revenue
Arrangements with Multiple Deliverables
 81




---



##### Table of Contents



Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendors Products)
  Other Services
 Software Revenue Recognition
  Cost of Revenues
  How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
 82




---



##### Table of Contents



Share-based Compensation Expenses
   Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services
 Income Taxes
  Accounting for Uncertainty in Income Taxes  an interpretation of
FASB Statement No. 109
 83




---



##### Table of Contents



Consolidation of Variable Interest Entities
  Goodwill and Intangible Assets
   Domain name
    
     5 yearsCustomer relationships
    
     4.9 yearsNon-competition agreement
    
     4 yearsSoftware
    
     9.8 yearsContract-based assets
    
     2.4 years
 84




---



##### Table of Contents



Allowance for Doubtful Accounts
   Impairment of Long-Lived Assets
 Accounting for the Impairment or Disposal of
Long-Lived Assets
 85




---



##### Table of Contents



Impairment of Goodwill
 Goodwill and Other
Intangible Assets
 Cash, Cash Equivalents and Short-term Investments
    86




---



##### Table of Contents



Investments
  Recent Accounting Pronouncements
 Fair Value Measurement
  Business
Combinations
 Noncontrolling Interests in
Consolidated Financial Statements
 Results of Operations
  87




---



##### Table of Contents



For the Year Ended December 31,(in thousands)
    
    2005
    
    2006
    
    2007RMB
    
    RMB
    
    RMB
    
    US$Consolidated Statements of Income DataRevenues:Online marketing services
    
    
    307,363
    
    
    
    828,484
    
    
    
    1,741,021
    
    
    
    238,673Other services
    
    
    11,852
    
    
    
    9,354
    
    
    
    3,404
    
    
    
    467Total revenues
    
    
    319,215
    
    
    
    837,838
    
    
    
    1,744,425
    
    
    
    239,140Operating costs and expenses (1):Cost of revenues
    
    
    (104,401
    )
    
    
    (245,489
    )
    
    
    (645,406
    )
    
    
    (88,477
    )Selling, general and administrative
    
    
    (134,771
    )
    
    
    (250,240
    )
    
    
    (411,163
    )
    
    
    (56,366
    )Research and development
    
    
    (44,200
    )
    
    
    (79,231
    )
    
    
    (140,702
    )
    
    
    (19,289
    )Total operating costs and expenses
    
    
    (283,372
    )
    
    
    (574,960
    )
    
    
    (1,197,271
    )
    
    
    (164,132
    )Operating profit
    
    
    35,843
    
    
    
    262,878
    
    
    
    547,154
    
    
    
    75,008Interest income
    
    
    13,580
    
    
    
    42,443
    
    
    
    49,009
    
    
    
    6,719Other income, net, including exchange gains or losses
    
    
    93
    
    
    
    4,098
    
    
    
    20,053
    
    
    
    2,749Taxation
    
    
    (1,911
    )
    
    
    (12,256
    )
    
    
    12,752
    
    
    
    1,748Cumulative effect of change in accounting principle
    
    
    
    
    
    
    4,603
    
    
    
    
    
    
    
    Net income
    
    
    47,605
    
    
    
    301,766
    
    
    
    628,968
    
    
    
    86,224
 
 (1)
    
    Share-based compensation expenses are allocated as follows: Cost of revenues
    
    
    (974
    )
    
    
    (1,416
    )
    
    
    (1,717
    )
    
    
    (235
    )Selling, general and administrative
    
    
    (22,804
    )
    
    
    (32,970
    )
    
    
    (17,371
    )
    
    
    (2,382
    )Research and development
    
    
    (9,793
    )
    
    
    (13,894
    )
    
    
    (20,760
    )
    
    
    (2,846
    )(33,571
    )
    
    
    (48,280
    )
    
    
    (39,848
    )
    
    
    (5,463
    )
 Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
 Revenues
 88




---



##### Table of Contents



Operating Costs and Expenses
 
    
    Cost of Revenues. Our cost of revenues increased by 162.9 % from RMB245.5 million
in 2006 to RMB645.4 million (US$88.5 million) in 2007. This increase was primarily
due to the following factors:
 
    
    Business Tax and Surcharges. Our business tax and surcharges increased by
109.9 % from RMB51.8 million in 2006 to RMB108.8 million (US$14.9 million) in
2007, primarily as a result of increase in our online marketing revenues.
    
    Traffic Acquisition Costs. Our traffic acquisition costs increased by
172.3% from RMB75.2 million in 2006 to RMB204.7 million (US$28.1 million) in
2007. This was primarily due to the growth of revenue contribution from our
Baidu Union members.
    
    Bandwidth Costs. Our bandwidth costs increased by 193.8 % from RMB40.0
million in 2006 to RMB117.6 million (US$16.1 million) in 2007, as a result of
increased bandwidth to support increased traffic in our existing market in
China and the new Japan market.
    
    Depreciation Expenses of Servers and Other Equipment. Our depreciation
expenses of servers and other computer hardware increased by 185.3 % from
RMB51.6 million in 2006 to RMB147.1 million (US$20.2 million) in 2007, as we
acquired more servers, network equipment and computer hardware to meet
increased user traffic and accommodate growing online marketing services.
    
    Operational Expenses. Our operational expenses increased by 157.2 % from
RMB25.5 million in 2006 to RMB65.5 million (US$9.0 million) in 2007, primarily
due to the increase in the number and compensation levels of our operating and
technical support employees to meet the needs of our growing operations.
 
    
    Selling, General and Administrative Expenses. Our selling, general and
administrative expenses increased by 64.3% from RMB250.2 million in 2006 to
RMB411.2 million (US$56.4 million) in 2007. This increase was
primarily due to the following factors:
 
    
    total salaries and benefits and staff-related expense increased by 96.0%
from RMB111.6 million in 2006 to RMB218.7 million (US$30.0 million) in 2007,
primarily due to the increased direct sales and administrative headcount to
support our expanded online marketing services;
 89




---



##### Table of Contents




    
    total office operating expenses increased by 69.2% from RMB33.2 million in
2006 to RMB56.1 million (US$7.7 million) in 2007, as a result of increase and
expansion of our direct sales offices; and
    
    total traveling, communication and entertainment expenses increased by
58.1% from RMB10.3 million in 2006 to RMB16.3 million (US$2.2 million) in
2007, primarily due to the increased administrative and direct sales headcount
to support our expanded online marketing services.
 The above increases were offset by a 47.3% decrease in share-based compensation
expenses for staff performing selling, general and administrative functions from
RMB33.0 million in 2006 to RMB17.4 million (US$2.4 million) in 2007,
primarily due to a decrease in the amount of share-based awards granted.
    
    Research and Development Expenses. Our research and development expenses increased
by 77.6 % from RMB79.2 million in 2006 to RMB140.7 million (US$19.3 million) in 2007,
primarily as a result of the increased headcount and increased compensation levels.
 Operating Profit
 Taxation
 Other income, net, including exchange gains or losses.
 Cumulative effect of change in accounting principle
 Net Income
 Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
 Revenues
 90




---



##### Table of Contents



Operating Costs and Expenses
 
    
    Cost of Revenues. Our cost of revenues increased by 135.1% from RMB104.4 million in
2005 to RMB245.5 million in 2006. This increase was primarily due to the following
factors:
 
    
    Business Tax and Surcharges. Our business tax and surcharges increased by
149.6% from RMB20.8 million in 2005 to RMB51.8 million in 2006, primarily as a
result of increase in our online marketing revenues.
    
    Traffic Acquisition Costs. Our traffic acquisition costs increased by
254.4% from RMB21.2 million in 2005 to RMB75.2 million in 2006. This was
primarily due to the growth of revenue contribution from our Baidu Union
members.
    
    Bandwidth Costs. Our bandwidth costs increased by 88.0% from RMB21.3
million in 2005 to RMB40.0 million in 2006, as a result of increased bandwidth
to support increased traffic.
    
    Depreciation Expenses of Servers and Other Equipment. Our depreciation
expenses of servers and other computer hardware increased by 104.0% from
RMB25.3 million in 2005 to RMB51.6 million in 2006, as we acquired more
servers, network equipment
and computer hardware to meet increased user traffic and accommodate
growing online marketing services.
    
    Operational Expenses. Our operational expenses increased by 70.9% from
RMB14.9 million in 2005 to RMB25.5 million in 2006, primarily due to the
increase in the number of our operating and technical support employees to
meet the needs of our growing operations.
 
    
    Selling, General and Administrative Expenses. Our selling, general and
administrative expenses increased by 85.7% from RMB134.8 million in 2005 to RMB250.2
million in 2006. This increase was primarily due to the following factors:
 
    
    total salaries and benefits increased by 136.2% from RMB47.2 million in
2005 to RMB111.6 million in 2006, primarily due to the increased
administrative and direct sales headcount along with our expanded online
marketing services;
 91




---



##### Table of Contents




    
    total office operating expenses increased by 158.4% from RMB12.8 million in
2005 to RMB33.2 million in 2006, as a result of increase and expansion of our
direct sales offices;
    
    professional expenses increased by 191.4% from RMB9.2 million in 2005 to
RMB26.9 million in 2006, primarily due to the increased expenditures
associated with being a public company, such as the compliance with the
requirements of Section 404 of the Sarbanes-Oxley Act; and
    
    share-based compensation expenses for staff performing selling, general and
administrative functions increased by 44.6% from RMB22.8 million to RMB33.0
million in 2006, primarily due to the adoption of the fair value measure of
our share-based awards under SFAS 123R since January 1, 2006.
 
    
    Research and Development Expenses. Our research and development expenses increased
by 79.3% from RMB44.2 million in 2005 to RMB79.2 million in 2006, primarily as a
result of the increased headcount.
 Operating Profit
 Taxation
 Cumulative effect of change in accounting principle
 Net Income
 Inflation
  92




---



##### Table of Contents



Foreign Currency
  Liquidity and Capital Resources
 Cash Flows and Working Capital
  For the Year Ended December 31,(in thousands)
    
    2005
    
    2006
    
    2007RMB
    
    RMB
    
    RMB
    
    US$Net cash generated from operating activities
    
    
    162,352
    
    
    
    526,144
    
    
    
    935,152
    
    
    
    128,199Net cash used in investing activities
    
    
    (181,096
    )
    
    
    (294,272
    )
    
    
    (713,216
    )
    
    
    (97,772
    )Net cash generated from financing activities
    
    
    724,333
    
    
    
    32,179
    
    
    
    40,698
    
    
    
    5,579Effect of exchange rate changes on cash
    
    
    (5,192
    )
    
    
    (28,370
    )
    
    
    (48,308
    )
    
    
    (6,624
    )Net increase in cash and cash equivalents
    
    
    700,397
    
    
    
    235,681
    
    
    
    214,326
    
    
    
    29,382Cash and cash equivalents at beginning of the period
    
    
    200,196
    
    
    
    900,593
    
    
    
    1,136,274
    
    
    
    155,769Cash and cash equivalents at end of the period
    
    
    900,593
    
    
    
    1,136,274
    
    
    
    1,350,600
    
    
    
    185,151
 Operating Activities
   93




---



##### Table of Contents



Investing Activities
   Financing Activities
    Capital Expenditures
  94




---



##### Table of Contents



Research and Development
  Trend Information
  Off-Balance Sheet Commitments and Arrangements
  Contractual Obligations and Commercial Commitments
  95




---



##### Table of Contents



Payment Due by PeriodLess than 1
    
    
    
    
    
    
    
    
    
    More than 5(in RMB thousands)
    
    Total
    
    year
    
    1-3 years
    
    3-5 years
    
    yearsOperating lease obligations (1)
    
    
    179,643
    
    
    
    128,556
    
    
    
    51,087
    
    
    
    
    
    
    
    Capital commitments (2)
    
    
    179,636
    
    
    
    179,636
    
    
    
    
    
    
    
    
    
    
    
    Other long-term obligation reflected on
balance sheets under U.S. GAAP (3)
    
    
    3,000
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    362,279
    
    
    
    311,192
    
    
    
    51,087
    
    
    
    
    
    
    
    
 
 (1)
    
    Operating lease obligations represent the lease obligations for our premises and bandwidth
obligations.(2)
    
    Capital commitments relate primarily to leasehold improvements and building construction.(3)
    
    Other long-term obligation represents the payment arrangement relating to an acquisition in
2006.  
 Item 6.
    
