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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C. 20549
      Form 20-F
      (Mark One)o

Registration statement pursuant to Section 12(b) or
    12(g) of the Securities Exchange Act of 1934orþ

Annual report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934For the fiscal year ended
    December 31, 2008.oro

Transition report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934For the transition period
    from          tooro

Shell company report pursuant to Section 13 or 15(d) of
    the Securities Exchange Act of 1934Date of event requiring this
    shell company report   Commission file number:
    000-51469
  Baidu, Inc.
      (Exact name of Registrant as
    specified in its charter)
  N/A
      (Translation of
    Registrants name into English)
  Cayman Islands
      (Jurisdiction of incorporation
    or organization)
  12/F, Ideal International
    Plaza
 No. 58 West-North 4th
    Ring,
 Beijing, 100080, Peoples
    Republic of China
      (Address of principal executive
    offices)
  Jennifer Li, Chief Financial
    Officer
 Telephone: +(86
    10) 8262-1188
 Email:
    jenniferli@baidu.com
 Facsimile: +(86
    10) 8260-7007
 12/F, Ideal International
    Plaza
 No. 58 West-North 4th
    Ring,
 Beijing, 100080, Peoples
    Republic of China
      (Name, Telephone, Email and/or
    Facsimile number and Address of Company Contact
    Person)
      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)
    25,641,847 Class A ordinary
    shares and 8,873,986 Class B ordinary shares, par value
    US$0.00005 per share, as of December 31, 2008.
  þ o
  o þ
  þ o
  12b-2
  þ o Non-accelerated o
    þ
    o
  o
    o
  o
  Rule 12b-2 o þ
    o o




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TABLE OF
    CONTENTS
   
 INTRODUCTION


3PART I


4Item 1.


Identity of Directors, Senior Management and
    Advisers


4Item 2.


Offer Statistics and Expected Timetable


4Item 3.


Key Information


5Item 4.


Information on the Company


34Item 4A.


Unresolved Staff Comments


55Item 5.


Operating and Financial Review and Prospects


55Item 6.


Directors, Senior Management and Employees


73Item 7.


Major Shareholders and Related Party
    Transactions


82Item 8.


Financial Information


86Item 9.


The Offer and Listing


87Item 10.


Additional Information


88Item 11.


Quantitative and Qualitative Disclosures About
    Market Risk


95Item 12.


Description of Securities Other than Equity
    Securities


96PART II


96Item 13.


Defaults, Dividend Arrearages and
    Delinquencies


96Item 14.


Material Modifications to the Rights of Security
    Holders and Use of Proceeds


96Item 15.


Controls and Procedures


96Item 16A.


Audit Committee Financial Expert


97Item 16B.


Code of Ethics


97Item 16C.


Principal Accountant Fees and Services


97Item 16D.


Exemptions from the Listing Standards for Audit
    Committees


98Item 16E.


Purchases of Equity Securities by the Issuer and
    Affiliated Purchasers


98Item 16F.


Change in Registrants Certifying
    Accountant


98Item 16G.


Corporate Governance


98PART III


98Item 17.


Financial Statements


98Item 18.


Financial Statements


98Item 19.


Exhibits


99EX-8.1EX-12.1EX-12.2EX-13.1EX-13.2EX-15.1EX-15.2EX-15.3   2




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INTRODUCTION    
    we, us, our company,
    our, and Baidu refer to Baidu, Inc., its
    subsidiaries, and, in the context of describing our operations
    and consolidated financial information, also include Baidu
    Netcom Science Technology Co., Ltd., Beijing Perusal Technology
    Co., Ltd. and BaiduPay Science and Technology Co., Ltd., our
    consolidated affiliated entities in China;
    user traffic or traffic refers generally
    to page views and the reach of a website; when used in the
    context of Alexa.com website traffic rankings, user
    traffic refers to a combined measure of the page
    views and the reach of a website averaged over
    a specified period of time; page views measure the number of web
    pages viewed by Internet users over a specified period of time
    except that multiple page views of the same page viewed by the
    same user on the same day are counted only once; reach measures
    the number of Internet users and is typically expressed as the
    percentage of all Internet users who visit a given website;
    China or PRC refers to the Peoples
    Republic of China, and solely for the purpose of this annual
    report, excluding Taiwan, Hong Kong and Macau;
    shares or ordinary shares refers to our
    ordinary shares, which include both Class A ordinary shares
    and Class B ordinary shares; convertible preferred
    shares refers to and includes our Series A,
    Series B and Series C redeemable convertible preferred
    shares, all of which were converted into the same number of
    Class B ordinary shares upon the completion of our initial
    public offering on August 10, 2005; preferred
    shares refers to our preferred shares, none of which is
    issued and outstanding;
    ADSs refers to our American depositary shares, each
    of which represents one Class A ordinary share;
    U.S. GAAP refers to generally accepted
    accounting principles in the United States;
    all references to RMB or Renminbi are to
    the legal currency of China and all references to $,
    dollars, US$ and
    U.S. dollars are to the legal currency of the
    United States;
    the MIIT refers to the PRC Ministry of Industry and
    Information Technology and, before its formal establishment in
    2008, its predecessor, the Ministry of Information
    Industry; and
    all discrepancies in any table between the amounts identified as
    total amounts and the sum of the amounts listed therein are due
    to rounding.  FORWARD-LOOKING
    INFORMATION
  Form 20-F
  
    our anticipated growth strategies;
    our future business development, results of operations and
    financial condition;
    our ability to attract and retain users and customers;
    the outcome of ongoing or any future litigation, including those
    relating to copyright or other intellectual property rights;
    competition in the Chinese language and Japanese language
    Internet search markets;
    the expected growth of the Chinese language Internet search
    market and the number of Internet and broadband users in China; 3




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
    PRC governmental regulations and policies relating to the
    Internet and Internet search providers; and
    development of PRC tax law reforms that may have uncertain
    implications on high and new technology companies.   PART I  Item 1.
    Identity
    of Directors, Senior Management and Advisers    Item 2.
    Offer
    Statistics and Expected Timetable   4




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Item 3.
    Key
    Information  A.  Selected
    Financial Data
  page F-1.
  For the Year Ended December 31,2004

2005

2006

2007

2008RMB

RMB

RMB

RMB

RMB

US$(In thousands except per share and per ADS data)Consolidated Statements of Income Data:Revenues:Online marketing services


106,854



307,363



828,484



1,741,021



3,194,461



468,224Other services


10,597



11,852



9,354



3,404



3,791



556Total revenues


117,451



319,215



837,838



1,744,425



3,198,252



468,780Operating costs and expenses:Cost of revenues


(41,192
)


(104,401
)


(245,489
)


(645,406
)


(1,155,457
)


(169,360
)Selling, general and administrative


(50,724
)


(134,771
)


(250,240
)


(411,163
)


(659,804
)


(96,710
)Research and development


(14,531
)


(44,200
)


(79,231
)


(140,702
)


(286,256
)


(41,958
)Total operating costs and expenses


(106,447
)


(283,372
)


(574,960
)


(1,197,271
)


(2,101,517
)


(308,028
)Operating profit


11,004



35,843



262,878



547,154



1,096,735



160,752Interest income


1,135



13,580



42,443



49,009



47,677



6,988Other income, net


347



93



4,098



20,053



19,767



2,898Income before tax and cumulative effect of change in accounting
    principle


12,486



49,516



309,419



616,216



1,164,179



170,638Taxation


(481
)


(1,911
)


(12,256
)


12,752



(116,071
)


(17,013
)Cumulative effect of change in accounting principle










4,603











Net income


12,005



47,605



301,766



628,968



1,048,108



153,625 5




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For the Year Ended December 31,2004

2005

2006

2007

2008RMB

RMB

RMB

RMB

RMB

US$(In thousands except per share and per ADS data)Net income per Class A ordinary share, per Class B
    ordinary share and per ADS(1):Basic:Basic (prior to cumulative effect of change in accounting
    principle)


1.09



2.40



8.92



18.57



30.63



4.49Cumulative effect of change in accounting principle










0.14











Basic (after cumulative effect of change in accounting principle)


1.09



2.40



9.06



18.57



30.63



4.49Diluted:Diluted (prior to cumulative effect of change in accounting
    principle)


0.43



1.49



8.62



18.11



30.19



4.43Cumulative effect of change in accounting principle










0.13











Diluted (after cumulative effect of change in accounting
    principle)


0.43



1.49



8.75



18.11



30.19



4.43Pro 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



30.63



4.49Diluted


0.43



1.49



8.75



18.11



30.19



4.43Pro 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



34,217



34,217Diluted


28,124



32,044



34,507



34,724



34,717



34,717     (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 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 Earnings per Share under Note 2 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.  6




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As of December 31,2004

2005

2006

2007

2008RMB

RMB

RMB

RMB

RMB

US$(In thousands)Consolidated Balance Sheets Data:Cash and cash equivalents


200,196



900,593



1,136,274



1,350,600



2,362,171



346,233Total assets


262,206



1,136,423



1,668,077



2,655,908



3,937,991



577,206Total liabilities


54,192



131,370



310,816



634,536



849,328



124,489Redeemable convertible preferred shares


211,352



















Total shareholders (deficit) / equity


(3,338
)


1,005,053



1,357,261



2,021,372



3,088,663



452,717Total liabilities, redeemable convertible preferred shares and
    shareholders equity


262,206



1,136,423



1,668,077



2,655,908



3,937,991



577,206   Exchange
    Rate Information
      Noon Buying RatePeriod

Period-End

Average(1)

Low

High(RMB per U.S. dollar)2004


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



7.29462008


6.8225



6.9193



7.2946



6.7800October


6.8388



6.8358



6.8521



6.8171November


6.8254



6.8281



6.8373



6.8220December


6.8225



6.8539



6.8842



6.82252009January


6.8392



6.8361



6.8403



6.8225February


6.8395



6.8363



6.8470



6.8241March


6.8329



6.8360



6.8438



6.8240April (through April 3, 2009)


6.8343



6.8341



6.8343



6.8339     (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.  B.  Capitalization
    and Indebtedness
   7




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C.  Reasons
    for the Offer and Use of Proceeds
    D.  Risk
    Factors
  Risks
    Related to Our Business
  If
    online marketing is not more widely adopted in China, our
    ability to increase revenue and 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.  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.
    word-of-mouth
  We
    face significant competition and may suffer from a loss of users
    and customers as a result.
  U.S.-based
 8




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U.S.-based U.S.-based
      consumer-to-consumer,
  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 retain existing customers or attract new customers for
    our online marketing services, our business and growth prospects
    could be seriously harmed.
   9




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We may
    not be able to manage our expanding operations
    effectively.
      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.
       10




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Metro-Goldwyn-Mayer
    Studios Inc. v. Grokster, Ltd Grokster Grokster Grokster Grokster
      and/or
  We
    have been and may continue to be subject to claims based on the
    content found on our websites or the results in our paid search
    listings.
   11




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We may
    be subject to patent infringement claims with respect to our P4P
    platform.
  pay-for-performance, U.S.-based
 12