    Directors, Senior Management and Employees
 Directors and Senior Management
  Directors and Executive Officers
    
    Age
    
    Position/TitleRobin Yanhong Li
    
    
    39
    
    
    Chairman and Chief Executive OfficerJennifer Li
    
    
    40
    
    
    Chief Financial OfficerPeng Ye
    
    
    47
    
    
    Chief Operating OfficerWilliam I. Chang
    
    
    44
    
    
    Chief ScientistWilliam Decker
    
    
    61
    
    
    Independent DirectorJames Ding
    
    
    43
    
    
    Independent DirectorNobuyuki Idei
    
    
    70
    
    
    Independent DirectorGreg Penner
    
    
    38
    
    
    Independent Director
 Robin Yanhong Li
 Jennifer Li
 96




---



##### Table of Contents



Peng Ye
 William I. Chang
 William Decker
 James Ding
 97




---



##### Table of Contents



Nobuyuki Idei
 Greg Penner
 Compensation of Directors and Executive Officers
   98




---



##### Table of Contents



Ordinary SharesUnderlyingOutstanding
    
    Exercise PriceName
    
    Options
    
    (US$/Share)
    
    Grant Date
    
    Expiration DateRobin Yanhong Li
    
    
    50,000
    
    
    
    2.50
    
    
    April 1, 2004
    
    April 1, 200922,050
    
    
    
    49.25
    
    
    February 15, 2006
    
    February 15, 2011393
    (1)
    
    
    
    
    
    February 15, 2006
    
    N/A15,000
    
    
    
    124.90
    
    
    January 24, 2007
    
    January 24, 20122,500
    (1)
    
    
    
    
    
    January 24, 2007
    
    N/AJennifer Li(2)
    
    
    6,000
    
    
    
    317.75
    
    
    April 16, 2008
    
    April 16, 20154,500
    (1)
    
    
    
    
    
    April 16, 2008
    
    N/APeng Ye(3)
    
    
    8,500
    
    
    
    342.00
    
    
    April 25, 2008
    
    April 25, 20152,000
    (1)
    
    
    
    
    
    April 25, 2008
    
    N/AWilliam I. Chang
    
    
    30,000
    
    
    
    124.90
    
    
    January 24, 2007
    
    January 24, 20123,000
    (1)
    
    
    
    
    
    January 24, 2007
    
    N/AWilliam Decker
    
    
    800
    (1)
    
    
    
    
    
    January 11, 2008
    
    N/AJames Ding
    
    
    650
    (1)
    
    
    
    
    
    January 11, 2008
    
    N/ANobuyuki Idei
    
    
    15,000
    
    
    
    183.23
    
    
    January 10, 2008
    
    July 25, 2012Greg Penner
    
    
    650
    (1)
    
    
    
    
    
    January 11, 2008
    
    N/AOther individuals as a group
    
    
    554,564
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Restricted shares.(2)
    
    Ms. Li joined us in March 2008 and her options and restricted shares were granted on April
16, 2008. The options will vest in batches over a period a time and generally will expire
three years after vesting. The expiration date disclosed in the table is the last expiration
date.(3)
    
    Mr. Ye joined us in April 2008 and his options and restricted shares were granted on April
25, 2008. The options will vest in batches over a period a time and generally will expire
three years after vesting. The expiration date disclosed in the table is the last expiration
date. Types of Awards
 
    
    our ordinary shares;
    
    options to purchase our ordinary shares; and
    
    any other securities with value derived from the value of our ordinary shares.
 Plan Administration
 Award Agreement
 99




---



##### Table of Contents



Eligibility
 Acceleration of Awards upon Corporate Transactions
 Exercise Price and Term of Awards
  Vesting Schedule
 Repurchase Rights
 Amendment and Termination
 100




---



##### Table of Contents



Board Practices
 Board of Directors
  Committees of the Board of Directors
  Audit Committee
  
    
    appointing, retaining and overseeing the work of the independent auditors,
including resolving disagreements between the management and the independent auditors
relating to financial reporting;
    
    pre-approving all auditing and non-auditing services permitted to be performed by
the independent auditors;
    
    reviewing annually the independence and quality control procedures of the
independent auditors;
    
    reviewing and approving all proposed related party transactions;
    
    discussing the annual audited financial statements with the management;
    
    meeting separately with the independent auditors to discuss critical accounting
policies, management letters, recommendations on internal controls, the auditors
engagement letter and independence letter and other material written communications
between the independent auditors and the management; and
 101




---



##### Table of Contents




    
    attending to such other matters that are specifically delegated to our audit
committee by our board of directors from time to time.
  Compensation Committee
  
    
    reviewing and approving executive compensation;
    
    reviewing periodically and approving any long-term incentive compensation or equity
plans, programs or similar arrangements, annual bonuses, employee pension and welfare
benefit plans;
    
    determining our policy with respect to change of control or parachute payments;
and
    
    managing and reviewing director and executive officer indemnification and insurance
matters.
  Corporate Governance and Nominating Committee
  
    
    recommending to the board nominees for election or re-election to the board or for
appointments to fill any vacancies;
    
    reviewing annually the performance of each incumbent director in determining
whether to recommend such director for an additional term;
    
    overseeing the board in the boards annual review of its own performance and the
performance of the management; and
    
    considering, preparing and recommending to the board such policies and procedures
with respect to corporate governance matters as may be required or required to be
disclosed under the applicable laws or otherwise considered to be material.
 102




---



##### Table of Contents



Terms of Directors and Executive Officers
  Employees
  Share Ownership
  
    
    each of our current directors and executive officers; and
    
    each person known to us to own beneficially more than 5.0% of our shares.
  103




---



##### Table of Contents



Shares Beneficially OwnedDirectors and Executive Officers:
    

Number (1)
    

% (2)Robin Yanhong Li (3)
    
    
    5,617,608
    
    
    
    16.4
    %Jennifer Li(4)
    
    
    10,500
    
    
    
    *Peng Ye(5)
    
    
    10,500
    
    
    
    *William Chang (6)
    
    
    33,370
    
    
    
    *William Decker (7)
    
    
    800
    
    
    
    *James Ding (8)
    
    
    650
    
    
    
    *Nobuyuki Idei (9)
    
    
    15,000
    
    
    
    *Greg Penner (10)
    
    
    1,133,853
    
    
    
    3.3
    %All Directors and Executive Officers as a Group (11)
    
    
    6,822,281
    
    
    
    19.9
    %Principal Shareholders:Handsome Reward Limited (12)
    
    
    5,490,000
    
    
    
    16.1
    %
 
 *
    
    Less than 1%.(1)
    
    The number of shares beneficially owned by each listed person includes the shares
beneficially owned by such person, the shares underlying all options held by such person, and
restricted shares held by such persons. The options and restricted shares were granted under
our 2000 option plan.(2)
    
    Percentage of beneficial ownership of each listed person is based on 34,195,183 ordinary
shares (consisting of 25,300,772 Class A ordinary shares and 8,894,411 Class B ordinary
shares) of the company outstanding as of March 31, 2008, the number of ordinary shares
underlying options and the number of restricted shares held by such person as of that date.(3)
    
    Includes (i) 37,665 Class A ordinary shares held by Mr. Li, (ii) 87,050 Class A ordinary
shares issuable upon exercise of options held by Mr. Li, (iii) 2,893 restricted shares held by
Mr. Li, and (iv) 5,490,000 Class B ordinary shares held by Handsome Reward Limited, a company
wholly-owned and controlled by Mr. Li. Excludes 1,676,667 Class B ordinary shares held by
Melissa Ma, Mr. Lis wife, of which Mr. Li disclaims beneficial ownership. The business
address for Mr. Li is c/o Baidu.com, Inc., Ideal International Plaza, 12/F, No. 58 West-North
4th Ring, Beijing, 100080, PRC.(4)
    
    Includes (i) 6,000 Class A ordinary shares issuable upon exercise of options and (ii) 4,500
restricted shares, both granted on April 16, 2008. The business address for Ms. Li is c/o
Baidu.com, Inc., Ideal International Plaza, 12/F, No. 58 West-North 4th Ring, Beijing, 100080,
PRC.(5)
    
    Includes (i) 8,500 Class A ordinary shares issuable upon exercise of options and (ii) 2,000
restricted shares, both granted on April 25, 2008. The business address for Mr. Ye is c/o
Baidu.com, Inc., Ideal International Plaza, 12/F, No. 58 West-North 4th Ring, Beijing, 100080,
PRC.(6)
    
    Includes (i) 370 Class A ordinary shares in the form of ADSs beneficially owned by Mr. Chang,
(ii) 30,000 Class A ordinary shares issuable upon exercise of options held by Mr. Chang and
(iii) 3,000 restricted shares held by Mr. Chang. The business address for Mr. Chang is
Baidu.com, Inc., Ideal International Plaza, 12/F, No. 58 West-North 4th Ring, Beijing, 100080,
PRC.(7)
    
    Includes 800 restricted shares granted to Mr. Decker on January 11, 2008. The address of Mr.
Decker is 24 Nordic Way, Saranac Lake, NY, 12983, USA.(8)
    
    Includes 650 restricted shares granted to Mr. Ding on January 11, 2008. The business address
of Mr. Ding is 4/F, Zhongdian Information Tower No.6 Zhongguancun South Street, Haidian
District, Beijing 100086, PRC.(9)
    
    Includes 15,000 ordinary shares issuable upon exercise of options held by Mr. Idei. The
business address of Mr. Ideis address is Tokyo Ginko Kyoukai Building 16F,1-3-1, Marunouchi,
Chiyoda-ku, Tokyo, 100-0005, Japan. 104




---



##### Table of Contents



(10)
    
    Includes (i) 15,520 Class A shares in the form of ADSs held by Mr. Penner, (ii) 650
restricted shares, (iii) 150,000 Class A ordinary shares in the form of ADSs held by MCP Fund
I, LLC, a fund for which Mr. Penner serves as a managing member of the sole manager; and (iv)
967,683 Class B ordinary shares held by Peninsula Capital Fund I, LLC. Mr. Penner is the sole
manager of Peninsula Capital Fund I, LLC, and has sole voting and dispositive power over all
the shares held by Peninsula Capital Fund I, LLC. Mr. Penner disclaims beneficial ownership
of these shares except to the extent of his pecuniary interest therein. The business address
for Mr. Penner is 3000 Sand Hill Road, Building 1, Suite 150, Menlo Park, California 94025,
U.S.A.(11)
    
    Includes ordinary shares, ordinary shares issuable upon exercise of all options and
restricted shares held by all of our directors and executive officers as a group.(12)
    
    Represents 5,490,000 Class B ordinary shares held by Handsome Reward Limited, a British
Virgin Island company wholly-owned and controlled by Mr. Robin Yanhong Li. The business
address of Handsome Reward Limited is c/o Robin Yanhong Li, Baidu.com, Inc., Ideal
International Plaza, 12/F, No. 58 West-North 4th Ring, Beijing, 100080, PRC.   
 Item 7.
    
    Major Shareholders and Related Party Transactions
 Major Shareholders
  Related Party Transactions
 Contractual Arrangements with Baidu Netcom and Its Shareholders
  105




---



##### Table of Contents



Exclusive Technology Consulting and Services Agreement .
 Business Cooperation Agreement.
 Operating Agreement.
 Software License Agreement.
 106




---



##### Table of Contents



Other License Agreements.
 Proxy Agreement.
 Equity Pledge Agreement.
 Exclusive Equity Purchase Option Agreement.
 Loan Agreement.
 Irrevocable Power of Attorney.
 107




---



##### Table of Contents




    
    a loan agreement for an interest-free loan in an aggregate amount of RMB90.0
million;
    
    an equity pledge agreement between Robin Yanhong Li and Baidu Online; and
    
    an exclusive equity purchase option agreement between Robin Yanhong Li and Baidu
Online.
  Contractual Arrangements with Beijing Perusal and Its Shareholders
  
    
    loan agreements for interest-free loans in an aggregate amount of RMB1.0 million to
the shareholders of Beijing Perusal;
    
    equity pledge agreements between the shareholders of Beijing Perusal and Baidu
Online;
    
    exclusive equity purchase option agreements between the shareholders of Beijing
Perusal and Baidu Online;
    
    a proxy agreement among the shareholders of Beijing Perusal, Baidu Online and
Beijing Perusal;
    
    an exclusive technology consulting and services agreement between Beijing Perusal
and Baidu Online;
    
    an operating agreement between Beijing Perusal and Baidu Online; and
    
    various license agreements between Beijing Perusal and Baidu Online, including
domain name license agreements, trademark license agreements and webpage copyright
license agreements. The domain name license agreement was terminated in May 2008
because Beijing Perusal already owns the domain names primarily used in its business.
After the transfers of certain pending trademark applications from Baidu Online to
Beijing Perusal are completed, the trademark license agreement will be terminated. We
do not expect the termination of these license agreements to have any material effect
on our operations.
 108




---



##### Table of Contents



Contractual Arrangements with BaiduPay and Its Individual Shareholder
  
    
    a loan agreement for interest-free loan in an aggregate amount of RMB9.0 million to
the individual shareholder of BaiduPay;
    
    an equity pledge agreement between the individual shareholder of BaiduPay and Baidu
Online;
    
    an exclusive option agreement between the individual shareholder of BaiduPay and
Baidu Online;
    
    a proxy agreement among the individual shareholder of BaiduPay, Baidu Online and
BaiduPay;
    
    an exclusive technology consulting and services agreement between BaiduPay and Baidu
Online;
    
    operating agreement between BaiduPay and Baidu Online; and
    
    a trademark license agreement and a webpage copyright license agreement between
BaiduPay and Baidu Online. After the transfer of a pending trademark application from
Baidu Online to BaiduPay is completed, the trademark license agreement will be
terminated. We do not expect the termination of this agreement to have any material
effect on our operations.
   Share Options
  Interests of Experts and Counsel
  109




---



##### Table of Contents



Item 8.
    
    Financial Information
 Consolidated Statements and Other Financial Information
  Legal Proceedings
      Dividend Policy
  110




---



##### Table of Contents



Significant Changes
  
 Item 9.
    
    The Offer and Listing
 Offering and Listing Details.
   111




---



##### Table of Contents



Sales PriceHigh
    
    LowAnnual High and Low2005 (from August 5, 2005)
    
    
    153.98
    
    
    
    60.002006
    
    
    128.68
    
    
    
    44.442007
    
    
    429.19
    
    
    
    92.80Quarterly Highs and LowsFirst Quarter 2006
    
    
    69.90
    
    
    
    44.44Second Quarter 2006
    
    
    94.03
    
    
    
    54.25Third Quarter 2006
    
    
    96.67
    
    
    
    67.92Fourth Quarter 2006
    
    
    128.68
    
    
    
    82.24First Quarter 2007
    
    
    134.10
    
    
    
    93.44Second Quarter 2007
    
    
    172.00
    
    
    
    92.80Third Quarter 2007
    
    
    304.40
    
    
    
    161.00Fourth Quarter 2007
    
    
    429.19
    
    
    
    280.66First Quarter 2008
    
    
    397.70
    
    
    
    201.15Monthly Highs and LowsDecember 2007
    
    
    418.22
    
    
    
    348.91January 2008
    
    
    397.70
    
    
    
    237.01February 2008
    
    
    285.74
    
    
    
    223.16March 2008
    
    
    279.85
    
    
    
    201.15April 2008
    
    
    378.20
    
    
    
    243.00May 2008
    
    
    382.90
    
    
    
    321.85June 2008 (through June 4, 2008)
    
    
    348.89
    
    
    
    331.67
 Plan of Distribution
  Markets
  Selling Shareholders
  Dilution
  Expenses of the Issue
  112




---



##### Table of Contents



Item 10.
    