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If we
    fail to keep up with rapid technological changes, our future
    success may be adversely affected.
    Our
    business may be adversely affected by third-party software
    applications or practices that interfere with our receipt of
    information from, or provision of information to, our users,
    which may impair our users experience.
    We are
    subject to risks and uncertainties faced by companies with
    limited operating history in a rapidly evolving
    industry.
    
    maintain our leading position in the Chinese language Internet
    search market;
    offer new and innovative products to attract and retain a larger
    user base; 13




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
    attract additional customers and increase spending per customer;
    further enhance our brand recognition;
    maintain the quality of our products and services 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.    Our
    historical growth rate may not be indicative of our future
    growth rate.
    Our
    operating results may fluctuate, which makes our results
    difficult to predict and could cause our results to fall short
    of expectations.
  period-to-period
  
    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;
    unforeseen events, such as negative publicity arising from
    reports by influential media outlets and other sources; and 14




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
    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.    The
    global financial and economic crisis, particularly the slowdown
    in the Chinese economy, may adversely affect our business,
    results of operations and financial condition.
    We may
    not be able to prevent others from unauthorized use of our
    intellectual property, which could harm our business and
    competitive position.
    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.
     15




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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.    Our
    recent expansion into the Japanese market may not be
    successful.
  10-month
   16




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
    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;
    currency exchange rate fluctuations;
    political or social unrest or economic instability;
    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
    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.
      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.
     17




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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.
    The
    successful operation of our business depends upon the
    performance and reliability of the Internet infrastructure and
    fixed telecommunications networks in China.
     18




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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.
      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.
     19




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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.
      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.
   20




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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
    websites.
    
    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, or we may not
    be able to obtain or renew certain permits or licenses,
    including without limitation an Internet news license issued by
    the State Council News Office, an Internet culture business
    permit issued by the Ministry of Culture and an audio/video
    program transmission license issued by the State Administration
    of Radio, Film and Television. This may significantly 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, including online
    advertising and online payment. Other aspects of our online
    operations may be regulated in the future. If these new laws and
    regulations are promulgated, additional licenses may be required
    for our online operations. If our operations do not comply with
    these new regulations at the time they become effective, or if
    we fail to obtain any licenses required under these new laws and
    regulations, we could be subject to penalties.       21




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and/or e-commerce e-commerce
    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.
  wholly-owned
   22




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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.
    Our
    contractual arrangements with our consolidated affiliated
    entities in China may result in adverse tax consequences to
    us.
     23




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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.
    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.
   24




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Regulation
    and censorship of information disseminated over the Internet in
    China may adversely affect our business and subject us to
    liability for information displayed on or linked to our
    websites.
        Intensified
    government regulation of Internet cafes could restrict our
    ability to maintain or increase user traffic to our
    website.
   25




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If our
    PRC subsidiaries Baidu Online and Baidu Times fail to maintain
    qualification as high and new technology enterprise
    under the PRC Enterprise Income Tax Law, or if our PRC
    subsidiary Baidu China fails to retain its 50% reduced rate tax
    holiday, or if our PRC subsidiaries declare and distribute
    dividends to their respective offshore parent companies, we will
    be required to pay more taxes, which could have a material
    adverse effect on our result of operations.
         26




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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.
    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 in China 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.
   27




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##### Table of Contents



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.
     28




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##### 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.
  change-of-control
  Fluctuation
    in the value of the RMB may have a material adverse effect on
    your investment.
   29




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##### 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;
    changes in financial estimates by securities research analysts;
    conditions in Internet search and online marketing markets; 30




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##### Table of Contents




    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 or elsewhere
    in the world.    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.
    You
    may not be able to participate in rights offerings and may
    experience dilution of your holdings as a result.
   31




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##### Table of Contents



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.
          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.
   32




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##### 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.
  non-U.S. corporation
 33




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##### Table of Contents



Item 4.
    Information
    on the Company  A.  History
    and Development of the Company
        (10) 8262-1188.
  B.  Business
    Overview
      Users.
  Customers.
  Baidu Union Members.
   34




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##### 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;
    Spell Checker  suggests alternate search terms
    when a search appears to contain misspellings or typing errors;
    Stock Quotes  provides links to stock
    information of companies listed on the stock exchanges in China;
    News, Knows, Postbar, MP3, Images, Video, and Space
    Information displays search results from other
    Baidu products including Baidu News, Baidu Knows, Baidu Postbar,
    Baidu MP3 Search, Baidu Image Search and Baidu Video 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.
 35




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##### Table of Contents



Baidu Knows.
  Baidu MP3 Search.
  Baidu Image Search.
  Baidu Video Search.
  Baidu Space.
  Other Search and Community Products.
  Baidu Encyclopedia.
  Baidu Search Ranking and Search Index.
  Baidu Web Directory.
  Baidu Map Search.
  Baidu Yellow Page Search.
 36




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##### Table of Contents



Baidu Ancient Chinese Literature
    Search.
  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 Love.
  Baidu Patent Search.
  Baidu Voice Search.
  Baidu Games.
  Baidu-Hexun Finance.
 37




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##### Table of Contents



Baidu Statistics Search.
  Baidu Entertainment.
  Baidu Dictionary.
  Other
    Products Offered by Baidu
  Baidu Hi.
  Baidu Youa.
  Baidu Safety Center.
  Baidu Desktop Search.
  Baidu Sobar.
  Baidu Anti-Virus.
  Baidu Internet TV.
  Baidu Japanese Language Search. www.baidu.jp Chinese-language
  Products
    and Services for Customers
   38




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##### Table of Contents



Online
    Marketing Services
  P4P. sign-up
        
    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.
  Fixed Ranking.
  Targetizement.
  Baidu TV.
 39




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##### Table of Contents



Brand-Link.
  My Marketing Center.
  Other Forms of Online Advertising.
  Other
    Services
      Baidu
    Union
    Our
    Customers
  Online Marketing. e-commerce,
 40




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##### Table of Contents




    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
        Marketing
  word-of-mouth.
     41




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##### Table of Contents



Strategic
    Relationships
            Chinese-language
  Competition
  U.S.-based
  U.S.-based
    Internet Search
    Providers. U.S.-based U.S.-based U.S.-based
  Chinese Internet Companies.
  Other Advertising Media.
 42




---



##### Table of Contents



IM and C2C Service Providers.
  Technology
    Web
    Search Technology
    Link Analysis Techniques.
  Information Extraction Techniques.
  Web Crawling Techniques.
    Chinese Language Processing Techniques.
  P4P
    Technology
    P4P Auction System.
 43




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##### Table of Contents



P4P Billing System.
  P4P Customer Service System.
  ProTheme Contextual Promotion Technology.
  Branded
    Advertising Technology
  Targetizement Technology.
  Large-Scale
    Systems Technology
  off-the-shelf
     44




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##### Table of Contents



Intellectual
    Property
  
    Regulation
       45




---



##### Table of Contents



Regulations
    on Value-Added Telecommunications Services and Internet Content
    Services
          
    opposes the fundamental principles stated in the PRC
    constitution;
    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
   46




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##### Table of Contents



Regulations
    on News Display
   47




---



##### Table of Contents



Regulation
    on Internet Culture Activities
      Regulation
    on Broadcasting Audio/Video Programs through the
    Internet
       48




---



##### Table of Contents



Regulations
    on Advertisements
        Regulation
    on Software Products
     49




---



##### Table of Contents



Regulations
    on Intellectual Property Rights
    Patent.
  Copyright.
         50




---



##### Table of Contents



Trademark.
    Regulation
    on Information Security
           51




---



##### Table of Contents



Regulations
    on Internet Privacy
    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).    Foreign
    Exchange Registration of Offshore Investment by PRC
    Residents
   52




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##### Table of Contents



Regulations
    on Labor
    Regulations
    on Taxation
    Regulations
    in Japan
   53




---



##### Table of Contents



C.  Organizational
    Structure
    Time of

Place ofName

Formation

Formation

RelationshipBaidu Online Network Technology (Beijing) Co. Ltd.

January 2000

China

Wholly-owned
    subsidiaryBaidu Holdings Limited

February 2000

British Virgin
    Islands

Wholly-owned
    subsidiaryBaidu Netcom Science Technology Co., Ltd.

June 2001

China

Consolidated
    affiliated entityBaidu (China) Co., Ltd.

June 2005

China

Wholly-owned
    subsidiaryBaidu.com Times Technology (Beijing) Co., Ltd.

April 2006

China

Wholly-owned
    subsidiaryBeijing Perusal Technology Co., Ltd.

June 2006

China

Consolidated
    affiliated entityBaidu, Inc.

December 2006

Japan

Wholly-owned
    subsidiaryBaidu (Hong Kong) Limited

November 2007

Hong Kong

Wholly-owned
    subsidiaryBeijing BaiduPay Science and Technology Co., Ltd.

February 2008

China

Consolidated
    affiliated entityBaido, Inc.

April 2008

Japan

Wholly-owned
    subsidiaryHyakudo, Inc.

April 2008

Japan

Wholly-owned
    subsidiaryBaidu Interaction (Shenzhen) Network Technology Co., Ltd.

February 2009

China

Wholly-owned
    subsidiary        54




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##### Table of Contents



D.  Property,
    Plant and Equipment
      Item 4A.
    Unresolved
    Staff Comments    Item 5.
    Operating
    and Financial Review and Prospects  Form 20-F. Form 20-F.
  A.  Operating
    Results
  Overview
        Revenues
  Revenue
    Generation
   55




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##### Table of Contents




    the number of our users and online marketing customers;
    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 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.       56




---



##### Table of Contents



Revenue
    Collection
        Operating
    Costs and Expenses
    Cost
    of Revenues
    For the Year Ended December 31,2006

2007

2008RMB

%

RMB

%

RMB

US$

%(In thousands, except percentages)Total revenues


837,838



100.0



1,744,425



100.0



3,198,252



468,780



100Cost of revenues:Business tax and surcharges


(51,833
)


6.2



(108,783
)


6.2



(200,085
)


(29,327
)


6.2Traffic acquisition costs


(75,180
)


9.0



(204,693
)


11.7



(418,474
)


(61,337
)


13.1Bandwidth costs


(40,005
)


4.8



(117,554
)


6.8



(178,651
)


(26,186
)


5.6Depreciation of servers and other equipment


(51,574
)


6.1



(147,115
)


8.4



(225,799
)


(33,096
)


7.1Operational expenses


(25,481
)


3.0



(65,544
)


3.8



(127,906
)


(18,748
)


4.0Share-based compensation expenses


(1,416
)


0.2



(1,717
)


0.1



(4,542
)


(666
)


0.1Total cost of revenues


(245,489
)


29.3



(645,406
)


37.0



(1,155,457
)


(169,360
)


36.1   Traffic Acquisition Costs.
 57




---



##### Table of Contents



Bandwidth Costs.
  Depreciation of Servers and Other
    Equipment.
  Operational Expenses.
  Operating
    Expenses
    For the Year Ended December 31,2006

2007

2008RMB

%

RMB

%

RMB

US$

%(In thousands, except percentages)Total revenues


837,838



100.0



1,744,425



100.0



3,198,252



468,780



100Cost of revenues


(245,489
)


29.3



(645,406
)


37.0



(1,155,457
)


(169,360
)


36.1Selling, general and administrative


(250,240
)


29.9



(411,163
)


23.6



(659,804
)


(96,710
)


20.6Selling and marketing


(149,856
)


17.9



(275,283
)


15.8



(452,245
)


(66,288
)


14.1General and administrative


(100,384
)


12.0



(135,880
)


7.8



(207,559
)


(30,422
)


6.5Research and development


(79,231
)


9.4



(140,702
)


8.1



(286,256
)


(41,958
)


9.0Total costs and operating expenses


(574,960
)


68.6



(1,197,271
)


68.7



(2,101,517
)


(308,028
)


65.7   Selling,
    General and Administrative Expenses
      Research
    and Development Expenses
  SOP 98-1,
  Share-based
    Compensation Expenses
   58




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##### Table of Contents



For the Year Ended December 31,2006

2007

2008RMB

%

RMB

%

RMB

US$

%(In thousands, except percentages)Allocation of Share-based Compensation ExpensesCost of revenues


1,416



2.9



1,717



4.3



4,542



666



5.4Selling, general and administrative


32,970



68.3



17,371



43.6



41,651



6,105



49.6Research and development


13,894



28.8



20,760



52.1



37,784



5,538



45.0Total share-based compensation expenses


48,280



100.0



39,848



100.0



83,977



12,309



100.0   Taxation
    PRC
    Enterprise Income Tax
     59




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##### Table of Contents



60




---



##### Table of Contents



PRC
    Business Tax
    PRC
    Value-added Tax
   61




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##### Table of Contents



Results
    of Operations
  period-to-period
  For the Year Ended December 31,2006

2007

2008RMB

RMB

RMB

US$(In thousands)Consolidated Statements of Income DataRevenues:Online marketing services


828,484



1,741,021



3,194,461



468,224Other services


9,354



3,404



3,791



556Total revenues


837,838



1,744,425



3,198,252



468,780Operating costs and expenses(1):Cost of revenues


(245,489
)


(645,406
)


(1,155,457
)


(169,360
)Selling, general and administrative


(250,240
)


(411,163
)


(659,804
)


(96,710
)Research and development


(79,231
)


(140,702
)


(286,256
)


(41,958
)Total operating costs and expenses


(574,960
)


(1,197,271
)


(2,101,517
)


(308,028
)Operating profit


262,878



547,154



1,096,735



160,752Interest income


42,443



49,009



47,677



6,988Other income, net, including exchange gains or losses


4,098



20,053



19,767



2,898Taxation


(12,256
)


12,752



(116,071
)


(17,013
)Cumulative effect of change in accounting principle


4,603











Net income


301,766



628,968



1,048,108



153,625     (1)
    
    Share-based compensation expenses are allocated as follows:  Cost of revenues


(1,416
)


(1,717
)


(4,542
)


(666
)Selling, general and administrative


(32,970
)


(17,371
)


(41,651
)


(6,105
)Research and development


(13,894
)


(20,760
)


(37,784
)


(5,538
)(48,280
)


(39,848
)


(83,977
)


(12,309
)   Year
    Ended December 31, 2008 Compared to Year Ended
    December 31, 2007
  Revenues.
 62




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##### Table of Contents



Operating Costs and Expenses.
  
    Cost of Revenues.  Our cost of revenues
    increased by 79.0% from RMB645.4 million in 2007 to
    RMB1.2 billion (US$169.4 million) in 2008. This
    increase was primarily due to the following factors:  
    Traffic Acquisition Costs.  Our traffic
    acquisition costs increased by 104.4% from RMB204.7 million
    in 2007 to RMB418.5 million (US$61.3 million) in 2008.
    This was primarily due to the growth of revenue contribution
    from our Baidu Union members.
    Bandwidth Costs and Depreciation Expenses. Our bandwidth
    costs increased by 52.0% from RMB117.6 million in 2007 to
    RMB178.7 million (US$26.2 million) in 2008. Our
    depreciation expenses of servers and other computer hardware
    increased by 53.5% from RMB147.1 million in 2007 to
    RMB225.8 million (US$33.1 million) in 2008. The
    absolute increases in these costs were due to the expansion of
    our business. However, these costs in 2008 accounted for a lower
    percentage of total revenues than in 2007. The decreases in
    bandwidth costs and depreciation expenses as percentages of
    total revenues reflect our improved efficiency as well as
    increased scalability of capital expenditures.
    Business Tax and Surcharges.  Our business tax
    and surcharges increased by 83.9% from RMB108.8 million in
    2007 to RMB200.1 million (US$29.3 million) in 2008,
    primarily as a result of increase in our online marketing
    revenues.
    Operational Expenses.  Our operational expenses
    increased by 95.1% from RMB65.5 million in 2007 to
    RMB127.9 million (US$18.7 million) in 2008, 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 60.5% from RMB411.2 million in 2007
    to RMB659.8 million (US$96.7 million) in 2008. This
    increase was primarily due to the following factors:  
    total salaries and benefits and staff-related expenses increased
    by 61.8% from RMB218.7 million in 2007 to
    RMB353.8 million (US$51.9 million) in 2008, primarily
    due to the increased direct sales and administrative headcount
    to support our expanded online marketing services;
    share-based compensation expenses allocated to selling, general
    and administrative expenses increased by 139.8% from
    RMB17.4 million in 2007 to RMB41.7 million
    (US$6.1 million) in 2008 primarily due to share-based
    awards granted to the new senior management personnel hired in
    2008;
    total office operating expenses increased by 37.6% from
    RMB56.1 million in 2007 to RMB77.2 million
    (US$11.3 million) in 2008, as a result of increase and
    expansion of our direct sales offices;
    total traveling, communication and entertainment expenses
    increased by 46.6% from RMB16.3 million in 2007 to
    RMB23.9 million (US$3.5 million) in 2008, primarily
    due to the increased administrative and direct sales headcount
    and activities to support our expanded online marketing
    services; and  
    Research and Development Expenses.  Our
    research and development expenses increased by 103.4% from
    RMB140.7 million in 2007 to RMB286.3 million
    (US$42.0 million) in 2008, primarily due to an increase in
    the number and compensation levels of research and development
    staff.  Operating Profit.
  Taxation.
 63




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##### Table of Contents



Other income, net, including exchange gains or
    losses.
  Net Income.
  Year
    Ended December 31, 2007 Compared to Year Ended
    December 31, 2006
  Revenues.
  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 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 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 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 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 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 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 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 in 2007, primarily due to the increased
    direct sales and administrative headcount to support our
    expanded online marketing services; 64




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##### Table of Contents




    total office operating expenses increased by 69.2% from
    RMB33.2 million in 2006 to RMB56.1 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 in 2007, primarily due to the increased
    administrative and direct sales headcount to support our
    expanded online marketing services.    
    Research and Development Expenses.  Our
    research and development expenses increased by 77.6% from
    RMB79.2 million in 2006 to RMB140.7 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.
  Inflation
    Foreign
    Currency
   65




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##### Table of Contents



Critical
    Accounting Policies
      Revenue
    Recognition
    Online
    Marketing Services
  (1)  Auction-based
    P4P Services
      (2)  Other
    Performance-based Online Marketing Services
    (3)  Time-based
    Online Advertising Services
    (4)  Online
    Marketing Services Involving Baidu Union
   66




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##### Table of Contents



(5)  Barter
    Transactions
  Accounting for Nonmonetary
    Transactions
  EITF 99-17, Accounting for Advertising Barter Transactions
  EITF 00-8, 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.    (6)  Other
    Revenue Recognition Related Policies
  EITF 00-21, Revenue Arrangements with Multiple Deliverables
  EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer
    (Including a Reseller of the Vendors Products)
    Share-based
    Compensation Expenses
  Share-Based Payment
 67




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##### Table of Contents



Income
    Taxes
    Accounting for Uncertainty in Income
    Taxes  an interpretation of FASB Statement
    No. 109 Accounting for Income Taxes
      Allowance
    for Doubtful Accounts
      Impairment
    of Long-Lived Assets
  Accounting for the Impairment or Disposal of Long-Lived
    Assets
  Impairment
    of Goodwill and Intangible Assets with Indefinite
    Life
  non-amortized Goodwill and Other Intangible
    Assets non-amortized
 68




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##### Table of Contents



non-amortized
  Recent
    Accounting Pronouncements
  Business Combinations
  Noncontrolling Interests in Consolidated Financial
    Statements  an amendment of ARB No. 51
  No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement
    No. 13 and Other Accounting Pronouncements That Address
    Fair Value Measurements for Purposes of Lease Classification or
    Measurement under Statement 13 No. 157-2, Effective Date of FASB Statement No. 157 No. 157-3, Determining the Fair Value of a Financial Asset When the
    Market for That Asset Is Not Active No. 157-1, No. 157-2 No. 157-3
  Disclosures about Derivative Instruments and Hedging
    Activities, an amendment of FASB Statement No. 133 Accounting for Derivative Instruments
    and Hedging Activities
  No. FAS 142-3, Determination of the Useful Life of Intangible Assets FSP 142-3.
 69




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##### Table of Contents



FSP 142-3 FSP 142-3 FSP 142-3 FSP 142-3
  The
    Hierarchy of Generally Accepted Accounting Principles
  No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is
    Indexed to an Entitys Own Stock EITF 07-5. EITF 07-5 EITF 07-5 EITF 07-5 EITF 07-5
  No. 03-6-1, Determining Whether Instruments Granted in Share-Based
    Payment Transactions Are Participating Securities EITF 03-6-1. EITF 03-6-1 EITF 03-6-1 EITF 03-6-1
  No. 08-7, Accounting for Defensive Intangible Assets EITF 08-7. EITF 08-7 EITF 08-7 EITF 08-7 EITF 08-7
  B.  Liquidity
    and Capital Resources
   70




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##### Table of Contents



Cash
    Flows and Working Capital
    For the Year Ended December 31,2006

2007

2008RMB

RMB

RMB

US$(In thousands)Net cash generated from operating activities


440,805



935,152



1,746,199



255,948Net cash used in investing activities


(208,933
)


(713,216
)


(661,102
)


(96,901
)Net cash generated from financing activities


32,179



40,698



(35,637
)


(5,223
)Effect of exchange rate changes on cash


(28,370
)


(48,308
)


(37,889
)


(5,555
)Net increase in cash and cash equivalents


235,681



214,326



1,011,571



148,269Cash and cash equivalents at beginning of the period


900,593



1,136,274



1,350,600



197,963Cash and cash equivalents at end of the period


1,136,274



1,350,600



2,362,171



346,232   Operating
    Activities
      Investing
    Activities
      Financing
    Activities
   71