    Additional Information
 Share Capital
  Memorandum and Articles of Association
  Material Contracts
  Exchange Controls
  Taxation
  Cayman Islands Taxation
  113




---



##### Table of Contents



United States Federal Income Taxation
   
    
    banks;
    
    financial institutions;
    
    insurance companies;
    
    broker dealers;
    
    traders that elect to mark to market;
    
    tax-exempt entities;
    
    persons liable for alternative minimum tax;
    
    persons holding an ADS or ordinary share as part of a straddle, hedging,
conversion or integrated transaction;
    
    persons that actually or constructively own 10% or more of
our voting shares;
    
    persons holding ADSs or ordinary shares through partnerships or other
pass-through entities; or
    
    persons who acquired ADSs or ordinary shares pursuant to the exercise of
any employee share option or otherwise as consideration.
 U.S. Holders are urged to consult their tax advisors about the application of the United States
federal tax rules to their particular circumstances as well as the state and local and foreign tax
consequences to them of the purchase, ownership and disposition of ADSs or ordinary shares.
  
    
    a citizen or individual resident of the United States;
    
    a corporation (or other entity taxable as a corporation for United States
federal income tax purposes) organized under the laws of the United States, any State
or the District of Columbia;
    
    an estate whose income is subject to United States federal income taxation
regardless of its source; or
 114




---



##### Table of Contents




    
    a trust that (1) is subject to the supervision of a court within the
United States and the control of one or more United States persons or (2) has a valid
election in effect under applicable United States Treasury regulations to be treated as
a United States person.
   Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
    115




---



##### Table of Contents



Taxation of Disposition of Shares
  Passive Foreign Investment Company
  
    
    at least 75% of its gross income is passive income (the income test), or
    
    at least 50% of the value of its assets (based on an average of the
quarterly values of the assets during a taxable year) is attributable to assets that
produce or are held for the production of passive income (the asset test).
   116




---



##### Table of Contents




    
    the excess distribution or gain will be allocated ratably over your
holding period for the ADSs or ordinary shares,
    
    the amount allocated to the current taxable year, and any taxable year
prior to the first taxable year in which we became a PFIC, will be treated as ordinary
income, and
    
    the amount allocated to each other taxable year will be subject to the
highest tax rate in effect for that taxable year and the interest charge generally
applicable to underpayments of tax will be imposed on the resulting tax attributable to
each such taxable year.
   de minimis
 117




---



##### Table of Contents



Information Reporting and Backup Withholding
   Dividends and Paying Agents
  Statement by Experts
  Documents on Display
   118




---



##### Table of Contents



Subsidiary Information
  
 Item 11.
    
    Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
  119




---



##### Table of Contents



Foreign Exchange Risk
   
 Item 12.
    
    Description of Securities Other than Equity Securities
  120




---



##### Table of Contents



PART II
 
 Item 13.
    
    Defaults, Dividend Arrearages and Delinquencies
  
 Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
  
 Item 15.
    
    Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Managements Annual Report on Internal Control over Financial Reporting
 Internal Control-Integrated
Framework
   121




---



##### Table of Contents



Changes in Internal Control over Financial Reporting
  
 Item 16A.
    
    Audit Committee Financial Expert
  
 Item 16B.
    
    Code of Ethics
  
 Item 16C.
    
    Principal Accountant Fees and Services
  2006
    
    2007Audit fees (1)
    
    
    US$1,050,000
    
    
    
    US$858,000Audit-related fees(2)
    
    
    US$150,000
    
    
    
    Tax fees
    
    
    
    
    
    
    All other fees
    
    
    
    
    
    
    
 
 (1)
    
    Audit fees means the aggregate fees billed in each of the fiscal years listed for
professional services rendered by our principal auditors for the audit of our annual financial
statements. In 2006 and 2007, the audit refers to integrated audit, including financial audit
and audit pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.(2)
    
    Audit-related fees means the aggregate fees billed in each of the fiscal years listed for
assurance and related services by our principal auditors that are reasonably related to the
performance of the audit or review of our financial statements and are not reported under
Audit fees.  122




---



##### Table of Contents



Item 16D.
    
    Exemptions from the Listing Standards for Audit Committees
  
 Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  
 PART III
 
 Item 17.
    
    Financial Statements
  
 Item 18.
    
    Financial Statements
  
 Item 19.
    
    Exhibits
 Exhibit Number
    
    Description of Document1.1
    
    Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated by reference to
Exhibit 3.2 of Amendment No. 4 to our Registration Statement on Form F-1 (file no. 333-126534) filed with the
Securities and Exchange Commission on August 1, 2005)2.1
    
    Registrants Specimen American Depositary Receipt (incorporated by reference to Exhibit 4.3 (included as Exhibit
A thereof) of our Registration Statement on Form F-1 (file no. 333-126534) filed with the Securities and Exchange
Commission on July 12, 2005)2.2
    
    Registrants Specimen Certificate for Class A Ordinary Shares (incorporated by reference to Exhibit 4.2 of
Amendment No. 5 to our Registration Statement on Form
 123




---



##### Table of Contents



Exhibit Number
    
    Description of DocumentF-1 (file no. 333-126534) filed with the Securities and
Exchange Commission on August 2, 2005)2.3
    
    Form of Deposit Agreement among the Registrant, the depositary and holder of the American
Depositary Receipts (incorporated by reference to Exhibit 4.3 to our Registration Statement on
Form F-1 (file no. 333-126534) filed with the Securities and Exchange Commission on July 12,
2005)4.1
    
    Second Amended and Restated Shareholders Agreement, dated as of June 9, 2004, among the
Registrant and other parties therein (incorporated by reference to Exhibit 4.4 of our
Registration Statement on Form F-1 (file no. 333-126534) filed with the Securities and
Exchange Commission on July 12, 2005)4.2
    
    2000 Option Plan (incorporated by reference to Exhibit 10.1 of our Registration Statement on
Form F-1 (file no. 333-126534) filed with the Securities and Exchange Commission on July 12,
2005)4.3
    
    Form of Indemnification Agreement with the Registrants directors (incorporated by reference
to Exhibit 10.3 of our Registration Statement on Form F-1 (file no. 333-126534) filed with the
Securities and Exchange Commission on July 12, 2005)4.4
    
    Form of Employment Agreement between the Registrant and an Executive Officer of the Registrant
(incorporated by reference to Exhibit 10.4 of our Registration Statement on Form F-1 (file no.
333-126534) filed with the Securities and Exchange Commission on July 12, 2005)4.5
    
    Translation of Acquisition Agreement dated as of August 9, 2004 between Baidu Online and the
owner of Hao123.com (incorporated by reference to Exhibit 10.5 of our Registration Statement
on Form F-1 (file no. 333-126534) filed with the Securities and Exchange Commission on July
12, 2005)4.6
    
    Translation of Technology Consulting and Services Agreement dated as of
March 22, 2005 between Baidu Online and Baidu Netcom (incorporated by
reference to Exhibit 99.2 of our Registration Statement on Form F-1 (file
no. 333-126534) filed with the Securities and Exchange Commission on July
12, 2005)4.7
    
    Translation of Business Cooperation Agreement dated as of March 22, 2005
between Baidu Online and Baidu Netcom (incorporated by reference to Exhibit
99.3 of our Registration Statement on Form F-1 (file no. 333-126534) filed
with the Securities and Exchange Commission on July 12, 2005)4.8
    
    Translation of Operating Agreement dated as of March 22, 2005 between Baidu
Online and Baidu Netcom (incorporated by reference to Exhibit 99.4 of our
Registration Statement on Form F-1 (file no. 333-126534) filed with the
Securities and Exchange Commission on July 12, 2005)4.9
    
    Translation of Software License Agreement dated as of March 22, 2005
between Baidu Online and Baidu Netcom (incorporated by reference to Exhibit
99.5 of our Registration Statement on Form F-1 (file no. 333-126534) filed
with the Securities and Exchange Commission on July 12, 2005)4.10
    
    Translation of Trademark License Agreement dated as of March 1, 2004
between Baidu Online and Baidu Netcom and the supplementary agreement dated
as of January 18, 2005 (incorporated by reference to Exhibit 99.6 of our
Registration Statement on Form F-1 (file no. 333-126534) filed with the
Securities and Exchange Commission on July 12, 2005)4.11
    
    Translation of Domain Name License Agreement dated as of March 1, 2004
between Baidu Online and Baidu Netcom and the supplementary agreement dated
August 9, 2004 (incorporated by reference to Exhibit 99.7 of our
Registration Statement on Form
 124




---



##### Table of Contents



Exhibit Number
    
    Description of DocumentF-1 (file no. 333-126534) filed with the
Securities and Exchange Commission on July 12, 2005)4.12
    
    Translation of Web Layout Copyright License Agreement dated as of March 1,
2004 between Baidu Online and Baidu Netcom and the supplementary agreement
dated as of August 9, 2004 (incorporated by reference to Exhibit 99.8 of
our Registration Statement on Form F-1 (file no. 333-126534) filed with the
Securities and Exchange Commission on July 12, 2005)4.13
    
    Translation of Proxy Agreement dated as of August 9, 2004 among Baidu
Online, Baidu Netcom, Robin Yanhong Li and Eric Yong Xu (incorporated by
reference to Exhibit 99.9 of our Registration Statement on Form F-1 (file
no. 333-126534) filed with the Securities and Exchange Commission on July
12, 2005)4.14
    
    Translation of Equity Pledge Agreement dated as of March 22, 2005 among
Baidu Online, Robin Yanhong Li and Eric Yong Xu (incorporated by reference
to Exhibit 99.10 of our Registration Statement on Form F-1 (file no.
333-126534) filed with the Securities and Exchange Commission on July 12,
2005)4.15
    
    Translation of Exclusive Equity Purchase Option Agreement dated as of March
22, 2005 among Baidu Online, Robin Yanhong Li and Eric Yong Xu
(incorporated by reference to Exhibit 99.11 of our Registration Statement
on Form F-1 (file no. 333-126534) filed with the Securities and Exchange
Commission on July 12, 2005)4.16
    
    Translation of Loan Agreement dated as of March 22, 2005 among Baidu
Online, Robin Yanhong Li and Eric Yong Xu (incorporated by reference to
Exhibit 99.12 of our Registration Statement on Form F-1 (file no.
333-126534) filed with the Securities and Exchange Commission on July 12,
2005)4.17
    
    Translation of Form of Irrevocable Powers of Attorney issued by the
shareholders of Baidu Netcom (incorporated by reference to Exhibit 99.13 of
our Registration Statement on Form F-1 (file no. 333-126534) filed with the
Securities and Exchange Commission on July 12, 2005)4.18
    
    Translation of Land Development Contract dated December 30, 2005 between
Beijing Shichuang Science and Technology Park Development Co., Ltd. and
Baidu Online (incorporated by reference to Exhibit 4.18 of our Annual
Report on Form 20-F filed with the Securities and Exchange Commission on
June 21, 2006)4.19*
    
    Translation of the form of Technology Consulting and Services Agreement
between Baidu Online and a consolidated affiliated PRC entity4.20*
    
    Translation of the form of Operating Agreement between Baidu Online and a
consolidated affiliated PRC entity4.21*
    
    Translation of the form of Web Layout Copyright License Agreement between
Baidu Online and a consolidated affiliated PRC entity4.22*
    
    Translation of the form of Proxy Agreement among Baidu Online, a
consolidated affiliated PRC entity and the shareholders of the consolidated
affiliated PRC entity4.23*
    
    Translation of the form of Equity Pledge Agreement between Baidu Online and
the shareholder of a consolidated affiliated PRC entity4.24*
    
    Translation of the form of Exclusive Equity Purchase Option Agreement
between Baidu Online and the shareholder of a consolidated affiliated PRC
entity4.25*
    
    Translation of the form of Loan Agreement between Baidu Online and the
shareholder of a consolidated affiliated PRC entity
 125




---



##### Table of Contents



Exhibit Number
    
    Description of Document8.1*
    
    List of Subsidiaries11.1
    
    Code of Business Conduct and Ethics (incorporated by reference to Exhibit
99.14 of our Registration Statement on Form F-1 (file no. 333-126534) filed
with the Securities and Exchange Commission on July 12, 2005)12.1*
    
    CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2*
    
    CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1*
    
    CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2*
    
    CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1*
    
    Consent of Maples and Calder15.2*
    
    Consent of Hawkhigh Law Firm15.3*
    
    Consent of Ernst & Young Hua Ming
 
 *
    
    Filed with this Annual Report on Form 20-F 126




---



##### Table of Contents



SIGNATURES
  BAIDU.COM, INC.By:

/s/
Robin Yanhong LiName:
    Robin Yanhong LiTitle:
    Chairman and Chief Executive Officer  127




---



##### Table of Contents



Page(s)Reports of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2006 and 2007
    
    F-4Consolidated Statements of Income for the Years Ended December 31, 2005, 2006 and
2007
    
    F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2006 and
2007
    
    F-6Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2005, 2006 and
2007
    
    F-7Notes to the Consolidated Financial Statements
    
    F-8
 F-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
           F-2




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
          
 F-3




---



##### Table of Contents



December 31,Notes
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    US$ASSETSCurrent assets:Cash and cash equivalents
    
    
    
    
    
    
    1,136,274
    
    
    
    1,350,600
    
    
    
    185,151Short-term investments
    
    
    3
    
    
    
    85,339
    
    
    
    242,037
    
    
    
    33,180Accounts receivable, net of allowance of RMB4,211 for
2006 and RMB3,581 (US$491) for 2007
    