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##### Table of Contents



Capital
    Expenditures
      C.  Research
    and Development
    D.  Trend
    Information
    E.  Off-Balance
    Sheet Arrangements
   72




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##### Table of Contents



F.  Contractual
    Obligations
    Payment Due by PeriodLess than





More thanTotal

1 Year

1-3 Years

3-5 Years

5 Years(in RMB thousands)Operating lease obligations(1)


328,728



194,665



134,063







Capital commitments(2)


149,408



149,408











Total


478,136



344,073



134,063







     (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.    Item 6.
    Directors,
    Senior Management and Employees  A.  Directors
    and Senior Management
    Directors and Executive Officers

Age

Position/TitleRobin Yanhong Li


40


Chairman and Chief Executive OfficerJennifer Li


41


Chief Financial OfficerPeng Ye


48


Chief Operating OfficerYinan Li


39


Chief Technology OfficerWilliam I. Chang


45


Chief ScientistWilliam Decker


62


Independent DirectorJames Ding


44


Independent DirectorNobuyuki Idei


71


Independent DirectorGreg Penner


39


Independent Director   Robin Yanhong Li
  Jennifer Li
 73




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##### Table of Contents



Peng Ye
  Yinan Li
  William I. Chang
  William Decker out-of-home non-U.S. companies
  James Ding
  Nobuyuki Idei
 74




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##### Table of Contents



Greg Penner
  B.  Compensation
    of Directors and Executive Officers
        Ordinary SharesUnderlyingOutstanding


Exercise PriceName

Options


(US$/Share)


Grant Date

Expiration DateRobin Yanhong Li


22,050



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/A20,000



133.86


February 11, 2009

February 11, 2014Jennifer Li(2)


*
(1)





April 16, 2008

N/A*



133.86


February 11, 2009

February 11, 2014Peng Ye(3)


*
(1)





April 25, 2008

N/A*



133.86


February 11, 2009

February 11, 2014Yinan Li(4)


*
(1)





October 16, 2008

N/A*



133.86


February 11, 2009

February 11, 2014William I. Chang


*



124.90


January 24, 2007

January 24, 2012*
(1)





January 24, 2007

N/AWilliam Decker


*
(1)





January 11, 2008

N/AJames Ding


*
(1)





January 11, 2008

N/ANobuyuki Idei


*



183.23


January 10, 2008

July 25, 2012Greg Penner


*
(1)





January 11, 2008

N/AOther individuals as a group


238,037








  75




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##### Table of Contents



*
    
    The options and restricted shares in aggregate held by each of
    these directors and officers represent less than 1% of our total
    outstanding shares.(1)
    
    Restricted shares.(2)
    
    Ms. Jennifer Li joined us in March 2008 and was granted
    some options and restricted shares on April 16, 2008. In
    February 2009, Ms. Li voluntarily surrendered all of the
    options previously granted to her. The surrendered options have
    been cancelled. The options listed in the table above were
    granted to Ms. Li in February 2009.(3)
    
    Mr. Peng Ye joined us in April 2008 and was granted some
    options and restricted shares on April 25, 2008. In
    February 2009, Mr. Ye voluntarily surrendered all of the
    options previously granted to him. The surrendered options have
    been cancelled. The options listed in the table above were
    granted to Mr. Ye in February 2009.(4)
    
    Mr. Yinan Li joined us in October 2008 and was granted some
    options and restricted shares on October 16, 2008. In
    February 2009, Mr. Li voluntarily surrendered all of the
    options previously granted to him. The surrendered options have
    been cancelled. The options listed in the table above were
    granted to Mr. Li in February 2009.    2000
    Option Plan
  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.
  Eligibility.
  Acceleration of Awards upon Corporate
    Transactions. change-of-control change-of-control change-of-control
  Exercise Price and Term of Awards.
 76




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##### Table of Contents



Vesting Schedule.
  Repurchase Rights.
  Amendment and Termination.
  2008 Share
    Incentive Plan
  Types of Awards.
  
    options;
    restricted shares;
    restricted share units; and
    any other form of award granted to a participant pursuant to the
    2008 plan.  Plan Administration.
  Award Agreement.
 77




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##### Table of Contents



Eligibility.
  Acceleration of Awards upon Corporate
    Transactions. change-of-control
    Exercise Price and Term of Awards.
  Restricted Shares and Restricted Share
    Unites.
  Amendment and Termination.
  C.  Board
    Practices
  Board of
    Directors
   78




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##### Table of Contents



Committees
    of the Board of Directors
    Audit
    Committee
  Rule 10A-3 Form 20-F.
  
    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
    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
   79




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##### Table of Contents




    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.    Terms of
    Directors and Executive Officers
    D.  Employees
    E.  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 (except that, for Morgan Stanley, the number of
    shares beneficially owned was as of December 31, 2008, as
    reported in its Schedule 13G/A filing). 80




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##### Table of Contents



Shares Beneficially OwnedNumber(1)

%(2)Directors and Executive Officers:Robin Yanhong Li(3)


5,591,224



16.2
%Jennifer Li(4)


*



*Peng Ye(5)


*



*Yinan Li(6)


*



*William Chang(7)


*



*William Decker(8)


*



*James Ding(9)


*



*Nobuyuki Idei(10)


*



*Greg Penner(11)


1,183,637



3.4
%All Directors and Executive Officers as a Group(12)


6,805,932



19.7
%Principal Shareholders:Handsome Reward Limited(13)


5,490,000



15.9
%Morgan Stanley(14)


1,765,818



5.1
%     *
    
    Less than 1% of our total outstanding shares.(1)
    
    The number of shares beneficially owned by each named director
    and executive officer includes the shares beneficially owned by
    such person, the shares underlying all options held by such
    person that have vested or will vest within 60 days after
    March 31, 2009, and restricted shares held by such person
    that have vested or will vest within 60 days after
    March 31, 2009. The options and restricted shares were
    granted under our 2000 option plan.(2)
    
    Percentage of beneficial ownership of each named director and
    executive officer is based on 34,552,169 ordinary shares
    (consisting of 25,678,183 Class A ordinary shares and
    8,873,986 Class B ordinary shares) of the company
    outstanding as of March 31, 2009, the number of ordinary
    shares underlying options that have vested or will vest within
    60 days after March 31, 2009, and the number of
    restricted shares that have vested or will vest within
    60 days after March 31, 2009, each as held by such
    person as of that date.(3)
    
    Includes (i) 37,665 Class A ordinary shares held by
    Mr. Li, (ii) 34,000 Class A ordinary shares in
    the form of ADSs held by Mr. Li, (iii) 26,666
    Class A ordinary shares issuable upon exercise of options
    held by Mr. Li, (iv) 2,893 restricted shares held by
    Mr. Li, and (v) 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,
    Inc., Ideal International Plaza, 12/F,
    No. 58 West-North 4th Ring, Beijing, 100080, PRC.(4)
    
    The business address for Ms. Li is
    c/o Baidu,
    Inc., Ideal International Plaza, 12/F,
    No. 58 West-North 4th Ring, Beijing, 100080, PRC.(5)
    
    The business address for Mr. Ye is
    c/o Baidu,
    Inc., Ideal International Plaza, 12/F,
    No. 58 West-North 4th Ring, Beijing, 100080, PRC.(6)
    
    The business address for Mr. Li is
    c/o Baidu,
    Inc., Ideal International Plaza, 12/F,
    No. 58 West-North 4th Ring, Beijing, 100080, PRC.(7)
    
    The business address for Mr. Chang is Baidu, Inc., Ideal
    International Plaza, 12/F, No. 58 West-North 4th Ring,
    Beijing, 100080, PRC.(8)
    
    The address of Mr. Decker is 24 Nordic Way, Saranac Lake,
    NY, 12983, USA. 81




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##### Table of Contents



(9)
    
    The business address of Mr. Ding is 4/F, Zhongdian
    Information Tower No. 6 Zhongguancun South Street, Haidian
    District, Beijing 100086, PRC.(10)
    
    The business address of Mr. Ideis address is Tokyo
    Ginko Kyoukai Building 16F,1-3-1, Marunouchi, Chiyoda-ku, Tokyo,
    100-0005,
    Japan.(11)
    
    Includes (i) 15,520 Class A ordinary shares in the
    form of ADSs held by Mr. Penner, (ii) 434 restricted
    shares, (iii) 200,000 Class A ordinary shares in the
    form of ADSs held by Madrone Partners, LP, 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 the shares held by Madrone Partners, LP
    and Peninsula Capital Fund I, LLC, 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.(12)
    
    Includes ordinary shares, ordinary shares issuable upon exercise
    of options and restricted shares, held by all of our directors
    and executive officers as a group.(13)
    
    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, Inc., Ideal International Plaza, 12/F,
    No. 58 West-North 4th Ring, Beijing, 100080, PRC.(14)
    
    Represents 1,765,818 Class A ordinary shares in the form of
    ADSs beneficially owned by Morgan Stanley, as reported on two
    Schedule 13G/As filed by Morgan Stanley on
    February 17, 2009. The business address of Morgan Stanley
    is 1585 Broadway, New York, NY 10036, U.S.A.      Item 7.
    Major
    Shareholders and Related Party Transactions  A.  Major
    Shareholders
    B.  Related
    Party Transactions
  Contractual
    Arrangements with Baidu Netcom and Its Shareholders
    Exclusive Technology Consulting and Services
    Agreement.
 82




---



##### Table of Contents



Business Cooperation Agreement.
  Operating Agreement.
  Software License Agreement.
  Other License Agreements.
  Proxy Agreement.
 83




---



##### Table of Contents



Equity Pledge Agreement.
  Exclusive Equity Purchase Option
    Agreement.
  Loan Agreement.
  Irrevocable Power of Attorney.
    
    a loan agreement;
    an equity pledge agreement between Robin Yanhong Li and Baidu
    Online; and
    an exclusive equity purchase option agreement among Robin
    Yanhong Li, Baidu Netcom 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; 84




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##### Table of Contents




    exclusive equity purchase option agreements among Beijing
    Perusal, Baidu Online and the shareholders of Beijing Perusal;
    a proxy agreement between the shareholders of Beijing Perusal
    and Baidu Online;
    an exclusive technology consulting and services agreement
    between Beijing Perusal and Baidu Online;
    an operating agreement among Beijing Perusal, Baidu Online, and
    the shareholders of Beijing Perusal; 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.    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 equity purchase option agreement among BaiduPay,
    Baidu Online and the individual shareholder of BaiduPay;
    a proxy agreement between the individual shareholder of BaiduPay
    and Baidu Online;
    an exclusive technology consulting and services agreement
    between BaiduPay and Baidu Online;
    operating agreement among BaiduPay, Baidu Online and the
    shareholders of BaiduPay; 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
    Transaction
    with UiTV
   85




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##### Table of Contents



C.  Interests
    of Experts and Counsel
    Item 8.
    Financial
    Information  A.  Consolidated
    Statements and Other Financial Information
    Legal
    Proceedings
            Dividend
    Policy
     86




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##### Table of Contents



B.  Significant
    Changes
    Item 9.
    The
    Offer and Listing  A.  Offering
    and Listing Details.
      Sales PriceHigh

LowAnnual High and Low2005 (from August 5, 2005)


153.98



60.002006


128.68



44.442007


429.19



92.802008


397.70



100.50Quarterly Highs and LowsFirst 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



201.15Second Quarter 2008


382.90



243.00Third Quarter 2008


353.37



227.00Fourth Quarter 2008


274.83



100.50First Quarter 2009


197.69



105.00Monthly Highs and LowsOctober 2008


274.83



176.33November 2008


239.75



105.55December 2008


142.45



100.50January 2009


139.98



105.00February 2009


153.00



119.65March 2009


197.69



136.26April 2009 (through April 8, 2009)


190.00



171.02   B.  Plan
    of Distribution
    C.  Markets
   87




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##### Table of Contents



D.  Selling
    Shareholders
    E.  Dilution
    F.  Expenses
    of the Issue
    Item 10.
    Additional
    Information  A.  Share
    Capital
    B.  Memorandum
    and Articles of Association
    Registered
    Office and Objects
    Board of
    Directors
    Ordinary
    Shares
  General.
  Dividends.
  Conversion.
  Voting Rights.
 88




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##### Table of Contents



Transfer of Shares.
      Liquidation. paid-up
  Calls on Shares and Forfeiture of Shares.
 89




---



##### Table of Contents



Redemption of Shares.
  Repurchase of Shares.
  Variations of Rights of Shares.
  Inspection of Books and Records.
  Preferred
    Shares
    C.  Material
    Contracts
  Form 20-F.
  D.  Exchange
    Controls
    E.  Taxation
    Cayman
    Islands Taxation
   90




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##### Table of Contents



United
    States Federal Income Taxation
  Form 20-F Form 20-F,
    
    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
    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.     91




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##### Table of Contents



Taxation
    of Dividends and Other Distributions on the ADSs or Ordinary
    Shares
          Taxation
    of Disposition of Shares
   92




---



##### Table of Contents



Passive
    Foreign Investment Company
  non-U.S. corporation
  
    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).    mark-to-market
  mark-to-market
  
    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.    mark-to-market mark-to-market
 93




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##### Table of Contents



mark-to-market mark-to-market mark-to-market mark-to-market mark-to-market
  mark-to-market de minimis mark-to-market
      Information
    Reporting and Backup Withholding
  Form W-9.
    F.  Dividends
    and Paying Agents
    G.  Statement
    by Experts
    H.  Documents
    on Display
  Form F-1,
  Form 20-F:
 94




---



##### Table of Contents



1-800-SEC-0330.
    Form 20-F http://ir.baidu.com.
  I.  Subsidiary
    Information
    Item 11.
    Quantitative
    and Qualitative Disclosures About Market Risk  Interest
    Rate Risk
      Foreign
    Exchange Risk
   95




---



##### Table of Contents



Item 12.
    Description
    of Securities Other than Equity Securities   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
  Rule 13a-15(e) Rule 13a-15(b)
    Managements
    Annual Report on Internal Control over Financial
    Reporting
  Rule 13a-15(f) Rule 13a-15(c) Internal Control-Integrated Framework
    page F-2 Form 20-F.
 96




---



##### Table of Contents



Changes
    in Internal Control over Financial Reporting
  Form 20-F
  Item 16A.
    Audit
    Committee Financial Expert  Rule 10A-3
  Item 16B.
    Code
    of Ethics  http://ir.baidu.com.
  Item 16C.
    Principal
    Accountant Fees and Services    2007

2008Audit fees(1)

US$
858,000


US$
870,000Audit-related fees






Tax fees(2)





US$
21,866All 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 2007 and 2008, the audit refers to integrated
    audit, including financial audit and audit pursuant to
    Section 404 of the Sarbanes-Oxley Act of 2002.(2)
    
    Tax fees means the aggregate fees billed in each of
    the fiscal years listed for professional services rendered by
    our principal auditors for tax compliance, tax advice, and tax
    planning. In 2008, the tax fees refer to fees paid to our
    principal auditors to review the compliance of our tax
    documentation.  case-by-case
   97




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##### 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  Rule 10b-18
    Rule 10b5-1 share
  Item 16F.
    Change
    in Registrants Certifying Accountant    Item 16G.
    Corporate
    Governance       PART III  Item 17.
    Financial
    Statements    Item 18.
    Financial
    Statements   98




---



##### Table of Contents



Item 19.
    Exhibits  ExhibitNumber

Description of Document1
.1

Third Amended and Restated Memorandum and Articles of
    Association of the Registrant (incorporated by reference to
    Exhibit 99.2 of
    Form 6-K
    furnished with the Securities and Exchange Commission on
    December 17, 2008)2
.1

Registrants Specimen American Depositary Receipt
    (incorporated by reference to Exhibit 1 of the prospectus
    filed with the Securities and Exchange Commission on
    January 5, 2009 pursuant to Rule 424(b)(3) under the
    Securities Act)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 F-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 (amended and restated effective
    December 16, 2008) (incorporated by reference to
    Exhibit 99.3 of
    Form 6-K
    furnished with the Securities and Exchange Commission on
    December 17, 2008)4
.3

2008 Share Incentive Plan (incorporated by reference to
    Exhibit 99.4 of
    Form 6-K
    furnished with the Securities and Exchange Commission on
    December 17, 2008)4
.4

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
.5

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
.6

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
.7

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
.8

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
.9

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
.10

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
.11

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
.12

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 F-1
    (file
    no. 333-126534)
    filed with the Securities and Exchange Commission on
    July 12, 2005) 99




---



##### Table of Contents



ExhibitNumber

Description of Document4
.13

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
.14

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
.15

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
.16

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
.17

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
.18

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
.19

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
.20

Translation of the form of Technology Consulting and Services
    Agreement between Baidu Online and a consolidated affiliated PRC
    entity (incorporated by reference to Exhibit 4.19 of our
    Annual Report on
    Form 20-F
    filed with the Securities and Exchange Commission on
    June 5, 2008)4
.21

Translation of the form of Operating Agreement between Baidu
    Online and a consolidated affiliated PRC entity (incorporated by
    reference to Exhibit 4.20 of our Annual Report on
    Form 20-F
    filed with the Securities and Exchange Commission on
    June 5, 2008)4
.22

Translation of the form of Web Layout Copyright License
    Agreement between Baidu Online and a consolidated affiliated PRC
    entity (incorporated by reference to Exhibit 4.21 of our
    Annual Report on
    Form 20-F
    filed with the Securities and Exchange Commission on
    June 5, 2008)4
.23

Translation of the form of Proxy Agreement among Baidu Online, a
    consolidated affiliated PRC entity and the shareholders of the
    consolidated affiliated PRC entity (incorporated by reference to
    Exhibit 4.22 of our Annual Report on
    Form 20-F
    filed with the Securities and Exchange Commission on
    June 5, 2008)4
.24

Translation of the form of Equity Pledge Agreement between Baidu
    Online and the shareholder of a consolidated affiliated PRC
    entity (incorporated by reference to Exhibit 4.23 of our
    Annual Report on
    Form 20-F
    filed with the Securities and Exchange Commission on
    June 5, 2008)4
.25

Translation of the form of Exclusive Equity Purchase Option
    Agreement between Baidu Online and the shareholder of a
    consolidated affiliated PRC entity (incorporated by reference to
    Exhibit 4.24 of our Annual Report on
    Form 20-F
    filed with the Securities and Exchange Commission on
    June 5, 2008)4
.26

Translation of the form of Loan Agreement between Baidu Online
    and the shareholder of a consolidated affiliated PRC entity
    (incorporated by reference to Exhibit 4.25 of our Annual
    Report on
    Form 20-F
    filed with the Securities and Exchange Commission on
    June 5, 2008)8
.1*

List of Subsidiaries and Consolidated Affiliated Entities11
.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) 100




---



##### Table of Contents



ExhibitNumber

Description of Document12
.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 Haiwen & Partners15
.3*

Consent of Ernst & Young Hua Ming     *
    
    Filed with this Annual Report on
    Form 20-F 101




---



##### Table of Contents



SIGNATURES
  Form 20-F
    By:
    /s/  Robin
    Yanhong Li   Title:
    Chairman and Chief Executive Officer   102




---



##### 



INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
   
 Page(s)Reports of Independent Registered Public
    Accounting Firm


F-2Consolidated Balance Sheets as of
    December 31, 2007 and 2008


F-4Consolidated Statements of Income for the Years
    Ended December 31, 2006, 2007 and 2008


F-5Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2006, 2007 and 2008


F-6Consolidated Statements of Shareholders
    Equity for the Years Ended December 31, 2006, 2007 and
    2008


F-7Notes to the Consolidated Financial Statements


F-8   F-1




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM            Share-Based Payment
        F-2




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      
                F-3




---



##### Table of Contents



BAIDU,
    INC.CONSOLIDATED BALANCE SHEETS
    (Amounts in thousands of Renminbi (RMB), and in
    thousands of U.S. Dollars
    (US$), except for number of shares and per share
    data)
  December 31,Notes

2007

2008

2008RMB

RMB

US$ASSETSCurrent assets:Cash and cash equivalents,






1,350,600



2,362,171



346,233Short-term investments


3



242,037



301,244



44,154Accounts receivable, net of allowance of RMB3,581 for 2007 and
    RMB8,561 (US$1,255) for 2008


4



64,274



92,777



13,599Prepaid expenses and other current assets


5



65,996



80,007



11,727Receivables from a shareholder


16







10,697



1,568Deferred tax assets, net


10



2,587



5,580



818Total current assets






1,725,494



2,852,476



418,099Non-current assets:Fixed assets, net


6



678,886



789,714



115,751Land use right, net


7



96,472



94,520



13,854Intangible assets, net


7



40,460



31,263



4,582Goodwill


7



51,093



51,082



7,487Investments, net






15,439



12,281



1,800Deferred tax assets, net


10



15,716



26,537



3,890Other non-current assets






32,348



80,118



11,743Total non-current assets






930,414



1,085,515



159,107TOTAL ASSETS






2,655,908



3,937,991



577,206LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accrued expenses and other liabilities


8



359,310



423,029



62,005Customers deposits






257,577



422,526



61,931Deferred revenue


9



11,832



3,441



504Deferred income






2,485



332



49Total current liabilities






631,204



849,328



124,489Non-current liabilities:Long-term payable for business acquisition






3,000







Deferred income






332







Total non-current liabilities






3,332







Total liabilities






634,536



849,328



124,489Commitments and contingencies


12Shareholders equityClass A Ordinary Shares, par value US$0.00005 per share,
    825,000,000 shares authorized, and 25,136,147 shares
    and 25,641,847 shares issued and outstanding as at
    December 31, 2007 and 2008


13



10



11



2Class B Ordinary Shares, par value US$0.00005 per share,
    35,400,000 shares authorized, and 8,996,842 shares and
    8,873,986 shares issued and outstanding as at
    December 31, 2007 and 2008