    
    4
    
    
    
    23,051
    
    
    
    64,274
    
    
    
    8,811Prepaid expenses and other current assets
    
    
    5
    
    
    
    32,339
    
    
    
    65,996
    
    
    
    9,047Deferred tax assets, net
    
    
    10
    
    
    
    1,734
    
    
    
    2,587
    
    
    
    355Total current assets
    
    
    
    
    
    
    1,278,737
    
    
    
    1,725,494
    
    
    
    236,544Non-current assets:Fixed assets, net
    
    
    6
    
    
    
    191,734
    
    
    
    678,886
    
    
    
    93,067Land use right, net
    
    
    
    
    
    
    92,400
    
    
    
    96,472
    
    
    
    13,225Intangible assets, net
    
    
    7
    
    
    
    44,386
    
    
    
    40,460
    
    
    
    5,547Goodwill
    
    
    7
    
    
    
    47,316
    
    
    
    51,093
    
    
    
    7,004Investments, net
    
    
    
    
    
    
    
    
    
    
    15,439
    
    
    
    2,116Deferred tax assets, net
    
    
    10
    
    
    
    5,802
    
    
    
    15,716
    
    
    
    2,154Other non-current assets
    
    
    
    
    
    
    7,702
    
    
    
    32,348
    
    
    
    4,435Total non-current assets
    
    
    
    
    
    
    389,340
    
    
    
    930,414
    
    
    
    127,548TOTAL ASSETS
    
    
    
    
    
    
    1,668,077
    
    
    
    2,655,908
    
    
    
    364,092LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accrued expenses and other liabilities
    
    
    8
    
    
    
    153,141
    
    
    
    359,310
    
    
    
    49,257Customers deposits
    
    
    
    
    
    
    141,185
    
    
    
    257,577
    
    
    
    35,310Deferred revenue
    
    
    9
    
    
    
    2,583
    
    
    
    11,832
    
    
    
    1,622Deferred income
    
    
    
    
    
    
    4,090
    
    
    
    2,485
    
    
    
    341Total current liabilities
    
    
    
    
    
    
    300,999
    
    
    
    631,204
    
    
    
    86,530Non-current liabilities:Long-term payable for business acquisition
    
    
    
    
    
    
    7,000
    
    
    
    3,000
    
    
    
    411Deferred income
    
    
    
    
    
    
    2,817
    
    
    
    332
    
    
    
    46Total non-current liabilities
    
    
    
    
    
    
    9,817
    
    
    
    3,332
    
    
    
    457Total liabilities
    
    
    
    
    
    
    310,816
    
    
    
    634,536
    
    
    
    86,987Shareholders equityClass A Ordinary Shares, par value US$0.00005 per share,
825,000,000 shares authorized, and 22,574,381 shares and
25,136,147 shares issued and outstanding as at December
31, 2006 and 2007
    
    
    13
    
    
    
    9
    
    
    
    10
    
    
    
    1Class B Ordinary Shares, par value US$0.00005 per share,
35,400,000 shares authorized, and 11,130,018 shares and
8,996,842 shares issued and outstanding as at December
31, 2006 and 2007
    
    
    13
    
    
    
    5
    
    
    
    4
    
    
    
    1Additional paid-in capital
    
    
    
    
    
    
    1,088,176
    
    
    
    1,171,575
    
    
    
    160,609Accumulated other comprehensive loss
    
    
    
    
    
    
    (33,697
    )
    
    
    (81,953
    )
    
    
    (11,235
    )Retained earnings
    
    
    15
    
    
    
    302,768
    
    
    
    931,736
    
    
    
    127,729Total shareholders equity
    
    
    
    
    
    
    1,357,261
    
    
    
    2,021,372
    
    
    
    277,105TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    
    
    
    1,668,077
    
    
    
    2,655,908
    
    
    
    364,092
  F-4




---



##### Table of Contents



For the years ended December 31,Notes
    
    2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    US$Revenues:Online marketing services
    
    
    
    
    
    
    307,363
    
    
    
    828,484
    
    
    
    1,741,021
    
    
    
    238,673Other services
    
    
    
    
    
    
    11,852
    
    
    
    9,354
    
    
    
    3,404
    
    
    
    467Total revenues
    
    
    
    
    
    
    319,215
    
    
    
    837,838
    
    
    
    1,744,425
    
    
    
    239,140Operating costs and expenses:Cost of revenues
    
    
    
    
    
    
    (104,401
    )
    
    
    (245,489
    )
    
    
    (645,406
    )
    
    
    (88,477
    )Selling, general and administrative
    
    
    
    
    
    
    (134,771
    )
    
    
    (250,240
    )
    
    
    (411,163
    )
    
    
    (56,366
    )Research and development
    
    
    
    
    
    
    (44,200
    )
    
    
    (79,231
    )
    
    
    (140,702
    )
    
    
    (19,289
    )Total operating costs and expenses
    
    
    
    
    
    
    (283,372
    )
    
    
    (574,960
    )
    
    
    (1,197,271
    )
    
    
    (164,132
    )Operating profit
    
    
    
    
    
    
    35,843
    
    
    
    262,878
    
    
    
    547,154
    
    
    
    75,008Other income:Interest income
    
    
    
    
    
    
    13,580
    
    
    
    42,443
    
    
    
    49,009
    
    
    
    6,719Foreign exchange loss, net
    
    
    
    
    
    
    (659
    )
    
    
    (89
    )
    
    
    (2,425
    )
    
    
    (332
    )Other income, net
    
    
    
    
    
    
    752
    
    
    
    4,187
    
    
    
    22,478
    
    
    
    3,081Total other income
    
    
    
    
    
    
    13,673
    
    
    
    46,541
    
    
    
    69,062
    
    
    
    9,468Net income before tax and cumulative effect of
change in accounting principle
    
    
    
    
    
    
    49,516
    
    
    
    309,419
    
    
    
    616,216
    
    
    
    84,476Income taxes
    
    
    10
    
    
    
    (1,911
    )
    
    
    (12,256
    )
    
    
    12,752
    
    
    
    1,748Net income before cumulative effect of change in
accounting principle
    
    
    
    
    
    
    47,605
    
    
    
    297,163
    
    
    
    628,968
    
    
    
    86,224Cumulative effect of change in accounting principle
    
    
    2
    
    
    
    
    
    
    
    4,603
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    47,605
    
    
    
    301,766
    
    
    
    628,968
    
    
    
    86,224Earnings per share for Class A and Class B ordinary shares:
    
    
    15Basic EPSBasic (prior to cumulative effect of change in
accounting principle)
    
    
    
    
    
    
    2.40
    
    
    
    8.92
    
    
    
    18.57
    
    
    
    2.55Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    0.14
    
    
    
    
    
    
    
    2.40
    
    
    
    9.06
    
    
    
    18.57
    
    
    
    2.55Diluted EPSDiluted (prior to cumulative effect of change in
accounting principle)
    
    
    
    
    
    
    1.49
    
    
    
    8.62
    
    
    
    18.11
    
    
    
    2.48Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    0.13
    
    
    
    
    
    
    
    1.49
    
    
    
    8.75
    
    
    
    18.11
    
    
    
    2.48Weighted average aggregate number of Class A and Class B
ordinary shares outstanding:Basic
    
    
    
    
    
    
    19,808,058
    
    
    
    33,290,696
    
    
    
    33,872,611
    
    
    
    33,872,611Diluted
    
    
    
    
    
    
    32,043,888
    
    
    
    34,506,594
    
    
    
    34,724,365
    
    
    
    34,724,365
  F-5




---



##### Table of Contents



For the years ended December 31,2005
    
    2006
    
    2007
    
    2007RMB
    
    RMB
    
    RMB
    
    US$Cash flows from operating activities:Net income
    
    
    47,605
    
    
    
    301,766
    
    
    
    628,968
    
    
    
    86,224Adjustments to reconcile net income to net cash generated from
operating activities:Depreciation of fixed assets
    
    
    30,650
    
    
    
    64,103
    
    
    
    170,731
    
    
    
    23,405Fixed assets written off
    
    
    16
    
    
    
    877
    
    
    
    622
    
    
    
    85Amortization of intangible assets and land use right
    
    
    3,136
    
    
    
    6,339
    
    
    
    10,204
    
    
    
    1,399Deferred tax assets, net
    
    
    (4,292
    )
    
    
    (3,244
    )
    
    
    (10,767
    )
    
    
    (1,476
    )Share-based compensation
    
    
    33,571
    
    
    
    48,280
    
    
    
    39,848
    
    
    
    5,463Provision for doubtful accounts
    
    
    4,301
    
    
    
    (310
    )
    
    
    (703
    )
    
    
    (96
    )Foreign exchange loss
    
    
    587
    
    
    
    89
    
    
    
    1,313
    
    
    
    180Interest income from short term investments
    
    
    
    
    
    
    
    
    
    
    (4,914
    )
    
    
    (674
    )Impairment on long-term investment
    
    
    
    
    
    
    1,976
    
    
    
    
    
    
    
    Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (4,603
    )
    
    
    
    
    
    
    Changes in operating assets and liabilities net of effects of acquisition:Accounts receivable
    
    
    (17,532
    )
    
    
    (388
    )
    
    
    (40,685
    )
    
    
    (5,577
    )Prepaid expenses and other current assets
    
    
    (8,529
    )
    
    
    (23,455
    )
    
    
    (50,442
    )
    
    
    (6,915
    )Customers deposits
    
    
    44,174
    
    
    
    70,858
    
    
    
    116,391
    
    
    
    15,956Accrued expenses and other liabilities
    
    
    27,060
    
    
    
    62,272
    
    
    
    121,167
    
    
    
    16,611Deferred revenue
    
    
    1,356
    
    
    
    (5,075
    )
    
    
    1,834
    
    
    
    252Deferred income
    
    
    249
    
    
    
    6,659
    
    
    
    (4,089
    )
    
    
    (561
    )Trading securities
    
    
    
    
    
    
    (85,339
    )
    
    
    (44,326
    )
    
    
    (6,077
    )Net cash generated from operating activities
    
    
    162,352
    
    
    
    440,805
    
    
    
    935,152
    
    
    
    128,199Cash flows from investing activities:Acquisition of fixed assets
    
    
    (88,660
    )
    
    
    (127,534
    )
    
    
    (569,091
    )
    
    
    (78,015
    )Acquisition of business
    
    
    (10,465
    )
    
    
    (43,320
    )
    
    
    (14,080
    )
    
    
    (1,930
    )Acquisition of intangible assets
    
    
    (2,144
    )
    
    
    (21,897
    )
    
    
    (4,000
    )
    
    
    (548
    )Capitalization of software costs
    
    
    (609
    )
    
    
    (982
    )
    
    
    (4,041
    )
    
    
    (554
    )Acquisition of long-term investments
    
    
    (2,018
    )
    
    
    
    
    
    
    (8,024
    )
    
    
    (1,100
    )Acquisition of short-term investments
    
    
    
    
    
    
    
    
    
    
    (108,769
    )
    
    
    (14,911
    )Acquisition of land use right
    
    
    (77,200
    )
    
    
    (15,200
    )
    
    
    (5,211
    )
    
    
    (714
    )Net cash used in investing activities
    
    
    (181,096
    )
    
    
    (208,933
    )
    
    
    (713,216
    )
    
    
    (97,772
    )Cash flows from financing activities:Proceeds from initial public offering (IPO), net of expenses
    
    
    716,297
    
    
    
    
    
    
    
    
    
    
    
    Payment for expenses in connection with IPO
    
    
    
    
    
    
    (641
    )
    
    
    
    
    
    
    Proceeds from exercise of share options
    
    
    8,036
    
    
    
    32,820
    
    
    
    40,698
    
    
    
    5,579Net cash generated from financing activities
    
    
    724,333
    
    
    
    32,179
    
    
    
    40,698
    
    
    
    5,579Effect of exchange rate changes on cash and cash equivalents
    
    
    (5,192
    )
    
    
    (28,370
    )
    
    
    (48,308
    )
    
    
    (6,624
    )Net increase in cash and cash equivalents
    
    
    700,397
    
    
    
    235,681
    
    
    
    214,326
    
    
    
    29,382Cash and cash equivalents at beginning of the year
    
    
    200,196
    
    
    
    900,593
    
    
    
    1,136,274
    
    
    
    155,769Cash and cash equivalents at end of the year
    
    
    900,593
    
    
    
    1,136,274
    
    
    
    1,350,600
    
    
    
    185,151Supplemental disclosures:Income taxes paid/(received), net
    
    
    4,655
    
    
    
    24,192
    
    
    
    (11,892
    )
    
    
    (1,630
    )Fixed asset acquisitions included in accrued expense and other liabilities
    
    
    4,803
    
    
    
    36,054
    
    
    
    126,992
    
    
    
    17,409Non-cash acquisitions of long-term investments
    
    
    
    
    
    
    
    
    
    
    7,415
    
    
    
    1,016
  F-6




---



##### Table of Contents



Redeemable convertible
    
    
    
    
    
    
    
    
    
    Additional
    
    Accumulated other
    
    
    
    
    
    Totalpreferred share
    
    Ordinary shares
    
    paid-in
    
    comprehensive
    
    Retained earnings
    
    shareholdersNumber of shares
    
    Amount
    
    Number of shares
    
    Amount
    
    capital
    
    loss
    
    (Accumulated losses)
    
    equityRMB
    
    
    
    
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMBBalances at December 31, 2004
    
    
    16,648,877
    
    
    
    211,352
    
    
    
    11,306,372
    
    
    
    4
    
    
    
    43,261
    
    
    
    
    
    
    
    (46,603
    )
    
    
    (3,338
    )Comprehensive income:Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,451
    )
    
    
    
    
    
    
    (5,451
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,605
    
    
    
    47,605Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,154Initial public offering of ordinary shares
    
    
    
    
    
    
    
    
    
    
    3,690,000
    
    
    
    2
    
    
    