13



4



4



1Additional paid-in capital






1,171,575



1,218,356



178,579Accumulated other comprehensive loss






(   81,953
)


( 109,552
)


(  16,057
)Retained earnings


14



931,736



1,979,844



290,192Total shareholders equity






2,021,372



3,088,663



452,717TOTAL LIABILITIES AND SHAREHOLDERS EQUITY






2,655,908



3,937,991



577,206    F-4




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##### Table of Contents



BAIDU,
    INC.CONSOLIDATED STATEMENTS OF INCOME
    (Amounts in thousands of Renminbi (RMB), and in
    thousands of U.S. Dollars
    (US$), except for number of shares and per share
    data)
  For the Years Ended December 31,Notes

2006

2007

2008

2008RMB

RMB

RMB

US$Revenues:Online marketing services






828,484



1,741,021



3,194,461



468,224Other services






9,354



3,404



3,791



556Total revenues






837,838



1,744,425



3,198,252



468,780Operating costs and expenses:Cost of revenues






(245,489
)


(645,406
)


(1,155,457
)


(169,360
)Selling, general and administrative






(250,240
)


(411,163
)


(659,804
)


(96,710
)Research and development






(79,231
)


(140,702
)


(286,256
)


(41,958
)Total operating costs and expenses






(574,960
)


(1,197,271
)


(2,101,517
)


(308,028
)Operating profit






262,878



547,154



1,096,735



160,752Other income:Interest income






42,443



49,009



47,677



6,988Foreign exchange loss, net






(89
)


(2,425
)


(1,920
)


(281
)Other income, net






4,187



22,478



21,687



3,179Total other income






46,541



69,062



67,444



9,886Net income before tax and cumulative effect of change in
    accounting principle






309,419



616,216



1,164,179



170,638Income taxes


10



(12,256
)


12,752



(116,071
)


(17,013
)Net income before cumulative effect of change in accounting
    principle






297,163



628,968



1,048,108



153,625Cumulative effect of change in accounting principle


2



4,603











Net income






301,766



628,968



1,048,108



153,625Earnings per share for Class A and Class B ordinary
    shares:Basic EPSBasic (prior to cumulative effect of change in accounting
    principle)


2



8.92



18.57



30.63



4.49Cumulative effect of change in accounting principle






0.14











9.06



18.57



30.63



4.49Diluted EPSDiluted (prior to cumulative effect of change in accounting
    principle)






8.62



18.11



30.19



4.43Cumulative effect of change in accounting principle






0.13











8.75



18.11



30.19



4.43Weighted average aggregate number of Class A and
    Class B ordinary shares outstanding:Basic






33,290,696



33,872,611



34,217,443



34,217,443Diluted






34,506,594



34,724,365



34,717,489



34,717,489    F-5




---



##### Table of Contents



BAIDU,
    INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
 (Amounts
    in thousands of Renminbi (RMB), and in thousands of
    U.S. Dollars (US$))
  For the Years Ended December 31,2006

2007

2008

2008RMB

RMB

RMB

US$Cash flows from operating activities:Net income


301,766



628,968



1,048,108



153,625Adjustments to reconcile net income to net cash generated from
    operating activities:Depreciation of fixed assets


64,103



170,731



259,635



38,056Fixed assets written off


877



622



1,675



246Amortization of intangible assets, land use right and long-term
    prepaid computer parts


6,339



10,204



21,079



3,090Deferred tax assets, net


(3,244
)


(10,767
)


(13,814
)


(2,025
)Share-based compensation


48,280



39,848



83,977



12,309Provision for doubtful accounts


(310
)


(703
)


4,980



730Foreign exchange loss


89



1,313



1,157



170Interest income from short term investments






(4,914
)


(5,739
)


(841
)Impairment on long-term investment


1,976







7,986



1,171Cumulative effect of change in accounting principle


(4,603
)










Changes in operating assets and liabilities net of effects of
    acquisition:Accounts receivable


(388
)


(40,685
)


(33,282
)


(4,878
)Prepaid expenses and other current assets


(23,455
)


(50,442
)


(27,349
)


(4,009
)Receivables from a shareholder










(10,697
)


(1,568
)Customers deposits


70,858



116,391



164,949



24,177Accrued expenses and other liabilities


62,272



121,167



130,230



19,088Deferred revenue


(5,075
)


1,834



(13,876
)


(2,034
)Deferred income


6,659



(4,089
)


(2,485
)


(364
)Trading securities


(85,339
)


(44,326
)


129,665



19,005Net cash generated from operating activities


440,805



935,152



1,746,199



255,948Cash flows from investing activities:Acquisition of fixed assets


(127,534
)


(569,091
)


(417,898
)


(61,253
)Acquisition of business


(43,320
)


(14,080
)






Acquisition of intangible assets


(21,897
)


(4,000
)






Capitalization of software costs


(982
)


(4,041
)


(17,668
)


(2,590
)Acquisition of long-term investments






(8,024
)






Purchases of held-to-maturity securities






(228,896
)


(764,720
)


(112,088
)Maturities of held-to-maturity securities






120,127



580,430



85,076Acquisition of land use right


(15,200
)


(5,211
)






Acquisition of long-term prepaid computer parts










(41,246
)


(6,046
)Net cash used in investing activities


(208,933
)


(713,216
)


(661,102
)


(96,901
)Cash flows from financing activities:Payment for expenses in connection with IPO


(641
)










Structured share repurchase










(68,539
)


(10,046
)Proceeds from exercise of share options


32,820



40,698



32,902



4,823Net cash generated from (used in) financing activities


32,179



40,698



(35,637
)


(5,223
)Effect of exchange rate changes on cash and cash equivalents


(28,370
)


(48,308
)


(37,889
)


(5,555
)Net increase in cash and cash equivalents


235,681



214,326



1,011,571



148,269Cash and cash equivalents at beginning of the year


900,593



1,136,274



1,350,600



197,963Cash and cash equivalents at end of the year


1,136,274



1,350,600



2,362,171



346,232Supplemental disclosures:Income taxes paid/(received), net


24,192



(11,892
)


145,830



21,375Fixed asset acquisitions included in accrued expense and other
    liabilities


36,054



126,992



52,650



7,717Other non-current assets acquisitions included in accrued
    expense and other liabilities










4,764



698Non-cash acquisitions of long-term investments






7,415



5,486



804    F-6




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##### Table of Contents



BAIDU,
    INC.
  CONSOLIDATED
    STATEMENTS OF SHAREHOLDERS EQUITY
 (Amounts
    in thousands of Renminbi (RMB) and U.S. Dollars
    (US$), except number of shares)
  Accumulated

RetainedOrdinary Shares

Additional

Other

Earnings

TotalNumber of



Paid-In

Comprehensive

(Accumulated

ShareholdersShares

Amount

Capital

Loss

Losses)

EquityRMB

RMB

RMB

RMB

RMBBalances 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






















273,520Cumulative 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



2,021,372Comprehensive income:Foreign currency translation adjustment














(27,599
)






(27,599
)Net income


















1,048,108



1,048,108Total comprehensive income






















3,041,881Exercise of share options


382,844



1



28,637











28,638Share-based compensation










86,683











86,683Structured share repurchase










(68,539
)










(68,539
)Balances at December 31, 2008


34,515,833



15



1,218,356



(109,552
)


1,979,844



3,088,663Balances at December 31, 2008, in US$






3



178,579



(16,057
)


290,192



452,717    F-7




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE
    YEARS ENDED DECEMBER 31, 2006, 2007, and 2008
  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, Inc. (Baidu Japan) incorporated in Tokyo
    under the laws of Japan on December 13, 2006, and
    Baidu (Hong Kong) Limited (Baidu HK) incorporated in
    Hong Kong under the laws of Hong Kong on November 27, 2007.    
    Baidu (China) Co., Ltd. (Baidu China) incorporated
    under the laws of the PRC on June 6, 2005, and
    Baidu.com Times Technology (Beijing) Co., Ltd. (Baidu
    Times) incorporated under the laws of the PRC on
    April 19, 2006.    
    Hyakudo Inc. (Hyakudo) incorporated in Tokyo under
    the laws of Japan on April 14, 2008, and
    Baido, Inc. (Baido) incorporated in Tokyo under the
    laws of Japan on April 14, 2008    
    Beijing Baidu Netcom Science Technology Co., Ltd. (Baidu
    Netcom) incorporated under the laws of the PRC on
    June 5, 2001,
    Beijing Perusal Technology Co., Ltd. (Beijing
    Perusal) incorporated under the laws of the PRC on
    June 6, 2006, and
    Beijing BaiduPay Science and Technology Co., Ltd.
    (BaiduPay) incorporated under the laws of the PRC on
    February 27, 2008.  e-commerce e-commerce
   F-8




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Consolidation of Variable
    Interest Entities, an Interpretation of ARB No. 51
    2.
    SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES  Principles
    of Consolidation
    Currency
    Translation for Financial Statements Presentation
    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
 F-9




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Use of
    Estimates
    Fair
    Value Measurements
    Cash,
    Cash Equivalents and Short-Term Investments
  e-commerce e-commerce e-commerce e-commerce
 F-10




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  e-commerce e-commerce
  Accounting for Certain
    Investments in Debt and Equity Securities.
  No. SFAS 115-1/SFAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its
    Application to Certain Investments
  Long-term
    Investments
    Capitalization
    of Software Developed for Internal Use
  98-1, Accounting for the Costs of Computer Software Developed or
    Obtained for Internal Use
 F-11




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Fixed
    Assets
    Computer equipment

3 or 5 yearsInternal use software development costs

3 yearsVehicles and office equipment

5 yearsLeasehold improvements

over the shorter of lease terms or estimated useful lives of the
    assets       Intangible
    Assets
    Domain name

5 yearsCustomer relationships

4.9 yearsNon-competition agreements

4 yearsSoftware

9.8 yearsContract-based assets

2.4 yearsLand use right

50 years     Impairment
    of Long-Lived Assets
  Accounting for the Impairment
 F-12




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  or Disposal of Long-Lived Assets
  Accounting
    for Impairment of Goodwill
  Goodwill and Other Intangible
    Assets
  Accounts
    Receivable and Other Receivables
      Deferred
    Income
   F-13




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Revenue
    Recognition
    Online
    marketing services
  (1)  Auction-based
    pay-for-performance service
      (2)  Other
    performance-based online marketing services
    (3)  Time-based
    online advertising services
    (4)  Online
    marketing services involving Baidu Union
    (5)  Barter
    transactions
  Accounting for
    Nonmonetary Transactions
  No. 99-17, Accounting for Advertising Barter Transactions
 F-14




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    No. 00-8, 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.    (6)  Other
    revenue recognition related policies
  No. 00-21, Revenue Arrangements with Multiple Deliverables
  No. 01-9, Accounting for Consideration Given by a Vendor to a Customer
    (Including a Reseller of the Vendors Products)
    (7)  Other
    services
  97-2, Software Revenue Recognition
   F-15