    713,275
    
    
    
    
    
    
    
    
    
    
    
    713,277Conversion of redeemable preferred shares to ordinary shares
    
    
    (16,648,877
    )
    
    
    (211,352
    )
    
    
    16,648,877
    
    
    
    7
    
    
    
    211,345
    
    
    
    
    
    
    
    
    
    
    
    211,352Exercise of share options
    
    
    
    
    
    
    
    
    
    
    1,300,513
    
    
    
    1
    
    
    
    8,036
    
    
    
    
    
    
    
    
    
    
    
    8,037Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,571
    
    
    
    
    
    
    
    
    
    
    
    33,571Balances at December 31, 2005
    
    
    
    
    
    
    
    
    
    
    32,945,762
    
    
    
    14
    
    
    
    1,009,488
    
    
    
    (5,451
    )
    
    
    1,002
    
    
    
    1,005,053Comprehensive income:Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,246
    )
    
    
    
    
    
    
    (28,246
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    301,766
    
    
    
    301,766Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    273,520Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,603
    )
    
    
    
    
    
    
    
    
    
    
    (4,603
    )Exercise of share options
    
    
    
    
    
    
    
    
    
    
    758,637
    
    
    
    
    
    
    
    34,417
    
    
    
    
    
    
    
    
    
    
    
    34,417Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,663
    
    
    
    
    
    
    
    
    
    
    
    48,663Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    211
    
    
    
    
    
    
    
    
    
    
    
    211Balances at December 31, 2006
    
    
    
    
    
    
    
    
    
    
    33,704,399
    
    
    
    14
    
    
    
    1,088,176
    
    
    
    (33,697
    )
    
    
    302,768
    
    
    
    1,357,261Comprehensive income:Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48,256
    )
    
    
    
    
    
    
    (48,256
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    628,968
    
    
    
    628,968Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    580,712Exercise of share options
    
    
    
    
    
    
    
    
    
    
    428,590
    
    
    
    
    
    
    
    42,605
    
    
    
    
    
    
    
    
    
    
    
    42,605Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,794
    
    
    
    
    
    
    
    
    
    
    
    40,794Balances at December 31, 2007
    
    
    
    
    
    
    
    
    
    
    34,132,989
    
    
    
    14
    
    
    
    1,171,575
    
    
    
    (81,953
    )
    
    
    931,736
    
    
    
    2,021,372Balances at December 31, 2007, in US$
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    160,609
    
    
    
    (11,235
    )
    
    
    127,729
    
    
    
    277,105
  F-7




---



##### Table of Contents



1.
    
    ORGANIZATION AND BASIS OF PRESENTATION
  
    
    Baidu Online Network Technology (Beijing) Co., Ltd (Baidu Online) incorporated under the laws of the Peoples
Republic of China (PRC) on January 18, 2000,
    
    Baidu (China) Inc. (Baidu China) incorporated under the laws of the PRC on June 6, 2005,
    
    Baidu.com Times Technology (Beijing) Co., Ltd (Baidu Times) incorporated under the laws of the PRC on April
19, 2006, and
    
    Baidu Inc. (Baidu Inc.) incorporated in Tokyo under the laws of Japan on December 13, 2006.
   
    
    Beijing Baidu Netcom Science Technology Co., Ltd (Baidu Netcom)
incorporated under the laws of the PRC on June 5, 2001, and
    
    Beijing Perusal Technology Co., Ltd. (Beijing Perusal) incorporated
under the laws of the PRC on June 6, 2006.
    Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51
  Principles of Consolidation
  F-8




---



##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Convenience Translation
  Foreign Currency
 Foreign Currency Translation,
 Guarantees
 Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees to Others an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34
   Use of Estimates
  F-9




---



##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 Fair Value of Financial Instruments
  Cash, Cash Equivalents and Short-Term Investments
    Long-term Investments
  Capitalization of Software Developed for Internal Use
 Accounting for the Costs of Computer Software Developed or Obtained for Internal Use
 F-10




---



##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 Fixed Assets
  Leasehold improvements
    
     over the shorter of lease terms or estimated useful lives of the assetsComputer equipment
    
     3 or 5 yearsInternal use software development costs
    
     3 yearsVehicles and office equipment
    
     5 years
   Goodwill and Intangible Assets
   Domain name
    
     5 yearsCustomer relationships
    
     4.9 yearsNon-competition agreements
    
     4 yearsSoftware
    
     9.8 yearsContract-based assets
    
     2.4 years
   F-11




---



##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 Impairment of Long-Lived Assets
 Accounting for the Impairment or Disposal of Long-Lived Assets
 Accounting for Impairment of Goodwill
 Goodwill and Other
Intangible Assets
 Accounts Receivable and Other Receivables
   Deferred Income
  F-12




---



##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 Revenue Recognition
  Online marketing services
           Accounting for Nonmonetary Transactions
 F-13




---



##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 Revenue Recognition (continued)
  Accounting for Advertising Barter
Transactions
 Accounting by a Grantee for an Equity Instrument to Be Received in
Conjunction with Providing Goods or Services,
 
    
    The date the parties come to a mutual understanding of the terms of the equity-based compensation arrangement
and a commitment for performance by the Company to earn the equity instruments is reached;
    
    The date at which the Companys performance necessary to earn the equity instruments is completed.
   Revenue Arrangements with Multiple Deliverables
 Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products)
  Other services
 Software Revenue Recognition
  F-14




---



##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 Cost of Revenues
  How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income Statement
 Advertising Expenses
  Research and Development Expenses
  Leases
  Income Taxes
  F-15




---



##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 Income Taxes (Continued)
 Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109,
  Comprehensive Income
  Share-based Compensation
 Share-Based Payment Accounting for Stock Issued to Employees
  F-16




---



##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 Share-based Compensation (Continued)
  Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services
  2005RMBNet income, as reported
    
    
    47,605Add: Share-based compensation expense for employees
included in reported net income
    
    
    11,085Deduct: Share-based compensation expense for
employees determined under fair value method
    
    
    (18,995
    )Pro forma net income
    
    
    39,695Basic net income per Class A and Class B ordinary sharesAs reported
    
    
    2.40Pro forma
    
    
    2.00Diluted net income per Class A and Class B ordinary sharesAs reported
    
    
    1.49Pro forma
    
    
    1.24
  F-17




---



##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 Earning Per Share (EPS)
 Earnings per Share,
 Participating Securities and the Two-Class Method under FASB Statement No. 128
  F-18




---



##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 Earning Per Share (EPS) (Continued)
  For the years ended December 31,2005
    
    
    2006
    
    
    2007Class A
    
    
    Class B
    
    
    Class A
    
    
    Class B
    
    
    Class A
    
    
    Class A
    
    
    Class B
    
    
    Class BRMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    RMB
    
    
    US$
    
    
    RMB
    
    
    US$Numerator:Allocation of undistributed earnings
    
    
    5,791
    
    
    
    41,814
    
    
    
    137,874
    
    
    
    163,892
    
    
    
    428,128
    
    
    
    58,691
    
    
    
    200,840
    
    
    
    27,533Denominator:Weighted average of issued shares outstanding
    
    
    2,409,728
    
    
    
    17,398,293
    
    
    
    15,209,525
    
    
    
    18,080,464
    
    
    
    23,056,501
    
    
    
    23,056,501
    
    
    
    10,816,110
    
    
    
    10,816,110Weighted average of options exercised but related
shares not yet issued (as below)
    
    
    
    
    
    
    37
    
    
    
    707
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Denominator used for basic earnings per Class A and
Class B ordinary shares
    
    
    2,409,728
    
    
    
    17,398,330
    
    
    
    15,210,232
    
    
    
    18,080,464
    
    
    
    23,056,501
    
    
    
    23,056,501
    
    
    
    10,816,110
    
    
    
    10,816,110Basic earnings per Class A and Class B ordinary shares
    
    
    2.40
    
    
    
    2.40
    
    
    
    9.06
    
    
    
    9.06
    
    
    
    18.57
    
    
    
    2.55
    
    
    
    18.57
    
    
    
    2.55Numerator:Allocation of undistributed earnings for
diluted computation
    
    
    6,242
    
    
    
    41,363
    
    
    
    133,739
    
    
    
    168,027
    
    
    
    420,463
    
    
    
    57,640
    
    
    
    208,505
    
    
    
    28,584Reallocation of undistributed earnings as a result
of conversion of Class B to Class A shares
    
    
    41,363
    
    
    
    
    
    
    
    168,027
    
    
    
    
    
    
    
    208,505
    
    
    
    28,584
    
    
    
    
    
    
    
    Allocation of undistributed earnings-diluted
    
    
    47,605
    
    
    
    41,363
    
    
    
    301,766
    
    
    
    168,027
    
    
    
    628,968
    
    
    
    86,224
    
    
    
    208,505
    
    
    
    28,584Denominator:Weighted average ordinary shares outstanding-basic
    
    
    2,409,728
    
    
    
    17,398,330
    
    
    
    15,210,232
    
    
    
    18,080,464
    
    
    
    23,056,501
    
    
    
    23,056,501
    
    
    
    10,816,110
    
    
    
    10,816,110Conversion of Class B to Class A ordinary shares
    
    
    27,803,879
    
    
    
    
    
    
    
    18,080,464
    
    
    
    
    
    
    
    10,816,110
    
    
    
    10,816,110
    
    
    
    
    
    
    
    Employee stock options
    
    
    1,830,281
    
    
    
    38,581
    
    
    
    1,215,898
    
    
    
    1,133,210
    
    
    
    851,754
    
    
    
    851,754
    
    
    
    695,130
    
    
    
    695,130Redeemable convertible preferred share
    
    
    
    
    
    
    10,405,549
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Denominator used for diluted earnings per Class A
and Class B ordinary shares
    
    
    32,043,888
    
    
    
    27,842,460
    
    
    
    34,506,594
    
    
    
    19,213,674
    
    
    
    34,724,365
    
    
    
    34,724,365
    
    
    
    11,511,240
    
    
    
    11,511,240Diluted earnings per Class A and Class B ordinary shares
    
    
    1.49
    
    
    
    1.49
    
    
    
    8.75
    
    
    
    8.75
    
    
    
    18.11
    
    
    
    2.48
    
    
    
    18.11
    
    
    
    2.48
 F-19




---



##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 Recent Accounting Pronouncements
 Fair Value Measurement
 The Fair Value Option for Financial
Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
 Business
Combinations
 Noncontrolling Interests in
Consolidated Financial Statementsan amendment of ARB No. 51
 Concentration of Risks
 Concentration of credit risk
   F-20




---



##### Table of Contents



2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 Concentration of Risks (continued)
 Business and economic risks
    Currency convertibility risk
  Foreign currency exchange rate risk
   F-21




---



##### Table of Contents



3.
    
    SHORT-TERM INVESTMENTS
 December 31,2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Held-to-maturity securities Bank debenture
    
    
    
    
    
    
    112,372
    
    
    
    15,405Trading securities Money market funds
    
    
    85,339
    
    
    
    129,665
    
    
    
    17,77585,339
    
    
    
    242,037
    
    
    
    33,180
 During the years ended December 31, 2005, 2006 and 2007, the Company recorded short-term
investment gains and interest income of nil, RMB339 and RMB5,247 (US$719) in the consolidated
statements of income, respectively. Held-to-maturity securities were all due within one year as
of December 31, 2007.Considering the current economic environment, Baidu determined it had no investments in any
indexed funds or mortgage linked instruments. In addition, Baidus investments are specified by
contract to cover the costs at minimum with additional interest to be earned. As of December
31, 2007, Baidu had investments with certain financial institutions that appear to be financially
strong enough to withstand the impact of the subprime credit crisis.
 4.
    
    ACCOUNTS RECEIVABLE
 December 31,2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Accounts receivable
    
    
    
    
    
    
    27,262
    
    
    
    67,855
    
    
    
    9,302Less: Allowance for doubtful accounts
    
    
    
    
    
    
    (4,211
    )
    
    
    (3,581
    )
    
    
    (491
    )23,051
    
    
    
    64,274
    
    
    
    8,8112005
    
    
    
    2006
    
    
    
    2007
    
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Movements in allowance for doubtful accountsBalance at the beginning of the year
    
    
    627
    
    
    
    4,643
    
    
    
    4,211
    
    
    
    577Amounts charged to (credited against) costs and expenses
    
    
    4,301
    
    
    
    (310
    )
    
    
    (243
    )
    
    
    (33
    )Write-offs
    
    
    (285
    )
    
    
    (122
    )
    
    
    (387
    )
    
    
    (53
    )Balance at the end of the year
    
    
    4,643
    
    
    
    4,211
    
    
    
    3,581
    
    
    
    491
 5.
    
    PREPAID EXPENSES AND OTHER CURRENT ASSETS
 December 31,2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Deposits
    
    
    4,968
    
    
    
    8,680
    
    
    
    1,190Prepaid expenses
    
    
    3,485
    
    
    
    6,234
    
    
    
    855Advances to suppliers
    
    
    3,283
    
    
    
    8,930
    
    
    
    1,224Interest receivable
    
    
    460
    
    
    
    1,556
    
    
    
    213Receivables from employees
    
    
    5,282
    
    
    
    7,115
    
    
    
    975Receivables from service provider
    
    
    4,907
    
    
    
    29,744
    
    
    
    4,078Prepaid income taxes
    
    
    9,515
    
    
    
    
    
    
    
    Other
    
    
    439
    
    
    
    3,737
    
    
    
    51232,339
    
    
    
    65,996
    
    
    
    9,047
 F-22




---



##### Table of Contents



5.
    
    PREPAID EXPENSES AND OTHER CURRENT ASSETS (CONTINUED)
 Since 2006, the Company used a broker to facilitate the cashless exercises of share options by
employees. As of December, 31, 2006 and 2007, the exercise price and employee withholding taxes
receivable from the broker totaled RMB4,907 and RMB29,744 (US$4,078), respectively, which is
recorded in receivables from service provider.
 6.
    
    FIXED ASSETS
 December 31,2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Leasehold improvements
    
    
    12,848
    
    
    
    37,736
    
    
    
    5,173Computer equipment
    
    
    262,687
    
    
    
    775,637
    
    
    
    106,330Capitalized software costs
    
    
    7,789
    
    
    
    7,081
    
    
    
    971Office equipment
    
    
    6,660
    
    
    
    14,096
    
    
    
    1,932Motor vehicles
    
    
    2,636
    
    
    
    3,703
    
    
    
    508292,620
    
    
    
    838,253
    
    
    
    114,914Less: Accumulated depreciation
    
    
    (110,351
    )
    
    
    (278,007
    )
    
    
    (38,111
    )Construction in progress
    
    
    9,465
    
    
    
    118,640
    
    
    
    16,264191,734
    
    
    
    678,886
    
    
    
    93,067
 The Company started the construction of its new headquarters building in 2007 and
RMB102,052 (US$13,990) direct costs related to this construction were capitalized as
construction in progress as of December 31, 2007.
 7.
    
    GOODWILL AND INTANGIBLE ASSETS
 During 2006, the Company acquired online marketing properties and related assets accounted for
as business combinations, resulting in the recognition of RMB38,029 of acquired goodwill. In
2007, the Company paid cash consideration payments of RMB3,777 (US$518) upon resolution of
contingent consideration arrangements related to the acquisitions made in 2006, which resulted
in the increase of goodwill. In addition, the Company purchased a customer relationship
intangible from a third party distributor for RMB5,324 (US$730).The changes in the carrying amount of goodwill are as follows:
 2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Balance as of January 1
    
    
    9,287
    
    
    
    47,316
    
    
    
    6,486Goodwill acquired
    
    
    38,029
    
    
    
    3,777
    
    
    
    518Balance as of December 31
    
    
    47,316
    
    
    
    51,093
    
    
    
    7,004
 F-23




---



##### Table of Contents



7.
    
    GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
 Intangible assets consist of the following:
 As of December 31, 2006Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingValue
    
    
    Amortization
    
    
    ValueRMB
    
    
    RMB
    
    
    RMBDomain names
    
    
    24,433
    
    
    
    6,912
    
    
    
    17,521Customer relationships
    
    
    26,039
    
    
    
    3,106
    
    
    
    22,933Non-compete agreements
    
    
    1,022
    
    
    
    192
    
    
    
    830Software
    
    
    3,219
    
    
    
    254
    
    
    
    2,965Contract-based assets
    
    
    186
    
    
    
    49
    
    
    
    13754,899
    
    
    
    10,513
    
    
    
    44,386
 As of December 31, 2007Gross
    
    
    
    
    
    
    Net
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    CarryingValue
    
    
    Amortization
    
    
    Value
    
    
    ValueRMB
    
    
    RMB
    
    
    RMB
    
    
    US$Domain names
    
    
    24,304
    
    
    
    9,839
    
    
    
    14,465
    
    
    
    1,983Customer relationships
    
    
    31,363
    
    
    
    8,659
    
    
    
    22,704
    
    
    
    3,113Non-compete agreements
    
    
    1,022
    
    
    
    448
    
    
    
    574
    
    
    
    79Software
    
    
    3,221
    
    
    
    585
    
    
    
    2,636
    
    
    
    361Contract-based assets
    
    
    210
    
    
    
    129
    
    
    
    81
    
    
    
    1160,120
    
    
    
    19,660
    
    
    
    40,460
    
    
    
    5,547
 Amortization expense for the year ended December 31, 2007 was RMB9,147 (US$1,254).
Estimated amortization expenses of the existing intangible assets for the next five years are
as follows:
 RMB
    
    
    US$For the year ending December 31,2008
    
    
    10,232
    
    
    
    1,4032009
    
    
    8,459
    
    
    
    1,1602010
    
    
    6,284
    
    
    
    8612011
    
    
    3,732
    
    
    
    5122012
    
    
    1,307
    
    
    
    179
 8.
    
    ACCRUED EXPENSES AND OTHER LIABILITIES
 December 31,2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Accrued payroll and welfare
    
    
    17,694
    
    
    
    29,815
    
    
    
    4,087Accrued operating expenses
    
    
    23,883
    
    
    
    62,352
    
    
    
    8,548Taxes payable
    
    
    38,012
    
    
    
    56,446
    
    
    
    7,738Distributors deposits
    
    
    1,872
    
    
    
    2,662
    
    
    
    365Purchase of fixed assets
    
    
    36,054
    
    
    
    126,992
    
    
    
    17,409Traffic acquisition costs
    
    
    14,758
    
    
    
    40,788
    
    
    
    5,592Bandwidth costs
    
    
    4,492
    
    
    
    12,992
    
    
    
    1,781Professional expenses
    
    
    7,562
    
    
    
    11,800
    
    
    
    1,618Purchase of intangible assets
    
    
    4,000
    
    
    
    
    
    
    
    Other
    
    
    4,814
    
    
    
    15,463
    
    
    
    2,119153,141
    
    
    
    359,310
    
    
    
    49,257
 F-24




---



##### Table of Contents



9.
    
    DEFERRED REVENUE
 December 31,2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Online marketing services
    
    
    1,741
    
    
    
    11,702
    
    
    
    1,604Other services
    
    
    842
    
    
    
    130
    
    
    
    182,583
    
    
    
    11,832
    
    
    
    1,622
 10.
    
    INCOME TAXES
 Cayman IslandsUnder the current laws of the Cayman Islands, the Company is not subject to tax on income or
capital gains. Additionally, upon payments of dividends by the Company to its shareholders, no
Cayman Islands withholding tax will be imposed.British Virgin Islands (BVI)Baidu Holdings Ltd is exempted from income tax on its foreign-derived income in the BVI. There
are no withholding taxes in the BVI.Baidu (Hong Kong) Limited (Baidu HK)Baidu HK is exempted from income tax on its foreign-derived income in Hong Kong. There are no
withholding taxes in Hong Kong on remittance of dividends.ChinaPrior to January 1, 2008, in accordance with Income Tax Law of China for Enterprises with
Foreign Investment and Foreign Enterprises, foreign invested enterprises (FIEs) were
generally subject to enterprise income tax (EIT) at the rate of 30% plus a local income tax
rate of 3%. The Companys subsidiaries in China, as FIEs, were entitled to various tax
holidays and preferential tax rates, which reduced their effective tax rates.
 
    
    Baidu Online, being a foreign invested enterprise and located in the Beijing
Zhongguancun Science Park, had been recognized as a High and New Technology
Enterprise and thus entitled to a tax holiday for a full exemption from EIT from
2000 to 2002, and a 50% tax reduction (at 7.5%) from 2003 to 2005 followed by reduced
EIT rate at 15% upon expiry of the tax holiday, as well as an exemption from local
income tax. In 2006, Baidu Online obtained the certificate of Technologically
Advanced Enterprise from the Beijing Municipal Bureau of Commerce, which qualified
Baidu Online for a 10% EIT rate from 2006 to 2008, and a 15% EIT rate thereafter.
    
    Baidu China has been granted Software Enterprise status by the Shanghai Municipal
Information Commission and thus entitled to a tax holiday for a full exemption from
EIT from 2006 to 2007, and a 50% tax reduction from 2008 to 2010.
    
    Baidu Times, being a foreign invested enterprise and located in the Beijing
Zhongguancun Science Park, had been recognized as a High and New Technology
Enterprise and thus entitled to a reduced EIT rate of 15% upon expiry of the tax
holiday, as well as exemption from local income tax. The tax holiday granted to Baidu
Times was for a full exemption from EIT from 2006 to 2008, and a 50% tax reduction (at
7.5%) from 2009 to 2011.
 F-25




---



##### Table of Contents



10.
    
    INCOME TAXES (Continued)
 Prior to January 1, 2008, in accordance with Enterprise Income Tax laws of the PRC, PRC
domestic Companies are generally subject to EIT at the rate of 30% plus a local income tax rate
of 3%.
 
    
    Beijing Perusal, a PRC domestic company and a VIE to which the Company is deemed a
primary beneficiary, is located in the Beijing Zhongguancun Science
Park, and is
subject to EIT at a rate of 33%.
    
    Baidu Netcom, as a PRC domestic company, is located in the Beijing Zhongguancun
Science Park and is subject to EIT at a rate of 33%.
 Prior to January 1, 2008, based on the Income Tax Law of China for Enterprises with Foreign
Investment and Foreign Enterprises and Enterprise Income Tax Laws of the PRC, dividends payable
by a FIE to its foreign investors are not subject to any withholding tax.On March 16, 2007, the National Peoples Congress enacted the Enterprise Income Tax Law (the
New EIT Law), which became effective on January 1, 2008 and has replaced the existing separate
income tax laws for domestic enterprises and FIEs by adopting an unified 25% enterprise income
tax rate applicable to all resident enterprises in China, including FIEs and foreign
enterprises operating in the PRC, except for certain entities that are eligible to tax holidays
and are grandfathered by the New EIT Law. In accordance with the implementation rules of the
New EIT Law, the existing preferential tax treatments granted to PRC entities that previously
qualified for High and New Technology Enterprise will not automatically qualify for the
preferential tax treatments granted to High and New Technology Enterprise strongly supported
by the State under the New EIT Law. Until these entities receive official approval for this
new status, they are generally subject to the statutory 25% tax rate. The impact of the change
in enacted rates from the New EIT Law on the Companys net deferred tax assets was not
significant to the financial statements as of and for the year ended December 31, 2007.
 F-26




---



##### Table of Contents



10.
    
    INCOME TAXES (Continued)
 In addition, under the New EIT Law, dividends payable by a FIE to any of its foreign
non-resident enterprise investors shall be subject to a 10% withholding tax, unless such
foreign non-resident enterprise investors jurisdiction of incorporation has signed a tax
treaty or arrangement for the avoidance of double taxation and the prevention of fiscal evasion
with respect to taxes on income with China that provides for a reduced rate of withholding tax
on dividends. Since PRC and Hong Kong signed the above mentioned tax arrangement for the
avoidance of double taxation, and Baidu Times and Baidu China are wholly owned by Baidu HK, the
dividends payable by Baidu Times and Baidu China to its foreign non-resident enterprise
investors, shall be subject to 5% withholding tax pursuant to the China-Hong Kong double tax
arrangement. However, dividends declared and paid from pre-January 1, 2008 distributable
profits are grandfathered under the New EIT Law and are not subject to withholding tax.
Furthermore, under the New Income Tax Law, a resident enterprise, which include an enterprise
established outside of the PRC with management and control located in the PRC, will be subject
to PRC income tax on its world-side income. If the PRC tax authorities subsequently determine
that the Company and its subsidiaries registered outside the PRC should be deemed a resident
enterprise, the Company and its subsidiaries registered outside the PRC will be subject to the
PRC income tax at a rate of 25%.JapanBaidu Japan, with a paid-in capital in excess of Japanese Yen (JPY) 100 million, is subject to
national income tax of 30%. Also, Baidu Japan is subject to inhabitants tax, assessed by both
prefectures and municipalities. Inhabitants tax is computed as a percentage of national income
tax. The per capita tax is based on the companys capitalization and the number of employees.
In addition, Baidu Japan is subject to a corporate enterprise tax on a pro forma basis based on
the amount of taxable profit subject to the corporate tax, added-value components, (e.g., labor
costs, net interest and rental payments, income/loss for current year) and a capital component.The Company had minimal operations in jurisdictions other than the PRC and Japan. Income (loss)
before income taxes consists of:
 For the years ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$PRC
    
    
    75,242
    
    
    
    328,428
    
    
    
    699,332
    
    
    
    95,870Non-PRC
    
    
    (25,726
    )
    
    
    (19,009
    )
    
    
    (83,116
    )
    
    
    (11,394
    )49,516
    
    
    
    309,419
    
    
    
    616,216
    
    
    
    84,476
 The loss from the non-PRC operation consists primarily of the operation cost,
administration expenses, interest income and charges for share-based compensation.Income taxes consist of:
 For the years ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Current income tax
    
    
    6,203
    
    
    
    15,500
    
    
    
    19,409
    
    
    
    2,661Reinvestment tax refund
    
    
    
    
    
    
    
    
    
    
    (21,198
    )
    
    
    (2,906
    )Deferred income tax benefit
    
    
    (4,292
    )
    
    
    (3,244
    )
    
    
    (39,691
    )
    
    
    (5,441
    )Valuation allowance
    
    
    
    
    
    
    
    
    
    
    28,728
    
    
    
    3,9381,911
    
    
    
    12,256
    
    
    
    (12,752
    )
    
    
    (1,748
    )
 Prior to the New EIT Law, a foreign investor may be eligible for a tax refund when it
reinvests its share of accumulated profits from an existing FIE to increase the registered
capital of the existing FIE. In 2007, Baidu Holdings obtained such a reinvestment tax refund,
as it increased the registered capital in Baidu Online by reinvesting the retained earnings of
Baidu Online.
 F-27




---



##### Table of Contents



10.
    