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Cost
    of Revenues
    EITF 06-3, 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
    Accounting for
    Uncertainty in Income Taxes  an interpretation of
    FASB Statement No. 109,
 F-16




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2004-2008 2006-2008
  Comprehensive
    Income
    Share-based
    Compensation
  Share-Based Payment Accounting for Stock Issued to
    Employees
      No. 96-18 (EITF 96-18), Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services
 F-17




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  EITF 96-18,
    Share
    Repurchase Program
    No. 00-19, Accounting for Derivative Financial Instruments Indexed to,
    and Potentially Settled in, a Companys Own Stock
  three-day
  Earning
    Per Share (EPS)
  Earnings per Share,
 F-18




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  No. 03-6, Participating Securities and the Two-Class Method under
    FASB Statement No. 128
      For the Years Ended December 31,2006

2007

2008Class 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


137,874



163,892



428,128



200,840



772,330



113,203



275,778



40,422Denominator:Weighted average of issued shares outstanding


15,209,525



18,080,464



23,056,501



10,816,110



25,214,154



25,214,154



9,003,290



9,003,290Weighted average of options exercised but related shares not yet
    issued (as below)


707



























Denominator used for basic earnings per Class A and
    Class B ordinary shares


15,210,232



18,080,464



23,056,501



10,816,110



25,214,154



25,214,154



9,003,290



9,003,290Basic earnings per Class A and Class B ordinary shares


9.06



9.06



18.57



18.57



30.63



4.49



30.63



4.49Numerator:Allocation of undistributed earnings for diluted computation


133,739



168,027



420,463



208,505



765,509



112,203



282,599



41,422Reallocation of undistributed earnings as a result of conversion
    of Class B to Class A shares


168,027







208,505







282,599



41,422







Allocation of undistributed earnings-diluted


301,766



168,027



628,968



208,505



1,048,108



153,625



282,599



41,422Denominator:Weighted average ordinary shares outstanding-basic


15,210,232



18,080,464



23,056,501



10,816,110



25,214,154



25,214,154



9,003,290



9,003,290Conversion of Class B to Class A ordinary shares


18,080,464







10,816,110







9,003,290



9,003,290







Employee stock options


1,215,898



1,133,210



851,754



695,130



500,046



500,046



357,512



357,512Denominator used for diluted earnings per Class A and
    Class B ordinary shares


34,506,594



19,213,674



34,724,365



11,511,240



34,717,490



34,717,490



9,360,802



9,360,802Diluted earnings per Class A and Class B ordinary
    shares


8.75



8.75



18.11



18.11



30.19



4.43



30.19



4.43  F-19




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Recent
    Accounting Pronouncements
  Business Combinations
  Noncontrolling Interests in
    Consolidated Financial Statements  an amendment of
    ARB No. 51
  No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement
    No. 13 and Other Accounting Pronouncements That Address
    Fair Value Measurements for Purposes of Lease Classification or
    Measurement under Statement 13 No. 157-2, Effective Date of FASB Statement No. 157 SFAS 157-3, Determining the Fair Value of a Financial Asset When the
    Market for That Asset Is Not Active, No. 157-1, No. 157-2 No. 157-3
  Disclosures about Derivative
    Instruments and Hedging Activities, an amendment of FASB
    Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
  No. FAS 142-3 (FSP 142-3), Determination of the Useful Life of Intangible Assets FSP 142-3 FSP 142-3 FSP 142-3 FSP 142-3
  The Hierarchy of Generally
    Accepted Accounting Principles
 F-20




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    No. 07-5 (EITF 07-5), Determining Whether an Instrument (or Embedded Feature) Is
    Indexed to an Entitys Own Stock EITF 07-5 EITF 07-5 EITF 07-5 EITF 07-5
  No. 03-6-1(FSP EITF 03-6-1), Determining Whether Instruments Granted in Share-Based
    Payment Transactions Are Participating Securities EITF 03-6-1 EITF 03-6-1 EITF 03-6-1
  No. 08-7 (EITF 08-7), Accounting for Defensive Intangible Assets EITF 08-7 EITF 08-7 EITF 08-7 EITF 08-7
  Concentration
    of Risks
  Concentration
    of credit risk
      Business
    and economic risks
   F-21




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Currency
    convertibility risk
    Concentration
    of Risks
  Foreign
    currency exchange rate risk
        Comparative
    Information
   F-22




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  3.
    SHORT-TERM
    INVESTMENTS  December 31,2007

2008

2008RMB

RMB

US$(In thousands)Trading securities: Money market funds


129,665







Held-to-Maturity securities: Fixed rate investments


112,372



140,033



20,525 Adjustable rate investments






161,211



23,629242,037



301,244



44,154           Gross

GrossCarrying

Unrealized

Unrealized

Fair

FairValue

Gains

Losses

Value

ValueRMB

RMB

RMB

RMB

US$Short-term investments:Fixed-rate investments


140,033



1,487







141,520



20,743Adjustable-rate investments


161,211



1,517







162,728



23,852Total


301,244



3,004







304,248



44,595   4.
    ACCOUNTS
    RECEIVABLE  December 31,2007

2008

2008RMB

RMB

US$(In thousands)Accounts receivable


67,855



101,338



14,854Less: Allowance for doubtful accounts


(3,581
)


(8,561
)


(1,255
)64,274



92,777



13,599   F-23




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  2006

2007

2008

2008RMB

RMB

RMB

US$Movements in allowance for doubtful accountsBalance at the beginning of the year


4,643



4,211



3,581



525Amounts charged to (credited against) costs and expenses


(310
)


(243
)


7,390



1,083Write-offs


(122
)


(387
)


(2,410
)


( 353
)Balance at the end of the year


4,211



3,581



8,561



1,255   5.
    PREPAID
    EXPENSES AND OTHER CURRENT ASSETS  December 31,2007

2008

2008RMB

RMB

US$(In thousands)Deposits


8,680



10,777



1,580Prepaid expenses


6,234



11,194



1,641Advances to suppliers


8,930



9,080



1,331Interest receivable


1,556



2,887



423Receivables from employees


7,115



5,878



861Receivables from service provider*


29,744



1,836



269Prepaid income taxes






38,312



5,616Other


3,737



43



665,996



80,007



11,727     *
    
    Since 2006, the Company has used a broker to facilitate the
    cashless exercises of share options by employees. As of
    December, 31, 2007, the exercise price and employee withholding
    taxes receivable from the broker totaled RMB29.74 million,
    which is recorded in receivables from service provider. In 2008,
    since the company changed the service provider, the outstanding
    balance of the receivables from service provider decreased
    significantly due to more timely settlement with the current
    service provider.  6.
    FIXED
    ASSETS  December 31,2007

2008

2008RMB

RMB

US$(In thousands)Leasehold improvements


37,736



43,132



6,322Computer equipment


775,637



944,807



138,484Capitalized software costs


7,081



26,811



3,930Office equipment


14,096



17,134



2,511Vehicles


3,703



4,019



589838,253



1,035,903



151,836Less: Accumulated depreciation


(278,007
)


(535,199
)


(78,446
)Construction in progress


118,640



289,010



42,361678,886



789,714



115,751  F-24




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      7.
    GOODWILL
    AND INTANGIBLE ASSETS    2007

2008

2008RMB

RMB

US$(In thousands)Balance as of January 1


47,316



51,093



7,489Goodwill acquired


3,788







Foreign currency translation adjustment


(11
)


(11
)


(2
)Balance as of December 31


51,093



51,082



7,487     As of December 31, 2007Gross



NetCarrying

Accumulated

CarryingValue

Amortization

ValueRMB

RMB

RMB(In thousands)Domain names


24,304



(9,839
)


14,465Customer relationships


31,363



(8,659
)


22,704Non-compete agreements


1,022



(448
)


574Software


3,221



(585
)


2,636Contract-based assets


210



(129
)


8160,120



(19,660
)


40,460   As of December 31, 2008Gross



Net

NetCarrying

Accumulated

Carrying

CarryingValue

Amortization

Value

ValueRMB

RMB

RMB

US$(In thousands)Domain names


24,184



(12,724
)


11,460



1,680Customer relationships


31,363



(15,234
)


16,129



2,364Non-compete agreements


1,022



(703
)


319



47Software


3,221



(916
)


2,305



338Contract-based assets


210



(210
)






Well-known trademark


1,050







1,050



15361,050



(29,787
)


31,263



4,582  F-25




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    RMB

US$(In thousands)For the year ending December 31, 2009


8,343



1,2232010


6,284



9212011


3,732



5472012


1,307



1922013


363



53     2007

2008

2008RMB

RMB

US$(In thousands)Gross carrying value


97,611



97,611



14,307Accumulated amortization


(1,139
)


(3,091
)


(453
)Net carrying value


96,472



94,520



13,854     RMB

US$(In thousands)For the year ending December 31,2009


1,952



2862010


1,952



2862011


1,952



2862012


1,952



2862013


1,952



286  F-26




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  8.
    ACCRUED
    EXPENSES AND OTHER LIABILITIES  December 31,2007

2008

2008RMB

RMB

US$(In thousands)Accrued payroll and welfare


29,815



51,686



7,576Accrued operating expenses*


62,352



102,843



15,074Taxes payable


56,446



84,524



12,389Distributors deposits


2,662



4,671



685Purchase of fixed assets


126,992



57,414



8,415Traffic acquisition costs


40,788



62,497



9,160Bandwidth costs


12,992



15,680



2,298Professional expenses


11,800



17,062



2,501Other


15,463



26,652



3,907359,310



423,029



62,005     *
    
    The increase in accrued operating expenses was mainly from the
    incentives accrued for advertising agents and increase in
    payroll related accrual.  9.
    DEFERRED
    REVENUE  December 31,2007

2008

2008RMB

RMB

US$(In thousands)Online marketing services


11,702



3,441



504Other services


130







11,832



3,441



504   10.
    INCOME
    TAXES    China
   F-27




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  
    Baidu Online, being a foreign invested enterprise, was
    recognized as a Technologically Advanced Enterprise
    by the Beijing Municipal Bureau of Commerce and thus entitled to
    a preferential tax rate of 10% from 2006 to 2007.
    Baidu China, being a foreign invested enterprise, has been
    granted Software Enterprise status and thus entitled
    to a tax holiday for a full exemption from EIT from
    2006 to 2007, and a 50% tax reduction (at 12.5%) from 2008 to
    2010.
    Baidu Times, being a foreign invested enterprise, had been
    recognized as a High and New Technology Enterprise
    and thus entitled to a reduced EIT rate of 15% upon expiration
    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.  2-year 3-year
      Japan
   F-28




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    For the Years Ended December 31,2006

2007

2008

2008RMB

RMB

RMB

US$(In thousands)PRC


328,428



699,332



1,360,326



199,388Non-PRC


(19,009
)


(83,116
)


(196,147
)


(28,750
)309,419



616,216



1,164,179



170,638       For the Years Ended December 31,2006

2007

2008

2008RMB

RMB

RMB

US$(In thousands)Current income tax


15,500



19,409



129,885



19,038Reinvestment tax refund






(21,198
)