    INCOME TAXES (CONTINUED)
 The reconciliation of tax computed by applying respective statutory income tax rate to pre-tax
income is as follows:
 For the years ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Expected taxation at PRC EIT statutory rate of 33%
    
    
    16,339
    
    
    
    102,108
    
    
    
    203,352
    
    
    
    27,877Effect of differing tax rates in different jurisdictions
    
    
    8,490
    
    
    
    6,273
    
    
    
    (1,486
    )
    
    
    (204
    )Permanent differences  non-taxable income
    
    
    (525
    )
    
    
    (438
    )
    
    
    (1,325
    )
    
    
    (181
    )Permanent differences  non-deductible expense
    
    
    353
    
    
    
    1,295
    
    
    
    2,410
    
    
    
    330Tax incentives relating to R&D expenditures (see below*)
    
    
    (5,352
    )
    
    
    (8,652
    )
    
    
    (8,791
    )
    
    
    (1,205
    )Effect of tax exemption and reduction inside PRC
    
    
    (18,257
    )
    
    
    (86,732
    )
    
    
    (214,442
    )
    
    
    (29,397
    )Reinvestment tax refund
    
    
    
    
    
    
    
    
    
    
    (21,198
    )
    
    
    (2,906
    )Addition to (reversal of) valuation allowance
    
    
    863
    
    
    
    (1,598
    )
    
    
    28,728
    
    
    
    3,938Taxation for the year
    
    
    1,911
    
    
    
    12,256
    
    
    
    (12,752
    )
    
    
    (1,748
    )Effective tax rate
    
    
    3.9
    %
    
    
    4.0
    %
    
    
    (2.1
    %)
    
    
    (2.1
    %)Earnings per Class A and Class B ordinary shares effect
of tax exemptions and reductions inside PRC, (basic)
    
    
    0.92
    
    
    
    2.61
    
    
    
    6.33
    
    
    
    0.87
 
 *
    
    Baidu Online enjoyed an additional tax incentive relating to its research and
development expenses. The Company may be able to claim an additional tax deduction
amounting to 50% of the current years research and development expenses. The amount that
exceeds the current years taxable profit would be able to be brought forward for up to
the following five years utilization. In 2005, 2006 and 2007, the Company has no
brought forward deductible research and development expenses. The tax effects of temporary differences that give rise to the deferred tax balance at December
31, 2006 and 2007 are as follows:
 December 312006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Provision for doubtful receivables
    
    
    1,019
    
    
    
    680
    
    
    
    93Deferred revenue
    
    
    176
    
    
    
    155
    
    
    
    21Fixed assets
    
    
    5,805
    
    
    
    13,410
    
    
    
    1,838Net operating loss carry-forward
    
    
    
    
    
    
    30,157
    
    
    
    4,135Other
    
    
    536
    
    
    
    2,629
    
    
    
    360Deferred tax assets
    
    
    7,536
    
    
    
    47,031
    
    
    
    6,447Valuation allowance
    
    
    
    
    
    
    (28,728
    )
    
    
    (3,938
    )Deferred tax assets, net
    
    
    7,536
    
    
    
    18,303
    
    
    
    2,509
 The Company did not believe that sufficient objective positive evidence currently exists
to conclude that the recoverability of Baidu Japans net deferred tax assets is more likely
than not. Consequently, the Company has provided a valuation allowance on the related net
deferred tax assets.As of December 31, 2007, the Company had net operating loss carryforwards of approximately
RMB75,352 (US$ 10,330) for income tax purposes that will expire in the year 2014.
 F-28




---



##### Table of Contents



11.
    
    EMPLOYEE DEFINED CONTRIBUTION PLAN
 Full time employees of subsidiaries of the Company in the PRC participate in a government
mandated multi-employer defined contribution plan pursuant to which certain pension benefits,
medical care, unemployment insurance, employee housing fund and other welfare benefits are
provided to employees. Chinese labor regulations require that the subsidiaries of the Company
make contributions to the government for these benefits based on certain percentages of the
employees salaries. The Company has no legal obligation for the benefits beyond the
contributions made. The total amounts for such employee benefits, which were expensed as
incurred, were RMB12,742, RMB32,618 and RMB 55,122 (US$7,557) for the years ended December 31,
2005, 2006 and 2007, respectively.
 12.
    
    COMMITMENTS AND CONTINGENCIES
 Capital commitmentsThe Companys capital commitments relate primarily to leasehold improvements and building
construction. Total capital commitments contracted but not yet reflected in the financial
statements was RMB179,636 (US$24,626) at December 31, 2007.Operating lease commitmentsThe Company leases facilities in the PRC under non-cancelable operating leases expiring on
different dates. Payments under operating leases are expensed on a straight-line basis over the
periods of the respective leases. Total rental expense under all operating leases was RMB6,413,
RMB17,259 and RMB45,413 (US$6,226) for the years ended December 31, 2005, 2006 and 2007,
respectively.Future minimum payments under non-cancelable operating leases with initial terms of one-year or
more consist of the following at December 31, 2007:
 RMB
    
    
    US$2008
    
    
    128,556
    
    
    
    17,6232009
    
    
    35,113
    
    
    
    4,8142010
    
    
    15,974
    
    
    
    2,190179,643
    
    
    
    24,627
 LitigationBaidu Netcom, Baidu China and Baidu Online were involved in certain cases pending in various
PRC courts and Arbitration as of December 31, 2007. These cases include copyright infringement
cases, unfair competition cases, and defamation cases, among others. Adverse results in these
lawsuits may include awards of damages and may also result in, or even compel, a change in the
Companys business practices, which could result in a loss of revenue or otherwise harm the
business of the Company.As of December 31, 2007, the plaintiffs claimed compensation of RMB111 million (US$15 million)
in total. Although the results of litigation and claims cannot be predicted with certainty, the
Company does not expect that the outcome of the matters discussed above will result in a
material adverse effect on its business, consolidated financial position, results of operations
or cash flow.
 F-29




---



##### Table of Contents



13.
    
    ORDINARY SHARES
 On May 30, 2005, the Companys shareholders approved an Amended and Restated Memorandum and
Articles of Association, pursuant to which 31,326,801 shares were authorized as Class B ordinary
shares. All of the existing ordinary shares and all of those to be issued to the existing
preferred shareholders upon conversion were re-designated as Class B ordinary shares, each of
which carries ten votes per share at future shareholder meetings. A total of 822,424,322
authorized but unissued ordinary shares were re-designated as Class A ordinary shares, each of
which carries only one vote per share at future shareholder meetings. In addition, Class B
ordinary shares are convertible into the same number of Class A ordinary shares at the option of
the holder thereof at any time, and are automatically converted into the same number of Class A
ordinary shares at any time the holder thereof transfers them to a person or entity that is not
an affiliate of such holder.Upon completion of the initial public offering (IPO) in August 2005, 16,648,877 Class B
Ordinary shares were issued upon conversion of all convertible preferred shares. In addition,
immediately following the closing of the IPO, the Memorandum and Articles of Association were
amended and restated such that the authorized share capital consisted of 870,400,000 ordinary
shares at a par value of US$0.00005 per share, of which 825,000,000 shares were designated as
Class A ordinary shares, 35,400,000 as Class B ordinary shares, and 10,000,000 shares are
designated as preferred shares. The rights of the holders of Class A and Class B ordinary shares
are identical, except with respect to voting and conversion rights. Each share of Class A
ordinary shares is entitled to one vote per share and is not convertible into Class B ordinary
shares under any circumstances. Each share of Class B ordinary shares is entitled to ten votes
per share and is convertible into one Class A ordinary share at any time by the holder thereof.
Upon any transfer of Class B ordinary shares by the holder thereof to any person or entity that
is not an affiliate of such holder, such Class B ordinary shares would be automatically
converted into an equal number of Class A ordinary shares. There were 12,355,318 and 2,133,176
Class B ordinary shares transferred to Class A ordinary shares in 2006 and 2007, respectively.As of December 31, 2007 there were 25,136,147 and 8,996,842 Class A and Class B ordinary shares
outstanding respectively.
 14.
    
    PREFERRED SHARES
 As mentioned in Note 12, upon completion of the IPO in August 2005, the Amended and Restated
Memorandum and Articles of Association authorized 10,000,000 preferred shares with a par value
of US$0.00005 each. As of December 31, 2006 and 2007, there were no preferred shares issued and
outstanding.
 15.
    
    RETAINED EARNINGS
 In accordance with the Regulations on Enterprises with Foreign Investment of China and their
articles of association, the Companys subsidiaries, being foreign invested enterprises
established in China, are required to provide for certain statutory reserves, namely general
reserve fund, enterprise expansion fund and staff welfare and bonus fund, all of which are
appropriated from net profit as reported in their PRC statutory accounts. The Companys
subsidiaries are required to allocate at least 10% of their after-tax profits to the general
reserve fund until such fund has reached 50% of their respective registered capital.
Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the
discretion of the board of directors of the Companys subsidiaries. Appropriation to the staff
welfare and bonus fund is charged to selling, general and administrative expenses.In accordance with the China Company Laws, the Companys VIEs must make appropriations from
their after-tax profits as reported in their PRC statutory accounts to non-distributable reserve
funds, namely statutory surplus fund, statutory public welfare fund and discretionary surplus
fund. The Companys VIEs are required to allocate at least 10% of their after-tax profits to the
statutory surplus fund until such fund has reached 50% of their respective registered capital.
Appropriation to the statutory public welfare fund is 5% to 10% of their after-tax profits as
reported in the PRC statutory accounts. Effective from January 1, 2006, under the revised China
Company Laws, appropriation to the statutory public welfare fund is no longer mandatory.
Appropriation to discretionary surplus is made at the discretion of the Companys VIEs.
Appropriation to the statutory public welfare fund is charged to selling, general and
administrative expenses.
 F-30




---



##### Table of Contents



15.
    
    RETAINED EARNINGS (CONTINUED)
 General reserve fund and statutory surplus funds are restricted to set-off against losses,
expansion of production and operation and increasing registered capital of the respective
company. Staff welfare and bonus fund and statutory public welfare funds are restricted to the
capital expenditures for the collective welfare of employees. The reserves are not allowed to be
transferred to the Company in terms of cash dividends, loans or advances, neither are they
allowed for distribution except under liquidation.
 December 312006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$PRC statutory reserve funds
    
    
    44,125
    
    
    
    90,135
    
    
    
    12,356Unreserved retained earnings
    
    
    258,643
    
    
    
    841,601
    
    
    
    115,373302,768
    
    
    
    931,736
    
    
    
    127,729
 Under PRC laws and regulations, there are certain restrictions on the Companys PRC
subsidiaries and VIEs with respect to transferring certain of their net assets to the Company
either in the form of dividends, loans, or advances. Amounts restricted include paid up capital
and statutory reserve funds of the Companys PRC subsidiaries and the net assets of VIEs in
which the Company has no legal ownership, totaling approximately RMB171,653 and RMB550,526
(US$75,470) as of December 31, 2006 and 2007, respectively.
 16.
    
    SHARE-BASED AWARDS PLAN
 In January 2000, the Company adopted the 2000 Option Plan (the Plan). The Plan provides for
the granting of share options and restricted ordinary shares to employees and consultants of the
Company. Options granted under the Plan may be either incentive share options or nonqualified
share options. Incentive share options (ISO) may be granted only to Company employees
(including officers and directors who are also employees). Nonqualified share options (NSO)
may be granted to Company employees and consultants. The Company has reserved 5,040,000 ordinary
shares for issuance under the Plan. Under the Plan, which expires in ten years, options granted
generally vest 25% after the first year of service and ratably each month over the remaining
36-month period.Under the Plan, the employees may exercise their options immediately, but the Company has a
right to repurchase such shares at the amount equal to the original purchase price paid by the
grantee for each such Share. Before the closing date of the Companys initial public offering on
August 5, 2005, such repurchase right was exercisable at any time (i) during the 90-day period
following employee termination date, or (ii) during the 90-day period following an exercise of
the option that occurs after employee termination date. Upon the closing date of its initial
public offering, the time limitation of exercising such repurchase rights has been changed to
lapse at the rate of at least twenty percent of the shares subject to the share option per year
over five years from the date the share option is granted (without respect to the date the award
was exercised or became exercisable). The contractual term of options granted is generally five
years.Starting from February 15, 2006, the Company has granted restricted Class A ordinary shares
(Restricted Shares) of the Company under the Plan, which generally vest 50% after the first
year of service and ratably each month over the remaining 12-month period. Terms for Restricted
Shares are the same as share options except that Restricted Shares do not require exercise and
have a two-year vesting term. The contractual term of Restricted Shares granted is generally
five years.
 F-31




---



##### Table of Contents



16.
    
    SHARE-BASED AWARDS PLAN (CONTINUED)
 The following table summarizes the option activity for the year ended December 31, 2007 (amounts
in thousands of U.S. Dollars (US$), except for number of shares and exercise price):
 Number
    
    
    
    
    
    Weighted-average
    
    
    Aggregateof
    
    
    Weighted-average
    
    
    Remaining
    
    
    IntrinsicShare Option
    
    Shares
    
    
    Exercise Price
    
    
    Contractual Life
    
    
    Value (US$)Outstanding, December 31, 2006
    
    
    1,154,658
    
    
    
    US$11.94Granted
    
    
    94,200
    
    
    
    US$131.09Exercised
    
    
    (409,640
    )
    
    
    US$13.82Forfeited/Cancelled
    
    
    (159,976
    )
    
    
    US$17.79Expired
    
    
    (4,009
    )
    
    
    US$0.20Outstanding, December 31, 2007
    
    
    675,233
    
    
    
    US$26.24
    
    
    
    1.76
    
    
    
    245,486Vested and expected to vest
at December 31, 2007
    
    
    640,982
    
    
    
    US$23.85
    
    
    
    1.68
    
    
    
    234,569Exercisable at December 31, 2007
    
    
    398,871
    
    
    
    US$9.48
    
    
    
    1.03
    
    
    
    151,700
 The aggregate intrinsic value in the table above represents the difference between the Companys
closing stock price on the last trading day in 2007 and the exercise price.Total intrinsic value of options exercised for the three years ended December 31, 2005, 2006 and
2007 was RMB66,004, RMB396,324 and RMB559,591 (US$76,713), respectively.As of December 31, 2007, there was RMB34,496 (US$4,729) unrecognized share-based compensation
cost related to share options. That deferred cost is expected to be recognized over a
weighted-average vesting period of 1.81 years. To the extent the actual forfeiture rate is
different from original estimate, actual share-based compensation costs related to these awards
may be different from the expectation.Restricted shares activity for the year ended December 31, 2007 was as follows:
 WeightedAverageGrant dateRestricted Shares
    
    Number of Shares
    
    
    Fair valueNonvested, December 31, 2006
    
    
    22,525
    
    
    
    US$53.00Granted
    
    
    70,440
    
    
    
    US$159.19Vested
    
    
    (18,950
    )
    
    
    US$52.06Forfeited
    
    
    (2,936
    )
    
    
    US$86.40Nonvested, December 31, 2007
    
    
    71,079
    
    
    
    US$157.11
 As of December 31, 2007, there was RMB51,432 (US$7,051) unrecognized share-based compensation
cost related to restricted shares. That deferred cost is expected to be recognized over a
weighted-average vesting period of 1.35 years. To the extent the actual forfeiture rate is
different from original estimate, actual share-based compensation costs related to these awards
may be different from the expectation.The fair value of each option award was estimated on the date of grant using the Black-Scholes
Method valuation model. The volatility assumption was estimated based on the volatilities of
comparable public companies and limited historical volatility of the Companys share price.
Assumptions about the expected term were based on the vesting and contractual terms, employee
demographics and the expected term of the similar companies. The Company considered the
comparable data because the Company has limited relevant historical information to support the
expected exercise behavior of employees who have been granted options. This relevant historical
information is limited because the Company has been a public company only since August 2005. The
risk-free rate for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant.
 F-32




---



##### Table of Contents



16.
    
    SHARE-BASED AWARDS PLAN (CONTINUED)
 The following table presents the assumptions used to estimate the fair values of the share
options granted in the periods presented:
 2005
    
    
    2006
    
    
    2007Risk-free interest rate
    
    
    3.24%
    
    
    
    1.98%~3.14%
    
    
    
    4.54%~5.03%Dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected volatility range
    
    
    89.25%~100%
    
    
    
    82.55%~84.80%
    
    
    
    63.94%~72.90%Weighted average expected volatility
    
    
    95.20%
    
    
    
    84.67%
    
    
    
    68.28%Expected life (in years)
    
    
    2~10
    
    
    
    0.91~2.49
    
    
    
    1~2.6
 In addition, the Company applies an expected forfeiture rate in determining the grant date fair
value of the option grants. The estimation of the forfeiture rate was based primarily upon
historical experience of employee turnover. To the extent the Company revises this estimate in
the future, the share-based payments could be materially impacted in the quarter of revision, as
well as in following quarters. During the year ended December 31, 2007, the Company increased
forfeiture rate for the executive group primarily due to changes in historical employee turnover
rates. As a result of this change, the share-based payments expense decreased by approximately
RMB7,490 for the year ended December 31, 2007. No change was made to the estimated forfeiture
rate for the employee group during the year ended December 31, 2007.The table below summarizes the weighted average fair value and exercise price of share options
granted:
 2005
    
    
    2006
    
    
    2007US$
    
    
    US$
    
    
    US$Weighted average grant-date fair value of share options granted during the year:Where exercise price is lower than market price
    
    
    14.30
    
    
    
    
    
    
    
    Where exercise price is equal to market price
    
    
    26.63
    
    
    
    25.89
    
    
    
    57.02Weighted average exercise price of share options granted during the year:Where exercise price is lower than market price
    
    
    10.30
    
    
    
    
    
    
    
    Where exercise price is equal to market price
    
    
    48.83
    
    
    
    49.25
    
    
    
    131.09
 Total compensation cost recognized for the year ended December 31, 2007 is as follows:
 For the years ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Cost of revenues
    
    
    974
    
    
    
    1,416
    
    
    
    1,717
    
    
    
    235Selling, general and administrative
    
    
    22,804
    
    
    
    32,970
    
    
    
    17,371
    
    
    
    2,382Research and development
    
    
    9,793
    
    
    
    13,894
    
    
    
    20,760
    
    
    
    2,846Share-based compensation cost capitalized as part of
internally used software in fixed assets
    
    
    
    
    
    
    383
    
    
    
    714
    
    
    
    9833,571
    
    
    
    48,663
    
    
    
    40,562
    
    
    
    5,561
 17.
    
    SEGMENT REPORTING
 In accordance with SFAS 131, Disclosures about segments of an Enterprise and Related
Information, the Companys chief operating officer relies upon consolidated results of
operations when making decisions about allocating resources and assessing performance of the
Company; hence, the Company has only one operating segment. The Company does not distinguish
between markets or segments for the purpose of internal reporting.The Companys long-lived assets and revenue are substantially all located in and derived from
the PRC.
 F-33




---



##### Table of Contents



18.
    
    COMPARATIVE INFORMATION
 Certain items in prior years consolidated financial statements have been reclassified to
conform to the current years presentation to facilitate comparison.
 19.
    
    SUBSEQUENT EVENTS (UNAUDITED)
 New VIEIn February 2008, Baidu Netcom and an individual designated by the Company established a VIE,
Beijing BaiduPay Science and Technology Co., Ltd. (Baidupay or the VIE), to operate the
payment platform to be developed by BaiduPay. The paid-in capital of the VIE was funded by
Baidu Netcom and the Company through loans extended to the authorized individual. The Company
has entered into certain exclusive agreements with the VIE, which obligate the Company to absorb
a majority of the risk of loss from the VIEs activities and entitles the Company to receive a
majority of its residual return. In addition, the Company has entered into certain agreements
with the authorized individual, including loan agreements for the paid-in capital of the VIE,
option agreements to acquire the equity interest in the VIE when permitted by the PRC laws, and
share pledge agreements for the equity interest in the VIE held by the authorized individual.New tax circularOn April 18, 2008, a new tax circular Guokefahuo [2008] No. 172 was issued by the PRC tax
authorities, which provides detailed implementation rules for the recognition and administrative
measures as High and New Technology Enterprises under the New EIT Law. The new circular sets
forth certain conditions that must be satisfied by a company in order to apply for preferential
tax treatment under the High and New Technology Enterprise status, while leaving other
additional measures to be released in the future.
 F-34




---



##### Table of Contents



20.
    
    PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
  Balance sheets
 December 31,2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    US$Cash and cash equivalents
    
    
    844,509
    
    
    
    605,210
    
    
    
    82,966Prepaid expenses and other current assets
    
    
    6,450
    
    
    
    10,031
    
    
    
    1,376Total current assets
    
    
    850,959
    
    
    
    615,241
    
    
    
    84,342Fixed assets, net
    
    
    150
    
    
    
    784
    
    
    
    107Goodwill
    
    
    171
    
    
    
    159
    
    
    
    22Investment in subsidiaries
    
    
    507,890
    
    
    
    1,415,237
    
    
    
    194,012Intangible assets, net
    
    
    1,038
    
    
    
    601
    
    
    
    82Total non-current assets
    
    
    509,249
    
    
    
    1,416,781
    
    
    
    194,223Total assets
    
    
    1,360,208
    
    
    
    2,032,022
    
    
    
    278,565Accrued expenses and other liabilities
    
    
    2,947
    
    
    
    10,650
    
    
    
    1,460Total current liabilities
    
    
    2,947
    
    
    
    10,650
    
    
    
    1,460Total liabilities
    
    
    2,947
    
    
    
    10,650
    
    
    
    1,460Class A Ordinary Shares, par value US$0.00005 per share,
825,000,000 shares authorized, and 22,574,381 shares
and 25,136,147 shares issued and outstanding as at
December 31, 2006 and 2007
    
    
    9
    
    
    
    10
    
    
    
    1Class B Ordinary Shares, par value US$0.00005 per share,
35,400,000 shares authorized, and 11,130,018 shares and
8,996,842 shares issued and outstanding as at December
31, 2006 and 2007
    
    
    5
    
    
    
    4
    
    
    
    1Additional paid-in capital
    
    
    1,088,176
    
    
    
    1,171,575
    
    
    
    160,609Accumulated other comprehensive loss
    
    
    (33,697
    )
    
    
    (81,953
    )
    
    
    (11,235
    )Retained earnings
    
    
    302,768
    
    
    
    931,736
    
    
    
    127,729Total shareholders equity
    
    
    1,357,261
    
    
    
    2,021,372
    
    
    
    277,105Total liabilities, and shareholders equity
    
    
    1,360,208
    
    
    
    2,032,022
    
    
    
    278,565
 F-35




---



##### Table of Contents



20.
    
    PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
 Statements of income
 For the year ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cost of revenues
    
    
    (1,389
    )
    
    
    (1,842
    )
    
    
    (2,159
    )
    
    
    (296
    )Selling, general and administrative
    
    
    (26,637
    )
    
    
    (41,208
    )
    
    
    (26,167
    )
    
    
    (3,587
    )Research and development
    
    
    (9,793
    )
    
    
    (14,119
    )
    
    
    (20,760
    )
    
    
    (2,846
    )Total operating costs and expenses
    
    
    (37,819
    )
    
    
    (57,169
    )
    
    
    (49,086
    )
    
    
    (6,729
    )Operating loss
    
    
    (37,819
    )
    
    
    (57,169
    )
    
    
    (49,086
    )
    
    
    (6,729
    )Equity in profits of subsidiaries
    
    
    73,353
    
    
    
    315,252
    
    
    
    618,396
    
    
    
    84,775Other income:Interest income
    
    
    12,071
    
    
    
    40,125
    
    
    
    37,020
    
    
    
    5,075Other (loss)/income, net
    
    
    
    
    
    
    (1,045
    )
    
    
    1,440
    
    
    
    197Total other income
    
    
    12,071
    
    
    
    39,080
    
    
    
    38,460
    
    
    
    5,272Net income before tax and cumulative effect of
change in accounting principle
    
    
    47,605
    
    
    
    297,163
    
    
    
    607,770
    
    
    
    83,318Income taxes
    
    
    
    
    
    
    
    
    
    
    21,198
    
    
    
    2,906Net income before cumulative effect on change in
accounting principle
    
    
    47,605
    
    
    
    297,163
    
    
    
    628,968
    
    
    
    86,224Cumulative effect on change in accounting
principle
    
    
    
    
    
    
    4,603
    
    
    
    
    
    
    
    Net income
    
    
    47,605
    
    
    
    301,766
    
    
    
    628,968
    
    
    
    86,224
 F-36




---



##### Table of Contents



20.
    
    PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
 Statements of cash flows
 For the year ended December 31,2005
    
    
    2006
    
    
    2007
    
    
    2007RMB
    
    
    RMB
    
    
    RMB
    
    
    US$Cash flows from operating activities:Net income
    
    
    47,605
    
    
    
    301,766
    
    
    
    628,968
    
    
    
    86,224Adjustments to reconcile net income to net cash
generated from operating activities:Equity in profits of subsidiaries
    
    
    (73,353
    )
    
    
    (315,252
    )
    
    
    (618,396
    )
    
    
    (84,775
    )Depreciation of fixed assets
    
    
    
    
    
    
    22
    
    
    
    56
    
    
    
    8Share-based compensation
    
    
    33,571
    
    
    
    48,280
    
    
    
    39,848
    
    
    
    5,463Amortization of intangible assets
    
    
    415
    
    
    
    404
    
    
    
    386
    
    
    
    53Impairment on long-term investment
    
    
    
    
    
    
    1,976
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Prepaid expenses and other assets
    
    
    (1,920
    )
    
    
    14
    
    
    
    (1,924
    )
    
    
    (264
    )Accrued expenses and liabilities
    
    
    4,759
    
    
    
    (1,597
    )
    
    
    8,233
    
    
    
    1,129Net cash generated from / (used in) operating activities
    
    
    11,077
    
    
    
    35,613
    
    
    
    57,171
    
    
    
    7,838Cash flows from investing activities:Advances to subsidies
    
    
    1,934
    
    
    
    (1,211
    )
    
    
    (138,354
    )
    
    
    (18,967
    )Acquisition of business
    
    
    (179
    )
    
    
    
    
    
    
    
    
    
    
    Capital injection into subsidies
    
    
    (15,395
    )
    
    
    (1,649
    )
    
    
    (144,209
    )
    
    
    (19,769
    )Acquisition of long-term investment
    
    
    (2,018
    )
    
    
    
    
    
    
    (8,024
    )
    
    
    (1,100
    )Net cash used in investing activities
    
    
    (15,658
    )
    
    
    (2,860
    )
    
    
    (290,587
    )
    
    
    (39,836
    )Cash flows from financing activities:Proceeds from exercise of share options
    
    
    8,063
    
    
    
    25,394
    
    
    
    40,800
    
    
    
    5,593Proceeds IPO, net of expenses
    
    
    716,297
    
    
    
    
    
    
    
    
    
    
    
    Payment for expenses in connection with IPO
    
    
    
    
    
    
    (641
    )
    
    
    
    
    
    
    Net cash generated from financing activities
    
    
    724,360
    
    
    
    24,753
    
    
    
    40,800
    
    
    
    5,593Effect of exchange rate changes on cash and cash
equivalents
    
    
    (8,230
    )
    
    
    (27,972
    )
    
    
    (46,683
    )
    
    
    (6,400
    )Net increase / (decrease) in cash and cash equivalents
    
    
    711,549
    
    
    
    29,534
    
    
    
    (239,299
    )
    
    
    (32,805
    )Cash and cash equivalents at beginning of the year
    
    
    103,426
    
    
    
    814,975
    
    
    
    844,509
    
    
    
    115,772Cash and cash equivalents at end of the year
    
    
    814,975
    
    
    
    844,509
    
    
    
    605,210
    
    
    
    82,967
 (a) Basis of presentationFor the purposes of the presentation of the parent company only condensed financial information,
the Company records its investment in direct and indirect subsidiaries under the equity method
of accounting as prescribed in APB opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock. Such investment is presented as Long-term Investment in the
balance sheets and share of the direct and indirect subsidiaries profits or losses as Equity
in profits of subsidiaries in the statements of income.(b) CommitmentsThe Company does not have any significant commitments or long-term obligations as for the year
presented.
 F-37