Deferred income tax benefit


(3,244
)


(39,691
)


(58,553
)


(8,582
)Valuation allowance






28,728



44,739



6,55712,256



(12,752
)


116,071



17,013     For the Years Ended December 31,2006

2007

2008

2008RMB

RMB

RMB

US$Expected taxation at PRC EIT statutory rate*


102,108



203,352



291,045



42,660Effect of differing tax rates in different jurisdictions


6,273



(1,486
)


3,533



518Permanent differences  non-taxable income


(438
)


(1,325
)


(2,121
)


(311
)Permanent differences  non-deductible expenses


1,295



2,410



2,703



396Tax incentives relating to R&D expenditures (see below**)


(8,652
)


(8,791
)


(17,848
)


(2,616
)Effect of tax exemption and reduction inside PRC


(86,732
)


(214,442
)


(205,980
)


(30,191
)Reinvestment tax refund






(21,198
)






Addition to (reversal of) valuation allowance


(1,598
)


28,728



44,739



6,557Taxation for the year


12,256



(12,752
)


116,071



17,013Effective tax rate


4.0
%


( 2.1
)%


9.97
%


9.97
%Basic earnings per Class A and Class B ordinary shares
    effect of tax exemptions and reductions inside PRC


2.61



6.33



6.02



0.88  F-29




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    *
    
    The statutory EIT rate was 33% for the years ended
    December 31, 2006 and 2007, and was changed to 25% for the
    year ended December 31, 2008.**
    
    Baidu Online and Baidu China enjoyed an additional tax incentive
    relating to its research and development expenses. The Company
    has claimed 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 carried forward for up to the following five
    years utilization. In 2006, 2007 and 2008, the Company has
    no deductible research and development expenses carried forward.      December 312007

2008

2008RMB

RMB

US$(In thousands)Provision for doubtful receivables


680



1,548



227Deferred revenue


155



0



Fixed assets


13,410



24,984



3,662Net operating loss carry-forward


30,157



73,357



10,752Other


2,629



5,695



835Deferred tax assets


47,031



105,584



15,476Valuation allowance


(28,728
)


(73,467
)


(10,768
)Deferred tax assets, net


18,303



32,117



4,708          F-30




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    11.
    EMPLOYEE
    DEFINED CONTRIBUTION PLAN    12.
    COMMITMENTS
    AND CONTINGENCIES  Capital
    commitments
    Operating
    lease commitments
      RMB

US$(In thousands)2009


194,665



28,5332010


131,872



19,3292011


2,191



3212012 and thereafter






328,728



48,183   Litigation
     F-31




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    13.
    ORDINARY
    SHARES      14.
    RETAINED
    EARNINGS       F-32




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,2007

2008

2008RMB

RMB

US$(In thousands)PRC statutory reserve funds


90,135



136,034



19,939Unreserved retained earnings


841,601



1,843,810



270,253931,736



1,979,844



290,192     15.
    SHARE-BASED
    AWARDS PLAN  36-month
  90-day 90-day
    12-month
   F-33




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Number



Weighted-Average

Aggregateof

Weighted-Average

Remaining

IntrinsicShare Option

Shares

Exercise Price

Contractual Life

Value (US$)(Years)

(In thousands)Outstanding, December 31, 2007


675,233


US$
26.24Granted


42,706


US$
247.05Exercised


(364,536
)

US$
11.29Forfeited/Cancelled


(20,569
)

US$
24.15Expired


(4,741
)

US$
3.11Outstanding, December 31, 2008


328,093


US$
72.06



1.95



24,681Vested and expected to vest at December 31, 2008


321,566


US$
70.02



1.92



24,547Exercisable at December 31, 2008


217,771


US$
38.21



1.43



20,844           WeightedAverageGrant DateRestricted Shares

Number of Shares

Fair ValueNonvested, December 31, 2007


71,079


US$
157.11Granted


32,184


US$
271.87Vested


(18,308
)

US$
129.28Forfeited


(2,573
)

US$
189.18Nonvested, December 31, 2008


82,382


US$
210.76    F-34




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Share-Based
    Payment
    2006

2007

2008Risk-free interest rate

1.98%~3.14%

4.54%~5.03%

1.74%~2.60%Dividend yield





Expected volatility range

82.55%~84.80%

63.94%~72.90%

63.52%~70.82%Weighted average expected volatility

84.67%

68.28%

66.54%Expected life (in years)

0.91~2.49

1~2.6

1.63~2.64       2006

2007

2008US$

US$

US$Weighted average grant-date fair value of share options granted
    during the year:Where exercise price is lower than market price










Where exercise price is equal to market price


25.89



57.02



136.97Weighted average exercise price of share options granted during
    the year:Where exercise price is lower than market price










Where exercise price is equal to market price


49.25



131.09



247.05    F-35




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    For the Years Ended December 31,2006

2007

2008

2008RMB

RMB

RMB

US$(In thousands)Cost of revenues


1,416



1,717



4,542



666Selling, general and administrative


32,970



17,371



41,651



6,105Research and development


13,894



20,760



37,784



5,538Share-based compensation cost capitalized as part of internally
    used software in fixed assets


383



714



2,706



39748,663



40,562



86,683



12,706     16.
    RELATED
    PARTY TRANSACTIONS    17.
    SEGMENT
    REPORTING  Disclosures about
    segments of an Enterprise and Related Information
    18.
    FAIR
    VALUE MEASUREMENT  Fair
    Value Measurement
           F-36




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Fair Value Measurement atDecember 31, 2008 UsingQuoted Prices inActive Markets for

Significant OtherIdentical Assets

Observable Inputs

Total Fair Value at(Level 1)

(Level 2)

December 31, 2008(RMB)

(RMB)

(RMB)

(US$)(In thousands)Cash equivalents:Money market fund


912,822







912,822



133,796Short-term investments:Fixed-rate investments






141,520



141,520



20,743Adjustable-rate investments






162,728



162,728



23,852Total


912,822



304,248



1,217,070



178,391   19.
    SUBSEQUENT
    EVENTS (UNAUDITED)  New
    Subsidiary
    Share
    Repurchase Programs
       F-37




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Option
    Modification
   F-38




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  20.
    PARENT
    COMPANY ONLY CONDENSED FINANCIAL INFORMATION    Balance
    sheets
  December 31,2007

2008

2008RMB

RMB

US$(In thousands)ASSETSCash and cash equivalents


605,210



436,431



63,969Prepaid expenses and other current assets


10,031



3,309



485Total current assets


615,241



439,740



64,454Fixed assets, net


784



2,718



398Goodwill


159



149



22Investment in subsidiaries


1,415,237



2,649,183



388,301Intangible assets, net


601



216



32Total non-current assets


1,416,781



2,652,266



388,753Total assets


2,032,022



3,092,006



453,207LIABILITIES AND SHAREHOLDERS EQUITYAccrued expenses and other liabilities


10,650



3,343



490Total current liabilities


10,650



3,343



490Total liabilities


10,650



3,343



490Commitments and contingenciesClass A Ordinary Shares, par value US$0.00005 per share,825,000,000 shares authorized, and 25,136,147 shares
    and 25,641,847 shares issued and outstanding as at
    December 31, 2007 and 2008


10



11



2Class B Ordinary Shares, par value US$0.00005 per share,35,400,000 shares authorized, and 8,996,842 shares and
    8,873,986 shares issued and outstanding as at
    December 31, 2007 and 2008


4



4



1Additional paid-in capital


1,171,575



1,218,356



178,579Accumulated other comprehensive loss


(81,953
)


(109,552
)


(16,057
)Retained earnings


931,736



1,979,844



290,192Total shareholders equity


2,021,372



3,088,663



452,717Total liabilities and shareholders equity


2,032,022



3,092,006



453,207  F-39




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Statements
    of income
  For the Year Ended December 31,2006

2007

2008

2008RMB

RMB

RMB

US$(In thousands)Revenues














Cost of revenues


(1,842
)


(2,159
)


(6,867
)


(1,007
)Selling, general and administrative


(41,208
)


(26,167
)


(50,910
)


(7,462
)Research and development


(14,119
)


(20,760
)


(37,784
)


(5,538
)Total operating costs and expenses


(57,169
)


(49,086
)


(95,561
)


(14,007
)Operating loss


(57,169
)


(49,086
)


(95,561
)


(14,007
)Equity in profits of subsidiaries


315,252



618,396



1,130,437



165,693Other income:Interest income


40,125



37,020



15,531



2,276Other (loss)/income, net


(1,045
)


1,440



(2,299
)


(337
)Total other income


39,080



38,460



13,232



1,939Net income before tax and cumulative effect of change in
    accounting principle


297,163



607,770



1,048,108



153,625Income taxes






21,198







Net income before cumulative effect on change in accounting
    principle


297,163



628,968



1,048,108



153,625Cumulative effect on change in accounting principle


4,603











Net income


301,766



628,968



1,048,108



153,625  F-40




---



##### Table of Contents



BAIDU,
    INC.
  NOTES TO
    THE CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Statements
    of cash flows
  For the Year Ended December 31,2006

2007

2008

2008RMB

RMB

RMB

US$(In thousands)Cash flows from operating activities:Net income


301,766



628,968



1,048,108



153,625Adjustments to reconcile net income to net cash generated from
    operating activities:Equity in profits of subsidiaries


(315,252
)


(618,396
)


(1,130,437
)


(165,693
)Depreciation of fixed assets


22



56



268



39Share-based compensation


48,280



39,848



83,977



12,309Amortization of intangible assets


404



386



352



52Impairment on long-term investment


1,976







2,299



337Changes in operating assets and liabilities:Prepaid expenses and other assets


14



(1,924
)


1,841



270Accrued expenses and liabilities


(1,597
)


8,233



(6,872
)


(1,007
)Net cash generated from / (used in) operating activities


35,613



57,171



(464
)


(68
)Cash flows from investing activities:Advances to subsidiaries


(1,211
)


(138,354
)


(94,910
)


(13,911
)Capital injection into subsidiaries


(1,649
)


(144,209
)






Acquisition of long-term investment






(8,024
)






Net cash used in investing activities


(2,860
)


(290,587
)


(94,910
)


(13,911
)Cash flows from financing activities:Payment for expenses in connection with IPO


(641
)










Structured share repurchase










(68,539
)


(10,046
)Proceeds from exercise of share options


25,394



40,800



32,902



4,823Net cash generated from financing activities


24,753



40,800



(35,637
)


(5,223
)Effect of exchange rate changes on cash and cash equivalents


(27,972
)


(46,683
)


(37,768
)


(5,537
)Net increase/(decrease) in cash and cash equivalents


29,534



(239,299
)


(168,779
)


(24,739
)Cash and cash equivalents at beginning of the year


814,975



844,509



605,210



88,708Cash and cash equivalents at end of the year


844,509



605,210



436,431



63,969   (a)
    Basis
    of presentation  The Equity Method of Accounting for Investments in Common
    Stock
  (b)
    Commitments   F-41